Are you following the wrong directions for your retirement savings?
Back in the ’80’s my then-husband I were avid bicyclists. We lived in north Dallas and we used to ride north on Custer Road, out to a farm market road, east to what is now McDermott and then south on the service road of 75 back to Richardson. Preston Road was two lanes then and barely had a shoulder. There was a little country church where we used to sit and rest on the steps and when we got to the service road there was a McDonalds. It was in “the middle of nowhere”, apparently there for the travelers who couldn’t wait to get to Dallas to get a meal or a drink.
Imagine using my directions from the ’80’s to take that ride today. Custer is now 6 lanes. All the landmarks, including the church, are long gone. The farm to market road doesn’t allow bicycles anymore and it is also 6 lanes. The McDonald’s is still there, but now it is in the center of a busy retail area. Riding on the service road of 75 could only be considered suicidal.
Following directions from the ’80’s won’t get you where you want to go. Not on a bicycle, and not in your financial life, either.
What’s the big myth about retirement savings?
Well, really, there are two.
- Social Security will be there when you need it.
- If your 401k balance equals a certain number when you retire, you’ll be OK.
What’s the problem?
Let’s look at myth #1 – Social Security will be there when you need it.
Surely you’ve heard that Social Security is in trouble. Just how much is up for debate and depends on a lot of assumptions. Without some intervention, the money is going to run out sometime within the next 15 years. Yes, there are bonds that are supposed to be “paid back” to continue to fund it, but that’s debatable, too.
To add to the risk, Social Security is at the whim of Congress. Everything about it – benefit amounts, qualifications for benefits, and other rules and regulations, can change.
In short, just because it has been there for years, doesn’t mean it always will be.
Myth #2 – A certain 401k balance guarantees a comfortable retirement
If you’ve had a financial advisor run projections about your 401k, you probably have a retirement savings balance you’re shooting for by the time you retire. Different gurus recommend different multiples of your current income to “guarantee” you won’t run out of money.
Here’s the problem – there are a LOT of assumptions in there that they don’t necessarily mention.
- There’s a rate of return assumed before and after you retire
- There’s a rate of withdrawal assumed, too
- There’s an assumption about what your spending is going to be after you retire
That’s a lot of assumptions. The rate of return between now and retirement day doesn’t help you if the market crashes the week before you retire, taking your retirement funds with it. Even small variations in the rate of return will affect how long your money will last.
Why can’t we do something different?
Whether you’re anywhere near retirement or not, these two pillars of retirement “savings” have been the backbone of most people’s retirement plans for years now.
It’s a classic case of status quo bias and the anchoring effect. The status quo is that you put $$ in your 401k and contribute to Social Security and everything will be OK. Any other approach looks crazy because “everyone knows this is how you do it”. And the number 65 has been anchored in your brain as the time you “quit working”. Once that number gets anchored, it’s hard to change.
What’s the Answer?
To get the right answer, you have to ask the right question. The right question is not “what worked in the past”, but “given today’s economic reality, what will work in the future?”.
Almost all retirement savings advice focuses on how much you need to save by the time you reach retirement so you don’t run out of money before you stop needing it. This is the wrong question. The RIGHT question is how much cash flow do you need throughout your life.
You don’t have to save a million dollars to have adequate cash flow in retirement. There are other ways to do it, and in today’s economy, they may even be more realistic.
Retirement Savings vs. Retirement Income
Phillip Brewer, in this article on Wisebread, argues that a return to financial solutions from the past is the answer to today’s economy. Specifically, he recommends investing in your own business. I totally agree with this, as this is a way to generate an income stream that doesn’t rely on the government or the stock market to secure your retirement income.
He also suggests that returning to the family as the primary economic unit is an appropriate response to current economic realities. Many millennials have already figured this out and are leaving home much later than their parents did.
Brewer points out that this model of the family business as the economic unit was the norm until less than a hundred years ago. THAT sort of redefines the status quo, doesn’t it?
Assuming you have a job, and a 401k, and you’ve paid into Social Security, should you just ditch all that? Of course not!
Investing in your own business can be a supplement to all that. There are many businesses you can start on the side, and many smart people keep their business on the side. After all, there are benefits to the 401k and Social Security. There’s no need to throw the baby out with the bathwater.
Most people call this kind of business a sideline, but I like to call it a lifeline. Many people tell stories of how a side business kept them from financial disaster when they lost a job, became ill and were unable to work, or needed to take time off to care for a loved one.
I’ve put together a checklist for evaluating this kind of business and I’ll be happy to email it to you. Just put your email address in the form below and I’ll send it right over, along with semi-regular tips to help you make smart decisions about your money AND make them stick.