Since many of us have no hope of ever saving the megabucks needed to produce this yearly cornucopia, the main effect of these messages is to make us anxious. Fortunately, these "you'll need at least $1,000,000 to retire happily" articles more accurately reflect the biases of the investment industry than they do the spending patterns of real retirees. As a result, they greatly exaggerate the amount you'll really need to spend post-retirement.
Start figuring out how much you'll really need to spend after retirement by understanding that retirement planning is best done with a dash of black humor. That's because, no matter what the investment industry claims, it's impossible to predict with anything approaching accuracy how much you or anyone else really needs to save. For example, unless you are currently in the last stages of a terminal illness or plan to poison yourself next Friday, you can't know how long you will live or how healthy your mind and body will be in your retirement years, both essential facts to accurately determine how much money you'll need.
Read articles in personal finance mags closely and you'll see that many begin by claiming that millions of people are at high risk of becoming destitute in their old age. Then, in paragraph two, the author typically goes on to discuss how much income a retiree will need to maintain a second home, travel the world, eat at lovely restaurants, and pay dues at social clubs. A big reason for this schizophrenic approach to retirement advice is that the writers try to simultaneously pitch their message to people with vastly different incomes and expectations. The first sentence discusses the potential financial problems of ordinary working people, many of whom will in fact be at risk of a financially insecure retirement unless they embark upon a sensible savings and investment plan. The next addresses upper-middle-income people (most of the magazine's readers) whose only retirement worry will be whether they can afford to step up from an Audi to a BMW.
So keep in mind two essential points whenever you come across a piece of retirement advice:
- There is a huge difference between the income it will take to meet your honest retirement needs and how much you would need to buy everything you want.
- Assuming you agree that many, if not most, elements of a good
retirement really can't be bought, it follows that it only makes sense
to save and invest enough to be able to purchase what you really need.
Or put another way, it's just plain nuts to sacrifice important present
needs (for example, quit your mind-numbing second job) so you can
afford luxuries later.