After almost a decade in the financial world and working with over 250 families, many who are at or nearing retirement, I have noticed a common theme among those who are about to embark on their most critical financial journey yet - navigating retirement without the fear of running out off money.
Most people feel like they haven't saved enough.
But this isn't just true for the soon-to-be-retirees, it's relevant among many families of all age groups. Over and over again, I hear that people feel like they just haven't saved enough, or that they feel like they should be further along at this point in life.
Why is that?
Well, it typically comes down to two reasons:
1) Things come up unexpectedly, and that prevents people from saving (or they have to pull money from savings). New tires on the car, the hot water heater goes out, an unexpected medical bill. We've all had at least one of those.
2) They don't know how much they really spend each month. Think about it - do you know exactly what it takes each month to live life and cover all of your expenses? Now go back and actually run the numbers.
When people are getting close to retirement, the most important number to know is how much you spend each month. That's everything to a retiree. They need to make sure they have the assets, and more importantly, the strategy to recreate an income stream to cover those monthly expenses. What's crazy to me is the amount of people who have gone through life without thinking much about what their monthly expense number really is. That's the first step to having clarity and confidence in our personal finances.
Almost every time I ask someone what their monthly expenses are, they give me a number off the top of their head which is usually the lowest number with all the minimum expenses. However, when they go back and really think about it, it is somewhere between 20-50% higher than what they originally thought.
It is absolutely critical to get a grasp on how much it takes us to live each month!
Here's the problem with not knowing your monthly expense number - you don't really know how much you CAN save each month. And without knowing how much you can save, you will always feel like you aren't saving enough.
The consequences of not saving enough early on in life are dire later on in retirement.
Right now, while you are working, you have an income stream. It's consistent, and you typically don't have to worry all that much. You know in two weeks or next month that you'll get paid again and the cycle starts all over. If you don't save enough in one year, it's not a big deal, today, because you know next year you'll have more income coming in.
But in retirement, that changes.
You may not be going to work every day, and you may not have an income stream from a job to rely on. For anyone retiring after 2028, hopefully we get some social security money, but it's beginning to look like we should plan to not have anything at all. And if we get to retirement and we do have some social security money coming in, well hey! more money to spend and enjoy, or leave for your grandkids.
So, what are the consequences in retirement of not saving enough?
1) You are forced to live off of less income each year, which means you may have to significantly adjust the lifestyle you are currently accustomed to,
2) You are forced to work longer than you expected, or
3) You are forced to take more risk in retirement to try and generate enough income so that you can survive.
None of those are good outcomes for someone who is wanting to retire! No retirees WANT less money. No retirees WANT to work longer. And no retirees WANT to take more risk when they need those assets to create income.
What's funny to me is when I bring this up, sometimes people try to justify their under-saving by saying things like, "well I won't need as much in retirement."
When I hear that, it always makes me wonder - so you want to work all of these years so that when you get to the point where you can retire, you're forced to live off of less? That doesn't make any sense to me. Now hopefully your mortgage is paid off by then, but your defenses against taxes may go down significantly (mortgage interest, child tax credits, etc.).
And what are you going to do when every day is a Saturday?
When I get to retirement, I want to be able to do more with family, continue to travel, and not live with the fear of having to penny pinch because I didn't save enough when I should have. That doesn't mean I need to have less today, it just means I need to have the right priorities with my money. You can do both if you have a strategy and are smart about your decisions (which, I get, is difficult when companies spend BILLIONS each year to get your money and use psychological marketing tactics - that's no secret).
There will always be pressures on our money, and threats and risks that will attempt to separate it from you. Every company and organization views you as a multi-million dollar asset (which you are), just do the math yourself. If you are 30 years old, make $100k, work for 40 years, and your income grows by 3%, that's $7.7 million dollars that you will touch over the course of your working career. Every company wants their share, and they are willing to spend millions and billions each year to get it!
So what can you do about it?
You need to have a strategy. You need to have a system in place that makes it easy for you to do the things you know you should, but are difficult to do (i.e. saving money). And once my clients have this system in place, it's common for people to become addicted to saving money and seeing their accounts grow - I can't tell you how many times I have heard that from clients. You become more efficient, and end up having less financial stress in your life.
If you want to learn a proactive system, one that will allow you the chance to save more money than you ever thought possible, send me an email at email@example.com or send a note on my website www.mblakemiller.com and I'd be happy to share some ideas with you.