“How much money do I need to retire comfortably?”
That question was torn apart in a recent article I read. More precisely, the author was ripping into the non-expert experts that were answering the question in various forums online.
It’s an unanswerable question without knowing more about the person asking it and their circumstances.
My answer was clarified by an offshore attorney I met years ago. He defined being wealthy as having enough passive income to cover all your monthly expenses.
That’s an easy answer but not so easy of a goal to achieve.
And most financial advisors don’t take this approach to retirement planning… Mostly, I think, because their clients aren’t likely to ever reach that goal.
Financial advisors put numbers into a spreadsheet, project stock portfolio growth based on historic averages, and assume some annual drawdown of principal to supplement any passive income. They then hope their projections don’t have you running out of money before you die.
The problem most people face during their working years is that they spend what they earn. Even if they max out their 401(k)s and IRAs, they generally don’t create passive income.
This was a lesson I learned early while working for a CPA firm during college. They had many tax clients who earned high salaries… and those clients spent their salaries and then some. Their wealthy clients were small business owners… and real estate owners.
One client bought land and rented it out for communication towers (this was before cell phones). He created a portfolio of income producing properties. This particular client also had frugal spending habits. He didn’t drive a fancy car or have an expensive watch.
The Expense Side
The expense side of the “being wealthy” question has to be taken into account. Obviously, low expenses require less income.
My mother is a good example of that. She didn’t put much aside for retirement, but her teacher’s pension and Social Security are more than her monthly expenses. She’s not rich, but retired comfortably.
A friend who retired young found out the difference between being rich and being wealthy only after retiring.
He earned a good income… and spent it on toys. He had several cars, snow mobiles, and motorcycles. He bought every technology gadget whether or not he needed it.
He sold everything when he retired to “cut back” and he moved overseas with a small early retirement pension. He went from “rich and broke” to “being wealthy” mostly through a shift in his spending and reducing his unnecessary expenses.
He also created additional passive incomes during retirement by investing in real estate, allowing him to expand his spending.
Another friend has been saying for years that he’s going to retire soon, but he still hasn’t.
He wanted to retire early, but for various reasons continues to run his business. Part of the not retiring yet is, he likes his work. The other part, however, is, I believe, to do with this question of how much is enough. He’s another one with lots of toys and even with them paid off, maintenance is a killer.
He thinks he needs more set aside to “retire comfortably,” but he’s not planning on following my definition of being wealthy into retirement.
He’s happy to eat into his principal like his financial planner has projected.
He also balks at my numbers when we talk. He thinks I don’t need as much in the bank as I’m estimating, but doesn’t understand I’m working towards “being wealthy” not just having enough to “retire.” That aside, like him, I’ll likely not actually “retire” since I like my work.
The Problems With The Retirement Theories
The general problem with all of the different retirement theories seems to be human nature. One study reports that those of us who are frugal during our working years tend to be frugal during our retirement years. This group will likely die with plenty in the bank no matter what.
Those of us who spend without planning during our working years tend to do the same thing in retirement.
This group will likely outlive any retirement money they set aside.
It’s the latter group that would benefit most by embracing our definition of “being wealthy,” but they’re not likely to accumulate enough productive assets thanks to their spending habits.
Thankfully, the definition of retirement is changing.
More people are earning money in some capacity during “retirement” than ever before.
Some wouldn’t qualify as retired. That would be the FIRE (Financial Independence, Retire Early) people who say they are retired, but have actually created businesses promoting their retirement in order to earn money to pay their bills. Most of these people are amusing.
Others, though, start to make money from hobbies they couldn’t focus on full-time while working a regular job. One friend started painting… and selling her art. In fact, she gets commissioned work at this point. Another took up photography and makes good “retirement” money from it.
Thinking about these friends, I might have to change my working definition of “being wealthy.” They are enjoying life and want for nothing, but they aren’t living on just their pensions or other passive income.
They are retired, but they’re not.
The real lesson in all of this is that you’re the only one that can answer the question of how much you need to retire comfortably.
Stay diversified,
Lief Simon
Editor, Simon Letter
