Traditional retirement projections are f**king with your mind, man

An excessive and far out title, but not too far from the truth.  The typical retirement illustration might go something like;

Mr Zombie, you are a fine upstanding fellow.  Why not invest in our absolutely cracking defined contribution pension plan.  If you start at 25 years old, with a salary of £50k and put away 5% of your income each month, tax free (w00t!), until the normal retirement age of 65 you could build an investment balance of  £536,524*.
*Assumes no inflation, a growth rate of 7%, no dealing fees, no tax and a complete cut back of lifestyle at 65 from what you are used to.

You’d be forgiven for being initially impressed.  Only 5% of my salary each month for over half a million quid!  Sign me up.

On closer inspection you will notice there is one abhorrent assumption built into it – you working until you’re 65.

Following this standard approach means you are already locking yourself into 40 years of working.  You’ve actually based your financial plan around this assumption.  THINK ABOUT IT.  Who really wants to do that?  Nip that in the bud, as they say in office land.  And while you’re at it see what’s coming out of the woodwork and figure out why the sky is blue and thinking.

And that doesn’t even consider the raft of caveats that normally follow in small italic text, designed to be so infuriating to read that few bother to try.

Let’s quickly remove inflation, say taking the real growth rate down to 4% from 7%.  This reduces the final balance to an inflation adjusted balance just short of £250k (what that £537k from earlier will actually be worth in the mystical dystopian future that awaits).  Taking the 4% rule as a basis for what that could provide in retirement…around £10k.  Lets be generous and add in a state pension.  That’s just over £6k a year.

So, £16k a year in retirement for someone who has been used to spending 95% of their £50k salary…somewhere around £35k if the salary calculator is anything to go by.  £35k to £16k in one fell swoop.  Seems like the plan is ill-prepared and bleak, this poor sucker is going to hate leaving the work force and say things like “There’s nothing to do”, “I have no money” and “I’m so bored”.

There is no connection in this plan between what the person is spending now and what they will be spending when they are living off their investments.  There’s an assumption that come retirement the person will want an immediate and downward reduction in outgoings.  Why?

We tend to stumble along in life, assuming that everyone else has got it right, and so end up following the herd.  If the herd are looking to retire at 65, that’s what we tend towards.  If the herd are complaining that life is too expensive to even consider retiring, that’s what we tend towards.  Well, fuck the herd.

The Mr Zombie Retirement Projection
What about if the illustration went a little bit like;

Howdy there pilgrim, looking to start investing for your retirement?  Good for you.  Better buckle down sunshine, we don’t take any of that ‘following the norm’ shit around here.  With your salary of £50k you should be able to save at least 60% of your income.  Put this all into a pension and from the age of 25 to 65 you’d have nearly £6.4million.  Now just what in the creepy hell are you going to do with all that, you’re living off about £15k a year numbnuts.  No Sir, that’s not going to do.  We, at Mr Zombie Retirement Plc, want you to retire early, to stand in the face of convention and laugh heartily.  

We NEED YOU to diversify your 60% savings rate across taxable accounts, ISA’s and Pensions.  Keep this up for eleven or so years and then you can retire and point and laugh at your friends, colleagues and family still working.  

It certainly would have grabbed my attention.  Mind you, you’d have expected a large listed investment company to have spent at little more on their graphic designer.

This is more like it.  Saving until our investments support our outgoings, where the outgoings are set by our savings rate.  When we come to live off our investments the income provided matches our outgoings.  Like a financial perpetual motion machine, it looks like this arrangement really is the gift that keeps on giving.

And another thing, if after those 11 years work is still blissful then stay there.  Carry on accumulating my friend, that 11 years wasn’t a fixed target.  It’s just an arbitrary line in the sand, the point when your outgoings become over taken by the ability of your investments to provide a perpetual inflation adjusted income.

The traditional plan aims to save the absolute minimum across the maximum time frame.  This means there is very little room for error, get it wrong and your body is a withered mess being forced to creak out a few more years work.

I think I’ll aim for the Mr Zombie Retirement Plc thank you very much.

Mr Z

6 thoughts on “Traditional retirement projections are f**king with your mind, man

  1. ermine

    While I'm with Mr Z in spirit all the way, there are some good reasons why the assumptions of a lower spending in retirement was reasonable:

    1 – Children. A generation or so ago children reached (16,18,21 – take your pick depending on education) and became financially independent of their parents. Although this has broken down seriously for the public school/interning set, it held for a long time, at lest one could hope that even now children are less expensive as adults than as children ;). The life cycle of humans is such that people tend to have children in their late 20s to mid thirties so they should at least have come of age by the time the parents are 60+

    2 – people paid their mortgages off, which reduces a very significant cost

    Living off 15k p.a. while working is going to be tough for someone living in a community of people living off twice that much. There again, it's probably the wise course, because assumption 1 seems to have failed dismally in the modern world and assumption 2 is on the way out too, simply because house price to earnings ratios are drifting up.

  2. Mortimer

    Great article—I like the way you mention the "absolute minimum across the maximum time frame" for the traditional plan. Your plan is the absolute maximum savings across the minimum time frame—much more appealing, in my view!

  3. Jim McG

    You're very right Mr Z. The other problem with talking to twenty year olds about when they turn 65 is that their immediate thought is that it's so far away that they don't have to save for maybe another ten years. I always had a target of retiring at 55 and hadn't even thought of retiring before that until I read Jacob Fisker….and I was 47 when I found his book. I wish that had happened thirty years earlier!

  4. Mr Zombie

    Hi Ermine.

    Haha, I imagine quite a few families believe it to be their duty to cripple themselves sending their children through private education. A lady at work is "working for the next ten years" to put her daughter through university. If it's true, it's all very nice, if not a tad misguided.

    I do agree. I just wonder if people were taken aback by the apparent huge accumulation of funds for a seemingly small chunk of their paycheck, with little regard for how much it would actually get them.

  5. Mr Zombie

    Hi Jim,

    It's true, I fannied about taking a couple of years to get on the company pension scheme when I first signed up. And then failing dismally to save much until a couple of years ago.

    Ah well, at least the travelling at the time was fun!


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