The Decades Leading up to Retirement: Where Should You Be?

Recently I’ve had several conversations with 30-somethings looking to me for help in improving their overall financial health.

Happy feelings ensued. It’s every financial planners’ delight, I say to them, to see people your age smart enough to be getting into action on improving their overall financial health with the help of a financial planner. Most people wait a lot longer . . . and some people never do it at all . . .

I say it’s a delight because, at the tender age of 30-something, there is so much future remaining within which to both (a) build a financially healthy life, and (b) alleviate most any ill financial health issues that a 30-something might have accumulated in the past (student debt mostly be thy name, out out you damned spot).

In fact, I sometimes (always know your audience!) add, You can be a total financial-health-train-wreck and still, at your age, be able to lead a great long-term financial life.

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Retirement planning is the Big Kahuna of financial planing. It’s the one thing that’s on the mind of most everyone who works for a living: will I be able to retire?

Years ago I put together a picture to help answer that question. The picture illustrates two trajectories of what our financial lives typically look like, at the numeric level, as we steer (and sometimes veer and careen and bob and weave) our ways towards financially healthy retirements. The picture scales everything to multiples of annual spending. So, for instance, the picture answers the question, At any given age, how much should I have saved up, stated in terms of how much I spend each year, if I want to retire when I’m 65?

Here’s the picture:

For specific instance, looking at the Pretty Darn Safe green columns, the pic shows that a 30 year old person spending $50K per year (a bit more than $4k per month) would be doing quite well trajectory-wise to have about half that amount stored up, while a 50 year old person earning that amount would be doing just fine, thank you very much, having stored up about $350k.

I can just hear some of you out there saying to yourselves, Ahhhh, to be 30 again. 

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Here are some drill-downs on, and add-ons to, the pic:

    The 4% and 6% Rules of Thumb. The pic is based — loosely — on the much-debated 4% rule of thumb; that approach is depicted in the Pretty Darn Safe set of columns. To this I added my very own (at least I think I might have made it up) 6% rule of thumb; that approach is depicted in the Close to the Bone line.

    Spending in Retirement. The pic mostly fluffs the question of how much people spend once they retire. The old financial planner line of thought was that you’d spend less on dry cleaning, and that somehow your reduced dry cleaning bill, along with some other factors, meant that you’d spend less overall (I’ve worked with some dry cleaners, and they don’t make nearly enough money to explain that old line of thought).

My advice to people is quite different: I advise them to expect that they’ll spend at least as much when they retire as they spent right before they retired and that, at least while they are still able to be active, they’re likely to spend more than that, especially if they have the travel-bug and they don’t like roadtripping-and-cheap-motel’ing it.

So, too, with income taxes: the pic fluffs the issue of whether income taxes are included in the spending scalar or not. This topic can cut both ways in this model; do you see why that is?

   Pensions, Medicare and Social Security. The pic ignores pension, Medicare and Social Security benefits. If you know someone with a pension (largely limited these days to people who worked for the government), then you also know how big a something that is to ignore. Good ol’ fashioned pensions are truly wonderful retirement vehicles for lots of folks. We should all have it so well (and I do mean that literally).

As far as Social Security goes, I count myself among the yaysayers rather than the naysayers. I find the Social Security system to have been a smashing success so far, and believe that Congress can make it long-term healthy with a few tweaks along the lines of what Ronald Reagan and Tip O’Neill did during the 80sif the Ps-that-B (the Powers that Be) let ’em.

Medicare and Medicaid, on the other hand, because they ride on top of our enormously broken healthcare system, are themselves broken; they’ll likely be just fine if we ever manage to get our healthcare system itself healed. Healthcare system, heal thyself.

    Medical and Long Term Care Expenses. Medical expenses and long term care expenses (also known as nursing home expenses or assisted living expenses or convalescent home expenses and the like) in our later years are huge topics. Let’s talk about them some other time, shall we?

    On Models Generally. Like many financial models, the model embedded within the picture above is an unabashed lie. It will not happen. It more than fibs. Fabricates it does.

The model presupposes, for instance, that life is not change and instead presupposes that life is much more like the rocks: constant and unchanging from any time-frame at which we humans might care to observe it during our lifetimes, with the roller coaster ride that is ownership of financial assets magically (and illusorily) transformed into perfect, geometric, arithmetic CAGRs — into compound annual growth rates (aka constant annual growth rates).

And when was the last time you saw one of those? Our world is instead full of growth rates that are random, arbitrary and capricious: we live in a wild and crazy RAC’y world, not a smooth, calmly-flowing CAGR’y one.

That said, though, the model can well illuminate. Because, as it happens, the numbers typically making up the real-life trajectory of a person’s numeric approach to retirement are, when fully delved-into, what I like to call, in a nasally British voice, wickit complicated. If you were to look at real-life examples, then, you, if you’re a normal person, would likely throw up your hands and say, Enough of this and so be it — I’ll just keep on keepin’ on the way I’ve been doin’ it. Out you damned numbers all over the place, out.

Models are the antidote to this predicament. Yes, they surely round the edges and dodge the details, but in doing so they can help you see. Just please do be careful that you not take them literally.

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So how about all the twenty-somethings out there? Am I saying that they should party like it’s [fill in your chosen year — 1999 sounds so last century].

Yes, kinda I am. There’s plenty of time to get fully underway with accumulating and building up financial wherewithal. And — gee — there’s only one decade when you’re in your twenties, newly minted and living life independently for the first time (for most of us). Plus, the odds are that you’ll have plenty of time to live long and prosper.

And am I saying that if you’re in your 50s and you’re way Way WAY behind both trajectories shown in the pic that you’re SOL? No. But I hope you like what you’re doing for a living! Because the best way to make a retirement work (pun intended) is to love your work so much that your idea of retiring is to do less of your work but to continue doing your work and to continue bringing money in through your endeavoring rather than relying solely on your past accumulations to float your boat.

So try this on for size: see what you can do to become (or what you can do to remain for all time) one of those lucky, love-my-work-and-can’t-stop-doing-it sorts, who, when asked about the idea of stopping their work entirely, usually responds with something along the lines of, Are you kidding me? Are you outta your cotton pickin’ mind? Why on Earth would I do that? I love what I’m doing, and I’m getting better at it all the time, and really, really, really want to see just how far I can take it. So why would I do that? 

Here, then, is my main retirement advice, suitable for every person who does not have a fortune saved up big enough to for-sure float their boat for time immemorial, and regardless of which decade of life that person might be in: find something that you can’t *not* do, and be lucky enough to have that certain something pay well enough to float your boat, and then enjoy it and use it well. 

Because, when you have that sort of endeavoring in your life, the numbers will always number-out just fine and to your liking.

And because, with that sort of endeavoring in your life, you’ll be so very much more happy — and so very much more financially healthy — as you make your way towards your later years.

About 1500 words (less than a fifteen-minute read sans links)


PostScript: The kitty was kind enough today to deign to add her own thoughts on this topic. Here they are, with some punctuation, by way of gaps, to assist those of you who are small-screen-readers, provided by her felinal assistant and grammarist, moi:

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