Perhaps one of the more frustrating points of planning your early retirement is knowing at what point your target savings amount is enough without going so far over it you end up saving too much. After all missing the mark of enough is problematic on both sides: too little and you may need to go back to work or downgrade your lifestyle, while too much may result in you working years more than you needed. So how do you find that thin line of enough?
Unfortunately the answer is you really can’t know exactly if you hit enough in advance of retiring. It’s only after the fact does the answer become clear. It sucks, but sorry it is true. So what do you do about it?
In the end, you take your best educated guess and add just a bit beyond that to provide some degree of cushion and call it good. The problem is retirement planning tends to have people generate massively over conservative assumptions piled on top of each other landing a bunch of people firmly in the over saving category. For example, we assume high inflation and low market returns, we add in every possible spending item we can imagine for the next 30 years and we still can doubt if that is enough.
The real issue isn’t your planning process or your assumptions, but rather the fear that exists in your own mind. You see fear does funny things to people. We want to try and predict everything and control for it all, but in reality that is pointless. No one can predict the weather a week from now perfectly, so why on earth would you try to predict the stock market, government policy and inflation for the next 30 years or more…you can’t. So stop trying.
Instead realize humans got to where we are not by being smarter than other life, but rather our ability to adapt to our surroundings. You need to embrace that in your retirement as well. Life doesn’t go according to plan during your working life and that won’t change in your retirement. So what happens know when things don’t work out….we adjust our plans and keep going.
So instead of beating your head against the wall in frustration, might I offer a reasonable idea of what enough could be. Get a sample of three to five years of your spending and then add in some obvious adjustments for your spending changes in retirement like if you both have cars, but plan to drop down to one car in retirement or perhaps downsize your house. After that add in 5% to the yearly spending and then make your plan on that. Why just 5%…its good to have a little cushion to allow you some additional flexibility…so rather than having to reduce spending somewhere else for a minor change to your plan you can absorb a bit of the little shocks with a small cushion in your spending. Alternatively, you could also just create a lump sum of cash (~2 years living expenses) as a your super-sized emergency fund to do the same thing, then when you end up with extra money you can just top up your fund during the good times.
The actual construct of what you decide shouldn’t matter as much as how does that make you feel. Does that ease the fear in your mind just a bit? If so, you likely have it right. You can’t make that fear go away…that take WAY more money than you can EVER save. Instead, ease the fear and then do some ‘what if’ games. What if the market drops by 5% the day after you leave work? What would you do? What if a major storm happens the same week your car dies? What would you do? The idea is to move the fear of the unknown into possible futures where you have some reasonable thought responses to likely events. The key is to keep things in the realm of reasonable. The odds of your spouse dying by a lighting strike, your car breaking down, your house burning down, your parents getting sick and losing your keys in the same day is so utter improbable that it isn’t worth planning for it.
In the end, accept the fear you can’t plan for it all, do add a small cushion to your plans and then jump off that cliff called early retirement. There is no way to learn it until you are doing it. Also keep in mind you might very well end up earning some money from a hobby or interest down the road, everything that happens to you wont’ be bad.
So what do you use as your cushion for your retirement plan? How do you know you have enough?