Is Your Plan for Retirement Too Safe?
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What is the main topic discussed in this episode?
Is your retirement plan too safe? And how financial mistakes could be a sign of cognitive decline? That and more on this Saturday personal finance edition of the Motley Fool Hidden Gems Investing Podcast.
What assumptions about retirement planning might be too cautious?
I'm Robert Brokamp, and for today's main segment, I'm going to discuss a few assumptions about retirement planning that might be too cautious. But for some recent headlines that caught my eye, I'll start with a segment from NPR's Planet Money with the title, How Your Bank Account Might Predict Dementia. It started with the story of Sandra Balaban, who hadn't been in close contact with her father for a while. When she visited him, his house was a mess. And amidst the clutter were credit card statements showing purchases of scammy-seeming health products and online subscriptions. Her father couldn't explain them. He had also lost the $1 to $2 million he had in his retirement accounts. When Sandra reviewed his brokerage statements, they didn't make sense.
She described them as an extremely erratic pattern of investments. He also hadn't paid his taxes in years. The segment then brought in Lauren Nicholas, who is a professor of geriatrics at the University of Colorado. And she contributed to a study which found that wealth begins to decline about six years before a dementia diagnosis due to impaired financial decision-making. As Nicholas said in the interview, quote, End of quote. On last week's show, we talked about estate planning with attorney Jill Mastroianni, the host of the Death Readiness Podcast. But as we discussed, estate planning isn't just about death. It's also the planning and legal documents you need when you or someone you love is no longer able to handle their own affairs.
How can financial mistakes indicate cognitive decline?
So if you have older relatives, discuss with them in a very loving, gentle way, what's their plan for if and when they're no longer able to take care of themselves financially or otherwise. And look for signs of money-related mistakes that could be an indication of cognitive decline. Things like new spending patterns, bills and taxes not getting paid or being doubly paid. calls or letters from companies or charities you never heard of, evidence of falling for get-rich-quick scams, a declining credit score, even basic math mistakes. And if you're getting up there in years, have a plan for how your family will be able to step in and protect you and your financial legacy. Next up, CNBC recently highlighted an article by Fran Walsh, who is the co-founder of Opulus, a fee-only financial planning firm in Pennsylvania.
The article highlighted how saving more for retirement can move up your retirement date in an underappreciated way. Of course, saving more will accelerate the growth of your portfolio. That's obvious. But to save more, you have to spend less. And when you learn to live on less, you've lowered the cost of your retirement because you won't need as much income each year. Here's an illustration from Walsh's article. Let's say you have two households, both of which are 35 years old, earn $250,000 a year, and their portfolios grow 8% annually. Household A saves 10% a year or $25,000 and spends $225,000. Household B saves 30% or $75,000 and lives on $175,000. As a quick back of the envelope estimate of how much they need to retire, Walsh uses the rule of thumb that multiplies annual income needs by 25, because that's the inverse of the old 4% rule for how much you can withdraw from your portfolio in retirement.
According to this math, household A needs $5.6 million to retire, whereas household B needs $4.3 million. So household B is saving much more for a smaller goal and will be able to retire at age 57. Household A, on the other hand, won't be able to retire until age 73. And to me, this is the real magic of the FIRE movement. FIRE standing for Financial Independence Retire Early. These are people who have cut their spending significantly in order to save 30% to 50% or more of their incomes and retire well before their 60s. Now, I know that many people may not be comfortable with the sacrifices these FIRE folks make, but I also believe that many Americans can cut their spending without a huge drop off in satisfaction, especially if it means they can retire sooner.
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