Brief Background
Readers of this blog are quite familiar with what we call the Basic Actuarial Equation:
Where items on the left-hand side of the equation (including the present value of income from other sources such as Social Security) are your assets and items on the right-hand side of the equation are your non-recurring and recurring spending liabilities.
The straight-forward implication of this formula is that the amount you can spend in retirement is a function of how much assets you have at retirement (including the present value of income from sources other than your accumulated savings). There is no magic involved in retirement financing. Over the period of your retirement, you can’t spend what you don’t have (or otherwise can’t get your hands on).
This basic financial principle about retirement reminds us of the song, “Reviewing the Situation” from the musical “Oliver.” In this song, Fagin sings,
“What happens when I'm seventy?
Must come a time... Seventy.
When you're old, and it's cold
And who cares if you live or you die,
Your one consolation's the money
You may have put by...”
Some people (let’s call them Ants) may look at the implications of this equation and conclude that in order to have sufficient assets to finance their desired level of retirement spending, they should probably save a lot prior to their retirement. But, not surprisingly, other individuals (who we’ll call Grasshoppers) have come up with several reasons (or alternative strategies) why they don’t need to currently save anything (or very little) for their retirement. These reasons include:
Top Ten Reasons Not to Save Now for Retirement
#10—We’ll sell our home and move somewhere cheaper when we retire. This is actually not a bad strategy. Quite a few pre-retirees have significantly more assets tied up in their homes than in their 401(k) accounts. For these individuals, buying a home turned out to be a good investment of their savings. They can use this asset for retirement by selling the home or through a reverse mortgage. However, this strategy can also have downsides, some of which are discussed in this article.
#9—I’ll work forever. As discussed in our post of February 28, 2018, “working longer is a great solution to solving the problem of not having enough income in retirement, if you can make it work.” Unfortunately, this strategy may not always work. There are typically no guarantees that you will be able to continue working at the job you like for as long as you like, so this is a “maybe” or “iffy” strategy. You may be more successful at finding part-time employment.
#8—I’ll rely on Social Security or other government programs. This is also a “maybe” strategy. While Social Security was never really designed to meet all of one’s expenses in retirement, a strategy of continuing employment until age 70 and deferring commencement of one’s Social Security can increase projected income in retirement under current law to modest levels, this strategy will generally not support anywhere near the same level of spending in retirement as before retirement. Also, see our post of June 19, 2018 for discussion of the implication of Social Security’s current financing problems on potential future benefits. Some argue that if most individuals in the U.S. don’t save for retirement, the government will have no choice but to increase benefits. This line of thinking doesn’t appear to us to be entirely consistent with the trend in current political thinking, but we suppose that anything is possible.
#7—I’m going to receive a large inheritance. Apparently the “inheritance” strategy is not as uncommon as we might have thought. This article implies that 63% of “rich kids” rely on their expected inheritance to finance their retirement years. Of course, relying on a large inheritance is always somewhat risky. Those darn parents or grandparents may either live too long and spend the money themselves or they may remarry and bequeath the money to the new spouse. This article, entitled “My Stepmother Stole My Inheritance” points out one of the potential pitfalls of relying too heavily on an inheritance.
As long as we are quoting song lyrics in this post, we thought “God Bless the Child” (originally sung by Billy Holiday) works well for this particular top ten reason:
“Rich relations give a crust of bread and such
You can help yourself, but don't take too much
Mama may have, Papa may have
But God bless the child that's got his own, that's got his own”
#6—My kids will take care of me. On the other end of the family spectrum, some are counting on their children to take care of them for some or all of their retirement years. If you pursue this strategy, you are probably going to want to have serious discussions with your children in advance of your retirement just to make sure they are on board with your plans. Don’t be too surprised if they are not (as they are probably worried about financing their own retirement), and if they are, they will probably want to have more of a say in your current finances.
#5--Saving reduces how much I can spend currently. We understand that you have expenses and it is not easy to save today. We also understand that want to enjoy life today and not postpone enjoyment of life until you are older. Clearly, the trick is to find the right balance between enjoying life today and saving for the future. If you are a Grasshopper who isn’t saving anything, we suggest that you may not have found the right balance yet.
#4---I’m too young to save for retirement. This reason could be considered to be a subset of Reason #5 for younger workers. We get it. You don’t have a lot of income now, you expect your income to grow in the future, your current expenses are relatively high, and besides, you are too young to be even thinking about retirement. And it is true that many people do wait until they are older to start saving for retirement. We will point out, however, that the number 1 survey regret of many retirees (or their advice for younger individuals) is that they wished they had started saving earlier.
#3—We won’t live that long. Many individuals underestimate their life expectancy. You will probably live longer than you expect and there is a significant probability that you will live much longer than you expect.
#2—I’ll win the Lottery. Like we said above, anything is possible. Good luck with this alternative strategy.
#1—It will somehow all work out. This shoulder shrug-Alfred E. Neuman “what me worry?” strategy has probably worked for you at times in the past, so maybe it will work for you when it comes to planning for your retirement. Or not. It is not a strategy that we recommend.
Conclusion
The trick with financing your retirement is finding the right balance between living for today and living for tomorrow. You needn’t necessarily be an Ant, but you are going to need to save more than a Grasshopper. We believe the first step in determining the appropriate balance is to sit down with a calculator (or financial advisor) to crunch some numbers to see how much you should be saving to accomplish your retirement goals. For this purpose, we suggest that you start by kicking the tires on one of our Actuarial Budget Calculators (ABCs) for pre-retirees.
