When it comes to retirement planning, the conventional wisdom is to save diligently during our working years, then enjoy the fruits of our labor once we’ve retired. However, this approach might not be the most beneficial for everyone. Today, let’s explore why this traditional perspective might be limiting and how you can balance saving for the future while also enjoying life along the way.
This discussion stems from a recent conversation with a client who was passionate about both his work and his life outside of it. He faced a dilemma: at what point should he stop aggressively saving for retirement and start using his resources to enjoy his current life, without feeling pressured to retire immediately?
Case Study: Brad and Jill
To illustrate this concept, let’s look at a hypothetical example featuring Brad and Jill, both 52 years old. Brad enjoys his work and has no immediate plans to retire, while Jill is actively involved in their community through volunteer work and various boards. They have a range of assets, including IRAs, Roth IRAs, joint investments, a primary home with a mortgage, and two rental properties—one with a mortgage in California and one fully paid off in Nevada.
Despite their love for work and community involvement, Brad and Jill occasionally feel burned out. They want to know when they can be financially independent—when they can work because they enjoy it, not because they need to continue saving.
Defining Financial Independence
We started by discussing their potential retirement age, settling on 65 as a tentative target. Next, we examined their current expenses, excluding their mortgage and taxes, to determine what they needed to live comfortably today. Their estimated monthly living expenses came to about $7,500, which included some travel and community activities. We also factored in additional healthcare costs, estimating $9,000 per year before Medicare and $3,400 per year post-Medicare.
Income and Savings
Brad’s current salary, which would cease upon retirement, was a significant part of their income. We also discussed Social Security, deciding to plan conservatively by assuming they’d receive about 70% of their projected benefits. Brad’s Social Security benefit was projected to be reduced to ensure they were not overly reliant on future benefits. Jill, having previously worked, also had a projected Social Security benefit, albeit smaller.
Currently, Brad maxes out his 401(k) contributions at $30,500 per year, with an additional employer match of about $6,000 per year. They also save $1,000 monthly into a joint investment account, totaling $12,000 annually. As empty nesters, they are still saving aggressively, but they wonder if they can start enjoying more of their money now.
Balancing Present Enjoyment and Future Security
To address this, we looked at the long-term implications of reducing their savings rate. Currently, they save about $55,000 annually, including the employer match. By cutting their joint account contributions to zero and reducing the 401(k) contributions to $6,000 per year to still receive the employer match, they would free up about $36,500 annually for current use.
This additional $36,500 per year could significantly enhance their current lifestyle, allowing them to travel more, enjoy new experiences, and fully engage in their community activities without the stress of excessive saving. But what would this mean for their retirement goals?
Projecting the Impact
We projected the impact of these changes on their retirement plan. Even with reduced savings, their robust portfolio, assuming an 8% growth rate during working years and 6% during retirement, still projected a comfortable retirement. The probability of successfully meeting their retirement goals dropped slightly from 96% to 90%—a risk they felt comfortable taking given the increased quality of life they would enjoy now.
The Importance of Longevity Over Intensity
One key takeaway from this exercise is that the longevity of work can often be more important than the intensity of saving. By balancing saving with enjoying life today, Brad and Jill can maintain their enthusiasm for work and avoid burnout, potentially extending their careers and enhancing their financial security.
Personalized Financial Planning
This case highlights the importance of personalized financial planning. Every individual’s situation is unique, and while saving for the future is crucial, it’s equally important to enjoy the present. Good financial planning aligns your financial decisions with your life goals, ensuring you can fully enjoy both today and tomorrow.
For those looking to explore their financial planning in more detail, tools and resources are available to help model different scenarios and make informed decisions. By taking a holistic approach to your finances, you can achieve a balance that allows you to enjoy life now while still preparing for a secure and fulfilling retirement.
If you’re in a similar situation as Brad and Jill, consider reassessing your financial strategy. It’s not just about saving for the future but also about living fully in the present. With thoughtful planning and the right adjustments, you can achieve a balanced approach that supports a rich and enjoyable life both now and in retirement.