Ask any financial institution for a retirement-savings plan, and what you’ll get is a big pile of papers covered with numbers. They plug your data into planning software, which then dutifully spits out a series of projections. These are based on factors like rate of return, inflation rates, and some assumptions about how much cash you’ll need for retirement – especially if you plan on living for a long time (as most of us do).
The problem with this process is that while you might expect high numbers, few people are really prepared for the sticker price that pops out. A couple I know recently went through this exercise. They felt confident about their finances: they had worked hard all their lives, raised a couple of kids, paid off a very nice home, and amassed several hundred thousand dollars of savings for their retirement. Their combined incomes were about $200,000 a year.
The planner asked how much they’d need to live on in retirement. Not having done this before, they took a guess: 70% of their current income, or $140,000, would suffice, they thought.
The program chugged away, crunched its numbers, and told them they’d need to save six million dollars for their retirement. Helpfully, the program also told them that they could reach this goal by saving a mere $128,000 per year for the rest of their working lives.
Of course they were horrified, overwhelmed by feelings of financial guilt and a probable decline in their comfortable lifestyle. No way could they save $128,000 a year, of course. But was $100,000 a more reasonable figure? No? How about $65,000 or even just $50,000? No, and no again. They left the planner feeling frustrated.
The problem I have with this sort of exercise is that it ignores a whole bunch of important factors that are part of our “baby-boomer” lives – factors that affect all aspects of retirement planning. This “boomer” generation has enormous flexibility, high levels of skill and many different lifestyle choices.
The most important factor, though, is probably the affluent lifestyle we’ve all got accustomed to nowadays. Most boomers spend huge amounts of money on things our parents never dreamed of. The couple I mentioned above live in a big house, in an expensive neighbourhood, and have all kinds of pricy hobbies – including sending their kids to a private school.
But a quick look at their figures told me that much of their spending would vanish in retirement. By that time, the private school and the big McMansion would both be history. When I adjusted for those expenses, suddenly their accumulation goal seemed perfectly feasible. You can imagine how relieved they both were – and how they wished the financial institution had also thought to factor that information into its number-crunching.
That’s a problem I see all the time with retirement planning: so often, consultants like to reduce it to just a numbers exercise. But those numbers are of little value unless they’re put into context – a context that’s unique to you, as an individual. Questions I ask include these: What do you want? Where will you be living? What’s important to your family? What will your lifestyle be like?
Once you consider all those aspects, and take into account the qualifiers that affect your changing life, you may in fact find that you’ll come up short: you really won’t be able to save enough to support a particular lifestyle.
But that doesn’t mean you’ve failed – it just means that you can use your figures to calculate a financial plan that DOES work. What lifestyle can you support that will take into account what’s most important to you, and still be affordable? Can you live all year at your cottage? Move down to Mexico? Trade your McMansion for a duplex, and rent out the other side?
Another option that’s often overlooked is that these days, baby boomers who are used to active careers frequently want to work at something in retirement. A former executive may choose to move to a different city, find some work he loves, and do it part-time for the next twenty years. When it comes to retirement projections, a few years of consulting income makes a big difference to the numbers.
The good news is that in many respects, we’re the richest generation in history. Our ancestors were both shorter-lived than we are, and far less wealthy. So most bean-counting numbers won’t help you to see and feel your real wealth, until you put it into a reasonable context.
Remember, too, that retirement isn’t a “one-size-fits-all” event. The possibilities are many, and you need to examine them in the context of your personal values. Most of us DO have the raw ingredients to come up with a plan for financial independence. But since that plan is unique to you and your life, you’ll probably have to create a lot of it yourself.
Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com
Alan MacDonald CFA CFP
Ph: 613-788-8010
Cell: 613-863-5343
Fax: 613-788-8078
343 Preston St. Suite 300
Ottawa, Ontario K1S 1N4
