Is it better to save more or work longer?

Is it better to save more or work longer?

Quick note: I’m in the process of redesigning the Intentional Retirement website.  If you have any thoughts or suggestions on ways to improve it or make it more helpful to you, please hit “reply” to this email and send them my way.  Now on to today’s article…

Save more or work longer?

One of the first things I do for new clients is create a detailed retirement plan based on their unique circumstances.  This helps us determine if they’re on track financially for the type of retirement that they want.  Sometimes this exercise produces smiles.  Sometimes not so much.

If a plan is falling short, there are many ways to get it back on track.  You can save more, change your allocation, work longer, work part time, change your Social Security claiming strategy, get out of debt, spend less in retirement or downsize to a smaller house.  The effectiveness of those options varies.

The most obvious tactic is to save more, but the power of saving diminishes as you approach retirement.  Why?  Because each new dollar has fewer years to compound.  A dollar saved at 25 becomes about $22 by retirement (assuming an 8% annual return and retirement age of 65).  A dollar saved at 55 only becomes about $2 by retirement.

A recent report from the National Bureau of Economic Research illustrated this point by showing that saving another 1% of your salary each year for 10 years is only as effective as working for a single month longer.

To explore this idea further and look at the effectiveness of different tactics, I thought it would be interesting to look at an actual retirement plan and see which changes produce the biggest results.  Below is a short video of me working through a plan and testing potential changes to improve the overall success rate of the plan (If you have trouble viewing the video, click through to our site and click on the YouTube link).

 

You will probably retire sooner than you think

You will probably retire sooner than you think

Hi all.  Life got busy and Part 3 of my series on simplifying your life and executing on the things that are most important to you is taking a bit longer than expected.  I know.  Ironic isn’t it? Anyway, that post will be up soon.  Meanwhile I wanted to give you a few quick thoughts on some recent research related to when we expect to retire vs. when we actually retire.

Expectations

When do you plan to retire?  If you said mid to late 60s, you have a lot of company.  Most people plan on working until then.  Here are the specifics.  According to the latest iteration of the EBRI Retirement Confidence Survey, 75% of people said they expect to work until at least age 65.  A full 38% expect to work to age 70 and beyond.  When asked why, some gave lifestyle reasons and some gave financial reasons.  In other words, for some it’s a choice.  They don’t need the money, but they enjoy the challenge, engagement and structure that work provides.  For others it’s a necessity.  They need the money.  The paycheck (and in many cases the healthcare) they earn from working longer is an integral part of their retirement funding strategy.

Reality

Do those expectations match up with reality?  In a word, no.  In addition to tracking when people expect to retire, the EBRI study also tracks when they actually retire.  And as you may have guessed by now, most people retire much sooner than expected.  The study found that 76% of people retire before age 65 with the median retirement age at 62.  Almost 40% retire before age 60 (vs. 9% expected) and a scant 4% work to age 70 and beyond (vs. 38% expected).  When asked why, some said they decided they didn’t really want to work after all.  Others had a health issue or were the victim of downsizing and were forced to quit sooner than expected.

Regardless of the reasons, when expectations and reality are so far off, it causes problems.  It reminds me of something Mark Twain once said: “It ain’t what you don’t know that gets you into trouble.  It’s what you know that just ain’t so.”

What if you retire earlier than expected?  You’ll need to figure out how to bridge the healthcare gap until you’re eligible for Medicare.  You may need to claim Social Security early and take a permanent reduction in benefits.  You will need to fund your lifestyle for several years more than expected.  You’ll need to find other ways to fill your time, find purpose and get social interaction than heading to the office.  Those are some serious issues.  So as you plan for retirement, outline what you want and what you expect, but always be asking “What if it doesn’t work out that way?”  Have a contingency plan.  Be ready to pivot or call an audible if necessary.  Then if expectations and reality diverge, you’ll be able to adjust and keep your plans on track.

Have a great week!  As I mentioned earlier, Part 3 will be on the way soon.  Also, we’re heading to Iceland in a few weeks to do some exploring, so I’ll probably write a post on that that includes some stories as well as some of the tools, tricks and strategies I use for planning trips.  Until then, stay intentional and touch base if there’s ever anything I can do to help you.

