Summary:
Life is all about tradeoffs. In this post I talk about one of the most common one that people try to work through: saving more for retirement vs. enjoying life today. I cover the key numbers that you need to calculate and how to weigh those numbers against what you’re actually afraid of. Estimated read time: 6min.
“We’re finally making enough where we have extra cash at the end of each month. We really want to start traveling more but should we be saving it instead?”
It’s not always travel, it could be a dream home, a major renovation, a nicer car.
It’s a nice feeling to finally make it past those stretch years. You’re done paying off student loans. You’ve had a few promotions along the way (congrats!) and you’re now at the point where you don’t have to avoid the off the menu special of the evening that the waiter tells you about.
You want to enjoy this new financial flexibility but you’re also worried you could be sacrificing your future. After all, shouldn’t you be putting more towards retirement?
I talk to a lot of people about the tradeoff between long-term goals and short term lifestyle desires. The good news is that these tradeoffs are easily quantified.
The harder part is figuring out how you feel about what the numbers show. Which usually means working through what you’re actually anxious about together.
Start by quantifying your retirement numbers
First, sit down to calculate how far off you are from retirement based on your current assets and savings rates if you haven’t done it yet. A surprising number of people I meet with have no idea what numbers they’re actually aiming for.
Let’s say you and your spouse are both 35 and have two young kids. One of you is a corporate lawyer (in-house, now that you have kids) and the other works in marketing. You currently have $700k in retirement savings between you and you’re both maxing out your workplace retirement accounts.
We work through the numbers and find you should be able to retire by 55 based on your current trajectory and anticipated future spending needs.
We have a starting point. Your baseline strategy puts you 20 years from retirement.
What are you trading off against retirement?
You’d like to spend an extra $15k this year going on a special family trip. You’re not sure if that’s irresponsible. You don’t know how that affects your future retirement.
Since you know you’re 20 years from retirement, we can figure out how much that $15k today could be worth by the time you retire. If we assume your alternative is to put it into a stock-heavy portfolio earning a hypothetical 9.0%1 between now and retirement, that $15k could be worth $84k by the time you’re handing in your final resignation from the working world.
How should you think about this tradeoff?
Like I said before, the numbers are easy. Now we have to think through what those numbers mean to you.
It doesn’t affect your plan.
You both like your jobs and don’t really think about retiring early. Your baseline numbers show you could stop working at 55 without any additional contributions besides maxing your 401k plans. You’re going to be financially ready to retire well before you plan to actually leave the working world.
In this case, your decision is pretty simple.
Your retirement strategy is on auto-pilot. It doesn’t need extra fuel to get to the final destination. Spend the money on living life between now and retirement. Life is about much more than just the last two decades.
It could speed up retirement
Maybe you can’t stand your jobs and you really want to leave the working world as soon as you can. If you’re targeting being able to spend $150k a year by the time you’re retired, that $85k knocks half a year off your timeline.
That’s what the numbers clearly show on the spreadsheet.
But you also really want to take this trip. May it’s the one your youngest will form as one of their first core memories. And the one where your family took that picture that you actually print out and keep above your fireplace for the rest of your life. 20 years is a long time to give up on all of life’s missed opportunities and memories along the way.
Now you’re really torn.
In these cases, I find it can be helpful to model out a few tweaks to your plan like promotions along the way or even career changes. There are lots of ways to speed up the timeline to retirement if that’s what you really want.
But it’s much easier making it through life when you actually enjoy what you’re doing for the majority of your waking hours during the week. I learned this myself when i made the decision to leave a C-level career to do what I do now. And it’s something I see time and time again from mid-career changers. They thought what they wanted was the escape work altogether as fast as possible but what they really wanted was to find the work that was meaningful to them.
It could give you more flexibility in retirement
Maybe you’re the type who is just a bit on the anxious side. Your financial plan says you’re going to have plenty by the time you’re retired. But twenty years is a long time from now. What if the markets crash between now and then and you end up not having enough in retirement? What if there’s some big cost you’re not accounting for in retirement? What if?… You’d rather have more saved up just in case.
Here’s the counter-example to think about. What if you don’t make it to retirement? What if you or your spouse have mobility issues by the time you hit 60 and your dream of traveling the world or hiking the local trails isn’t possible?
In reality, most people dynamically manage their spend in retirement. They pull back in years the markets have been bad or they splurge a bit more in years when the market goes on a tear. And there are plenty of ways to smooth out retirement spending needs if all you want is stable, predictable cashflows year to year.
Sometimes the right answer is to create that extra retirement cushion. But often if you have a concrete fear, you an develop an objective plan to tackle that fear.
Your own tradeoff
Money. Work. Life.
These three things are always in tension and that’s what generic financial advice and calculations don’t capture. Money numbers on paper are easy to calculate, but those numbers may not actually help you figure out what it is you want from Work and Life.
Reach out to my email below if you’re trying to figure out your own retirement numbers or want help weighing the tradeoffs you’re facing. I love hearing from readers and don’t charge for friendly chats.
If you liked this piece, you might want to check out:
Nathan
Founder & Lead Advisor
[email protected]
The Tradeoff
Get more insights, strategies, and stories just like this delivered straight to your inbox every other week. Always free, no paywalls.
Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.
1. 9.0% is an illustrative number and is not a guaranteed rate of return. Use an appropriate estimate for your situation.