When Comparing Yourself to Others Is a Good Plan

Jul 22, 2016
Author: Scott Hanson

Retirement Countdown

I recently met with a client who asked me: “How does my situation compare to your other clients?”

This got me to thinking, when it comes to retirement preparation, are comparisons a good thing? Let’s take a look.

The following are the 3 most common comparative questions that my clients, and callers to Hanson McClain’s Money Matters, ask.

1) How Much Retirement Savings do Most People Have?

When it comes to clients, of course the amounts vary. But when you view the national averages for retirement savings, the numbers are downright discouraging. According to a May 2015 study conducted by the United States Government Accountability Office, 52 percent of households age 55 and older have saved no money for retirement. But clients of an advisory firm like Hanson McClain are usually going to be people who have been conscientious savers for many years.

So, if you have ascended to the category of those individuals who are consistently putting money away, what should be your goal?

Recommendation: Calculate the amount of money you’ll need to live the retirement life you want by counting backwards. That’s right. Here’s how: Let’s say you make $100,000 a year, and you want to have a similar standard of living once you retire. First, subtract the expenses you will no longer have once you stop working (i.e., FICA taxes, your mortgage [if you will be mortgage-free], and contributions to your retirement accounts). Let’s assume these expenses eat up 35 percent ($35,000) of your earnings. This means you’ll need to replace 65 percent ($65,000) of your yearly income. At a reasonable 4 percent return, in order to preserve your savings, you’ll need to have just over $1.6 million saved before you retire.

neoghbor_blog_quote.png2) Where Do People Get Their Retirement Income?

According to an August 17th, 2015, report in US News, an astonishing 41 percent of people in the top two income quartiles will still run out of money once they retire. (Some of these people will have saved that $1.6 million.) It’s not going to work to “simply” save $800,000, $1 million, or even $2 million, and then coast along for the next 30 years by drawing on that money month after month after month (a couple that spends $6,000 a month would blow through $1.6 million in just over 20 years.) Health emergencies are extremely expensive, with hospital stays averaging $25,000 a day. If you don’t have a pension, your retirement savings will need to earn income if it’s going to last. Many people believe Social Security will bridge any shortfall. Unfortunately, not only is the average Social Security payment a paltry $1,180 a month, but when you couple the government’s penchant for borrowing from the program with the fact that too few people are paying in (to support the massive influx of retirees), radical alterations and cuts to benefits could be on the horizon.

So, where’s your income going to come from?

Recommendation: When you consider taxes, debt management, the sequencing of your income sources, the timing of Social Security, and the arrangement of your required minimum distributions from your retirement accounts, modern retirement is a chaotic maze comprised of trap doors and opaque regulations. However, one thing seems certain: Choosing to work with a qualified, credentialed investment advisor, who will allocate your portfolio in a conscientious manner, should help make your money last.

3) How Much is Too Much Debt?

After ill health, debt is the most commonly-cited obstacle to a happy retirement. But that still doesn’t keep people from borrowing. According to Time magazine, 33 percent of people age 65 and older carry a mortgage, with half carrying a mortgage over $100,000. According to CNN Money, retirees average $6,400 in credit card debt. All of this debt is why, according to the Institute for Financial Literacy, 99,600 people over the age of 65 went bankrupt in 2015.

So, how do we instruct our clients to manage debt?

Recommendation: As you approach retirement, identify your excess monthly expenses. Are you paying for insurance you don’t need? Could you downsize your home (or relocate) and add money to your retirement nest egg? Work hard to eliminate all debt before you retire, including your mortgage. Consistently remind yourself that money that is not going out is the same as money coming in.

In most instances, comparing ourselves to others is a recipe for unhappiness. But when it comes to retirement preparation, these comparisons are not all bad. That’s because you need to know the realities, which include the fact that many people who attempt to prepare for retirement without professional guidance will, unfortunately, run out of money.

Remember, your situation, your wants, dreams and goals are all unique. This means it’s not as simple as saving “X” number of dollars and calling it a day. I’ve met many people with $1 million in savings (but $600,000 in mortgages and debt), who are not in as enviable a retirement position as those people with zero debt and a moderate monthly pension from the phone company.

One of the only ways to know where you truly stand in comparison to national averages is to speak with a credentialed advisor who can evaluate your situation and help you to determine a clear course of action that’s right for you.


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