On this week’s podcast Tim and I discuss why we’re incapable of telling people what age they’ll be able to retire at. This might be disappointing to hear, but it’s the truth.
We aren’t able to predict what age you’ll be able to retire at or how much money you’ll need to do so with any degree of certainty. Especially if your retirement is 20+ years in the future. The best we can provide is a (likely inaccurate) extrapolation of your current financial situation. Personally, I don’t think fuzzy estimations of this nature provide much value to clients, and I think they create dangerous expectations.
You’ve probably seen online calculators that profess the ability to determine your retirement year and the amount of money you’ll need. I’ve seen these tools embedded into company 401k pages, and they’re plastered all over the web if you do a search on Google. They ask for information such as your current age, estimated retirement age, current income and savings rate, and percentage of your current income you’d like in retirement. Then they use information like average market returns and the average rate of inflation to extrapolate your current financial reality into the future.
Sounds great, right? The only hiccup in these projections might be…life. Which, undoubtedly will occur whether you like it or not. This is especially true if you’re attempting to project a retirement that’s 20+ years away. So many different things could happen between now and then to compromise the information you provided the retirement calculation tool. In the next twenty years you could: get married, have kids, get a different job, start a business, buy a home, become unemployed, take a pay cut, go back to school, get a raise, just to name a few possibilities. Assuming that saving for retirement will be a neat line from now until your last day on the job is ill-advised. This analogy has been used by many before, but during flight, a plane is off course 90% of the time. The way it gets to where it needs to be is by making adjustments along the way. Retirement is best viewed in this light, as opposed to the straight, simplified line suggested by retirement calculation tools.
All of this worry about when we’ll retire and how much we’ll need is driven by the human brain’s incessant craving for certainty. David Rock wrote about this for Psychology Today stating:
“A sense of uncertainty about the future generates a strong threat or ‘alert’ response in your limbic system. Your brain detects something is wrong, and your ability to focus on other issues diminishes. Your brain doesn’t like uncertainty – it’s like a type of pain, something to be avoided. Certainty on the other hand feels rewarding, and we tend to steer toward it, even when it might be better for us to remain uncertain.”
Our brains tell us to avoid uncertainty at all costs, which results in searching for answers about our 30-years-in-the-future retirement. Trust me, if I could predict your future, I’d be glad to do it. I’d also love to know if I’ll ever see the Mets win a World Series, but I’m not going to let that uncertainty keep me up at night. Not only because I have no control over it, but also because it’s unhealthy.
The uncertainty of retirement is scary, I totally get that, but asking a human or online calculation tool to make predictions about your retirement isn’t the best use of your time. The answers you get are going to be estimations at best, and dangerous assumptions at worst. You’ll be giving yourself a false sense of certainty. It’s better to focus on things you can control like making smart financial decisions and saving as much money as you can currently afford to. Steps to do this might include creating a budget, paying down high interest rate debt, getting an emergency fund set up, and maximizing tax-deferred retirement accounts. It’s all going to depend on your personal situation. If you’re uncomfortable doing these things on your own, I recommend finding a good fee-only investment advisor or financial planner to help. Unfortunately, they won’t be able to predict your future, but they’ll be there to help you make adjustments as life happens and keep you heading in the right direction.