Pete the Planner: To secure retirement, don’t stretch your lifestyle

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Peter DunnDear Pete,

On Jan. 1, I will receive a 7% pay increase. I currently make $163,000. I’m 46 years old, and I have $230,000 saved for retirement. I feel like I’m behind on my savings goals, and I don’t want to waste this opportunity to get back on track. Given how intense inflation has been over the last couple of years, how realistic is it for me to save this raise? I’ve blown way too many opportunities, and I don’t want to blow another one.

—Phillip, Avon

Before I address your question, we should acknowledge the gut-wrenching feeling of knowing you’re off track.

I have a confession—I’ve wasted so many opportunities to get back on track, in nearly every area of my life. I’ve made excuses, I’ve dismissed the importance of the original goal, and I’ve blamed myself to tears. Yet somehow, some way, none of that seemed to help get me back on track to whatever it was that I was trailing. The closest relief I’ve found in underachievement is extending myself some grace.

Yes, I know pressure makes diamonds, but pressure can also lead to explosions. Extend yourself some grace, then let’s put together a realistic strategy to stabilize your financial life.

I know close to nothing about your life, other than your 28 adult years have been able to produce $230,000 of retirement savings. I’m not exactly sure what seems off track, because I don’t know what your retirement goals are. However, if you don’t save another dime, I’d project your retirement income at roughly $10,000/month. That is if your retirement account earns an average 8% rate of return until age 67, then you receive an estimated $3,700/month of Social Security income at that time. Also worth noting, after inflation, $10,000/month will feel closer to $5,300/month.

How does that strike you?

From my perspective, it’s not terrible. Especially if you are still actively contributing to your retirement account. Let’s assume that, between your contributions, your impending raise and your employer’s contributions, you’re able to contribute at least 13% of your compensation to your retirement account. My math there is a 10% contribution by you and a 3% contribution by your employer.

If you’re able to do that, your retirement income rockets north of $18,000/month, or an inflation-adjusted $9,600/month. After tax, that means you’ll have what feels like $7,700/month of retirement income, in today’s dollars.

How does that strike you?

Today, I’d estimate your take-home pay somewhere between $10,000 and $11,000 per month before your raise. And my guess is, your mortgage payment is somewhere in the $2,600/month range. If my wild guesses are true, you’re not as far off track as you think you are. Sure, I’d love to see you have at least $100,000 more right now, but hope isn’t how any of this works.

While you certainly have some work to do, there is one horrendous way this whole thing starts to go terribly wrong. If the gap between what you need and what’s available grows, you’re dead in the water. For instance, I’m estimating you’ll need about $8,000/month in today’s dollars, and you’ll have roughly $7,700/month in today’s dollars available at retirement. If your need grows well beyond $8,000/month, you’re in big trouble.

How and why would that happen, you ask?

Because that’s what has already happened, over and over and over again. Whenever you received a pay increase and didn’t save the increase, your lifestyle grew. Which means your income need grew, too.

I know this sounds weird, but I’m less concerned with your not saving the 7% increase than I am with your starting to need the 7% increase. In fact, you’d be better off donating the 7% increase to your favorite charity than taking it for yourself. I’m being both overly dramatic and overtly truthful. You’re only off-track if you keep doing what you’ve been doing, which is absorbing your raises to grow your lifestyle. I don’t offer this idea judgmentally; it’s simply an observation.

I find your chances at a successful retirement outcome to be excellent. Just focus on shrinking the need versus available gap, not growing it.•

__________

Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.

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