Mini-retirements and work: A how to guide.

Mini-retirements and work: A how to guide.

Based on the huge response to my initial “Mini-Retirement” post, I think I can safely draw two conclusions:

#1: There are A LOT of you who don’t buy into the “save the best for last” philosophy of retirement.  No surprise here.  IR readers are all about living intentional rather than conventional lives.

And…

#2: While you love the concept, some of you are a little uncertain how to make it work for you.  In other words, the “want to” is there, but the “how to” is a little fuzzy.

The comment I heard most went something like this: “I love the idea, but I don’t think I could make it work because of my job.”  Fair enough.  I’m fairly attached to my paycheck too.  The good news is that living an interesting life and doing meaningful work aren’t mutually exclusive.  If you want to make it happen, you can.  Below are some ideas to get you thinking how.

Making mini-retirements work with work.

Note: Not every idea will work for every person, but I’ll bet there is more than one thing on the list that will work for you.

Take the easy wins.  Many of us have a certain amount of paid vacation and sick time each year.  Some companies even allow you to bank unused time year after year.  Rather than spreading those days out in one or two day increments throughout the year, take it all at once.  For many, this idea alone will be enough to move mini-retirements from pipe dream to possibility.

Rearrange your hours.  Some jobs have a great deal of flexibility.  Others are a bit more rigid and follow a basic formula of trading time for money.  For those with the latter, your employer’s primary concern is that you’re putting in the hours and doing the work.

A full time job is usually 2,000 hours per year: 40 hours per week for 50 weeks with a 2 week vacation.  What if you flipped that equation and worked 50 hours per week for 40 weeks and then took 12 weeks off?  Not sure your employer would go for it?  Propose 43.5 hours per week for 46 weeks and then take 6 weeks off.  Or even 41.7 hours per week for 48 weeks and then take four weeks off.  With any of those options your employer is paying you exactly the same amount of money, you’re working exactly the same amount of hours and you’ve got time each year for a mini-retirement.

Ask for your raise to be paid in time off.  Companies have been watching their pennies pretty closely since the meltdown in 2008.  Consequently, your boss might not be very receptive if you ask for a raise, even if you deserve one.  You could probably improve your odds if you ask for that raise to be paid in time off instead of dollars.  It’s a win-win.  The company keeps a lid on expenses and you get more time off.

Optimize your schedule.  Many of us have jobs where we’re not doing the exact same thing day in and day out.  There is an ebb and flow to our tasks and responsibilities.  We have busy times and slow times throughout the year.  Times that require a lot of face to face interaction and times where any old computer and phone will suffice.  My job is a lot like this.  It gets busy and interactive during client reviews or when I’m doing seminars, but summers and holidays are usually dead.  It wouldn’t take much for me to rearrange my schedule so that the things I need to be present for are all concentrated in certain months and the things I can do remotely are shifted to a mini-retirement month.  This is a good option for those who want to take extended time off while still maintaing momentum at work.

Batch tasks.  Improved productivity means that you can do the same amount of work in less time.  If you have one of those jobs that is more focused on completing certain tasks rather than putting in certain hours, batching can be a big help. Most of you probably already use batching when you do things like pay bills.  Rather than grabbing your checkbook every time you go to the mailbox, you save up that month’s bills and then pay them all at once.  Are there parts of your job that you can batch in order to be more efficient?  Once the work is done, what’s keeping you behind your desk (besides inertia)?

Use technology for location independence.  For many of us, our jobs are perfectly designed for the people who did those jobs 10 years ago.  We commute to a special building and then sit in a fabric covered box (cubicle) so we can use a computer and a phone (sounds glamorous!).  Technology has made the building and the box, if not obsolete, at least less important.

We still need the computer and the phone, but technology like Skype, Go To Meeting, wireless internet, cloud computing, instant messaging, Google Voice and collaboration software (e.g. Asana, BaseCamp) have made it possible for many of us to do some or all of our job from just about anywhere (a.k.a. location independence).

Being gone for a year might not be realistic, but would it be possible to take a month or two off and use technology to keep up with important projects and deal with urgent issues even while you’re gone?

