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Save ’Til It Hurts

Richard Quinn

I FREQUENTLY FIND myself criticized when I state my fiscally conservative views on saving and spending in retirement. One fellow recently said I had no compassion and I was scaring people.

If folks are frightened by my urging them to retire with the ability to replace most of their preretirement income, then perhaps they should be scared.

I’m also criticized because I have a pension, and so don’t rely on investments for my income. As a result, I’m told, I don’t understand most people’s situation today.

I do know what it means to make ends meet, however. My monthly pension in 2021 is the same as it was in 2010 when I retired, and that’ll never change.

Today, most workers are on their own, with no pension plan to count on. They need to accumulate a large pile of savings to generate their desired retirement income. To me, that’s even more reason to aim high, and preferably for 100% income replacement.

When I bring up the topic of income replacement, an underlying issue frequently pops up. Individuals want to retire in their 50s or early 60s. They conclude that, if my ideas are followed, they’ll have to work longer. Maybe that’s what’s scary to them.

I retired at 67. By working longer, I knew my pension would replace 100% of my base salary. If you retire at 55, the numbers are much harder. If you start with 70% income replacement and think it’ll get you through 30-plus years of retirement, you’re dreaming—unless, that is, your idea of a retirement lifestyle means significant changes, and not for the better.

There’s another area of confusion: expenses versus spending. They aren’t the same. People who create detailed retirement budgets based on their expenses are shortsighted. Expenses are what you need to live. Spending is how you want to live, and can include any number of extras—from travel to home remodeling to helping children and grandchildren.

Should the goal of retirement be just to cover the bare essentials? I understand the challenge of creating 100% income replacement. But remember, Social Security alone may get you 35% to 40% of the way there. Besides, what’s wrong with having some money left at the end of the month? That extra cash could help you cope with an emergency, deal with high inflation or wait out a lengthy market downturn. And what about having extra money just for fun?

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Rob Jennings
Rob Jennings
8 months ago

1 quibble:: 1- “Your retirement income should equal your base pay”. In our case, our retirement income equals what we took home after taxes and retirement plan contributions (401ks) and extra contributions to savings. In other words, what we lived on. If have a defined contribution plans like many people do (unlike those who for example have a pension and did not have to pay into it), this is what your budget was based on. So that is our definition of “base pay”-its not gross, its net, take home, after taxes and retirement contributions etc.. I do agree on the expenses-we include essentials, discretionary (travel etc) and also some for unplanned/lumpy.

R Quinn
R Quinn
8 months ago
Reply to  Rob Jennings

I base it on gross pay to allow more flexibility and – believe it or not – ongoing savings in retirement to maintain emergency funds. If those funds are depleted perhaps used to deal with bear markets even, they need to be replenished IMO. I have a pension, but I also contributed to a 401k.

When you were working and you lived on was suddenly not sufficient for some reason, you had options like changing savings rates, that flexibility is limited in retirement if net income equals expenses.

I just like some fat in the spending. Stuff happens.

Brent Wilson
Brent Wilson
8 months ago

I agree with some points. You need to consider not just basic expenses, but the total spending you will have to achieve the life you want. This includes thinking through large, one-time expenses and having a buffer for unplanned expenses.

But I’m not convinced you need to base your retirement spending target on your pre-retirement income. Your retirement doesn’t care about what you used to make. Only how much you have in your portfolio, other expected sources of income during retirement (social security or pension), how long your retirement will last, and your expenses.

But even with this approach, you have to remain flexible and I would still agree with the title of the article that one should “save til it hurts.”

R Quinn
R Quinn
8 months ago
Reply to  Brent Wilson

Not your spending target, but your income target. My view is that your initial retirement income – from all sources – should equal your pre-retirement base pay. Spending may be different, but overall, including discretionary spending I don’t see and have not experienced a significant decline.

An
An
8 months ago

Your definition of expenses is my definition of basic living expenses. My total expenses include all my spending including taxes and the like. Basically the total reduction to my net assets and income for the year.

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