Saving For a Fabulous 4th Quarter Harvest

Why You Have More Runway Than You Think

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I’m going to take a cue from Avivah Wittenberg-Cox and refer to our lives in quarters. She describes our 3rd quarter as one of becoming and our 4th quarter as one of harvesting. Her goal is to enable us to understand that we are likely going to live to 100, and we need to be conscious that the shape we’re in when we get there is up to us.

When high-income clients aren’t saving enough, most planners give them a few choices:

• spend less in retirement;

• save more; or

• work longer.

Most clients want to live out their post-work lives at the same standard of living to which they’ve grown accustomed while working. Of course, there will be some reduced expenses in areas such as work clothing, commuting, saving from one’s paycheck, etc. But for the most part, nobody wants to take a step down, except by choice. Let’s assume that once we no longer incur the expenses of working, we’ll require about 70% of what we do today for income. 

If we’re not going to spend much less, then we might choose to save more. But how much more? Retirement researcher Dr. Wade Pfau has compiled some really cool work (I read it so you don’t have to) that establishes what he calls “Safe Savings Rates.” Dr. Pfau derived an easy-to-understand framework answering the age-old question: “How much more do I have to save to live the same lifestyle in retirement as I do today?”

The answer? It depends on how long you plan to save, how long you will live on the savings, and how your investment portfolio is designed.

Let’s assume that our investment portfolio (I promise to explain portfolio asset allocation down the line) is 60% equities and 40% fixed income. We call this a balanced portfolio. For us to have 70% of our pre-retirement income last for 30 years of retirement (from ages 65 to 95) and assuming we work for 40 years (from ages 25 to 65), we will achieve our goal by saving 12.27% of everything we earn over those 40 years. If we don’t start saving until we are 35 years old, that jumps to 23.27% of everything we earn.

I tell you this because I would always tell my clients, “Save 20% of everything you earn, and you will have what you want.”

And that advice comes from Dr. Pfau’s work.

But what if you didn’t start saving at 35 years old?  What if you’re now 45 years old and you don’t have a dime saved? Yikes! You’d have to save 50.28% of everything you earn to fund 30 years of financial freedom on only 20 years of savings. That’s a heavy lift.

But all these metrics assume one thing: that the day after we stop working we will automatically start distributing our assets. No fault to Dr. Pfau; after all, I’m a giant fan of his. But at some point you have to pick and choose your variables. And there are certain variables these models don’t consider because they make things too, well, variable. 

So, what happens when you stop saving for retirement, but you don’t immediately start distributing your assets? For instance, what if you continue to work simply for the health benefits and to avoid spending down?

Here’s what happens: Your money continues to grow, and that helps your financial outcome.

Now, what happens if you save a percentage for retirement and plan to supplement your savings with part-time work? The man at Home Depot, who sold me my replacement garage doors, said he worked to stay active, and his job paid for his golf. A client of mine worked part-time at a service desk (where she mostly read novels) just to have extra spending money for her grandchildren.

In other words, if you’re concerned about a shortfall in assets, there are things you can do in your 60s to sweeten the pot. But they’re all driven by one thing: your time horizon.

Time horizon is the amount of time we expect to hold an investment until we need the money back.  And it’s THE most important determinant in where we put our money; a.k.a., what financial instruments we choose. It’s also the key to how much our money will grow or compound.

The longer the time horizon, the larger the pot of money grows. 

At a 7.2% average growth rate for a stock market portfolio, money doubles every 10 years. So, what if we avoid spending down for an additional 10 years? OMG, our money would double, and we wouldn’t have had to save an extra penny! And all these examples of people earning beyond their primary work years show us how to avoid spending down assets too early. They are extending their time horizon for portfolio growth.

Now, if spending less and saving more are not solutions you want to consider for a retirement shortfall, let’s reframe how we think about work. It doesn’t have to be (nor should it be) performed at the same intensity as in your prime earning days. It may be easier on the body, or less taxing on the schedule. It may not come with the responsibility of management. This is because we don’t have to earn what we used to earn. We must earn only enough to avoid spending down our assets, and then making sure to evaluate our situation on an annual basis. To be clear, we also have to do things to remain healthy so we are physically able to continue to work … on our terms.

Right now, I’m sure there’s somebody out there who is saying that I’m wrong; we are not living to 100, so we should retire now, take Social Security now, and spend it all now. But according to the World Health Organization, the life expectancy for a woman who is currently 60 is 84.4 years. Remember that life expectancy is an average, so half of U.S. women will live longer than that. 

And you’re as likely to be one of those women as not.

One of the reasons Congress authorized the change in the age of Required Minimum Distributions to 75 (1960 birthdays and later) is to acknowledge our longevity and the need to keep the money in our portfolios growing for as long as possible. And that’s the beginning of our 4th quarter, the quarter of harvest.

I say we give ourselves more runway for our portfolios to grow by waiting a few years to start spending down our assets. Also, let’s think about extending the time horizon of our portfolios so we have a bigger cushion later. People are scared that they don’t have enough. But the problem isn’t the amount, it’s the knowing.

So, let’s use Dr. Pfau’s math and some easy doubling to calculate our needs.

If you want to play with some of these numbers yourself, you can find some free calculators here, courtesy of Uncle Sam. In the next blog, I’ll show you how to use them, so you can tell your children and grandchildren what you know.

When it comes to money, time horizon is the most important factor for growth.  And if you give your money long enough to grow, you can avoid having to save more or to live on less. 

#MoreRunwayThanYouThink #WeRescueOurselves

© 2024 Madrina Molly

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice.

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