A scary question isn’t it. We meet quite a number of people who don’t want to even think about retiring let alone thinking if they will have enough money when they finally do.
The answer to the question was the subject of a presentation at a network breakfast I attended. A certified financial planner used a case study to illustrate the point.
We probably all know this: we are living longer. But maybe we hadn’t quite connected the dots in terms of having enough money to retire on.
It wasn’t that long ago that the life expectancy after retirement at age 65 was only 9 years. Now it can easily be 20 to 30 years, so the number of people potentially outliving their capital is going to be quite significant.
The website My Longevity has gathered data to help you work out your life expectancy based on your lifestyle rather than actuarial data. It is worth spending a few minutes to complete the questionnaire to see what your life expectancy could possibly be.
I did mine and unless I get hit by a bus, I potentially will need my capital to last until I am 106!! We have a wee problem Houston!
Anyway, I digress, back to our case study. Here is our imaginary couple, they are in their mid forties; the children have left home and are financially independent of Mum and Dad.
Our couple have an after tax income of $80,000, they have paid off the house (worth about $800,000) so are now debt free, they have an investment portfolio from an inheritance of $30,000 and have $20,000 so far saved in their Kiwisaver (401(k)) and plan to continue to contribute to it.
Now they have no mortgage so they can afford to top up the pension fund to the tune of $1,000 a month. They want to start enjoying life a bit more (i.e. spend more money on lifestyle) and have a bit of time out. The plan is to retire at 65 on an income of $5,000 per month and take the well earned overseas holiday.
They sound very well set up for their retirement don’t they? Well, maybe 15 or 20 years ago when life expectancy was much shorter they did, but they are expected to live into their mid 90’s. So they are looking at being retired for 30 years, in this example they were going to run out of money around 10 years too soon.
At this point I looked around the room, many of the faces had a slightly shocked to stunned look. I could see they were thinking about their own financial position and comparing it to our ideal couple. Many were, like me, coming up short.
So what do you do? There were a few suggestions
- Keep working. In this case for another six years, the additional income and savings helps close the gap.
- Reduce your planned living expenses when you retire. By 20% for our example couple.
- Save more. Oh dear, 86% more saving required in our case study.
As money mentors it is point number 3 that was of interest to us. It sounds quite straight forward to cut back spending and increase savings now to get where you want to be in the future, but it was the least preferred option among the listeners.
There were some very creative ideas on how to bridge the gap, from an enterprising scheme (although probably quite illegal), work on growing the business so you could sell it to fund retirement, through to selling the house and downsizing.
The last is certainly a possibility but not always that easy to do if you want to stay in the same location. Of course there is always the standby fail safe scheme – winning the lottery!
So why is the concept of saving so hard?
It has quite a lot to do with what goes on in our head.
Our brain loves instant gratification and the thought of saving for something that is many years away just isn’t exciting. It is much easier to live and spend for today and worry about money to retire later, but unfortunately ‘later’ has a habit of creeping up on us.
Behavioural economist Shlomo Benartzi has a really great TED talk on Saving for Tomorrow, Tomorrow. I highly recommend you take 18 minutes out of your busy schedule to watch it and more importantly implement what he suggests.
The key thing we all need to do is stop. Take stock of where we are now. Take a deep breath and talk to a certified financial planner to find out if you have a shortfall in your retirement fund. Quantify how much it is and then start doing something about it.
If you need some help with implementing the changes you need to make to reach your financial goals then talk to us, we’re trained to help you.