Myth #16: I Need The Latest & Greatest! (part 2)

Computers, stereos, adventure sports equipment—we just have to have the latest. A quality new shirt can run $85, a tie $50. The house just has to be remodeled. And of course, we need all of it brand new. The latest. We are such a consumerist society that we no longer question these things.

You don’t need to replace something just because a newfangled one comes along. How many things do you have in your life that you spent good hard-earned money on, that are sitting in the attic or in the basement? Consider them the next time you feel the urge to buy something new.

A client just shelled out $42,000—more than half his after-tax income—on a new car. I asked him why he did that. He told me that his old car was four years old and it was time to get a new one. Four years old!

A typical consumer-minded American is programmed to march down to the local car dealer every three to five years, dicker for five minutes on the price of a glossy new set of wheels, and then sign a contract for something that costs more than a home mortgage did a few years ago—not to mention how much the car depreciates: an average of 25% in the first year.

I’m not against buying a car which represents the fulfillment of a lifelong dream. In fact, I support it. I have clients who have yearned for a particular car for ten, even twenty years. They have wanted that black 1966 Mustang Fastback or that 1954 Corvette Convertible since high school. To them I say, “Go ahead. Buy it if you can afford it.” To buy something special in fulfillment of a long-term dream is different than buying a new toy just because everyone else does. Some people feel they must buy a new car every few years. This naive belief costs a lot of money—money that won’t be there in retirement when they need it.

The calculations for Tom and Didi showed that upon retirement, they could afford living expenses of about $4,000 a month. I asked them to investigate how they could reduce their current living expenses of $5,000 a month and begin to live on $4,000 a month now. They could then save the extra $1,000 and apply that toward retirement. If they are successful, retirement will not result in any substantial change in their lifestyle, and with the extra $1,000 per month of savings, they could have more than $4,000 a month to spend. Retirement may not turn out to be about skimping and deprivation for them.

Remember that your retirement will likely last from twenty to forty years. That is a long time to live in a state of deprivation. If you begin to live below your means now, this simplified lifestyle will last for the rest of your life—and the extra money you’re putting away now will raise the amount you can spend in your retirement.

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Myth #16: I Need The Latest & Greatest!

Tom and Didi are in their mid-fifties and are planning to retire in ten years. They make regular contributions to their 401(k) plans and receive matching company contributions. Their income has gradually risen to its current level of about $100,000 a year—and their standard of living has risen to keep up with it.

They said they couldn’t possibly live on less than $5,000 a month when they retire.

Based on their current and projected retirement savings, they would have to work significantly longer than age sixty-five to achieve this level of income in retirement, or they could bite the bullet, simplify their lifestyle, and learn to live on less now.

Because people grow accustomed to spending everything they make, they set themselves up for a fall when they retire. Rather than living below their means, they live up to (and often beyond) their means. During their working years, they grow accustomed to a standard of living that they cannot afford once they retire.

If we are successful in our careers, we can expect to get regular promotions and pay increases. And invariably, we opt to take advantage of the opportunities these afford. There is a model in economics called the “marginal propensity to consume.” Numerous studies have found that when people receive an increase in their income, they don’t save it—they spend nearly all of it. Many of my clients are working extremely hard, in stressful conditions, and for long hours. In doing so, they make a handsome income. In fact, they make more than they need, but you’d never know it—they simply live up to that income by buying as many new things as they can. A lawyer client of mine calls this “creeping materialism.”

Is your life so enhanced by that big-screen, surround-sound home theater that you just can’t live without it? Well, how is it going to compare to the 19” model you can afford when you retire, after your big-screen surround-sound home theater goes on the blink?

We set ourselves up so that retirement seems like deprivation. We do so by living a lifestyle we can’t maintain. Then, when we get to retirement, we ask, “Why did I slave all those years and burn that midnight oil? For this? This puny little TV?”

