Danny writes in with a good question:
A lot of the retirement articles I read talk about saving enough for retirement so that you only have to take out 4% a year so that it will last forever. But why would you want that? I certainly don’t plan to last forever and I don’t have any kids to pass it down to. Shouldn’t my goal be to die broke?
You’re absolutely right. In a perfect world, the goal of retirement savings would be to ensure that on the day you pass away, you leave nothing behind unless you want to leave an inheritance for your spouse or children.
However, we don’t live in a perfect world, for several reasons.
First of all, we don’t know exactly when we will pass away. Actuarial science can predict with pretty good likeliness when we will pass away, but it is never exact. It doesn’t take into account accidents, nor does it perfectly predict our body’s internal chemistry. Actuarial science can predict things well, but it can’t predict things perfectly.
For example, I have a great grandmother who lived until she was 89. I described what I knew of her once to a friend of mine who is an actuary and he could not believe she lived as long as she did. Off the top of his head, he guessed she would have died fifteen years or more before she did, mostly due to factors like her lifelong spouse dying twenty years before she did and her relatively solitary life.
You just don’t know how long you’re going to live.
Furthermore, medical science is advancing at a stunning rate. Every day, there are new treatments for more and more diseases. Scientists are making headway against even the most challenging of diseases. While (of course) we haven’t solved everything, medicine has jumped forward by leaps and bounds even compared to the state of affairs just a decade ago.
It goes beyond even just the treatment of diseases. We now know what kinds of treatments to give people to extend life in the face of many aspects of gradual decline.
The end result of all of this is a steadily increasing life span for almost every one in the world. Americans born today, on average, can expect to live well into their eighties and lifespans are only going to keep getting longer. Some futurists predict that people living for a hundred years or more are going to be commonplace.
Beyond that, we can’t predict the future of investments. We never have been and, outside of a controlled economy or some incomprehensible change in analysis, we’ll never be able to. We can’t predict the next stock market crash, nor the next booming sector. We simply can’t predict the future.
The biggest part of why we can’t predict investment futures is because of the incredible rapid acceleration of technology. The internet barely existed twenty five years ago and was viewed either as a novelty or as a way for people to exchange scientific data. Cell phones from fifteen years ago were extremely limited in functionality. The rise of things like Facebook and Twitter and texting all happened in the last decade. The advances in other fields, such as genetics, are similarly mind-boggling.
We also can’t predict our personal futures. Our life events can often change in ways we can’t predict. For example, we might be drawn to stay in our career longer than we expect, or we might end up “retiring” a few years earlier than we planned. We might find retirement boring and end up rejoining the workforce, or we might find it wonderful and dig into lots of leisure and volunteer options.
All of this adds up to a giant mountain of uncertainty about the future. We don’t know how long we’ll live, how long science will extend our lives, how investments and finances will do, nor what technology will create for us.
For example, there might be a discovery tomorrow that cures the very type of cancer that runs rampant in your family history. Treating that cancer is easy and enables you to live until you’re 90 instead of likely dying of that cancer in your sixties or seventies.
On the other hand, you might just find that you saved what you thought would be enough for retirement, but a cataclysmic hurricane does immense damage to a few major coastal cities and brings about an economic collapse that no one saw coming, devaluing all of your investments rapidly (and devaluing the dollar, too). The money you thought you had saved up is no longer worth nearly as much as it was a few months ago.
Furthermore, running out of money in retirement is not a fun outcome. Often, it means a return to the workforce at a time in your life when it’s more challenging than ever before. It might also mean that you’re forced to live strictly on your Social Security check, which can be incredibly tight. It can also mean some very difficult periods during the final months and weeks of your life.
The best investment advice for a situation with this many degrees of uncertainty is to simply save as much as possible.
Most of the time, people come up with models for the future that take into account the most expensive possible outcomes of these uncertainties – a long lifespan, a weak dollar, poor investment returns – and model a person’s retirement savings based on that. Using that kind of model, the vast majority of people will find that they have much more than they need for retirement.
The thing is that the less you save, the fewer unfortunate twists and turns you can tolerate. If you save just enough to carry you through fifteen years of retirement with a strong stock market and then find out that you’re going to live twenty years or that the stock market isn’t nearly as strong as you planned, you’re going to simply run out of money in retirement.
There’s also the issue of comfort. How comfortable do you want to be in retirement? Do you want to live the same lifestyle that you do now, with nice perks like being able to eat out sometimes, driving a nicer car, living in a nice house, traveling a little, and so on? Or do you want to have to live in a small apartment with an old car (or none at all), avoiding eating out because it’s expensive, and not traveling at all? The difference between those two retirement scenarios is how much you save.
That’s the big picture, really. Most retirement advice tries to ensure that you will have plenty of money to live a comfortable life even in the event of some of the costly twists and turns mentioned above. The writers assume that this is the kind of life that you want to live in retirement, and they also assume that the road won’t be perfect along the way and that the stock market won’t continue to spit out a 15% annual return each and every year (because, historically, it never has).
So, back to the original question: should your goal be to die broke?
There is nothing inherently wrong with that goal, but the problem is that it’s basically impossible to pinpoint it. Given that, I think that using that as your model is a mistake. It’s a great model if you can predict the future, but you can’t. No one can. Instead, your retirement savings should be used to make sure that you can have an enjoyable life when you’re no longer able or willing to work.
So, you’re left with another question: how high should I be shooting? Should I be assuming a long period in retirement where I live to a ripe old age and the economy isn’t perfect? Or should I assume a fairly short retirement and a robust economy (and all of the other optimum things)? Can you live with a highly frugal retirement, or do you want to have a lot of creature comforts?
There is no right answer or wrong answer to any of these questions, but the catch is that your answer to those questions determines your quality of life in retirement. Some answers encourage you to save more, which ensures a higher quality of life over a longer period. Some answers encourage you to save less, which shortens the period where you’ll have a high standard of living or lowers your overall standard in retirement.
Personally, I’m betting high. We’re saving as much as we possibly can for what we call “financial independence,” but it really just amounts to an early retirement. Our goal is to have enough saved so that we can live just on part of the annual returns on that investment so that it can continue to slowly grow (as a block against inflation). That way, we’re protected against a lot of unexpected events and we have some time to prepare if a worst case scenario seems to be happening.
That’s my general advice to everyone, in fact. Save as much as you possibly can. That way, when you do decide to retire, it’ll be a secure retirement. Don’t worry about what happens to your money after you pass away – just leave it to family members or, if that doesn’t make sense for you, to a charity or two that you care a lot about, maybe a community organization in your town that’s done good things, or a big charity that’s making big positive changes in the world.
Sure, you didn’t leave this world spending every dime you made, but you most likely left this world enjoying a secure retirement and as much happiness as your final years can provide. To me, that’s better than dying broke.