The Secret That Will Help You Afford Retirement

Last Updated Sep 27, 2011 10:42 AM EDT

Financial analysts and writers (myself included) often start articles about retirement like this: If you retire at age 65, you'll need to make your money last for 30 years, since there's a good chance you could still be alive at age 95. Therefore you'll need a gazillion dollars to retire comfortably.
But you don't need to be an actuary (like me) to figure out just how much money you'll need during retirement. Let's pretend you put your retirement savings under your mattress, where it earns no interest (which isn't too far from reality considering today's rates from bonds and bank accounts). Say you need a retirement income of $30,000 per year to supplement your Social Security. Thirty years times $30,000 is $900,000, so that's the amount of money you'll need to stuff under your mattress, not accounting for inflation. Factor in inflation, and you'll need well over a million bucks.

Then consider the financial analyses that support the four percent rule -- this is the often-recommended percentage of your retirement savings that you can safely withdraw each year of your retirement so you won't outlive your money. These analyses typically consider that you'll be retired for 30 years, and they recommend low withdrawal rates so you can survive all kinds of economic disasters, including recessions, depressions, and periods of high inflation.

And that's a smart strategy if you want to be retired for 30 years. Just think back thirty years to 1981. We've had five major investment challenges since then. In 1981, inflation measured by the Consumer Price Index was more than 11 percent, coming down from more than 13 percent in 1980. Then we had four major blowups in the investment markets -- the 1987 stock market crash, the savings and loan debacle of the early 1990s, the tech bubble that burst in the first years of the aughts, and now the latest mess we're in. And this doesn't count the wars and other political upheavals that have affected our money. Looking forward, if we'll be retired for 30 years, it's reasonable to assume we'll need to survive four or five more economic challenges during that time.

A few Americans will have pensions or enough retirement savings that they can safely withdraw at a very low rate to avoid outliving their money. But for the vast majority of Americans, the solution is...don't try to be retired for 30 years. Which means you'll need to work into your 70s, which probably isn't news to you if you've been reading about retirement lately.

But how do you make this happen, particularly if you can't see yourself working at your current job for another 10 to 20 years? One possibility is to find different work that you enjoy and that pays just enough to cover your living expenses until your 70s, allowing you to avoid drawing your Social Security benefits or dipping into your retirement savings so they can grow until then. Even then, you'll still have 20 years of retirement to go, which is a longer retirement than many of our parents and grandparents enjoyed. On the other hand, compared to a 30-year retirement, you won't need to have as much money or need to survive as many economic blowups.

To make this work, you'll want to take a good look at all aspects of life -- working, living expenses, and how you want to spend your time. Can you work fewer hours, so you have more time to pursue your interests or spend time with friends or family? Or maybe you're tired of kissing up to the man and you want more independence in your work-life? In this case, some form of self-employment might work better for you. Maybe you can go back to school and earn a new credential, giving you the knowledge to follow a new career.

Perhaps you can figure out how to reduce your living expenses, so you don't need as much money to live on. Some ways to do this might be to downsize your house, drive your cars into the ground (or ditch your cars altogether), or try getting by with less stuff.

If you do decide to continue working, look for work that you truly enjoy doing, even if you're making much less money than today or if the work doesn't have as much prestige. I've met many people who are successfully following this strategy. Stay tuned for case studies in future posts where creative people share their secrets for affording retirement.

It comes down to this: Retirement can be an expensive path to happiness, and 30 years may be too long to be retired. To live long and prosper, we'll need to be creative, inventive, and resilient. A good place to start is a realistic -- yet optimistic -- acceptance of our circumstances.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.