Here is a “fun fact” in the form of a question to ponder over the Labor Day holiday weekend: How much do you think you will need to have saved to pay your cable bill over the course of your retirement? (Answer is below*)
First, some context. I do get questions like this one often from my smarter clients who are truly goal-oriented and who realize how breaking down various retirement (or other) goals into bite-sized pieces makes the whole “affording retirement thing” much easier. Questions like:
- How much should we be saving monthly in order to retire or slow down someday?
- What kind of annual income can we expect from our portfolio someday?
- How much will we need to have saved to afford future healthcare costs? (You can substitute other costs such as cable, vacations, kids’ costs, etc.)
Especially with the lack of certainty in the Social Security system (more to come on this topic) these are valid questions that need to be asked and planned for. The case used to be that monthly social security could be counted on to provide for much of the cost of retirement. However, costs of living have increased (especially healthcare costs) and various people’s tastes in retirement have become more sophisticated – and expensive. Social Security and claiming strategies have been changed. Pensions are a thing of the past. Therefore, additional savings are critical for survival.
There is a basic financial compounding calculation that answers the question mathematically. The inputs are:
- Time frame
- Estimated monthly (or yearly/quarterly) cost
- Estimated increase in cost, or inflation rate
- What amount is already saved today
….To solve for how much will be needed in total at a future point in time.
However, there are almost unlimited factors that can derail the basic math. Factors such as behavior (fear and elation), market performance, taxes, unexpected life events…and simply changing one’s mind! Important to note is that in times such as the present and recent past (7-10 years) when market performance and the job market have been mostly in growth mode, it is much easier to “do the math” and plan out these various expenses NOW and evaluate how close (or far) you are to your needs and desires – and what you need to do to achieve these goals for your future. Hint: Have an adviser who also serves as your accountability partner.
*Assuming a 30-year retirement, a $200 monthly cable bill and a 2.5% annual inflation rate, the total needed will be $107,000. And that’s just for cable.