Retirement Planning: Can You Make Do With Less?

Since the 80's, we have benefited from strong GDP growth, low inflation, lower taxes, and bull markets in both equities and bonds. It was easy to build up our wealth but gone are those days.

For the last year or so, a lot of people suffered immense losses in the financial crisis. Even if the worst of the recession is behind us, we have to prepare for a different economy.


Due to tighter regulations and lesser debt-fueled consumer spending, forecasts for economic growth and investment returns are expected to be lower. For a lot of baby boomers who are likely to retire in the next decade, that is bad news.

Yet, financial planners still impress upon us the need for an 80% replacement rate of pre-retirement income to enjoy a reasonable standard of living after retirement. This is a lofty target and if your wealth has been decimated in the financial crisis, achieving the goal looks even more distant.

For most of us, circumstances will ensure that we make do with less or continue working past retirement age. According to the Federal Reserve’s 2007 Survey of Consumer Finances, the median income for households headed by retirees is just $25,000 a year.

That is about half of the median income for all families, which is $47,000. Clearly, a lot of retirees are doing well on a modest 50% of pre-retirement income.

I do not like to set any benchmark to measure our retirement success but I won't say that the 80% target specified by financial planners is entirely unrealistic. It is true that the future contains many challenges which require that we save as much in our retirement fund as possible. And don't mention early retirement to me.

For a start, runaway inflation, or stagflation, thanks to the relentless money printing by the Federal Reserve to back-stop losses in the financial system and stimulate the economy, will whittle our purchasing power considerably.

Next up is Social Security which has been billed as one giant Ponzi scheme. As it is, the problems with funding Social Security are serious. Given the trillions of dollars in debt racked up by the U.S. government, from its years of practicing a reckless policy of "deficits don't matter," it has finally reached a stage where higher tax rates are inevitable.

And then there’s the problem of soaring healthcare costs. The Employee Benefit Research Institute reveals that a typical 65-year-old male retiree may need about $173,000 to cover health insurance premiums and out-of-pocket expenses in order to have a 50-50.

Of course, the longer you live, the more money you need to set aside. President Obama is advocating healthcare reforms to bring it in line with the core rate of inflation, but I am not sure how effective that policy will be.

In the end, 50% or 80% of pre-retirement income targets depend on individuals. To ensure self-sufficiency, we should get serious about a retirement plan as soon as possible and not wait till 5-6 years before retirement.

In a globalized economy where jobs are outsourced, manufacturing plants relocated and our skills rendered redundant quickly, we have to prepare for long periods of job losses, thus, our retirement goals should also be realistic.

I also prefer to pay off mortgage loans before retirement. This will greatly improve our cash flow and let us sleep better at night, knowing that whatever happens, we have a roof over our heads.

If possible, we should accumulate 1-2 years of cash to prepare for emergencies. This will prevent us from making panic decisions on our other investments.

There is no harm in saving too much money but if we retire with little assets and are debt-ridden, then it could be disastrous. I doubt the government will be able to look after our retirement needs.

Looking at California's budget crisis which is always a good reflection of America's state of affairs, who knows if the federal government will declare bankruptcy in a decade's time, when the dollar loses its reserve currency status and the world has had enough of US debts.

Hence, we should really set our savings target as high as possible and to get started saving money today.