Retirement 101: Making it work
Table of Contents
- Before we begin
- The who and the what
- What is retirement, anyway?
- Estimating your retirement number
- We need to talk... about investing
- Asset allocation and risk tolerance
- Setting up your portfolio
- Making it work
- COMING SOON - Keep on keeping on
- COMING SOON - What if something goes wrong?
- COMING SOON - The non-monetary side of retirement
- COMING SOON - OK, I've retired. Now what?
You’ve imagined your retirement. You’ve figured out the total amount you’ll need to save to make it happen. And you’ve run the numbers using compound interest to figure out how much you’ll need to set aside every month in order to hit your retirement number.
And that number is too high. You can’t imagine being able to find the extra in order to make the monthly investments.
First, check your expectations. Make sure you don’t have an unreasonable vision of what retirement will look like. I don’t mean to cut out every little thing other than the bare essentials for survival. On the other hand, If you’ve got plans to travel the world and maintain a six bedroom home so all of your relatives can visit when you happen to be home between your travels… Well, perhaps there’s some room to cut back.
If you’re unable to save enough each month to hit your retirement number, and that retirement number is significantly more than 25 times your current yearly expenses, it’s time to revisit your expectations.
I’m going to make a wild guess, though, and say that for most people, that’s not going to be the problem. No, for most people, the problem is that we all tend to start saving later than we “should” have, and the hedonic treadmill has gotten us used to a certain lifestyle that doesn’t leave room for retirement savings. So to address those issues, we’ll look at three things:
- Increase time until retirement
- Decrease Current Expenses
- Increase income
I put them in order of easiest to hardest to change. Let’s take a look at that.
Increase time until retirement
If your current ability to save for retirement falls short of reaching your retirement number by standard retirement age, the “easiest” thing you might be able to do to make it work is to delay retirement. It’s pretty incredible what an extra five or ten years can do, with compound interest. Your investments will likely double about every eight years. So, if you were hoping to retire at age 62, you might consider going until 70 to make things work.
Be very careful with this decision, though! It’s “easy” to make the decision, right now, but actually working those last 8 years may end up being quite difficult, depending on your job duties, job security, physical and mental health…
In the end, although this is the easiest choice to make, it should really be your last resort. So, what else can you do? Let’s jump to the other end of the spectrum and look at the hardest thing to do:
It would certainly be easier to hit your goal if you just make more money, right? And it’s a great goal… unfortunately, it’s also one that you have the the least direct control over. You can’t force a promotion. And while it’s possible to shop around for another job, there’s no guarantee that you’ll be able to find somewhere that pays you more than you currently earn.
Don’t get me wrong, this is ultimately the path you’ll probably need to take. But it’s also one that might take years before you get the results that you hope for. By all means, do what can to increase your income. At the very least, ask about a raise. Switching employers is typically the easiest way to end up with a higher-paying job. Or climb the ladder at your current employer. Or, consider a side-gig to bring in a few hundred extra every month. But none of that matters unless you also:
Decrease current expenses
(Or at least make sure that your budget is actually as tight as you feel like it is.)
If you get a raise or take a higher paying job, your income will go up, but unless you’re very careful, so will your expenses. Our old friends the hedonic treadmill and lifestyle inflation are great at taking control without you noticing. The next thing you know, your $20,000/year raise is all spoken for, by payments on a bigger house, a new car, dining out more often, more subscriptions to streaming services, a new phone… That’s how I end up working with families that have six-figure incomes and are still living paycheck to paycheck
What to look for
The way to avoid lifestyle inflation–and to hopefully reduce your current expenses enough to make room for your retirement savings–is to do a deep dive review of where every dollar that you earn goes. You may find that you spend far more on dining out than you realized. You may decide to choose the discount $15/month mobile carrier when you see how much you’re spending per year on your old “everything included” plan. You may find subscriptions that you thought you cancelled last year, but that are still automatically getting charged every month. Going line by line through your spending forces you to take a long hard look at your spending priorities.
