Do financial magazines grossly overstate retirement savings needs?

[Wendyimhome]

I don’t know how many of you read Money magazine (my wife gave me a two year subscription as a gift), but it runs a regular column similar to MMM’s case study.  Basically, a reader writes in asking for advice on what to do to get his or her financial house in order and goals met.  The magazine usually goes to a Financial Planner for advice, and I am routinely blown away by the projected needs that these Financial Planners come up with.
 
A case in point was in the August issue where a 43 year old mother of one child (a 15 month old) writes in that she wants to put the kid through college and then retire at 67.  She makes 136K a year and lives in Raleigh, NC, which is not a terribly expensive place to live.  The Financial Planner opines that she will need $2.5 million to put the kid through college and retire comfortably at 67.

Does anyone else see this as just crazy?  Granted, I know that most of the world is not Mustachian in nature, but why on earth would a single person need that kind of dough to retire at 67?  With any kind of social security and Medicare benefit at all, shouldn’t a single person be able to retire on a million less than that?  I assume the projection is based on the value of the portfolio upon retirement, which would be 24 years from now, and that accounts for some of the large number.  But, still, these kind of opinions just seem very unrealistic and demoralizing to me.

[arebelspy]

They often assume a low savings rate, thus very high expenses.  If she makes 136k and only puts away 10%, she needs to replace ~100k income in retirement.  At a 4% SWR, that's 2.5MM, exactly what was quoted.

The problem is people need to get their spending down.  Retirement amount needed is based on expenses.  And if she's only spending 20k, she only needs a nest egg of ~500k.  Plus college expenses, add another 50-100k depending.

Basically look at expenses, and most retirement places that do case studies run based on income, but that's because most people spend all or mostly all of their income, so the two numbers are equal.

[Jamesqf]

Yeah, the catch to these kinds of articles (and much of the retirement "advice" I get from Vanguard &c) is the basic assumption that you will need something like 80% of your current income in retirement.  They just don't want to know about people like us, who may be spending only 50% of our current income (and living quite comfortably, thank you!), and who expect to spend even less after reaching conventional retirement ages due to things like paid-off mortgages.

[MooreBonds]

Does anyone else see this as just crazy?  Granted, I know that most of the world is not Mustachian in nature, but why on earth would a single person need that kind of dough to retire at 67?  With any kind of social security and Medicare benefit at all, shouldn’t a single person be able to retire on a million less than that?  I assume the projection is based on the value of the portfolio upon retirement, which would be 24 years from now, and that accounts for some of the large number.  But, still, these kind of opinions just seem very unrealistic and demoralizing to me.

A few years ago, I used up some expiring airline miles and received a 2 year subscription to Money (it was either that, or Good Housekeeping...and from the usefulness of Money Mag, it was obvious I chose incorrectly ;) ).

I didn't read the story you referenced, but I would point out that in 24 years, even just 2% compound inflation would lead to a 61% price rise (or portfolio nominal drop of 38%). At 2.5% compound inflation, it's 81% price rise. Yes, we can debate the 'true' inflation, depending on your actual lifestyle, but most finance professionals will use a more average metric. (and don't forget college will cost a big chunk, and college inflation is just as relentless and bad as healthcare inflation, depending on which school she had her sights set on)

So that $2.5 million in 24 year future $ is actually just about $1.3 million or $1.5 million in today's dollars...perhaps even less than what you suggested off of the top of your head.

[totoro]

I think those figures are overstated, plenty of people retire on less than recommended.  I'm not sure if it is simple math that propels this, or if it helps financial advisors wanting to sell investment products and this is part of the media campaign. 

I had a young fellow come to help me with some renos.  His father is an investment planner and he is being trained in the business - no credentials required - just plenty of sales tactics. 

The first question he asked us while taping the walls was "do you know your retirement (FI) number".  I had to laugh.  We did of course (thx to this site), which I believe was a surprise for him, but it was part of his new sales spiel. 

Although we successfully deflected this sales approach, I do believe that when people say they don't, I'm sure he responds with some outrageous figure which scares them into thinking they should invest with his father's company which provides "7% minimum returns" and no cost to the investor at all (ie. the funds give a kick back to the adviser) using the "free money" aka your home equity through a HELOC.

