There is only one thing left to discuss about retirement that seems to be the most over-discussed thing about retirement: your current lifestyle. We, meaning all of the folks who regularly weigh in with their thoughts about risk and reward, how to use a 401(k), taxes and inflation, contributions and savings discuss the ways we can adjust our expectations.
And the you in retirement planning has been discussed at length as well, from how long you will live to how you should spend down those hard earned dollars to your generally erratic behaviour when it comes to the whole process.
Yet I keep coming across the same, almost volatile term, the one that is likely to have the largest and longest lasting impact on any plan, good or bad: your current lifestyle. Apparently, how you live today is supposed to be the goal you are striving for. But is this realistic? Is it even possible?
One of the first things we need to do is answer those questions based on how your current lifestyle looks compared to your past lifestyle. In almost every instance, it has evolved over the years, perhaps adding nuanced layers to what you didn’t consider a “need” in the past to a “can’t-live-without” necessity in the present. Is this evolution of your own attitude to what is important likely to play a role in what you think your lifestyle will be in the future?
Fresh into the workforce, you probably have adjusted to your new life of poverty. For those of you who began this journey without subsidized help from your parents know what it is like to tote around a bag full of college debt, suffer the low paying entry level job and scrap by enough to pay for your new lifestyle. Looking back you wonder how you did it. But more wondrous was the fact that based on that level of austerity, you pulled yourself up and moved into the next phase of “current lifestyle”.
This second phase of your current lifestyle involved the pursuit of more permanent residency, a chance to raise a family and even take the occasional vacation. This lifestyle move was far from inexpensive and perhaps demanded more effort at your workplace, closer accountability for how you spent your money and making the tough decision about how much you were going to put away for the future. This is perhaps the most costly phase of any “current lifestyle” and the one that has the most direct impact on any calculation of what would be the next phase of your “current lifestyle”.
By the time you reach the last phase of your “current lifestyle” you have become accustomed to certain expectations that your financial situation affords. It is this last and final phase that impacts your thinking about how retirement should look. That said, it’s no wonder that so many of us are anxious about those years that we have planned for in the near-future.
Each financial step in this process came with increased opportunities to earn more to support those lifestyle changes. Each change came with its challenges, the risk and rewards of investing, taxes and inflation and added to that, the people that may have depended on you during this process. But current income trumped those issues and you coped, some better than others. Nonetheless, you made it to the final phase.
But the thinking that the final phase of your lifestyle is something you can maintain when there is no (working) income, no way to adjust for taxes and inflation, and the biggest adjustment of all, the different aspects of risk and reward (which seem to change from how you invest to how much your health impacts you in the coming years) seems to be the goal we are striving so hard to get. The last thing you want to consider is downsizing your current lifestyle.
But that option may be the only thing left. In the best case scenario, you enter into this final phase without any debt and in possession of your home. Neither of these provides income. Both however provide solace. So how do you manage the unrealistic goal of maintaining your last phase of current lifestyle? Hard numbers provide some clue as well as the expectations that are considered average.
You will be able to embrace the next phase of your current lifestyle if that lifestyle is based on those first years of work. While student loans might be paid for, that financial burden is replaced by taxes. While the expense of living on your own in those first years are replaced with inflation in the later ones, all that is left is the relative income of those low-earning years. Maintain a five per cent pre-tax deduction in your 401(k) and this is your current lifestyle in retirement.
The second phase of your “current lifestyle”, the one where much of the pressure your income experiences is based on the burdens you chose to bear (kids, a house, etc.) can become your retirement lifestyle with a simple 10% rate of retirement deductions. This is wholly tolerable but adds little in the way of wiggle room. You probably recall those years vividly as a time when you got by but you always seemed to be poorer than your income portrayed. This 10% rate contributed to your retirement plan will give you a 50% replacement of your current lifestyle.
Only phase left is the last and final one, the phase that exists in those last years in the workforce, when if you were fortunate, the kids launched and the house was paid for. A 15% or better, lifelong deduction of your pay will give you only about 75% of what your current lifestyle provides. And that is considered typical and achievable under a wide variety of retirement tests and projections.
But most of us fail to consider this, thinking instead the current lifestyle means maintenance of all the bells and whistles that those final work years might provide. There have been numerous reports over the last week or so that point to two things: our portfolios have recovered but only because we continued to contribute to those plans and we still think that we will have to work longer to get to retirement. Problem is that we have never considered the fact that current lifestyle we are shooting for as less. It always seems to be full replacement.
No retirement plan and this includes pensions ever intended to give back a 100% financial maintenance of those last work years in our non-working years. While we have considered current lifestyle to mean various things throughout our lives, we need to consider which one we can live with in retirement. Once you do that, and save accordingly, you will be able to project with some degree of accuracy exactly what the last phase of “current lifestyle” will look like.
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