Kudos to Consumer Reports for their recent article “Avoid Costly Retirement Mistakes” and for hitting on one of the biggest mistakes people make when planning for retirement. The financial press spends a lot of time discussing accumulating a nest egg and often neglects the importance of getting your expenses under control. The Associated Press published an article in February titled “For boomers, it’s a new era of ‘work til you drop’,” lamenting the problems facing 78 million baby boomers that will not be able to retire at age 65. The article cites the stock market crash in 2008, employers eliminating pensions, and downsizing as the reasons boomers will be putting off retirement. Unfortunately, over-spending and under-saving were not even mentioned as a reason some are not prepared.
Life expectancy tables tell us that a healthy 65-year old couple has a high probability that one of them will live for another 30 years. Fifty years ago, life expectancy for that same couple was less than half that amount of time. Thirty years of retirement is expensive, which is why Social Security is in trouble and employers are changing their pension plans to 401(k) plans. It takes a lot of money to fund 30 years of retirement.
Those that want to retire at age 65 can still do so, but it will take careful planning that starts with disciplined spending. Saving a minimum of 10% each year is just the beginning. A person entering the workforce that saves 10% each year should be able to replace their earned income after 35 years of savings and investing. Anyone that waited until age 50 to start savings will need to save a lot more than 10%. They won’t have years of compounding to work for them. It can still be done by emphasizing spending control and asset accumulation. The less you spend, the smaller the nest egg needs to be to fund your spending.