The discipline of retirement planning is not conducive to a smooth, functioning lifestyle. Many are in the unfortunate position of struggling day-to-day; some have overcome the struggle but don’t have the resources to save for some far-off event. Some have the discipline and the means but allow their focus to be distracted.
Sound financial planning instils a restraint that tomorrow is another day; and our current income stream will not always be there. It encourages savings and reserves for leaner times. But this requires great personal resolve. Some people are motivated by aiming at a financial target. “If I achieve x amount I’ll be fine” The difficulty is that establishing the appropriate value of x for each individual is a real imponderable. Nobody knows for sure what surprises the retirement years will bring. Nobody can foretell the hardships. Nobody can truly understand the medical advances that will see future retirees living, healthily, well beyond 100.
Financial advisers squabble over the value of x. The truth is that nobody may ever have the correct solution simply because individual circumstances will differ so much. The common consensus is to rely on a multiple of current income or some other financial measure that appears to satisfy the individual’s expectations. What advisers must avoid at all costs is the ‘p’ word – pension.
Here’s an intriguing alternative approach*.
Take the market value of your house—and multiply it by 0.3. That is the income you will need in retirement.
For rounding purposes, let’s say your house is valued at €500,000. Take this figure and multiply it by 0.3. This equals €150,000, which is the amount of income you will need in retirement. Most will consider this to be a rather high figure and will argue that they should be able to survive on a much lower income. This proposition begs to differ. It all comes down to the value of your house! The insight is really rather simple.
A €500,000 house is expensive to maintain; is located in a nice neighbourhood and requires at least one high-end car to sit in the driveway.
If your house is worth €500,000, you are unlikely to shop for clothes in Penneys. You are not getting your furniture from Bargaintown. You are not buying your wine in Wetherspoons. You are not selecting your groceries at Polonez or Aldi. All of this adds up. Your lifestyle, and all the money you spend, is driven by your house and the eircode that it sits in. If you really want to spend less money, get a smaller house!
The proposition is compelling at one level and suggests that our expectations in retirement are a function of ‘what we have we hold’ and by hook or by crook ‘we have to keep up with the Jones’s!!
Suggesting that retirees downsize is a practical financial proposal. However, advisers may come to realise that social status upends logical practicalities!
*We’re indebted to Neile Wolfe, Wells Fargo Advisors in Austin, Texas for this proposal.