3 New Retirement Rules You Need to Know
Dear Rich Lifer,
Spend less than you earn. Never take a loan to invest. Don’t borrow more than you can repay.
If you stick to these simple money rules, you won’t ever be a slave to debt.
In retirement planning, there are rules of thumb that can help guide you away from financial ruin as well.
For instance, the 4% rule is great to avoid running out of money. But, a lot of basic retirement rules like these need a refresh.
If I’m being candid, there are too many Americans planning their financial futures with outdated advice and rules that no longer hold true today.
That’s why I thought it’d be a good idea today to share with you three new rules of retirement. These are new ways of looking at old problems that I think everyone should know.
Rule #1 – Forget About Your “Retirement Number.”
Only 39% of Americans have tried to figure out how much money they need to retire, according to FINRA.
I’m willing to bet the other 61% of Americans will do just as fine as the first group. Here’s why…
Too often we fixate on a single number — usually the amount of money we think we need saved to retire comfortably.
If you’re hoping to finance at least part of your retirement with savings, this is the wrong approach to take.
For most people, if you ask them what money means to them, they say things like “freedom,” “security,” and “having options.” Notice they didn’t say luxury cars and boats, beach villas, or expensive jewelry?
That’s because the number that matters most to you probably isn’t the number in your bank account. It’s the number of years of freedom those digits in your bank account buy.
If you frame retirement through this lens then your perception of wealth changes too.
For example, if someone is worth $1 million and lives a lifestyle that’s costing them $200,000 a year, this person likely only has five years of freedom and security to their name.
On the other hand, someone with a net worth of $200,000 who lives on $10,000 a year, plus Social Security, has 20 years of freedom banked. (Assuming their nest egg is invested and keeps pace with inflation and taxes.)
By our new definition, the second person is wealthier. You can think of wealth like a ratio: the money you have versus the money you need to live life on your terms for as long as you please.
Looking at wealth in time versus dollars is a powerful way of thinking about retirement.
Rule # 2 – Saving Beats Earning More.
If wealth is about time, and money buys freedom, then there are two ways you can become wealthier: make more money or spend the money you have more wisely.
Which one do you think is easier?
Going back to our example of someone with a net worth of $200,000. If that person were to spend $20,000 annually above Social Security payments, they’d have 10 years of financial wealth.
But if they could find simple ways to cut their annual expenses in half (a little over $800 per month), they’d double their financial wealth to 20 years.
Compare that scenario to someone who decides they want to keep their $20K-a-year lifestyle. Instead of cutting spending by $10,000 a year, they find ways to make an extra $10K each year.
The problem is you won’t get all that money after taxes. Even if you were willing to work an extra 10 years to maintain your current spending levels, you might bring home a total of $80,000 after taxes.
So, your net worth after 10 years would be $280,000. With a $20K-a-year spending rate, you have about 14 years of wealth.
What’s the better deal: Spend $10,000 less per year, and you immediately gain 10 years of wealth, or spend a decade making an extra $10,000 to gain about four years?
Surprisingly, living frugally actually has a better payback than taking on a side hustle.
But what about happiness?
If you think spending less will make you unhappy, it’s very unlikely. Research shows that we quickly get used to living on less, just as we quickly get used to living on more.
Plus, people tend to get more happiness out of experiences rather than buying stuff.
Most of the best memories you have probably cost very little. Taking your children and grandchildren out for ice cream, going on hikes, cooking dinner together.
Cutting costs is not rocket science either. I’ve shared several tips on how to save money by cutting cable, downsizing, selling your old junk…you name it.
I recommend starting by cutting one thing out of your budget for one or two months and see what that does to your happiness.
Rule # 3 – Delay Taking Social Security.
I touched on this on Monday, but it’s important enough that it bears repeating. There are a number of reasons why people choose to take Social Security as soon as they can rather than wait.
Sometimes it’s outside of their control, other times it’s because they don’t want to dip into their retirement savings.
If you’re taking benefits ASAP to protect your nest egg, you’re making a huge mistake. A better choice is to spend your savings today so you can delay taking Social Security.
When you follow this rule, you’re basically buying one of the best annuities around: one that’s guaranteed by the government, keeps pace with inflation and has a survivor benefit.
Plus, each month you wait to take Social Security, it gets better. Delaying payments from age 66 to 70 can raise your monthly benefit 32 percent, even before cost-of-living increases kick in.
While there are a lot of factors you need to consider, as a general rule of thumb, delaying Social Security is a solid strategy for most.
If you’re single, and in good health, wait.
If you’re the higher earner in a married couple, wait until 70 unless you and your spouse are in poor health.
If you’re the lower earner in a married couple, filing early is okay too, especially if one of you is in poor health.
Always run the numbers first to see what’s best given your circumstances.
These rules are meant to be guidelines not the gospel. Adopt the ones that fit your situation and discard the ones that don’t.
To a richer life,