By Brad Thomason, CPA
I don’t spend a lot of time talking about budgets, living within your means and having some dollars left over for savings. My focus is retirement, and that’s the primary thing my audience is interested in hearing about (I think…). To my way of thinking, those aren’t really retirement topics, per se. Let me explain.
It’s not a matter of those things not affecting retirement. In fact, they impact it quite a lot. Without them, it’s hard to see how retirement, as a financial proposition, could even be a thing.
In other words, if you don’t have those basics out of the way, we can’t really talk about retirement in the first place. They are essentially the entry requirements. Retirement is about growing capital, over time, so that it can support income withdrawals in the future. Can’t have much of a capital discussion if there’s no capital, nor any basis for knowing what the income requirements might be.
So my tendency to not talk about them is an assumption that anyone listening already has them squared away. Or at least knows they will have to, and is working on it. Either way, there’s not much need for me to bring it up.
But since we are now on the topic, let me mention another assumption. It might not be as obvious as I think these other factors are.
Just because you know that you are going to have some bills in the future, and are saving money today to help with that effort, it doesn’t mean there’s a match between the two. The exercise, ultimately, is not about merely putting back some money, but enough.
How much is enough? Well, as we’ve addressed over a great many of the materials on this site, that’s not an easy thing to answer. The process for answering it is well defined and logical, maybe even so much so that it would be fair to call it simple (i.e. not complicated). But that’s not the same thing as easy, and in our experience, any of the one-step approaches leave something to be desired.
But you can get a broad sense by merely observing a handful of facts that you already have at your disposal. For instance, you probably know about what you spend over the course of a typical year right now. You probably know what your annual income is. What are those amounts multiplied by 15, or 20 or 25?
You may not spend as much in retirement as you do now (though that’s often not the given that some people expect it to be), and you’ll have some help from Social Security. Maybe (hopefully) your capital earns net returns – meaning not only that it makes positive returns, but that it does not give them back at some later date due to losses.
On the other side of the equation, inflation will erode your purchasing power over the decades of your retirement. And medical expenses may show up in ways that pay no attention at all to your yearly budget assumptions. The interplay of these factors, for and against, has a lot of impact on what the answer ends up being.
Then again, to some extent, those impact items have a tendency to at least partially cancel each other out. So using your current income and expense levels as the basis for some rough estimates is not completely off base.
I talk to folks all the time who ask me how they are doing. They show me their numbers, they tell me what they earn and spend. Frequently I take a glance and tell them, surface level, it looks pretty good.
Sometimes though I get the question from people who should frankly already know the answer. I’m not trying to be mean when I say that, and I try not to be unkind to the people who ask me. But if your savings equal one or two times what you spend every year, is there really any question about how long that’s likely to last?
Complex discussions almost always exist within a context of certain assumptions. To meaningfully discuss retirement implies that there is already a level of financial control in place which covers such basics as budgets, consciousness of expense levels, and the accumulation of savings to fuel the capital growth effort. But those aren’t the only assumptions.
In addition, there is a requirement of something we might think of as scale. A sense that the resources bear a logical relationship to the job we are asking them to do. It is not always apparent, without some measurement and calculation, what the exact match needs to be. But when the mismatch is great enough, no such efforts are required. Such disparities are obvious if we only look.
If we look and find them, then we need to realize that the immediate goal should be to get them squared away. Until they are taken out of the equation, all of the rest of the work we need to do to get a retirement win is going to be difficult if not impossible.
Knowing what the assumptions are and making sure they are met is a basic step. So basic it is often overlooked. But just because it doesn’t get the airtime that other topics get doesn’t mean it isn’t important. In fact, just the opposite is true.
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