A Crazy Retirement Assumption

It occurs to me while planning retirement, we all make a serious simplification while we make our plans. Almost everyone assumes you will never make another dollar from something other than your investments again while in retirement.

Is it just me or is that perhaps just a little stupid? After all if you sell something in a garage sale you are making money or you could changes homes and make a small profit. Or perhaps we actually sell something from our hobbies (ie: wood working, crafts, writing, etc). To assume you are never going to make any money ever again actually seems a little excessive in the end.

So why do we assume we are never going to do this again? In short, it is easier to assume nothing and then not have to worry about it. After all we are already making gross assumptions about inflation for the next 30 years and average investment returns. So trying to make about extra income becomes a little scary to predict because what happens if we are wrong?

Well to combat this little problem I’m going to make a suggestion. Let’s assume something, but keep it small so if you are wrong you won’t be losing all that much out of your quality of life. So let’s try $250/year/person during your early retirement period (ie: until age 65).

So does that really matter for that little amount of money?  Well if that is from 45 to 65 for my wife and I that would be $10,000 if you do the math (20 years x $250 x 2 people).  So it in the end is a rather small assumption to have to worry about.  Yet it does provide a bit of a point.

Even minor variations of your calculations can have significant affects on your retirement planning.  So it is important to be aware of all your assumptions and try doing a little sensitivity analysis on them.  Try to see what happens when inflation is at 4% and then try 1%.  Then try changing your investment return up 5% and down 5%.  Then try different combinations of your assumptions (perhaps 4% inflation with a low investment return).  All of these will help flush out what could happen and provide a little comfort about your plan or perhaps motivation to change it.

Yet a word of caution.  Don’t spend too much of your time playing with ‘what if’ you can often end up planning for something so remote it isn’t worth the effort to try and figure it out (ie: 0.1% inflation and 20% investment return).

6 thoughts on “A Crazy Retirement Assumption”

  1. Hey CD,

    I rarely disagree with your opinions however, I have to say I’m part of the group that assumes that my income (excluding investments, pension etc…) will be $0 in retirement. I personally don’t have any hobbies that I’m going to attempt to monetize in retirement and although I may have a few garage sales in my retirement years I certainly won’t be counting on $500 annually between my wife and myself. I know a number of retired people and their income (excluding pension, investments etc…) is $0 in retirement, with no plans to increase it. I think it’s certainly possible for most retirees to generate $250/person annually however, for most retirees I don’t think it’s in the plans (not in my own personal plans either).


  2. I think there’s two reasons:

    1) I’m not planning for retirement so much as having total control over when and where I do things that make money; that only comes when I know I have a steady income no matter what I spend my time on. Other people might have different plans, but reaching the point where you theoretically don’t need to earn another dollar is an important milestone.

    2) For the same reason that I’m weighting my plans towards saving too much. If I do that any errors in planning are likely to leave me with more money than I need; if I saved too little and stopped working I would be forced to work for money again.

    Maybe a lot of people haven’t thought it out that much, but I think those are two good reasons to plan for a passive income that’s a little more than you need to support you.

  3. I agree with MCM and SP – I don’t want to plan on making money in retirement.

    The other thing is that when you get older (like really old) you may not have the ability to keep generating that income whether it’s from a hobby, garage sales or whatever.


  4. CD

    As you know, I took super early retirement because our needs were more than met by our portfolio. However, I was recently appointed to our local hydro board and as such receive a stipend of about $300 per month to attend two meetings a month.

    I talked it over with my wife as to what we should do with this “windfall” and she suggested that it should go to a “mad money” account. We will throw it into our ING savings account and we will use it when I want a new computer upgrade, Xmas, etc.

    The appointment is only for two years, so it is not going to be massive, but it will pay for us to have a couple extra weeks in Florida.

    So, in answer to your post, extra income is doable in retirement and easy to come by with a minimal amount of effort. As long as you are not counting on the funds to survive, put it in your “mad money” account.


  5. MCM & others

    Good point. Depending on your hobbies/lifestyle you might not have much chance to generate any cash.

    I more pointed out the assumption that we all tend to make without realizing it. I also suggested the idea because it was a tiny amount and only for the early retirement period (so as you hit 65+ you would not plan to make anything).

    I rather like Qcash’s idea. Make a mad money account on any windfall money you get.

    I suppose the exception to all this is if you do intend to work in retirement part time. At that point you might have to insert some adjustment to your plan for a set amount of time.

    Thanks for the feedback everyone. I appreciate discussing ideas with you all.


  6. Thanks for writing that article. It is a subject people need to think about. The current retirees have it different to what the younger genrations will have if current trends of low bithrates etc continue. There may not be retirement in the future for some, especially those in debt.

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