You probably need less money than you think for retirement.
One of the biggest problems with money is that our feelings about it are always relative. Many assume that once they hit a certain level of income or net worth, all of their problems will magically vanish. Unfortunately, what typically happens when you make and save more money is you begin comparing yourself to people who have more than you instead of your previous levels of wealth.
This phenomenon, known as lifestyle creep, causes you to spend more and more to keep up. Since there will always be people richer than you, it’s difficult to feel wealthy even when you are. Even people with millions of dollars don’t always feel rich.
Some mythical number
Consider this, despite owning a home worth almost $400,000 in Dallas and a condo in Hawaii, Tom Thompson and his wife don’t feel rich. In fact, having more money has just resulted in more bills. Despite an annual household income of about $450,000, Thompson worries about his job stability at an ad agency where losing a big client could mean a layoff.
“We’re not living paycheck to paycheck, but I feel like we have looming expenses,” he said. “My personal definition of rich is the ability to buy or participate without concern, and I do not have that.”
Thompson’s situation perfectly encapsulates why some mythical number in the future probably won’t solve all of your problems.
The saver’s mindset
Financial advisors often act more like therapists than number-crunchers with many of their clients. We all have a weird relationship with money in some form or another. To be fair, this is only money in retirement accounts like 401k and IRAs and doesn’t include taxable money. Still, the point remains that people with seven-figure portfolios are in the minority.
While some wealthy individuals spend like crazy, most millionaire next-door types have a difficult time going from being a saver to a spender once they retire.
For instance, one individual profiled has more than $6 million saved. Yet he only spends $144,000 a year and expects to receive $40,000 annually once he claims Social Security.
“My plan is to continue living within or below my means, stay invested and have something to leave to my kids,” he said.
This saver’s mindset persists even with such a large nest egg.
The fear of spending in retirement
It’s counterintuitive, but many people overestimate how much they will need based on their spending habits because it can be so psychologically challenging to spend money in retirement.
Research from the Employee Benefit Research Institute in 2018 analysed the spending habits of retirees during their first two decades of retirement:
- People with less than $200k in assets (not including their house) spent down around 25% of their savings in the first 18 years of retirement.
- Individuals with between $200k and $500k heading into retirement spent a little more than 27% of their money.
- Retirees with $500k or more at retirement spent less than 12% of their nest egg within the first 20 years of retirement (on a median basis).
- People with a pension spent the least from their portfolio with assets down an average of just 4% (versus a 34% decline for non-pensioners).
Interestingly, the more secure people were in retirement, the less they spent relative to the size of their wealth.
In conclusion, millions of people are woefully underprepared for retirement due to a low income or a lack of planning. Then there are those people who are prepared but cannot stop worrying about money enough to enjoy it. Everyone worries about money somehow, and few people have it all figured out. However, it’s important to remember that you probably need less money than you think for retirement.
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THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP AND YOU MAY GET BACK LESS THAN YOU INVESTED.
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