One approach to retirement is to begin to live more simply now, at the income level you will have in retirement. Better to live a moderate lifestyle both now and in retirement than to live high on the hog now and in deprivation after retirement.

Step back and ask yourself whether you really need the latest and greatest of everything. Was it really necessary to purchase that new van sitting in your driveway? Perhaps you could have gotten by with a good used one, or invested a little in refurbishing your old wheels. Perhaps in using this approach over the long term, retirement won’t be about deprivation. It will be about maintaining the lifestyle you have grown comfortable with and can sustain.

Myth #15: I’ll Retire at 65 (part 4)

Many people have the opportunity in their current careers to develop skills that they can utilize for consulting part time after they retire. With this in mind, you have all the more reason to find a fulfilling career you enjoy now.

One client, an accountant, did tax returns for businesses. When he retired, he began consulting for small businesses. He charges $100 an hour and works about twenty hours per week.

Another client worked in human resources for twenty years. She developed skills that allow her to consult part time for startup companies, setting up their human resources departments. Her “retirement” is anything but—she has no plans to quit working, because she’s having too much fun!

If you’re not in a career that you enjoy, start the process of finding one. When you are engaged in work that you love, retirement is no longer such a high priority. For many who follow this path, retirement is no longer their life-long goal. They find happiness is in their work.

On the other hand, if you truly want to opt out of your current line of work at age sixty-five, then do so. Be creative in finding ways to supplement your retirement income with something you enjoy. Be an espresso barista, make jewelry, teach sewing classes.

People put an enormous amount of unnecessary pressure on themselves because they fear they will not have enough money to retire at age sixty-five. I have experienced this forlorn look in my clients so many times. They come to me armed with their Money Magazine quick calculation on retirement, and saying, “Oh my God, I won’t have enough!”

How can you channel that negative energy and fear into something that works in your favor?

I suggest four things:

  • Save as much as you can for retirement—the sooner the better.
  • Plan to work past age sixty-five.
  • Look for ways to supplement your retirement income once you have retired.
  • Begin now to live a simpler, less expensive lifestyle.

Whatever your age, start now to visualize and plan your lifestyle after retirement. Embrace the idea that you will have a longer life expectancy, and that you may be working past age sixty-five. Do the necessary financial calculations (or get someone to do them for you) so that you will know what you can expect when you do retire. And start doing now what you enjoy doing.

Many couples that chose to start a family later in life, with all the associated expenses of children, are realizing that they’ll be working longer than imagined.

Sonya and Jack are such a couple. At first, the thought was a little depressing. They really hadn’t expected to work as hard as they have been for that many more years, but they did acknowledge that they enjoyed the stimulation and sense of accomplishment of working. They had to admit that they loved their work and would miss it if they were retired.

I asked, “What else would you do, once you retire and have more time, that you’re not currently doing?” Sonya immediately said she would volunteer at their daughter’s school. Jack wanted to lift weights twice per week.

But as things stood, they assured me there was no way it could happen. I asked, “What could you change that would free up time in your life right now?” They looked at each other, and said simultaneously, “not having to drive forty-five minutes each way to our daughter’s school.”

Since this discussion, they have moved to a house within walking distance of their daughter’s school. Sonya volunteers there every Thursday morning, and Jack now lifts weights on Tuesdays and Fridays. Creatively find time to do those things that will add to your life right now. You don’t have to wait until “retirement.”

“I’m too busy” has become almost a mantra for baby boomers. We work like mad to keep up with our financial responsibilities, and put off things we think we don’t have time for. Sometime in the future, we say, we’ll have the time for them—maybe after we retire.

You have time now—it’s a matter of priorities. Search for work that you enjoy and start doing it. Begin now to build into your life style those things that bring you pleasure and which you can do for the rest of your life. Then, working past age sixty-five won’t be as big a deal, because you will have built a richer and more fulfilling life—both personally and professionally—that will go on well past sixty-five.

