Six Fresh Ways to Think About Retirement Savings

Most of the ways in which people talk about retirement these days follows along a few narrow lines.

Put away 10% of your salary into a target retirement fund starting at age 25 and you’ll be fine at age 65. Scoop up every bit of matching money from your employer, as that’ll help you reach your target. Your retirement “number” – the amount of money you actually need saved to retire and maintain your current lifestyle – is enormous.

The vast majority of financial writing about retirement essentially just studies the lines of that basic story. They might look at a few different investment options. They might look at a few different account options. They might evaluate how much Social Security will help.

What they don’t do is offer different ways of looking at the situation. Often, it’s a fresh way of looking at a situation that can cause you to see it in a new light.

What follows are six different and perhaps unexpected ways to look at your retirement savings that I’ve picked up or developed over the years. Consider each of them and see what they tell you about your own retirement plans.

Remember, these ideas are merely new ways for you to wrap your mind around the challenge of retirement. They’re meant to help you consider the problem in a fresh way so that perhaps you can approach it with new insight or with different tactics.

A Few Caveats

Many of the ways described below to rethink your retirement savings rely on a few underlying principles. Rather than repeating them endlessly, here’s a summary of some of those principles. Use these as assumptions when you continue reading.

Social Security and Medicare are likely to be helpful, but it’s really hard to assess how helpful. It’s impossible to predict what kinds of benefits those programs will be offering to people in 10 or 20 or 30 years. It’s probably reasonably safe to say that they will offer some positive benefit, but how much positive benefit is unclear.

Taxes are hard to predict, too. In order to use some of these tools, you should assume that you’ve taken responsibility for taxes elsewhere. This can be done by making use of tax-advantaged accounts like a Roth IRA, which has no tax burden whatsoever when used in retirement, or by accounting for taxes in your other withdrawals.

4% is a fairly safe withdrawal rate. It’s widely accepted that a diversely invested retirement account or investment portfolio can pay out 4% per year to the account holder for at least 30 years. In other words, provided you don’t have all of your eggs in one basket and at least some of that money is invested aggressively, you should be able to withdraw 4% of your account balance on the day you retire and each year thereafter for at least 30 years (and probably more). So, if you retired with $1 million in various accounts, you could withdraw $40,000 per year and your savings ought to last for at least 30 years at that withdrawal rate.

3% is a very safe withdrawal rate. Similarly, a diversely-invested set of investments should be able to pay out 3% essentially forever. So, again, with the above example, if you have $1 million in various accounts, you could withdraw $30,000 per year and your savings would last for the rest of your life at that rate, no matter how long you live.

7% is a reasonable number to use when calculating the average annual return of a long-term investment. I use this number because it’s the one Warren Buffett suggests as a healthy long-term number for such calculations. It’s not perfect – obviously, the stock market and other such investments are volatile, meaning they might earn 15% one year, 20% the next, and -15% the next – but over the long term, that volatility averages out, leaving you right around 7%.

The $300,000 Standard

So, let’s take those withdrawal rates and play with them a little bit. If you have $300,000 and are planning on withdrawing at a rate of 4% per year, you’ll withdraw $12,000 a year. Another way to think about that is that it’s actually $1,000 per month for the next 30 years.

In other words, for every $300,000 you have socked away, you can start withdrawing from those accounts at a rate of $1,000 per month and it should last at least 30 years.

If you have $600,000, that’s $2,000 a month. If you have $900,000, that’s $3,000 a month. You get the idea.

If you feel better operating with a 3% withdrawal rate so that you can theoretically withdraw forever, for every $400,000 you have saved up, you can withdraw $1,000 per month and it should last forever.

Similarly, if you have $800,000, you can withdraw $2,000 a month and the account should last forever. If you have $1.2 million in there, you can withdraw $3,000 a month and the account should last forever.

So, if you want a quick analysis of where your retirement savings is sitting right now, just count the number of $300,000 levels in there. For every $300,000 you have, you can likely safely withdraw $1,000 per month in retirement. If you want to be safer, you can use the $400,000 number instead.

What’s the key idea here? You can use this perspective to look at your retirement easily through the eyes of the amount of money you need each month to live. You can use your monthly living expenses as something of a filter to help you figure out how much you need to save.

The Poverty Line Standard

Another, similar way to look at things is to consider how much you’d have to save for retirement in order to meet the federal poverty standard on your own, without any help from Social Security. Obviously, this doesn’t really give you the most affluent of lives, but it does ensure that you’ll be able to keep food on the table and a basic roof over your head. Money above this level is mostly going to raise quality of life, but once you meet this threshold, your basic needs will be met.

