Financial advisors will argue about how much income we will need in our retirement. It used to be that planners would say around 80% of our pre-retirement income. Why? We will no longer pay payroll taxes (8% to 9%) and we no longer need to be saving for retirement anymore (another 10% to 12%). Unless our income and assets are high in retirement—a happy worry—we probably won’t owe any income tax either.
Some advisors even suggest that we will need 100% or more of our pre-retirement income. Why the higher amount? Well, we want to enjoy our retirement and that means spending much more on travel, home improvements, special events—and when we get too old to partake of these, we’ll need much more for healthcare…
The thinking goes like this: subtract other sources of income—like Social Security and pensions—from our anticipated monthly retirement spending and the remainder is the amount we need to finance from our savings. And in case we live a very long time, we should have enough savings to cover that possibility as well. A common rule-of-thumb is that we should be able to withdraw about 4% from our savings each year with low risk of ever running out of money.
Do the math and the amount of required savings can be huge.
Consider this example. Gina wants to retire at 62. She could receive a Social Security benefit at that age of $1,500. She doesn’t have a pension. Her current income is $4,000 a month. If we follow the old rule which says she’ll need about 80% of her income in retirement, then she needs about $3,200 a month. Subtract Social Security and her shortfall is $1,700 a month, which will have to come from savings. We can use the 4% rule to approximate how much she will need: divide the annualized shortfall by 4% and the amount is $510,000.
Here’s the problem: Gina only has $300,000. If Gina is 50, she will need to save over $1,000 monthly (and hope for a good rate of return on her investments) to approach that goal. That’s 25% of her income.
Maybe she can scrimp and save to do it. But what if Gina is 62? Her financial advisor will suggest she keep working—otherwise she will have to drastically cut her spending to around $2,500 a month, around 60% of her pre-retirement spending. That assumes that she can keep working and won’t get laid off… It also assumes she wants to keep working.
She doesn’t.
One option almost never mentioned by financial advisors is to consider relocating someplace where fewer dollars can offer a top-shelf standard of living: that could be any one of dozens of places overseas—one or more of which could be perfect for Gina.
Here’s a better financial plan for Gina. Relocate to one of these countries now, where $2,000 will deliver a first-class lifestyle for a single person. She can live on her savings until age 70, when she will still have a bit over $100,000 left. Her benefit at 70 will be 76% greater: $2,640 per month, adjusted annually for inflation and guaranteed for life. She could take the extra $640 a month and replenish her savings in about 12 years. Or, she could just up her spending for an even more luxurious lifestyle. Or she could do something in between—she has options.
Bottom line: financial advisors want to see your savings grow and last and last. They make more money if you have more savings over a long period of time. They tend to steer us to work longer, live frugally, and grab Social Security and pensions first before touching savings. That’s not always in our best interest. Gina can live at a luxury standard of living right away and arrange to eventually have her spending fully covered by her guaranteed Social Security benefits. That works for Gina. It can probably work for you too.