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.