Negotiate a remote work agreement.  According to Forrester Research, more than 34 million people work remotely.  That number is expected to hit 63 million by 2016.  I’m skeptical that most bosses would be ok with you working in your pajamas from home 365 days per year, but if you combine this idea with one or more of the previous ones, I’m guessing that a reasonable boss would be willing to allow you to work remotely for a fixed period (say 6 weeks) and only count part of that time as vacation.

Sacrifice.  All of the options up to this point involve still getting your paycheck.  If you didn’t find something on the list that works for you, maybe it’s time to take more drastic action.  This could include taking unpaid time off or quitting/changing jobs altogether.  Obviously, that’s a little more painful because it involves change and sacrifice, but I think it’s important to ask yourself this: “If my current job keeps me from living the kind of life I want to live, should I really stay there for the next 10, 20 or 30 years?”  If the answer is no, a change may be in order.

Putting it into practice

Anytime you’re trying to wrap your mind around something that is unconventional and complicated, it’s helpful to know that it’s possible.  That’s why it’s been so encouraging to me this week to hear how some of you are working to make mini-retirements a reality.  There’s the couple planning to move to Spain for a year with their kids.  There’s the family who, after reading my initial post on mini-retirements, read it aloud at the dinner table and had a mini-retirement to New York booked by the end of the week.  There’s the friend who is consistently updating me while living in the Congo for three months as a volunteer for Mercy Ships.  These stories and more are good reminders that, with a little planning and effort, we don’t need to defer our dreams until “someday.”  I hope you’ll join in with the rest of us.  Feel free to leave a comment or question on the site and touch base with me if there’s ever anything I can do to help.

Have a great week!

~ Joe

A short lesson in perspective

A short lesson in perspective

Late last month an advertising executive (a real life Mad Man) named Linds Redding died of esophageal cancer.  After being diagnosed in 2011, he would regularly write about the disease, his treatments and his thoughts on life at his blog.

Earlier this year he wrote a post called A Short Lesson in Perspective in which he reflected on how wholeheartedly he had thrown himself into his career over the years.  As he rapidly approached the premature end of his life, he wondered aloud if it was worth it.

His insights and conclusions were so raw and honest that I wanted to excerpt a small portion of his post below so that you and I could reflect on our own priorities as we live life and plan for retirement.  One day (hopefully not soon) we will be where Linds was when he wrote that essay.  How great would it be if we could heed his words of warning so we could look back on our life with pride, satisfaction and few regrets?

A quick note: Linds refers to something called “The Overnight Test.”  When creating advertising campaigns, he and his team would often let ideas simmer overnight.  If it still seemed like a good idea the next day, they would say that it passed “The Overnight Test.”

From A Short Lesson in Perspective:

“Countless late nights and weekends, holidays, birthdays, school recitals and anniversary dinners were willingly sacrificed at the altar of some intangible but infinitely worthy higher cause.  It would all be worth it in the long run…

This was the con.  Convincing myself that there was nowhere I’d rather be was just a coping mechanism.  I can see that now.  It wasn’t really important.  Or of any consequence at all really.  How could it be?  We were just shifting product.  Our product, and the clients.  Just meeting the quota.  Feeding the beast as I called it on my more cynical days.

So was it worth it?

Well of course not.  It turns out it was just advertising.  There was no higher calling.  No ultimate prize.  Just a lot of faded, yellowing newsprint, and old video cassettes in an obsolete format I can’t even play any more even if I were interested.  Oh yes, and a lot of framed certificates and little gold statuettes.  A shit-load of empty Prozac boxes, wine bottles, a lot of grey hair and a tumor of indeterminate dimensions.

It sounds like I’m feeling sorry for myself again.  I’m not.  It was fun for quite a lot of the time.  I was pretty good at it.  I met a lot of funny, talented and clever people, got to become an overnight expert in everything from shower-heads to sheep-dip, got to scratch my creative itch on a daily basis, and earned enough money to raise the family which I love, and even see them occasionally.

