Anyone who has done any initial research on retirement planning has probably come across the popular advice to plan to live off of 75% of your pre-retirement income while in retirement. In other words, take whatever you are earning before retirement and multiple it by .75 to get your target income for post-retirement. If you earn $100,000 before retirement, plan to live off of $75,000 in retirement.
This simplistic rule of thumb is a great starting point and is logically based. After all, when you stop driving to work, buying work clothes, start paying lower taxes, it’s easy to see how you only need about 75% of your income. Maybe you have even paid off your house, like I plan to do as part of my retirement plan. Given the logic behind this over-simplified guide to retirement planning, I often accept this advice for what it is: an easy instruction guide for those who can’t handle complex equations. In other words, the 75% rule is one of the chapters in a Retirement Guide for Dummies book – and that’s okay; you could even say that it’s a good thing.
Can you sense the BUT coming..?
BUT, there are some thing that push me over the edge. In Stuart Ritter’s artice at T Rowe Price, he makes this introductory statement when it comes to retirement planning (emphasis added):
Because you will no longer be paying payroll tax or saving for retirement, you should be able to maintain your lifestyle and cover your expenses with approximately 75% of your preretirement income. Fifty percent should be generated from your retirement investments, with the remaining 25% coming from Social Security benefits and other sources, such as a pension or part-time wages.
What’s Wrong With This Statement
Here’s a step-by-step analysis of what Ritter does in these two sentences. Building off of the general rule of thumb to plan for 75% of your pre-retirement income, he breaks it down into what you should plan to replace with your retirement savings. He suggests that 50% of your pre-retirement income (2/3 of your post-retirement income) should be covered from your traditional retirement investments. In other words, things like your 401(k) or 403(b), IRA, etc.
Before I get into what concerns me with this approach, let me first say that I applaud his efforts – and T Rowe Price for that matter. I invest a portion of my retirement portfolio through TRowe and would gladly recommend some of their investment tools. His article, in general, provides valuable advice to the novice investor or someone who doesn’t want to stress about their retirement plan, and offers important advice to investors, essentially persuading them to invest more money.
But, what it also does is subtly encourage saving less for retirement. This is how I read his statement. “You don’t need to save enough to cover 75% of your income – you only need to save enough to cover 50%. The other 25% will take care of itself through social security, a pension, or part-time work.” As I suggested, this is probably great advice for someone who fails to save anything because they get stressed out about having enough. But, it’s probably not the best advice for an earnest person wondering if they need to be saving more money – someone like me.
My Approach to Retirement Planning
I’m someone who likes to be over-prepared than under. I grew up as a “Royal Ranger” (particular Christian denomination version of a boy scout), where the motto was “Be Prepared for Everything.” I wasn’t brainwashed, nor do I attribute my need to plan for everything to my few years in this program, but I do recognize that my lifestyle embodies this mantra. Just like how I am obsessing over a move that is months away, I’m also trying to be over-prepared for retirement.
That’s why when I’m not a fan of Ritter’s approach. Because when I read that first statement, whether I like to admit it or not, I found myself asking if I am saving too much for retirement. My sub-conscious and commitment to over-saving was challenged momentarily. Luckily, I haven’t changed my approach to retirement planning as a result of this one article. I still ask myself, “How much can I save?” instead of “How little do I need to save?”
Is it Ritter’s Fault?
I don’t blame Ritter. Most likely, he is writing to a particular target audience, and in that regard succeeds at getting his point across, which is to save more for retirement. However, I can’t help but wish he would rock the boat a little more. Given that his main point in his article is to persuade people to save at least 15% of their income, I’m guessing that he understands the importance being prepared for retirement.
But, I do wish he did more. I wish he would stand up and tell people how ridiculous they are for needing such an article. If you ask me, there is a culture of placing a low priority on retirement planning. Retirement planning should not be a last concern. Saving for retirement should be one of the first things you do after paying the bills. While I understand the desire to have the latest, greatest, fanciest gadgets, clothes, and other items, it’s just plain stupid to let this control your life.
Instead, why not try to save more than you need for retirement. What’s the worst that could happen? You have enough money to retire early? Follow your dreams? Able to travel more when you’re older? Able to provide financial support to your children and grandchildren? If you ask me, I would much rather have more money in retirement than I need than not enough – and that starts with re-shaping your approach to your finances.
Readers, do you think it’s possible for our culture to prioritize retirement planning?