What Happens When Everyday is Vacation?

What Your Dream Retirement Costs & How To Get It

“U.S. dollar banknote with map” by Christine Roy on Unsplash

You probably need a lot more money in retirement than you think. At least that is the argument put forward in a recent article from the Wall Street Journal.

Challenging Assumptions

What I love about this article is that it challenges one of the fundamental assumptions made when planning for retirement; what percentage of your salary do you think you will need in retirement? Almost everybody, when asked this question, spits out something close to 70%.

I am not quite sure how, but the standard advice for decades has been that you need approximately 70% of your final salary (what you made the year before retiring) during retirement.

That figure has become so ingrained in our heads that, as the author in the WSJ points out, people spend almost no time thinking about it, despite the incredible implications your answer will have on your retirement. This question is usually hashed out in the following way.

Financial Advisor: How much do you think you’ll need in retirement?

You: Ummm……. (blank stare)

Financial Advisor: Most people say they need around 70% of their income in retirement, does that sound about right to you?

You: Yeah, let’s go with that. (Never thinks about this conversation again).

Not the most efficient way to think about one of the most important financial assumptions you’ll make in your life. But we should not be too hard on ourselves this is the type of decision that is easier for “econs” but is next to impossible for humans. There is a whole list of reasons that we are set up to fail when asked: “how much do you need during retirement”.

1. It is a complex question that requires you to know things like “how many times a week am I going to go to the coffee shop? How many trips to Europe do I plan on taking? How much does a trip to Europe cost? The more variables we must account for the higher the chance we will get something wrong.

2. The benefits and costs of making this decision are not felt for decades. We tend to make better decisions when the consequences of that decision are felt immediately. If we were told “If you smoke that cigarette, you will die instantly”, most people would choose not to smoke the cigarette. If we were told “If you smoke that cigarette, you will increase the probability of future health complications” fewer people would make the correct decision not to smoke the cigarette.

3. We get no “practice” making this decision. This is a one-time decision, and most of us make it without any way of verifying what a “good decision” even looks like.

Action item: Want to know what you have to do to retire early? Try this free FIRE calculator.

How Much Would We Spend if every day was Vacation?

The sobering question, asked by the WSJ, is how our spending patterns would change in retirement? Many of us spend 40+ hours a week at work, which is a very inexpensive way to use our time.

Unless you have an online shopping addiction there is not much opportunity to spend money at work. If your employer pays for coffee, food, your laptop, your cell phone, or your car it would actually cost you less money to be at work without pay then to sit at home and eat the food you bought from the grocery store.

If you are lucky enough to be one of those people with a “company car” or phone or laptop, please keep in mind that once you retire these are costs that are going to come out of your pocket and must be accounted for in your retirement planning.

So when we really stop and think about it, spending time at work is a pretty good way to save money. Do you know when we spend more money? While we are on vacation or on the weekends.

The more free time we have, the more ways we need to find to fill that time. Most of the activities that people engage in to fill time (going out for coffee or lunch, going to the movies, etc.,.) cost money. Typically, we spend more money when we are on vacation. In Retirement, every day is a vacation.

The WSJ developed a fantastic online retirement calculator that forces you to spend more than one minute answering the question: what percentage of my income will I need in retirement? The brilliance in this calculator is that the only requirement of you is to answer questions like “how often you would like to eat at restaurants?” or “how many magazine subscriptions would you like to have?” You don’t need to estimate how much these things cost (they do that for you), only how often you would like to do them. From there it tells you what percentage of your income you would need during retirement and how much money you would need to save to fund that retirement.

My wife and I filled it out and were pleasantly surprised that our current pensions at work would more than fund what we considered a retirement with a high standard of living. All of our extra savings will go towards increasing that standard of living and/or retiring early.

So how much do you need to retire? check out the calculator here to find out. After you’ve filled out the calculator what percentage of your income does it suggest you need to retire? Let me know in the comments.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.