Saving TOO MUCH for retirement?!
July 18th, 2005 | by mbhunter |This MSN Money article lobs this whopper:
Are you saving too much for retirement?
The author (Liz Pulliam Weston) discusses the analysis of planner Ty Bernicke, who turns conventional retirement planning advice on its head to propose that, since people tend to spend less in retirement rather than more, it’s not necessary to save as much for retirement as previously thought. The claim that we spend less as we age is supported by Bureau of Labor Statistics data from the Consumer Expenditure Survey of 2002, which shows declining expenditures in all key areas except health care, which should be expected to increase as one ages.
Others weighed in arguments against this opinion, regarding it as taking away the safety net when you’re already halfway across the high wire. Among them:
- You take away your ability to deal with “what ifs” — long term health care, disaster, etc.
- You’re shackling yourself to a lifestyle of reduced spending in retirement.
Retirement can be a lot longer than you think. Taxes might be a lot higher than you think. Inflation may have been a lot worse than you think. Your investments may not perform as well as you think. Social Security and Medicare might pay out a lot less than you think.
Why even think about taking chances with your retirement when you don’t have to?
Money in retirement equates to choices. The choice to live where you want. The choice to have a full-time helper in your home instead of going to a nursing home. The choice to travel or just stay home. The choice to give money and time to whomever you want. Why put those choices in jeopardy when there’s no reason to?
Here’s a bunch of assumptions I’d like to see financial planners use:
- Assume that, for people around my age (33), there will be no social security payments from Uncle Sam. Or assume that your social security tax will double. It’s well-known that the system is in trouble as it stands now; why not take this into account?
- Assume a much more conservative rate of return for investments. Two percent after inflation might work, or 4% before inflation (current rule of thumb is 8%). Assuming no real return on your investment is even better.
- Assume the unthinkable: your house might not appreciate every year. Assume that all of that mortgage and HELOC interest you’re paying might become non-tax-deductible. Both of these things can happen.
- Assume that you’ll need a lot of health care — maybe a few good invasive operations to set your net worth back a few hundred thousand, or a few perscriptions that cost you a couple thousand a month. Healthy people have bad things happen to them every day.
- Assume that your income will be taxed at twice the rate that it is now. Government debt is increasing at an alarming rate, and a day of reckoning will come, probably sooner rather than later.
- Assume that you will be out of work for a while, or that you will have to accept a pay cut, because someone overseas will gladly do your job for a fraction of what you’re being paid. Project your career earnings accordingly. If you know that your profession is vulnerable to outsourcing and don’t want to see this happen, find other ways to make money that aren’t.
Basically, if you want to be comfortable in retirement, it’s much better to assume that there will be a lot of hands digging very deeply in your pockets, a lot of inflation, a lot of mediocre or losing investments, and a lot of hardship. If the worst doesn’t happen, great! But if it does, you’ll be far ahead of those who assumed the best-case.
One Response to “Saving TOO MUCH for retirement?!”
By Cathy on Jul 19, 2005 | Reply
I agree with most of these assumptions, and have used them in my own financial planning. I think it’s only practical and affords the best peace of mind.