Myth #15: I’ll Retire at 65 (part 3)

I encourage my clients to begin now to find work they love, regardless of their age. Baby-boomers’ parents did not concern themselves a great deal with finding work that they enjoyed. A job was required, and retirement was the reward for working for forty years. I have clients who have this mentality—they work at jobs they don’t like and tell me they “just need to hang on until retirement.”

They think they’ll just follow in their parents’ footsteps. They see their parents retire at sixty-five from long, successful careers, and begin a new existence of leisure. But is that going to work for us? It actually doesn’t even work very well for many of today’s sixty-five-and-over population, either. The search for a deep and fulfilling purpose in life spans all generations, and it does not have to wait until age sixty-five.

A couple in their late fifties both worked, owned a home and two cars, shopped where and when they wanted, and went out on the town whenever they felt the urge. In short, they had a lifestyle characterized by enjoyment now. They had saved some money for retirement, but not very much. They both wanted to retire at age sixty-five, and they asked me to do a retirement calculation for them.

I told them I wouldn’t do it. It would be a waste of their time and money. The amount they would have to save each month to be able to retire at age sixty-five and sustain their current lifestyle was more than their current disposable income.

I talked to them instead about finding careers that they could enjoy now—and could spend the next twenty to twenty-five years building and developing. I also talked to them about reducing their current lifestyle so they could save more toward retirement.

I asked them what they could do in retirement that might bring in $20,000-25,000 a year. The wife answered immediately, “I know what I’d do—go to work for a nonprofit organization as an administrative support person.”

Her husband was shocked. “You’ve got that figured out already?”

“You bet,” she said. “You tell me I need to earn $25,000 in retirement. For that, I’d go work at a nonprofit organization in an instant because—that’s where my heart is.”

There was no way she could live on so little now. The couple had financial demands far in excess of what such a job would bring in. But for her, it served to establish a vision of what she would be doing when she retires from her current job. It gave her something she could look forward to. It gave her some time to plan the means for this transition later in life. She could now begin developing the contacts that might make the transition to the nonprofit world go as smoothly as possible.

Knowing she has to earn that extra income beyond age sixty-five made her question continuing in her current job until retirement. She began to re-examine her devotion to a job she did not like very much—a job she had programmed herself to keep for the next fifteen years.

The time to take a close look at your retirement plan is now. How much are you saving a month, and how will that provide for you when you’re in your late seventies and eighties? Are you investing your funds for long-term growth? How much should you reasonably expect to receive from Social Security? If you are like most people, you’ll find that you won’t have enough to completely retire at sixty-five. In the end, you will be able to make withdrawals from your nest egg, but still have to supplement that with additional income from some type of work, at least for a while. Even though this may be bad news to some of you, it’s better to hear it now, while you can do something about it, and plan accordingly.

Myth #15: I’ll Retire at 65 (part 2)

There is another reason to consider working past age sixty-five. It stems from the myth that at age sixty-five—at last—we will be able to kick back and do what we want. We’ll have unlimited time to garden or fish or stay at the beach cottage.

We are forgetting one thing.

That’s not what people in our generation are likely to want to do when they retire. We baby-boomers have been raised in a dynamic, goal-driven, and achievement-oriented world that encourages physical activity, interpersonal contact, and accomplishment. I doubt that we’re going to be satisfied just sitting on the porch at the cottage. I suspect that we’re going to want to be busy, active, productive, enterprising, adventurous, and eager to find new experiences.

It would be sad to work thirty, forty, or fifty years so that we can retire, then find ourselves there and say, “Is this it? Is this all there is?” It might be great for a while, but I’ve been told that lounging around gets a little old. I know people who have retired to their condo on the golf course and after a short while tell me, “I can’t just play golf everyday. It’s not enough for me.”

Chances are, you will have twenty, thirty, or maybe even forty years left after retirement.

What if you structured your retirement so that you could stay active, and at the same time earn $10,000 or $15,000, or even $20,000 a year? You could look forward to working part time, or on a consulting basis.