Avoid the “latte illusion”
Read through a bunch of personal finance “ways to save” articles and you’ll see a heavy focus on things like “brew your own coffee instead of buying $5 lattes.” And it’s true, you can absolutely save a bit of your budget that way. In fact, one of the main reasons we do a deep dive into expenses is to find all those little places where we’ve been spending more than we thought. And for many folks, that can provide an extra “easy $200” that makes enough of a difference. But that “easy $200” typically comes from a lot of little improvements to your budget. You can’t expect to just stop buying lattes (or avocado toast) and suddenly be back on track for retirement. You need to do a deep review of all of your expenses.
Cutting back on expenses now will feel difficult at first, but it is immensely easier than trying to make it work later, after more lifestyle inflation and when there’s literally no time left to save for retirement. By cutting back now, you pull back a little on the hedonic treadmill. So not only do you increase your ability to save now, but by learning to build a lifestyle that you enjoy without the extra bedroom in the larger house, the new phone, the newer car… you’re also potentially reducing your retirement number.
For many, even all of those little changes won’t be enough. If you’re looking to make major changes to your budget, you’ve got to be willing to consider major changes to your lifestyle. This can be a hard pill to swallow, but if you’re living a lifestyle that’s unsustainable at your current income, then sooner or later something has got to give.
For most, that will mean reducing spending on the “Big Three” expenses: Housing, transportation, and food. It will mean giving up some comforts that you’ve taken for granted. It will be hard. Consider moving to a smaller house or apartment, perhaps in a lower cost of living area. Or if you have the space, consider renting out a portion of your home. Likewise, you may have to learn to make due with smaller, older cars. And a menu of rice, beans, and frozen veggies can be a huge savings on your food budget.
Note: If you find that you’re already doing all of these things, and there still isn’t room for any savings in your budget, please don’t be ashamed to reach out to professional help and government assistance! My heart goes out to you, but this little blog series about retirement planning isn’t going to help.
The great thing about this kind of deep dive review is that it is something that you can do right away, and that can have a huge impact on your savings right away. There’s no waiting or multi-year-long-term work needed.
The not-so-great thing is that, for most people, it is hard work, especially in terms of time, tedium, and stress. One in five Americans would rather spend an hour in jail than set up a five-year budget. Two-thirds would rather drink a glass of orange juice right after brushing their teeth than simply balance their checkbook. When I work with new clients to help them get their budgets on track, this is where most people drop out. Most people simply don’t want to do it. Don’t be most people!
Push through. Set a schedule if it helps. Set aside an hour a week, or ten minutes a day, or whatever works for you. Keep coming back to it until it’s done.
Here’s how to start:
The easy way
Does your bank or credit card provider offer an expense-tracking app? Great! If not, you can sign up for a service like mint.com. Mint isn’t the best tracking tool, and you’ll need to be mindful of ignoring their ads, but it’s one of the few that is totally free (hence those ads), and these days it seems to work with most banks and cards. And although I’m not a big fan of Intuit, their parent company, they do seem to at least be trustworthy with user data.
Make sure all of your accounts are set up correctly within the app. If you’re missing a credit card or bank account, you’re not going to have a complete picture of your spending. If you have an account that just won’t sync with the app for some reason, you may just have to enter those expenses manually. Depending on how much there is to enter manually, you can either choose enter them manually into the app, or forget the app and do the whole thing manually using the spreadsheet method below.
Once all of your data is synced, it’s time to start reviewing it. Most accounts will give you about three months’ worth of data when you first add them to an app like mint. Check to see how many months of data you have for each account. If you only have two months of data for one account, but three for the rest, you may choose to estimate the missing month, or you may choose to only review the last two months on all accounts. Just keep in mind that the longer the timeframe you use, the more accurate your numbers will get.
