Making Your Reality Work

Spending & Savings Rates Are More Important Than Returns

Michael Kitces and the Wall Street Journal took on different aspects of the same issue. Kitces did a deep dive on why he believes spending habits are the most important aspect of retirement, more so than market returns (we talk about that here all the time) and savings rates.

I've long talked about not needing to beat the market over the long term provided you have an adequate savings rate and keep your spending in check. We have far more control over those last two and no control over market returns. Kitces argues that between savings rates and spending habits we have more control over spending. It is easier to spend less than to earn more. That makes sense, if someone makes $80,000 as an employee at a company it can be very difficult to extract more pay from their employer. That same person, when faced with a $3000 repair bill for a vehicle transmission might weigh the merits of getting a new vehicle instead of shelling out for the tranny. A down payment alone is likely to be more than the bill for the repair plus however many years of payments. Or if they buy the car outright for cash then obviously the cost of the new car will be greater than the repair and so this person has the ability to choose. There are of course scenarios where they'd have to get a new (or new to them) car.

The Wall Street Journal article was more of a scare piece trying to convince readers that they could end up needing more than they think they will for retirement. They rightly suggest that you try to map out what sorts of things you will want to do in retirement and then figure out how much that costs. It's not that this is a bad idea but they come at it strangely and come to a conclusion where someone would need 130% of their income to retire the way they would like.

The Journal asks how many times a week do you want to eat out and what kind of trips do you want to take? They tell us more we eat out and more extravagant the trips the more we will need. Um, thanks. To which I would add that if you want a new Lamborghini every two years you will need 1000% of your final salary.

I actually don't know if this is a Lambo or not, I saw it at the Hoover Dam on the way to Las Vegas a couple of years ago.

These types of articles can go in many different directions. This one tries to scare you, some tell you that you don't need anywhere near what the experts say, Kitces takes a stoic approach in telling you to focus what is in your control (I like that very much) and there are probably other angles to take too.

I am probably in the middle of all of these. As I said spending and savings rates are far more important than market returns. The long term average return for equities is 7-10% depending on the period studied. It is not reasonable to expect that your returns will be far ahead of that average. If your plan needs that then you need to change your plan. It could happen but you should not expect it. You can be close to that long term average, especially if you avoid succumbing to emotion and that can be sufficient.

Depending on what online calculator you use or the software used by your financial advisor or relying on some generic rule of thumb like 70% of your income (that last one is a lousy idea), when you retire you will have some amount of money and no matter what the calculator, advisor or 70% rule said way back when, whatever you end up with will be your reality and you will have to make that work.

If you thought you needed $875,000 and you ended up with $825,000, it should not be that difficult to make it work. If you end up with $430,000 then you're going to need to change something; maybe that means downsizing, working part time or something else but this is manageable with enough forethought. What I mean by forethought is that if you've thought all along you needed $875,000 to retire at 65 and you get to 58 with $150,000 or 63 with $300,000 you have visibility for coming up short of $875,000 and you can start then, before you retire, to try to figure out how you can adapt.

If you thought you needed $875,000 and you ended up with $100,000 then you arguably have an emergency fund, not a retirement fund. That might be harsh but it is true and it doesn't have to be due to poor spending/saving habits. If something medical comes along that drains your finances over a few years, you need to take care of that and when it is hopefully resolved you need to adapt to your reality.

Life happens and it can change expectations for retirement. Maybe you inherit money that you were not expecting, that needs to be factored in. Maybe you shell out a lot of money for someone to go to school, a cousin of mine started medical school when he was around 50. I don't know his financial situation but I doubt medical school was cheap.

The focus of my writing on this blog and continuing in my book is about trying to help people solve their own problem, create their own solution. Retirement has evolved in such a way that for most people they will need to address it differently than their parents and that needs to start years before your actual retirement date. Waking up on day one of retirement and asking yourself, "ok, what the hell am I going to do now" is essentially saying "I give up." Again, I want to stress planning is more than the dollars and cents, as the Journal says it is also knowing what you want to do.

Speaking of my book, Random Roger's Rules: Building Blocks For A Happier Life is starting to sell some copies. Half of the next proceeds go to Walker Fire. I believe it can help a lot of people and I hope you can check it out.

Comments
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Flying Robot
Flying Robot

I can't help but think a lot of people will end up making adjustments, but also it works out ok for most people. For our age and income, my wife and I are in the top 5% when it comes to net worth. Our income is barely top 10%, with two professional incomes, but neither of us make 6 figures. I think we can retire by about age 61 +/- a few years (the snowball is in motion, it's mostly a matter of returns at this point.) For all that, I don't see us living an extravagant life style. I've budgeted 10% of retirement spending for travel, but other than that we'll continue to live in our nice but not palatial house, drive older cars, buy our clothes at Kohl's and Costco.

Counterpoint, though, my FIL on the other hand has barely 6 figures saved, but has a pension and SS and lives in a low cost of living area, and he has everything he wants. A lot comes down to the choices we make, not good or bad, just different.