A good friend of mine is retired and now works at an ice-cream shop in a small seaside town. She does this three or four hours a day and earns about $6,000 a year. It keeps her connected and gives her the feeling that she is doing something worthwhile. She enjoys the contact with other people, and she doesn’t think of it as work. To her, it’s fun.

Many people are working later in life by choice. Many are working part time. The bottom line is that many people have discovered the need to stay useful, active, and constantly learning. It might be a small business, teaching at the local community college, a stint with the Peace Corps, or serving as a mentor for a younger person.

Steven is a retired corporate executive who worked for a desktop publishing company. However, his true passion is poetry, and he is currently writing a book of poetry that his wife is illustrating.

He decided that writing could be a vehicle to help troubled teens. He thought it might help some of them resolve difficult issues they have had to deal with in their lives, so he now teaches a creative writing class once a week to kids who are in juvenile detention. He told me that the stuff these kids are being given permission to write is, on one level, very brutal, but on the other hand, very cleansing.

One kid was very quiet during the entire class. As Steven went through a discussion of various writing styles, this kid just looked out of the barred window, bored and distracted.

When it was time to write, he wrote about seeing his parents killed in front of him at age five and how since then, he has never trusted anyone. He knew he had to take care of himself, because no one else would.

Once he started, Steven couldn’t get him to stop. The kid wrote and he wrote. For the first time in his life, he consciously re-entered the pain and the anguish of what he had experienced. From that place, he began to heal.

Steven told me that everything he ever did in his corporate life paled in comparison to seeing that one kid begin to turn his life around. Steven is retired, but he has never felt more alive, productive, and useful. Steven has discovered that in many respects, life after age sixty-five can be richer than before—and it doesn’t have anything to do with money.

Myth #15: I’ll Retire at 65

Most people believe that they will work until age sixty-five and then, like their parents, retire and live a life of leisure. Like mom and dad, they will spend their autumn years traveling and playing golf.

Mom and dad are living on nothing more than their pension and Social Security. Combined, these benefits provide sufficient income to live comfortably in retirement. Just a few more years and you, too, will be living this idyllic life.

Fat chance. Today, few companies have pension plans like those our parents had. It is now rare for a company to contribute an amount we can live on when we reach retirement age.

Most companies have shifted the responsibility for retirement funding from them to us. Guaranteed benefit pension plans, where the company provides a set retirement income, have been supplanted by 401(k)-type plans. These plans are dependent on employee—not employer—contributions and they will only provide us retirement funding based on the level of our own contribution, and the performance of the investments in the plan we choose.

We are such a mobile workforce today that, even if we do work for a company that provides a traditional pension, few of us will be there long enough to qualify for much of a benefit. We no longer stay at jobs twenty, thirty, or forty years like our parents did.

The government’s original goal of providing a financial safety net to the elderly through Social Security is a fading memory. Social Security benefits have diminished to the point where they are now just a meager income supplement. You can’t live on Social Security. When I do retirement calculations for my clients who are fifty or younger, I don’t include Social Security in the equation.

For many people, the belief that their current retirement funding will be sufficient is often based on hope rather than facts.

Donna was a teacher approaching retirement. She told me that when she retired, she would need only $1,600 a month to live. This amount would cover her basic living expenses and the cost of her greatest desire: traveling to various parts of the country each year to visit her grandchildren. She believed that her teacher’s retirement benefit, Social Security, and some money she had saved would cover all these needs. She wanted to make sure that she would always have $1,600 a month to spend, given her life expectancy and inflation.

She was retiring at the end of the month. The school district was already planning a party for her. But based on my calculations, the most she could spend was $1,200 a month.

By the end of the session, Donna was in tears. It was twenty-four days before her retirement, and she had just discovered that she would not have enough. As she was walking out the door, she murmured, “Maybe I can go back and ask them if I can work part time for awhile.”

It was probably the saddest session I’ve ever had with anyone. She had waited too long to find out the bad news.