[ShanghaiStashing]

No, financial professionals don't overstate the capital people need to retire on, they simply overstate the monthly amount you need to live on in retirement.

As Arebelspy said they simply focus on the wrong side of the equation. Most FP's look at your income, expenses and plan for a 10-15% savings rate. They operate under the notion that you retire sometime between 55 and 65, but for most folks closer to the 65 end of the scale.

Given this, they work towards a calculation that aims to replace income, maximize current spending, while ensuring that under their advice you never run out of money in retirement. They use industry standard metrics like '70% of income in your last year of work' is what you need to replace when retired to accomplish this goal.

One fact that they regularly miss though is that most retiree's spending ends up looking like a mustachian budget within ~5 years of retirement. Most folks stop eating out as much, don't travel nearly as much as they think they might, and generally don't have any work related expenses. As a result for most folks spending falls up to 50% plus when they retire.

So, is the number overstated, in my opinion sort of, but only because most folks spend way more than they need to.

[Jamesqf]

...they should invest with his father's company which provides "7% minimum returns"...

The kid's name wasn't Madoff, by any chance?

[lauren_knows]

I feel like the industry as a whole overstate savings needs.

One of my best friends (friend in college, best man in my wedding, etc) is married and they both have high paying jobs (I think they're just cracking 200k/yr total). No kids. He's a very interesting breed when it comes to money.  He is an aggressive saver at times, but spends like the dickens in some other areas (vacations, wine, weekend getaways).

Anyways, they went to see a financial planner recently. The planner mentioned that they needed "somewhere around $4.5M" to retire.  Pretty much blew my mind.  I haven't laid into him about anything related to MMM, because it's always a touchy subject... but it's crazy.

[travelbug]

Yes, I agree. When we have spoken about our situation and FI most people think that the 5 million dollar figure is how much they will need to live on.
It blows my mind, but maybe they are getting these huge figures from magazines instead of their own personal knowledge about their budget and spending. They are not difficult calculations...

[inthebiz]

First of all, there are so many variables for each person, it's not fair to say a number is overstated. Mustachians are saving like crazy for FI, but do you intend to live the same way once you reach that number? Maybe once you reach FI, you'd actually like to drive a car or take vacations beyond a tent in the backyard. Unlike everyone else, expenses for Mustachians in retirement might go up a little bit. FI for me doesn't mean frugality for life.

Advisors assume a % of income, but that's not their fault - that's what the investor wants to spend. Now where the number bumps up because of an advisor's calculations is when a wise advisor takes a conservative approach, ie. inflation, lower returns, longer life expectancy.

[unitsinc]

First of all, there are so many variables for each person, it's not fair to say a number is overstated. Mustachians are saving like crazy for FI, but do you intend to live the same way once you reach that number? Maybe once you reach FI, you'd actually like to drive a car or take vacations beyond a tent in the backyard. Unlike everyone else, expenses for Mustachians in retirement might go up a little bit. FI for me doesn't mean frugality for life.

Advisors assume a % of income, but that's not their fault - that's what the investor wants to spend. Now where the number bumps up because of an advisor's calculations is when a wise advisor takes a conservative approach, ie. inflation, lower returns, longer life expectancy.

Well, you can easily plan for your expenses to increase in retirement.
I assume most people's lives would get cheaper. No nice clothes, or business lunches, or daily commutes. Obviously those are just some examples, and some may have one and not others.

Not to mention, with FI comes much more free time. No need to pay someone to do something you can now easily learn to do.
Of course, you can learn while working, but with the added free time, learning becomes a much easier proposition.

[totoro]

I think it is an issue to assume that a retiree will need a set percentage of income and not to suggest alternatives (like lifestyle changes after retirement) other than products you receive a commission for, which seems to be the way many financial advisors operate in Canada.  In order to be a financial advisor here you need no specific accreditation or training.  I do believe that by playing on peoples' fears of infirmity and poverty there is some inflation of needs going on.  This is based on my experience with a couple of financial advisors early on.  Maybe things have changed.