There are a lot of misconceptions when it comes to retirement savings…
There’s an assumption often shared by the retirement industry that your expenses are going to go down in retirement. Unfortunately, that’s not the only assumption the retirement industry makes. There’s also the assumption that you will pay off your mortgage, so that expense disappears. And, an assumption that your taxes will be less since your income will likely be less Lastly, there’s an assumption that the amount of income required will be less because your expenses will be less.
Because of all of these assumptions, the typical retirement planning advisor will say you likely only need 80% of your pre-retirement income (or maybe less depending on how high your pre-retirement income is).
Expectations Versus Reality
But then you ask people, “Do you expect to live on less income in retirement?” and their answer is, “No, I want to do things in retirement that I do now!” So, people don’t expect that they’ll need less in retirement. They believe that their lifestyle won’t change much at all.
Not to mention, other things have structurally changed in our economy. At one time, decades ago, families could live on one income and retire with a pension, and pay off their mortgages pre-retirement. But that’s not the reality today, and that hasn’t been the reality for quite some time. People are retiring with large mortgages. In fact, for some people, the only way to retire is to pull equity out of their house. These factors have changed how we think about our retirement savings.
Your expenses actually increase after you retire
Other expenses have changed dramatically, too. Medical expenses tend to go up when one retires. In our current economic environment, the cost of health insurance keeps going up and up and up. All of this is in addition to the fact that people are usually less healthy as they age. So, unlike most of us have been led to believe, expenses tend to go up post-retirement.
The reality is that people are probably not going to retire with fewer expenses. They’re more likely to retire with the same expenses or higher expenses even. So this whole set of assumptions is inaccurate.
What does tend to change dramatically in retirement?
Your income.
Post-retirement is unpredictable
While you’re working, you know what you’re going to earn. You know what your income is going to be each month, quarter, year. There’s some certainty in that. If the stock market goes down, you’re not making less this month than you did last month because pre-retirement doesn’t work that way for the majority of folks. But that’s not how your income works after you retire.
Now that IRAs and 401(K)s have replaced pensions, people in retirement are highly dependent upon what’s happening in the market and other areas of the economy. Their income is not stable like it was pre-retirement. Retirees have to restructure their retirement investments to something much more conservative. That’s their only option, unfortunately. This choice increases stability, but there’s a consequence to this – very rational – decision. Retirees will now have a lower rate of return on their investments, which makes it more challenging to keep up with the rate of inflation—generating steady income while without taking risks is a tough balancing act.
People often wonder, “How should I plan for my retirement?” or “How much do I need to save for my retirement savings to last?”
Unfortunately, today’s economic realities require people to approach these questions in an entirely different way than they have been.
The Retirement Industry isn’t looking out for you
Sadly, the retirement industry isn’t giving much thought to this problem. The industry is not motivated to care about your situation post-retirement. Their focus is to encourage you to think about accumulation. If wealth advisors produce a higher return for you today, you’ll put more money under their management…that’s how they win. This way, they earn more commissions from the increase in dollars under management.
Focusing on what it means to have income security in retirement has the potential of blowing up the whole model that the majority of the financial world is committed to.
And that is why we created VestCred.
Asking how much you will spend in retirement starts by asking a series of questions that – on the surface – don’t have much at all to do with budgeting.
How do I expect to spend my time in retirement?
Do I tend to live a healthy lifestyle pre-retirement?
Do I expect my lifestyle to change much?
Are there any big-ticket items I might expect to buy in retirement, or do I want to maintain what I have?
What do I expect my expenses to be in my ‘peak spending years’?
…and only after answering these, and many more questions, do you finally begin asking
How much will I spend in retirement?
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