Retirement is not an age.
Retirement is not a number.
Retirement is a percentage.
A common misperception is that retirement is like a destination, a station along the track, a target for our journey. If only it were that simple!
Retirement is not a destination that Americans reach at any particular age. After all, we can’t even agree on the age. Is it 50, 55, 62, 65, 67 … or an age that keeps growing over time? Nor is it a station along the track. If only life’s journey were so straight, chronological, clean and tidy. We live in a Sitcom World but most things in this world aren’t wrapped up in a 30-minute sitcom (with commercials). Retirement vehicles may be called Target Date funds, but there’s a raging debate about what date to target, and the only sure thing is that we’re more likely to miss a target if it keeps moving. Remember, millions of Americans aren’t in control of when they retire (Read: layoffs, terminations, health-related disabilities, reorgs that lead to downsizing, pandemics).
Retirement is also not a number, not a financial number or a guaranteed number or any number that we settle upon using any degree of fuzzy math. I’ve heard some say that you need a million dollars to retire. I’ve heard others argue that today you actually need two million dollars. But it’s such a nonsensical argument that we might as well be arguing about how many Thneeds does one need, since currency in the world of Dr. Seuss makes as much sense as arguing about the currency required in a future world beyond the certainty of today.
Retirement is a percentage. This is a fact. Really the only thing open for debate is what percentage to use, but clearly retirement is a percentage. American workers are encouraged to save a percentage of what they are making today to provide a percentage of what they will need tomorrow. We call it “The Rule of 70” (but I have no interest in thumb-wrestling with anyone who wants to call it the Rule of 80. The principal is the same.
When a person retires they are hoping to replace the income that they will need then from the income that they have now. Some financial advisors talk about income replacement of 70%. Others talk about income replacement of 80%. If your financial advisor is using a much smaller number you may want to find a new advisor. But then most probably wouldn’t suggest income replacement of 100% (or more) either. In other words, when you retire, you will probably (hopefully) be able to replace 70%-80% of your current income.
First of all, this is NOT bad news. The math generally works out because generally a person doesn’t need 100% of what they’re making now in retirement. Why? Because you’re getting all of the big ticket items (home, car, college, etc.) paid off now during your working years. So in retirement (and yes, even if you do travel more) your day-to-day living expenses should be less. Admittedly no one wants to live on less but if you plan on income replacement of at least 70% and you save so well that you are able to replace 80% or more of your income, that’s fine too. On the other hand, if you plan on (or need) income replacement of 80% or more and you’re only able to replace 60% or less because you haven’t saved adequately, that’s a huge problem.
Quick Question (just to make sure everyone at home is keeping score): Why would a person need more than 80% income replacement? DEBT. Conversely, why would a person only be able to replace 60% (or less)? Poor Stewardship.
If a person is a good steward of their resources (living on less than 100% of what they’re making now) and they avoid consumer debt (living on more than 100% of what they make now) retirement is an achievable goal. Americans are hurting today because far too many are living beyond their means with consumer debt like credit cards. When 24% of the average American’s paycheck is going straight towards consumer debt (according to the U.S. Census Bureau) we clearly have a problem.
At PHD. Retirement Consulting we refer to it as “The Rule of 70.” Able to replace 70% or more of your income (which is a stewardship question) and able to live on 70% or less (which can only happen if you’re debt free).
You don’t retire when you reach a particular age. You don’t even retire when you accumulate a particular amount of money. You retire when you’re debt free and when what you’ve accumulated is able to replace 70% (or more) of what you’re making now.
My hope and prayer for you is that that would be younger than age 65. But it means rolling up your sleeves and doing some hard work to eliminate debt and be a good steward of your resources.
Retirement is not an age.
Retirement is not a number.
Retirement is a percentage.
Recent Comments