Setting a monetary goal for retirement is not just about how big your nest egg can be. The goal should focus on the size of your expenses in relation to your nest egg. A retiree, let's call him Henry, can have $2 million set aside, but if he is spending $140,000 a year, his money may not last as long as needed. His neighbor, Mary, may have the same nest egg, but if she only spends $80,000 per year, her retirement will last longer. Although Henry and Mary had similar incomes, Mary planned ahead and spent wisely.
Mary was much more conservative with her spending through the years. During retirement, she'll have more free cash flow to spend on vacations and hobbies than Henry. Rather than adding onto her house, she paid it off before she retired. Henry refinanced and removed equity multiple times. He has a much bigger house than Mary, but his kids are grown and he doesn't need the space during retirement. During retirement, Mary does not have a mortgage payment and Henry still has a large monthly fixed expense and 20 years remaining to pay it off.
Mary did not buy luxury cars when she earned a bonus or received a pay raise. Henry did. Henry enters retirement with a car payment, but Mary's car has been paid off already. Henry spent his extra cash on nicer cars and more meals out at restaurants. They both traveled to fantastic vacation spots around the world, but Mary always made sure she saved the money for her trips in advance. Henry financed his trips on credit cards. By waiting a couple of years before her first trip, she avoided accruing interest on her credit cards. Instead, she earned interest in her investment account on the money she was saving. In their final vacation before retirement, Mary was able to pay for her vacation from realized gains in her investment account while Henry added onto his credit card debt that he has not been able to dig out of yet.
Debt hampers retirees' ability to spend money as they would like. Even if both of the neighbors above followed the 4% rule and only withdrew 4% of their account values per year, they would lead very different lives in retirement. 4% of $2 million is $80,000 per year or a little more than $6,650 per month. If Henry has a mortgage payment of $2,500, a car payment of $500 and monthly credit card payments of $1,000, he only has $2,650 in cash flow to pay for utilities, insurance, taxes, food and entertainment. Since Mary retired debt free, she has $6,650 to spend on utilities, insurance, taxes, food, entertainment and travel.
Sadly, this is not an extreme example. Henry is closer to the norm for Americans approaching retirement. People who live their pre-retirement in a lifestyle closer to how they will live post-retirement tend to be happier in their retirement. Many of those who cannot afford to maintain the way of life they've become accustomed have a hard time adjusting to the change. People who do not retire debt free, tend to stay in debt and pass it on to their heirs.
Plan now. Retire debt free. Retire happy.