Donna’s situation came from the typical and automatic belief that if we work hard for many years, we will be taken care of in retirement. It is based on an old belief that someone is looking out for us, that what we have in our retirement plan and Social Security will be enough.

It probably won’t work that way. Of my hundreds of clients, only a small percentage has adequately saved or are making adequate contributions to their retirement. Only those who have lucrative stock options from their company, an inheritance, or who have managed to accumulate a sizable portfolio, truly have what they need for retirement.

Most people presume they will save this big nest egg so they won’t have to work anymore in retirement. However, they rarely realize how large this nest egg will have to be. A forty-five-year old person who currently has $150,000 in a retirement fund, and who wants to live on the equivalent current spending power of $4,000 a month at age sixty-five, will need a portfolio value at retirement of $2,377,000. He or she will need to save $3,653 a month for the next twenty years to amass this amount. (This example assumes a 4.5% inflation rate, an average rate of return of 7%, and a life expectancy of ninety years.)

What this means is that in all likelihood, most people will need to work past age sixty-five. Age sixty-five was an arbitrary age to begin with. When Social Security was created in 1935, the average life expectancy was sixty-three. Today, we still hold age sixty-five as the standard retirement date, even though the average life expectancy for a sixty-five year old has increased to eighty-three years.

Myth #14: Fund Your 401(k) No Matter What! (part 3)

Many of my clients believe it is irresponsible to do things that would bring them the most satisfaction, a belief often carried over from childhood. They almost need permission to do things that they deeply yearn to do. Most of the time, their dreams are not only possible, but realizable.

Often, the key to unlocking the dream is to realize that funding their retirement plan does not always have to take precedence.

I want to be very clear on this. I’m not telling you to stop funding your retirement plan forever. I am saying it is okay to take a break from funding your 401(k) plan for one year, for a special circumstance, like the trip of a lifetime, the elimination of debt that is keeping you awake at night, or a maternity leave. These are special needs and events that call to you. It is appropriate and rational to temporarily divert some money from your retirement plan to fulfill these experiences.

A couple in their late twenties was committed to fully funding their 401(k) plans. The wife was pregnant and was planning to take six months off once the baby was born. They were concerned about how they were going to afford her time away from work. I told them not to fund their retirement plan that year.

They asked, “Is that okay?”

“Being home with your baby for the first six months of its life is certainly a special circumstance that warrants relaxing your annual savings goal. It’s a good reason to pull back a bit from fully funding your retirement for the year,” I told them.

This is not about diverting retirement funds in order to buy things. Wanting to buy a new car or a new big-screen TV are not good reasons. It is about life experiences that are precious and valuable and that will be lost if not capitalized on. It is about taking all aspects of your life, including the emotional and heartfelt parts, into account in your financial planning. I am simply telling you to invest in these special experiences when they beckon. If you don’t, you may lose the opportunity forever.

Yes, you need to fund your 401(k) plan. Yes, you need to plan for your eventual retirement. But just as importantly, you need to fund your dreams.

In reality, most people aren’t saving enough for retirement. I usually encourage my clients to save more—but not to the exclusion of a once in a lifetime experience that they are really passionate about, that will really feed their soul.

The important thing is to not let any one element of your financial plan become so overwhelmingly important that you exclude your dreams. If you allow yourself to enjoy these experiences fully, the memories and quality of life they bring will become a part of you that can never be taken away.

Is there a lifelong dream that you have never allowed yourself to consider because you didn’t think you had the money? Is there an opportunity that will be lost forever if you don’t do it in the next year or two? If you took $100 a month away from your retirement plan for one year, what would that allow you to do that you never thought was possible?

Maybe you don’t have to fully fund your 401(k) every year. Maybe you can bring to life the experience that calls to you most deeply. Then, when you finally do retire, you can do so with the memory and the peace of mind that you have invested not only in your retirement, but also in yourself and your loved ones along the way.