St. Paul’s first letter to Timothy (chapter six, verse ten) tells us “the love of money is the root of all evil.” Hard to improve on that. Mark Twain allegedly did so, quipping “the lack of money is the root of all evil.” When it comes to retirement, both maxims apply. As with working life, more money means more opportunities. Worker or retiree, you can be a happy, poor person, or a miserable rich person. The differences appear in the many ways you get there.
The key point is this: since you’re not working (remember our definition from Part One), your ability to generate resources may become limited. If you have a pension indexed to inflation, consider yourself greatly blessed. If not, there’s social security as a safety net (if you’re an American). If you have invested in a retirement account, it may continue growing, but you’ll be tapping it as you go, which limits the overall growth and total available. The inputs side of the equation, less a winning lottery ticket or a rich uncle’s will, is a fairly constant constraint.
Meanwhile, you do have great control over your expenses. Your spending for commuting, maintaining a wardrobe, and business expenses all drop dramatically. You can live where you want, which could be much less expensive. You can take time to comparison shop, and seize opportunities for deals and discounts which were out of reach during the workday. But you’ll also want to do things previously postponed (like travel or a hobby) which might be expensive. And you’ve got to place a bet which most of us avoid: how long am I going to be doing this? Most importantly, you control this variable (expenses, not when you check-out).
Since financing retirement is mostly a math problem, it is actually the easiest part to master. When should you start saving for retirement? Yesterday. Money set aside early compounds (remember the magic of compound interest?), turning the few dollars you saved in 1978 into thousands today. The amount is much less important than the fact of investing and not tapping it early. By the way, this is my biggest complaint with Millennials and Zoomers today who are living the digital nomad lifestyle, in effect moving retirement forward so they can enjoy it while they’re young. Your traditional work years (ages 20-50) are your peak earning years. By reducing your income in this period, you reduce what you can invest, and thus surrender significant compounding of your investments. I hope they are doing the math, too, while trekking across the globe!
How about those other young folk buying into the FIRE (Financial Independence, Retire Early) concept. Basically, the idea here is to restrict your spending while young, invest wisely, then retire very early and live off the wealth you created. Some challenges here are: (1) actually restraining your spending while young (hard, not impossible), (2) investing smartly to maximize your wealth (hard, not impossible), (3) guessing how long you’re going to be retired if you do so very early (damn near impossible, but essential to solving the FIRE calculation). It’s a simple math problem for a 65 year-old retiree to project they’ll live approximately fifteen more years, and a small error is easily covered. But a 40 year-old retiree planning to live another forty years? This is double jeopardy, where the “scores can really change!”
What if you don’t have a pension, didn’t save much (or anything) for retirement? Well, you have a lot of company: 45% of baby boomers in the US have zero retirement savings. If you’re planning on retiring under these conditions, you’ll need to seriously consider how to drive your cost-of-living down to meet your social security level means. Folks who through no fault of their own found themselves retirement age but with no other resources were a major source of expats in Mexico once upon a time. That is becoming more difficult to pull off, as the Mexican government keeps raising the income requirements for residency (temporary or permanent) while tightening up enforcement of tourist visa overstays.
I’m not going to get into all the ways one can amass wealth, as that is a path well-trod by many financial planning experts (which reminds me, retaining one of these experts, especially one who gets paid by the size of your holdings and not by the amount of trading, is a great idea!). Suffice it to say: live within your means, invest and diversify, avoid keeping up with the Joneses, and don’t get divorced. Maybe I will write a blog on how to amass wealth.
To finish with one more Die Hard reference, the “fly in the ointment, the monkey in the wrench” of retiree financing is your health. Health care costs, whether routine or traumatic, can bankrupt even the frugal, life-long saver. Having good health insurance is critical, but hard to do. You can’t really save your way past the risk of long-term care expenses. You will get old, you will get sick. Maybe you’ve won the genetic lottery. Maybe you exercise and eat a healthy diet. We all do what we can. I prefer to think of it this way: if you face life-or-death health issues, retirement financing is the least of your worries.
In Part Three, we’ll consider how to transition to retiree, smiling or not.
Your advice is great but why didn’t you tell me when I was 20—????? Fortunately I found another path to living a comfortable retirement—sell a few tons of cocaine and when that money id\s gone –marry a rich woman!!!!!!
Thanks Pat. Looking at retirement in a couple of years (or less). Still enjoying the work, but have to make the leap sometime.
Wisdom, Pat. Thank you