Retirement. What Retirement?

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Lately we hear many people asking, “Will I have to work for the rest of my life?” My response, “It depends.” I’m not trying to be flippant with my answer, because it truly is a serious question facing many people today. Some physicians already contemplate working until the end, so to them, the question is practically rhetorical. It remains a valid question, however.

Let’s suppose for a minute that you are not one of the “die with your boots on” set. What then? Have recent events caused you to wonder if you will have to work longer, whether you want to or not? No matter where you are in your career, that question has a quantifiable answer, but it is not as simple as it may first appear. Also, if you are within 10 years of your targeted retirement there may also be some urgency to the issue.

There are various ways to get at the answer to the question. Many planners, and most online tools, will address the question in three simple steps: 1) based on your expected income in the year just prior to retirement, first determine how much of your income needs to be replaced in retirement (some expenses will go away, they say); 2) calculate the amount of investment assets that will be needed at the outset of retirement to produce that level of income; and 3) calculate the amount that you need to contribute to your investment portfolio each year between now and retirement date. While we like to make things simple, this process involves a bit of oversimplification. Let’s break down each of the calculations.

Starting solely with income replacement as the goal is usually a misplaced priority in our opinion. We have all been taught that “living within one’s means” means that we will always spend less than income. However, the retirement goal that we hear most often is the desire to maintain living standard. It is not how much income that you have that determines your standard of living, but how much you spend to support your chosen lifestyle. It is spending, after taxes and payments on debt, that determines your living standard in any given year. The starting place for such a calculation is your current living standard matched against your satisfaction or dissatisfaction with it. Simply assuming that more income is the answer is not enough. Income is only one factor in determining living standard. Keep in mind that some people are actually satisfied with a level or even decreased living standard in retirement. Regardless of your direction, to base the whole analysis on income replacement is to miss a vital point. Assets, in addition to income, should enter into the equation.

Secondly, depending solely on the investment portfolio to produce the income needed to replace your pre-retirement income can be misguided. What about social security and other forms of assistance? Assuming that you live only on income ignores the possibility of consuming your portfolio to some very old age, e.g. 100. If you die before then, the children will have an inheritance.

Another factor: what will be your tax bracket in retirement compared to pre-retirement? The stock advice of most planners has been to delay withdrawals from your retirement account until the required age of 70½ AND delay the start of social security benefits to age 70. Guess what? In some cases, that strategy could actually increase your tax bracket in retirement and could substantially increase the amount of taxes paid over the rest of your life. A better idea is to determine if smoothing the expected tax bracket will be beneficial. That might mean that you will pay more taxes in pre-retirement and less in retirement but because retirement is likely to be a much longer period of time, the total accumulated tax bill could be less.

When dealing with the savings question, one has to ask whether it is possible to save too much. Savings always comes at the expense of current living standard. Remember too, that in addition to the terminal value needed in the portfolio at retirement there are multiple variables that must be considered when addressing such a goal. One must also assume a rate of return (which is not likely to be constant) on the assets that are accumulating. Furthermore, rarely do we see any programs that consider an increase in the amount of savings over time. That may be unrealistic since debts will be paid off eventually and children will hopefully be out of the house someday.

In our opinion, the correct method of determining the answer to the question is vitally important. In addition to the goal-setting method above, we consider the problem from the perspective that gauges the effect that working more (or less) years will have on your family’s living standard, now and in the future. The economist’s term for this is “consumption smoothing.” Let us show you how it’s done.


Scott Neal, a CPA and CFP, is president of D. Scott Neal, Inc. a FEE-ONLY financial planning and investment advisory firm with offices in Lexington and Louisville. He can be reached at or toll free at 1-800-344-9098.