Last year, I wrote that I felt that some people may be over-insured and that financial advisers and bloggers held the standard much too high for what qualifies as a sufficient amount of life insurance. A recent article on Untemplater got me thinking that this same is also true for retirement.
Just as with life insurance, financial planners and personal finance bloggers alike bemoan the low balances of most retirement accounts and fear that people will not be able to retire. I’m not saying that I disagree with them that many people have too little or even no retirement savings. I’m a little behind where I would like to be myself.
But what I am saying is that the number that many gurus expound is just too high. If you listen to that advice, you will believe that you need millions and millions of dollars for retirement and if you don’t save that much, you will be stuck eating “dog food” to get buy. I believe that this is simply untrue and hurts more than it helps.
Retirement Age and Life Expectancy
Retirement calculators and gurus assume that you will retire at 65 and live until 85. I guess it’s better to be over-prepared than under-prepared. But are either of those asumptions actually correct? Social Security has been slowly increasing the age at which you can receive full benefits. For those born after 1960, it is currently 67. I wouldn’t be surprised if that number continues to go up so that those of us born in the 70’s and 80’s see 70 as the full retirement age.
In my own planning, I consider 65 as my worst case senario, 70 as my mean case, and not retiring at all as my best case scenario (I hope to never have to retire, see why in Is It Time to Retire the Concept of Retirement?)
Those same calculators give 85 as the life expectancy. Really? In the US, current life expectancy is 76 for males and 81 for females. Japan has the highest life expectancy in the world, at 83 overall. Granted, everybody has different health and genetic factors that affect their longevity and many people live into their 90’s or later. If you have one or more family members that lived past 85, then by all means, adjust the age in your retirement calculator.
But the same factor goes both ways. Not a single person in my family has ever seen 80. Most have been gone by 75, and many before 70. Meanwhile, I work in an industry where there are an average of 18 deaths per year. Everybody I know who has been doing this job for more than a decade knows somebody who has been maimed or killed at work. Considering those factors, if I make it to 65, I’ll be doing pretty good.
How much money do you really need in retirement?
From Financial Samurai: $255,000 over 20 years is only $15,500 a year until you’ve got zero. Here’s the thing. If you live a debt-free, frugal lifestyle in retirement, than $15k is quite sufficient. By my own calculators, I will need $10,000 in today’s dollars.
Let’s take a look at the expenses in your budget. For me, rent is by far the largest, at 48% of my budget. Once we get the debts paid off in 5-6 years, we plan on buying a house. With a 30 year mortgage, it will be paid off around the time I’d be reaching retirement age. Right there, my need for retirement income drops in half. Those other debts are long gone by then, and they account for 18% of my budget. Not working means a lot less driving. I don’t hit it often, by my current budget allows for $200/month in gas, or about 7%.
That leaves me with a retirement budget of $700 per month, or $8400 annually. I rounded up to $10,000 to account for higher insurance costs in my old age. Now, I’ll grant that that is just in today’s dollars, and the amount I’ll be spending then will be much higher. According to CNN Money’s Retirement Calculator, it will be approximately $26,000. That’s 40% higher than the number Financial Samuari listed that you would get from the average 401(k) balance. But the number he was quoting was the average for 55 year olds. Inflation has a lot less time to cut into their balances.
Current Advice Hurts More than it Helps
I think that writing articles about how dire the situation is doesn’t help anyone and hurts an awful lot. When you read that your retirement savings are less than half of what some rich guy says you need for “basic” survival, you are prone to think, well, why even bother trying?
What do you think? How much money do you really need for retirement?
This post was found in the June 23rd Lifestyle Carnival at: http://fatguyskinnywallet.com/lifestyle-carnival-6-23-13/