The current federal poverty level is $12,060 a year for a single person, $16,240 for a family of two, $20,420 for a family of three, and so on. You can check the full listing for larger family sizes.

So, what do you need to save for retirement to meet that level?

In the case of a 4% withdrawal rate, you’d simply take the target annual number and divide it by 0.04, giving you $301,500 for a single person, $406,000 for a couple, $510,500 for a family of three, and so on. In other words, it assumes you need about $300,000 as a baseline, plus another $105,000 for each person dependent on you, give or take a little.

In the case of a lower 3% withdrawal rate – one that should last forever – you’d divide by 0.03 instead, giving you $402,000 for a single person, $541,333 for a couple, $680,666 for a family of three, and so on. In other words, it assumes you need about $260,000 for a baseline, plus another $141,000 or so for each person dependent on you (including yourself), give or take a little.

So, what’s the take-home message? You can use these numbers as a baseline to figure out what you should be shooting for as a bare minimum in order to keep food on the table and a roof over your head in retirement. Yes, as noted above, Social Security and Medicare will supplement this, but it’s hard to really know how much it will be supplemented, so it’s useful to think of things without those benefits.

Living Anywhere

You might have a strong sense of what your monthly expenses are in your current area, but when you retire, you’re not going to be tied to your current area. You have the freedom to move where you wish, including areas with much lower costs of living.

For example, let’s say you currently live in Boston. When you retire, you could consider moving to, say, Des Moines, Iowa, where the cost of living is about 38% less. In fact, the standard of living on a $50,000 salary in Boston is about equivalent to the standard of living on a $31,000 retirement “salary” in Des Moines.

You can figure this out by plugging your current city and lots of potential “destination” cities into this domestic cost of living calculator, which will take your current cost of living (or salary) in your current city and show you how you how much an equivalent lifestyle costs in your target city.

You can do the same thing with international cities. Take that fellow living in Boston. If that person were to move to Bangkok, Thailand, that person would be able to live a similar lifestyle 45% cheaper. That means that someone living on a $50,000 salary in Boston would be able to have a similar lifestyle on $27,500 a year in Bangkok.

You can figure out such comparisons for international cities using international cost of living comparison tool.

So, what’s the take-home message here? You don’t have to live in your current location in retirement; in fact, you’re probably better off moving. There are many locations around the world and likely even around the country that offer a substantially lower cost of living while maintaining most of the cultural and other features that you’ve come to rely on.

The Missing $100

Let’s say, hypothetically, you’re able to save $100 a month more for retirement starting at age 25. If you do that, by age 65, you’ll have just shy of $250,000 in your retirement accounts (assuming a 7% annual return, as noted above).

For many people, coming up with that $100 a month is a hassle. How do you squeeze $100 a month out of your spending?

Rather than looking at $100 as a lump sum, try a different approach. Pull out all of your credit card statements and bank statements for a month and walk through them, step by step. Look for any and all expenditures that seem completely silly in retrospect. Why did you spend $8 at a gas station on the 24th? Do you even remember why you withdrew that $40 from an ATM? You went to Starbucks nine times? And spent at least $6 each time? (This actually reminds me of a friend of mine who recently found himself in a cycle of buying two energy drinks every morning. I pointed out to him that the routine was costing him about $150 a month and he laughed at me and called me a joker. Except he was doing it every day, buying them from a gas station, and paying $5 a day for them. $5 times 30 is $150. Little things add up.)

Anyway, just pile up all of those little unknown expenses and unnecessary expenses. Make a big list of them. Then, once you’ve done that, total up all of those unnecessary expenses.

For many Americans, the total of those unnecessary and forgotten expenses, those ones that feel utterly silly and unnecessary in retrospect, add up to well over $100 a month. Doubt it? Try it for yourself and find out.

What’s the key idea? You probably already have the money you need for baseline retirement savings, or enough to boost your retirement savings up to respectability. You’re spending it on absolutely forgettable and frivolous things, things that add no lasting value whatsoever to your life. What those things are costing you, though, is a secure life when you’re old.

Gigging in Retirement

This strategy is worth telling a couple of stories about.

At the local bicycle shop that I use when I need repairs or parts, there’s a guy in his sixties that seems to be the “chief bicycle repairman.” There are three or four people who repair bikes, but he does most of the work, it seems, and handles a lot of the customer conversation. One day, I happened to mention that I write about finances for a living and he simply laughed and said, “This is my retirement!” It turns out that he’d been passionate about bicycles all of his life, found himself near retirement age, and just retired so he could work part-time in a bike shop, make enough money to supplement his retirement income and Social Security, and spend all day doing what he enjoys, talking about bicycling and repairing bicycles. The guy couldn’t be happier.

