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Old Arguments

Richard Quinn  |  January 22, 2021

THERE ARE TWO GREAT debates in retirement planning: whether the famous 4% rule is valid—and how much income folks need, relative to their final salary, to retire in comfort.

I find both subjects frustrating, in part because there’s so little consensus. I also find much of the advice way too complicated for the average American.

I participate in NewRetirement’s Facebook group and occasionally give my views on both topics. I recently expressed the opinion that the goal in retirement should be to replace 100% of the base income you earned immediately before retirement. I emphasize “immediately before” because that amount typically drives your current standard of living. Commenters said my 100% replacement rate is ridiculous—but those who disagreed suggested the right target should be everything from 30% to 120% of preretirement income. The thirty-percenters planned on moving to a farm. Most commenters supported 70% replacement.

Paying off a mortgage lowers living expenses, I was told. Those folks missed the point. Paying off that mortgage a few months before retiring is one thing. But if a couple pays off their mortgage several years before retirement, their spending has likely climbed, as they took advantage of the extra money available to them each month.

In making their case, some folks claimed living expenses will decrease significantly once retired. This was from people who were several years from retirement. Yes, expenses may change once you retire, but they probably won’t decrease and, even if they do initially, there’s still inflation to consider. Some spending may be eliminated, like commuting, work clothes and payroll taxes. Other costs, like health insurance premiums, will likely increase. My total premiums for health insurance, including Medicare, are five times higher than when I was working.

Moreover, once retired, chances are your discretionary spending will increase significantly, thanks to travel, hobbies, dining out, grandchildren and so on. Yup, these expenses are discretionary. But isn’t that what an enjoyable retirement is all about?

Other people commented that moving to a lower cost area would cut spending. If that’s the plan because you want to move, fine. But if moving is a necessity to get by in retirement, that’s another thing. It may mean your retirement savings can’t sustain the standard of living you really desire. In retirement, “frugal” isn’t a dirty word—unless you have no other choice.

Some folks seem obsessed with creating a retirement budget, going into great detail about every penny they expect to spend in retirement. Good luck with that. Certainly, having a good understanding of major living expenses is important, but there’s no need to stress over where every penny will go, which is impossible in any case.

One person asked me to outline my budget. When I said I didn’t have one, there was more criticism. “How do you know what you spend?” I was asked. You’re kidding, right? I can tell you exactly how much I spend each month.

I spend an amount equal to my net monthly pension and Social Security, except for any amount left in the bank at month’s end. Discretionary spending is automatically limited to what remains after all fixed expenses and credit card balances are paid in full. Someone may say, “That’s nice—you can afford to do that.”

But it’s not a matter of what we can afford to spend. Rather, what’s important is the amount we can’t afford to spend—otherwise known as living within our means. Once you know how much you can reasonably spend, the next question is, “Where does the money come from?”

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I recently saw a Zoom discussion about retirement planning. The “expert” said to avoid the 4% rule at all costs. His reasoning: If you take just 4%, there would be a lot of money left over and you’d be needlessly deprived. How does he know that 4% means depriving yourself, when he doesn’t know your desired lifestyle or how big a portfolio that 4% draw is coming from?

A talk show advisor expressed a similar view. “Spend it down,” he said, noting that you earned that money, not your kids. But spend it down by what age? His crystal ball must be a heck of a lot better than mine. Allow me one of my favorite words: balderdash.

Here’s the deal:

  1. Use your retirement money to maintain your lifestyle, including on things that don’t count as necessities. Don’t deprive yourself out of guilt.
  2. If it makes you happy, plan on leaving money to your children or to your favorite charities.
  3. Make sure your plans provide financially for a surviving spouse or other dependents.
  4. Try not to end up as a financial burden to your children.
  5. If the 4% rule doesn’t give you enough to live on, you either need to save more during your working years or withdraw more than the rule specifies—and the latter means there’s a risk you’ll run out of money. If 4% leaves you with extra money, invest the excess or take less than 4%. It isn’t that complicated.
  6. Use the 4% rule to estimate how big a portfolio you need for retirement. How? Take your base pay. Subtract your expected Social Security benefit and any pension you’ll receive. The remaining income will have to come from your portfolio. To find out how big your portfolio needs to be, simply multiply the required income by 25 (or divide by 4%, or 0.04, which is the same thing). Result: You’ll know how big a nest egg you need to replicate 100% of your base salary. Happy to live on 70% instead? You can adjust the calculation accordingly.
  7. Tell the experts to go live their own life.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, he was a compensation and benefits executive. Follow Dick on Twitter @QuinnsComments and check out his earlier articles.

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