Retirement Planning: How Much Money Do We Really Need?

I want to win the lottery. I know the odds aren’t exactly in my favour, but if I win, I’ll rest easy that I can retire in comfort.

Short of winning the lottery or some similar event, I worry about having enough money to last the rest of my life. Even though I save and invest, and I have many years before I check out of the workforce, I’m still concerned.

I think most people share this worry.

A few years ago, a popular book, The Number, set about finding the answer to the question of how much we need to retire, but it never really solved the puzzle. Like so many financial advisors (who are good at their jobs, don’t get me wrong), books on this subject start by asking consumers to outline their anticipated expenses in retirement, as well as their assets.

Then it becomes a game of math.

If you invest for X years and earn Y% return, then you’ll have Z amount to meet your expected obligations. But what if I can’t work for all of X years, or my return falls short of Y%? Then Z is sure to suffer.

At some point we all realise that if we do this wrong and end up short of funds, then our quality of life in retirement will go down the drain. By that time, we’re past our working years, so there’s not much we can do about it. We don’t get a second chance to build our retirement savings.

Those are scary thoughts, indeed.

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Gearing up for retirement

Think about the craziness of preparing for retirement. We are told to put away enough money so that it can grow to meet our needs. OK, so start with an easy question like, ‘how long will we be in retirement?’ No one knows (hopefully!), so we have to guess.

How much will we earn on our investments? Again, no one knows. And don’t forget that once we reach retirement, we have to decide the rate at which we take money from our accounts, which is another guess.

With something as important as the quality of our lives during our retirement years hanging in the balance, we have to guess at major components of our planning — the time frame, the returns, and the rate of distribution.  Somehow this doesn’t give me a warm fuzzy feeling.

The anxiety I feel, which is shared by so many, is leading to some interesting outcomes.  Robert Shiller wrote in The New York Times that this anxiety is driving investors to chase assets, buying them at almost any price simply to have their money invested. Fearful of losing the value of time in the markets, we rush to buy stocks and bonds that have already moved up in price.  Shiller’s point is that, through our anxiety, we drive asset prices to lofty levels.

These same concerns could lead us to consume less and save more, which only makes matters worse by increasing the amount of cash chasing investments.

As I started thinking about this the other day, it struck me that what many of us crave is the defined benefit plan that so many of our parents enjoyed. We want guaranteed income for the rest of our lives with no hassles and no worries.  We want to put the risk of investment loss or tortured planning over time horizons onto someone else.

At the end of the day, it all comes back to the same thing — there is no simple solution to preparing for retirement.

The answer to the question of ‘how much do I need?’ is simple: more than I have today. And I need it spread among different types of investments and opportunities, so that if any one thing fails, it doesn’t sink the whole ship.

Unless I win the lottery…then it’s all T-bills and tequila!

Regards,

Rodney Johnson,
For Harry Dent Daily

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