Retirement planning is difficult for a very simple reason. In most cases, it requires deferring consumption today in order to fund a goal sometime in the future. This effort requires a well developed sense of self-control. Self-control comes more easily to some people than others, but for most it is emotionally difficult. A wide range of businesses understand and exploit this fact. Credit card companies would not exist without our need for immediate gratification - - and consider for a moment how you feel when staring down a pint of Ben & Jerry’s ice cream.
Much has been written about American overspending. Take a look at the chart below. In late 2017, household debt levels reached an all time high of just under $13 trillion. Thanks to a growing economy, debt as a percentage of GDP has fallen from 87% in 2009 to 66% today but the dollar amount outstanding is still a big number.
Not surprisingly, Americans are not particularly good at saving for retirement. The Center for Retirement Research at Boston College recently reported that 43% of surveyed households are at risk of not having enough to maintain their standard of living in retirement. Our failings are somewhat understandable. The broad shift away from pensions to defined contribution plans over the last 30 years means that retirement funding now lies squarely on the shoulders of employees. And on top of that, we do not know how long we are going to live or, importantly, in what condition.
A recent article by Santa Clara University finance professor Meir Statman got me thinking about the remaining 57%, the “successful savers.” This segment of the population appears to have mastered the self-control needed to fund a secure retirement. But for this group, moving from living off a paycheck to living off your savings can be anxiety provoking. Money in the bank provides a tangible sense of security and research has shown that for some people, spending actually creates the same kind of emotional pain that delayed gratification causes for others.
In his work, Statman examines the idea of “financial well being” or the feeling generated when we have as much money as we need. As most of us know, this state is not tied to any specific dollar amount and varies a great deal among individuals. We can all think of people who appear content with little money and those for whom no dollar amount is enough. Feelings of not “having enough,” often developed in early childhood, prevent many people from actually enjoying their savings.
Fortunately, a number of retirement planning tools can help investors define and even embrace a sustainable level of retirement income. Acknowledging a few key facts can also help minimize the anxiety often associated with funding retirement. First, while many financial calculators assume a 30+ year retirement, life spans are typically shorter. According to the Social Security Administration, a man reaching 65 today can expect to live, on average, to just over 84 and a women to just over 86. Second, as the chart above shows, spending levels tend to drop throughout retirement. The point here is to make sure that your expectations around what is needed in retirement are reasonable. The transition to retirement is a big life change but it is one that can be successfully navigated with the right tools, self knowledge and yes, self-control.