Apps like mint or your bank’s expense tracker have gotten pretty good at guessing the categories that each expense belongs in, but they’re not perfect. You’re going to have to review each transaction and make sure it is sorted into the correct category. This can be especially challenging if you do a lot of your shopping in one place. If, for instance, you do your grocery shopping at Fred Meyer, and also tend to buy most of your clothes, electronics, housewares, and gasoline there, you’re going to have some research to do to split those out. I personally don’t believe that leaving it all in a generic “shopping” category is all that helpful. At the very least, you’ll want to split out groceries and automobile expenses, but I and many others prefer to be able see as much detail as possible. It can be very helpful when deciding where you can cut back. For instance, your clothing purchases may currently be heavily influenced by your office dress code. When you retire, that particular expense may be something you change quite a bit. But that will be hard to see if your clothing transactions are lumped in with all other general “shopping”.
If that level of detail feels overwhelming, it’s ok to start slow by putting things in their general “close-enough” categories. Then over the next few months, stay on top of any new transactions each week and categorize them at the more granular level.
The hard way
If you prefer not to use an online app to track your expenses, then you can do it manually. I would recommend still keeping it digital using a spreadsheet (Excel, Google Sheets, OpenOffice, etc.) because doing so will make it much easier edit and refine your data as you go… not to mention easier to keep track of the totals!
If you want to go fully analog, then you’re going to need quite a bit paper. Just saying.
Once you’ve prepared a spreadsheet or a large stack of paper, gather up the last three months’ worth of statements from every account that you have. For each month, go through the statements line by line and copy the general details into the spreadsheet. You should have at least: where you spent the money, how much it was , and which general category the spending belongs in. (If you’re doing this on paper, you’ll want to track each category on a different sheet of paper.) This may take quite a long time. Just like with the “easy” way, if you spend on multiple categories at one store, you’ll want to break those reciepts out into their respective categories. Read through the “easy way” section for more on that.
Regardless of your method of tracking, your end goal is to be able to estimate your yearly total spending in each category. Don’t forget to check for any once- or twice-per-year (or less!) expenses that may not have occurred during the timeframe that you reviewed. For instance, I pay my car insurance in six-month chunks, and typically do most of my holiday gift shopping in November. So if my initial review didn’t include those expenses, I’d need to add them in manually. And don’t forget car registration fees are often every two years.
If you choose to look at the data as a monthly number, you may have to take some yearly expenses and divide them by 12 to get a monthly number, divide that six-month auto insurance payment by six, etc. Likewise if you want to have a yearly total, don’t forget to check that you’ve multiplied your monthly, bimonthly, and semi-annual payments by their respective amounts!
Do you already do this? Great! Use those numbers to fill in the spreadsheet I linked below. How close are they to your quick and dirty expense estimate from last time?
If you don’t already track your spending this way, now is a great time to start! Even if you aren’t living paycheck to paycheck, it’s good to have a solid grasp of where your money is going. Having a thorough review of where your money actually goes (and not just where you think it goes) is an essential part of figuring out where you can cut back on spending to save more. And I suspect that, in our last exercise, most of you discovered that you need to save more per month for retirement than you thought!
This work can be hard. It can be especially taxing when you’re already working hard to make ends meet. But whatever you do…
DO NOT “make it work” by using credit cards or other forms of debt, especially high-interest debt.
DO NOT be afraid to seek help from family, government assistance, etc.
DO NOT join an MLM or other scheme that promises to make you wealthy, or that makes “be your own boss” claims.
DO NOT give up! Do not succumb to the “eff-its”!
Review your spending for the last 3+ months.
Use that information to estimate and summarize your yearly data.
Here’s a helpful fill-in-the-blanks Spreadsheet to give you an idea of what we’re going for:
Feel free to save a copy and make any edits needed to fit your personal circumstances! There will some lines that don’t apply to you… and there may be a category that you’d like to track that isn’t there.
For now, just fill in columns A through C. We’ll deal with D and E next time.
If you’re not used to spreadsheets and have any trouble figuring out how to do something with this one, let me know. I’m happy to help!