One of my neighbours in New York is a former comedy writer. In fact, he was one of the head writers on the long-running sitcom “The Golden Girls,” a colourful depiction of life in retirement. Four retired ladies living together in Florida, enjoying a life of socializing, recreation, and … other activities.
If my neighbour had to write another sitcom about retirement today, I think he would be at a loss for jokes.
The days of working for 40 or 45 years, finishing at age 65, retiring to your summer home in Maine, and collecting enough Social Security and pension dollars to live happily ever after, are fewer and farther between. This was the sobering message I shared this week via webinar with a nationwide group of retirement plan participants, part of my recent partnership with MassMutual’s Retirement Services Division. The point wasn’t to demoralize but to get participants to think strategically about the critically important issue of retirement planning and saving.
I don’t want to say that times are getting worse. It’s just that circumstances are different and the faster we can adapt to changes and accept the realities before us, the more likely we can understand what it takes to retire well, how to best take control of our futures and enjoy the golden years … even if those years are starting later in life.
In fact retiring at 65 is becoming increasingly rare. There are a few reasons for this, namely: the economic crisis, inadequate savings, the Social Security deficit, and greater life expectancy.
The most popular question regarding retirement is, of course, how much will I need? But that’s not where I’d start. Consider answering this first: what will retirement look like for me, personally? What’s the visual? After all, like any other financial goal in life, you can’t attach a cost before you know what it entails. As you prepare for retirement, imagine what life will be like. This not only gets you in the right mindset, it can help you make important savings calculations.
visualisation is a psychological technique and it can play a tremendous role in your financial planning. It’s something humans are inherently good at. In my research for “Psych Yourself Rich” I interviewed Dan Ariely, author of the New York Times best-seller “Predictably Irrational” and Professor of behavioural Economics at Duke University. He tells me that, “we do more vision more hours of the day than we do anything else and we’re good at it.” “What’s more,” says Ariely, “when it comes to visual illusions, we can see the mistakes.” visualisation will enable your whole body and brain to understand how this accomplishment—in this case retirement—may (or may not) resonate in your life.
To visualise retirement clearly, you must be really honest with yourself and imagine all the different scenarios that could play out. Ask yourself the following questions:
- Will I need to continue to earn money?
- How do I envision working in my 60s? Starting a business? Currently, baby boomers and those over the age of 60 account for more than 50% of small business owners in this country.
- What will I do in retirement? Where will I live?
- What kind of downsizing, if any, am I comfortable doing (e.g. reducing fixed expenses, moving to a smaller home with a smaller mortgage, selling clutter, going from two cars to one)?
- Who will take care of me if I become sick?
Here are some things we can all visualise with some certainty:
- Living a long time. There is a good chance you (and your partner) will live longer lives than the generation before you. That’s why most financial advisors now recommend that clients plan for a 30-year retirement. With life expectancies on the rise, it’s probably safe to assume that number will increase down the road.
- Inflation. While increases in the cost of living have been modest for the past several years, that trend will likely end soon. Experts predict that an inflationary period may follow in an economic cycle like the one we are currently experiencing.
- A life without Social Security. With the government-funded program spending more on benefits than it receives in revenue, its demise is almost certain unless the program is revamped. Planning retirement without Social Security will take the uncertainty out of your future.
From here we can begin to answer the big question of How Much Money Do I Need? There are a variety of calculators online that can provide a ballpark figure.
Two such examples are:
Each is different, but like most, they take into account baseline variables including: your current age, when you plan to stop working, your salary, how much you’re saving in retirement accounts (both a 401k and other vehicles), and your anticipated lifestyle. I can tell you this—that magic number may be in the millions.
Let’s say that through your calculations, you determine that you’ll need to save enough to reach 85% of your present annual income for every year of your retirement. So if you make an average of $50,000 a year, 85% is $42,500. That works out to about $3,542 per month of replacement income.
The key is to check in with your retirement savings periodically. While you may arrive at an equation showing that if you save 12% of your income each year in a 401k you’ll meet your retirement savings target, you need to check in occasionally to make sure you’re on the right track. After all, the percentage is just an estimate. And of course, life changes.