Pete the Planner: Reduce expenditures to get your retirement ship on course

Dear Pete,

My wife and I are both 52 years old and have done a mediocre job of saving for retirement. Based on every online calculator I’ve used, we’re falling short of our retirement goals, and the goals are rather modest. But it’s not like we’re living an extravagant life right now. Between our mortgage, our car payments and our kids’ college educations, we don’t have much left each month. We can’t be the only people in this situation. What do you tell people who are scraping by now, and are headed toward a not-so-great retirement?

—Brian, Indianapolis

You aren’t the only people in this situation, Brian. Although I’m sure it’s of little comfort, good for you for at least knowing where you stand. The vast majority of people in your same boat have yet to come to the very real conclusion you’ve come to. And like many problems in our lives, the sooner we realize we’re in the midst of a problem, the sooner we can get to a reasonable solution.

This is your silver lining, Brian.

You obviously need to take your pertinent details to a financial planner to dig deeper on the outline I’m happily about to provide. Your friendly neighborhood columnist will handle the theory, and your financial planner, well, she’ll handle the tactics.

If you’re behind the 8-ball in terms of retirement funding, you need to accept the fact that your retirement is unlikely to be dependent on “having a lot of money.” I find many people in your situation deny this reality and often waste a tremendous amount of time crossing their fingers, hoping the financial gods bless them with mystically obtained assets. Your successful retirement outcome will likely be dependent on “not needing a lot of money.”

This is a very important distinction, which I happen to believe is the great hope for the majority of Americans. Not needing a lot of money is a better strategy than having a lot of money. Don’t get me wrong—you still need to accumulate assets. But, realistically, reducing your lifestyle to accumulate assets is the actual magic bullet.

Do you remember that scene from “Lady and the Tramp” in which Lady and the Tramp are sharing a plate of spaghetti? You know, the part where they’re sharing the same noodle and they meet in the middle for a dog kiss? (I’m embarrassed I wrote that, too.)

I always think about that scene when I’m contemplating the proper retirement planning strategy. The perfect plan involves attacking the noodle from both sides: consistently decreasing your present need for money so you can simultaneously accumulate assets to fund a more modest lifestyle once work income ceases.

That’s the theory; here’s how to execute it. Identify all the expenses in your current lifestyle that you are able to permanently eliminate. I’m not talking about dining out or cable. Instead, I mean things like a mortgage payment, student loan payments (including Parent Plus loans), and car payments. Debt, of any type, requires your income to pay for your past. Eliminating that obligation lightens your present income needs while also taking the burden off your assets to provide income in the future.

Add up all the money you’re paying each month toward debt, and bask in the glory of knowing this obligation is not only your biggest retirement hurdle but, if eliminated properly, can propel you to retirement-income planning success.

There are a few keys to making this work. First, ensure your mortgage is paid off before retirement. As far as I’m concerned, you can even pay it off the month immediately preceding the day you stop working. Doing so could decrease your need for income by upward of 30%.

In order to accomplish this goal, you might either need to refinance your mortgage to a shorter term or simply figure out how much more you need to pay each month to wipe out the payment before retirement.

Finally, as soon as you eliminate your other debts (i.e. student loans and car loans), be sure you don’t reabsorb those monthly payments back into your lifestyle. Instead, increase your 401(k) contributions penny for penny, which accomplishes exactly what you’re trying to accomplish—eating the noodle from both ends.•

__________

Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.