Many financial planners assume you will need 70% of your working income during retirement and will live to be 88. They draw down your savings to nothing by the time you reach 90. They must have been designed by people using statistics instead of their brains. What matters is the kind of retirement you want to fund.
By
Getting and spending, we lay waste our powers ..."
--William Wordsworth
It's interesting how the connotations of words can change. "Retiree" used to conjure up an image of rocking chairs and baggy clothes for me. Now I think of tennis courts, cruise ships, and golf shirts.
A lot of that is probably the result of more positive images in the media, particularly advertising. With older Americans now the wealthiest demographic group, business has a vested interest in making geezerhood look good. But I am also starting to see myself as a retiree one day. Whoa! What a concept. But in my mind, "retiree" no longer means my parents -- a retiree is someone kind of like me, just a little farther down the line. Naturally, once I put myself in the picture, the image improves.
Of course, not everyone is eager to quit working. But I look at retirement as being about choice, rather than about quitting work, about having worked long enough and saved and invested well enough that you no longer have to sell your time unless you wish to. It's that magical phrase "financial independence" that attracts me.
Unlike most people in Wordsworth's time, we live in a time where most people, not just the lucky few, can, with care and planning, look forward to a time out from getting and spending. Well, from getting, anyway. Spending will probably be with us always. That's why the planning is so important.
My personal interest in retirement doesn't run toward tennis courts, cruise ships, and golf shirts. I see myself backpacking through South America or taking a freighter around Cape Horn, hopefully in very wild -- but not, of course, deadly -- weather. Everyone has her own dream. The goal of financial independence is to have at least part of your life that approximates your dream, whether it is sipping cappuccino on a terrace in Rome or joining the Peace Corps or playing golf seven days a week or volunteering at your local hospital or building tree houses for your grandchildren or... (fill in the blank with your dream).
So how much do you need for financial independence? The answer depends on how much you want to spend. What will your dream cost? The last time I mentioned this topic, I received a number of emails advocating an amazing range of retirement styles.
Some were adamant that one needed MORE income during retirement than while working. Their plans included traveling and helping their kids and generally doing all the things that they didn't have time or money to do when they were occupied with getting. Others spoke about how being retired let them revert to a simpler lifestyle someplace where the cost of living was low. Fishing and gardening can do wonderful things for your grocery bills, as well as your state of mind, and the health benefits may add years to your life -- more years of spending, even if at a low level.
There is no formula that can possibly work for everyone. Retirement planners who assume you will need 70% of your working income during retirement and will live to be 88 are useless. They must have been designed by people using statistics instead of their brains.
Obviously, you need to figure out for yourself how much you want to be able to spend in retirement. That's a fun exercise. Just how much do 'round-the-world cruises cost, anyway? Make a list. Make lots of lists. One thing is certain: Anyone who tries even the least little bit can outspend their income with ease. That can turn a pleasant retirement into a nightmare. All of the articles about credit card debt that seem aimed the young to middle-aged apply in spades when your income is fixed or dependent on investment returns.
The process of deciding how much income you need is a series of trade-offs. The more income you need, the more principal you must start with, which means the longer you have to work. The process is far more complicated than I have space to discuss, but it is a very important process and one that deserves far more input than many retirement calculators offer. Our Foolish Retirement Calculator is one of the best I've used even though it only allows you to input a life span of 115 years, which is rather shortsighted I like to think.
Once you have a figure in mind, our Retirement Area has an excellent article on how much one can withdraw from a portfolio each year without running out of money, even if the market goes into a tailspin for a few years. No one wants to run out of money before they run out of years.
In fact, the entire retirement area is full of excellent advice for creating financial independence at any age. I need to spend more time over there myself, but who has time with all this getting and spending?
Fool on and prosper!