Are You Saving Too Much for Retirement?
There are people out there who may be saving too much for retirement—and you might be one of them!
Don’t get us wrong, building your savings is a good thing. In fact, we’re in the business of helping people do just that. You certainly don’t want to under-save, but over-saving can also be a problem.
One of the contributing factors is the 4% rule that we’ve been talking about recently, which assumes you’ll need to increase your income withdrawals every year to account for inflation.
But research indicates that people’s rate of spending actually goes down in retirement, especially after age 75 or so. In fact, the Bureau of Labor Statistics says that in 2016 the average annual expenses of people between 45 and 54 was about $71,000, while those age 75 and older had annual expenses of just under $39,000. Spending goes down even when you factor in healthcare.
And this makes real-world sense. Think about it: a $50,000 income today at age 65, at 2% inflation each year, means you’ll need almost $91,000 per year 30 years from now at age 95. Do you think a 95-year-old really needs almost double the income they had at age 65? We say no! How much discretionary spending does a 95-year-old need to have?
So how does this relate to saving too much? If you’re working really hard to reach an amount in your portfolio that’ll give you inflation-adjusted income every year for 30 years (income that you may not even need), you might only be making your heirs happy with a larger nest egg to leave them.
Of course, that’s not necessarily a bad thing. But working extra years at a job you don’t like to give yourself income that you may never need can take a toll on your health or cause you to miss out on special family events because you’re working long hours—and that’s not good.
The 4% rule says you have to give yourself a raise for inflation each year, which of course means that your portfolio has to be that much bigger at retirement in order to supply you with all of that future income well into your 90s.
Let’s say you’re 60 years old right now and you want to retire in a couple of years, but you do the math and find out that your portfolio is maybe a few (or several hundred) thousand dollars short of giving you that income you’ll supposedly need. You might just toss your hands in the air and say, “I’ll never be able to retire.”
Wouldn’t it be nice to know that those future income figures might be wrong and that you just may be able to retire on what you have right now? It’s all about having a strategy. If you want help making one, give us a call. We’re here to help make it happen for you.
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Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.