Similarly, when I first moved to my current town, there was an elderly fellow that ran a small trading card shop in a small strip mall in our town. He didn’t have a lot of customers and didn’t make a whole lot of money, but I did notice that most of the time, when I stopped in there, there were always either a few people in there chatting with him or else he was sorting and organizing cards. When he passed away, the shop closed, and I happened to be there when his son was closing out the shop. It turns out that this was the older guy’s retirement gig – he’d enjoyed sports cards all of his life, so he just took his collection as a foundation and opened a shop to trade and sell the cards, organize and appreciate them, and talk to others passionate about it. He didn’t make enough from the shop to live on, but he made enough to supplement his retirement savings and Social Security.

You can probably see the parallels in these two stories. These two people had spent most of their adult lives engaged in a hobby they loved, acquiring so much domain knowledge about the hobby that when it was time to retire, they could easily use that domain knowledge to get a gig of some kind using that knowledge and passion. It didn’t have to be a lot of money or a full time gig, but just enough to keep a bit of cash flowing in while they engaged in the things that they’d always been passionate about.

What does that look like for you? What do you spend your free time on when you have it? Would you have fun working in a shop related to that passion on a part time basis some day, just to be able to revel in the hobby?

Make that part of your retirement plan. If you spent, say, 20 hours a week engaged in exploring your hobby in this way, passing along knowledge and simply enjoying a passion of yours, how would that change your retirement outlook? Would a part-time job fulfill that desire?

It might be as simple as doing something like working as a secretary at your church, or fulfilling some odd job at a nonprofit you care about. You might go into business on your own, writing ebooks or magazine articles or making nature videos on Youtube.

The point is to translate a passion you have into a low-key way of making money in retirement, banking on years of knowledge accumulated from many years with that hobby or passion. You don’t have to turn it into a high-pressure business because the purpose here is to be supplemental – this is a side gig, meant to supplement your retirement income with a few dollars.

Remember, a 20 hour a week job making $10 an hour earns you $200 a week. $200 a week over the course of a year is about $10,000. That’s a very nice supplement. As pointed out above, that’s the equivalent of $300,000 in retirement savings. Not only that, it’s 20 hours spent something you’d do anyway, as part of a hobby.

What can you do to prepare? Give yourself breathing room in your daily life to enjoy a passion. Build your knowledge of that passion along the way and look for a way, someday, that you could make a little money doing more or less what it is that you enjoy.

No ‘Death Wish’

One of the most popular arguments against saving for retirement is the idea that it would somehow be a “waste” to have saved a lot of money and then to die before you could ever spend it. If you saved a million for retirement and then dropped dead on retirement day, what good was all of that effort?

Well, let’s turn that around a little bit.

First of all, the average American will live until they’re 79. Women live even longer than that, on average, in part due to men being more likely to take on risky occupations when they’re younger. If you plan to retire at age 65, it’s worth noting that you have only a 17% chance of dying before then, and that percent goes down every single day you live. In other words, if you’re shooting to retire at age 65, there’s an 83% chance you’re going to start drawing down your retirement savings at that point.

Why would you plan your life around something that has a 17% chance of happening and ignore something that has an 83% chance of happening?

Even then, let’s look at that 17%. Let’s say you do die early and don’t get to spend what you saved. That means that you probably died unexpectedly and left some family members in a pickle – a spouse, or perhaps some children. That savings will ensure that they have a good life. Remember, 55% of American adults are married and around 53% of people have children – and those aren’t the same groups, though there’s overlap.

So, there’s less than a 10% chance that you’ll die before age 65 with no survivors.

But let’s look even further at that tiny group. Let’s say you’re in that 7% or 8% of people who will die before age 65 with no survivors. Your retirement savings can do great things in the world. You can leave it to your preferred charity. Donating $500,000 to a charity that you really care about, like, say, Habitat for Humanity, can make an enormous difference in a lot of lives. Perhaps you could leave it to a relative who could really use a boost in life – that money could transform their life.

The key thing to remember is that there’s more than a 90% chance that you’ll either live past 65 or have children or a spouse when you pass away. That alone is more than enough of an argument for some retirement savings. But even if you’re not in that group, your retirement savings still has tremendous positive power in the world.

Saving for the future is almost always a net benefit.

Some Final Thoughts

Hopefully, one (or more) of these different perspectives on saving for retirement clicked with you and helped to shape your thinking about your financial goals and your financial plans going forward. While these ideas aren’t hard plans themselves, what they each can do is provide the reasoning for and the motivation for retirement savings for you.

Sometimes, it’s just a matter of finding the right angle that makes sense to you.

Good luck!

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Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.