How does one strike a balance between saving for retirement and spending now? Where does one draw the line? Is it as simple as following the traditional norm of saving 10% of one’s after-tax income – and then being off the hook to spend everything above that until it’s all gone? The answer is a “yes” – if one accepts not being able to retire until one is at least 67 and can draw full Social Security. But I would not – could not – accept that. To me, the answer to the question was a “no.” So I looked for and found a different way of determining how much to save and how much to spend.
At age 42, I arrived at my answer by working backwards from my desired/targeted retirement date. And the first thing I realized was that, if I did not alter my then-present spending, I would be hard pressed to even retire at 67. So I started my calculations from that point.
Saving just 10% of my net income and spending the other 90%, as I was, I would need a stash equal to 27 times that net income to retire. I had, at age 42, just one tenth of that. It would take 25 more years for me to accumulate the rest. So I would be able to retire at 67 – just in time to collect my full Social Security payout — if I kept spending 90% of my net income. That was really, really unacceptable to me.
It was unacceptable because, in my view, I would be cheating myself of additional job-free years I thought I should be able to have. At a 10% savings rate, I would be making myself wait too long (25 years!) to break free. I would have to – and could – do better.
After running my calculations several times based on different retirement ages and savings rates, I finally came up with the balance I could live with and not feel guilty about either my wait to retirement or my here-and-now spending. My magic numbers were retiring at age 57, in 15 years, by saving 50% of my net income and spending the remaining 50%.
How I would split that 50% of my net income between basic living expenses and optional discretionary spending was still up for discussion between me and myself (and my wife!). But however that worked out (and it worked out just fine), I now had a game plan I could live with. Literally. And without regret.
So take a hard look at your projected retirement date. Do you feel good about it? Are you satisfied with the remaining years you will have to live free? If your answers are not a strong “yes”, realize that you can change that future of yours by (1) targeting a retirement date you would feel good about and (2) changing the balance point between your spending in the present and your savings for retirement so you can get there.
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