But what I didn’t do, with the benefit of perspective, is anything of any lasting importance.  At least creatively speaking.  Economically I probably helped shift some merchandise.  Enhanced a few companies bottom lines.  Helped make one or two wealthy men a bit wealthier than they already were.

As a life, it all seemed like such a good idea at the time.

But I’m not really sure it passes The Overnight Test.”

An open letter to the Class of 2012 and the Monthly Rewind

An open letter to the Class of 2012 and the Monthly Rewind

As some of you may know, I write a column on retirement for the Omaha World Herald.  Today’s column was an open letter to the Class of 2012.  Since many of you have graduates in your life, I thought I’d pass it on so you could share it with them.  Here’s a link:

An Open Letter to the Class of 2012

Also, each month I post a quick summary of the new articles at Intentional Retirement for anyone who may have missed something.  May’s articles are below.

Have a great weekend!  Don’t ever hesitate to touch base if I can help.

Joe

5 questions before you quit

5 questions before you quit

If you asked a group of people to define retirement, chances are good that almost every person’s answer would somehow revolve around no longer working.  In fact, “working during retirement” sounds like an oxymoron to most people.

In reality, though, working during retirement is becoming more and more common.  According to the recent SunAmerica Retirement Re-Set Study*, pre-retirees are delaying retirement by five years—from age 64 to 69—and when they do retire, two-thirds anticipate that they will continue to work in some fashion.  Reasons for staying on the job include longer life expectancies, the high cost of health insurance, the recent market downturn and a desire to stay active.  So how do you know if working during retirement is right for you?  Here are five questions to ask yourself before quitting your job.

1)      Do I need to work?  The volatile markets and economic downturn of the last several years have dealt a serious setback to the retirement plans of some pre-retirees.  In many cases, continuing to work is the most effective way to get your retirement plans back on track.  Staying on the job means more income, more time to save, continued employer provided benefits and increased Social Security benefits.  It also gives battered investments time to recover and means that your nest egg will need to provide income for a shorter period of time.  While continuing to work may not be your first choice, it can be a great way to increase your security and peace of mind.

2)      Do I want to work?  A growing number of people are working not because they have to, but because they want to.  Fyodor Dostoevsky once said “Deprived of meaningful work, men and women lose their reason for existence.”  In other words, all of us are designed to do something meaningful and productive.  Retirement doesn’t somehow remove that need, it just means that we no longer have to base our choice on how much something pays.  Before leaving the workforce, think about the non-financial benefits you get from working.  If you derive a great deal of satisfaction and purpose from your job, you may want to think twice before leaving it.  And if you do decide to leave, be sure to have a plan for how to fill the void.  Otherwise, you might find yourself frustrated and dissatisfied.

3)      Will working even be an option?  The SunAmerica Study also found that almost half of those already retired left work sooner than expected.  The number one reason sited for exiting early was personal health problems (41 percent), but many also lost their jobs (19 percent) or quit in order to take care of a family member or friend (13 percent).  As you think about working in retirement, it’s important to remember that the choice is not always up to you.  If you have a physically demanding job or a poor health history, your working days may be numbered.

4)      Does a Work-Retirement hybrid make sense?  If your answers to any of the above questions were yes, it might make sense to design a solution that offers the best of both worlds.  Whether this means doing a phased retirement with your current employer or choosing something else entirely, working part-time or at a less demanding job can give you increased freedom to follow some of your retirement dreams while still providing income and a connection to the working world.

5)      What is Plan B?  If we’ve learned anything from the last several years, it is this: Things don’t always go as expected.  A plan to continue working can get cut short by a pink slip.  The market might dive and take your income with it.  You might head into retirement with a number of meaningful pursuits in mind and find that none of them really meet your needs.  Whatever the reason, it’s important to have a Plan B, just in case.  Derek Sievers once said “Success comes from persistently improving and inventing, not from persistently doing what’s not working.”  When it comes to retirement, don’t be afraid to change course and make improvements until you get it right.

Work and retirement do not need to be mutually exclusive.  By striking the appropriate balance you can design a retirement that is uniquely yours and will result in a rewarding, meaningful new chapter in life.

* www.retirementreset.com

 I originally published this article at www.fpanet.org.