Separating Retirement Wants from Retirement Needs
October 21, 2010 by MJP
Filed under Retirement Planning
I’m guessing that when not-yet-retired baby boomers dream ahead into their retirement future, they spend much of their time thinking about retirement “wants.” I’m referring here to travel, hobbies, entertainment, and other activities that we expect to bring us pleasure in our retirement leisure but also cost money.
Thinking about retirement “wants” is fun and motivating but not if retirement needs are short-changed. I’ll explain my thought process on this.
You may think you “need” to watch cable and surf the Internet. If that were true, you would have perished in the 1960′s, before cable TV established a foothold. Or in the 70′s and 80′s, before the advent of PC’s and consumer Internet access.
And don’t get me started on cell phone data plans.
Yet we survived those barren technology years, did we not?
So everything beyond food, shelter and health care is a retirement want, not a need.
Now that we have agreed on this concept (you have agreed, haven’t you?), what do we do with it?
We use it in our retirement planning. In particular, we use it in our retirement income planning.
I propose that budgeting for retirement “needs” should be separate from budgeting for retirement “wants.” Planning to meet retirement needs should be a separate, priority task. The reason is that you do not want to take any investment risk in meeting your retirement needs. A failure in the “meeting our needs” department is not acceptable.
If you are fortunate, the income necessary to pay for your retirement needs can come exclusively from a guaranteed, inflation-adjusted source, such as Social Security. If not, you should consider setting up a “personal pension plan” using Treasury Inflation Protected Securities and/or I Savings Bonds, both available from the U.S. Treasury. Another option, although less secure, is a life annuity with an inflation rider.
After you have set up a retirement income plan to meet your retirement needs – for life – you can create a separate plan to meet your “wants.” In this second plan, it is OK to take some risk because the consequences of failure are not as severe.
A final thought: Let’s assume that, using my definition of retirement needs (food, shelter, health care), you have a solid plan to provide retirement income to meet those needs. Let’s further assume that you are one of those who insist that cable TV, Internet, travel, golf – you name it – is a retirement “must have.” What should you do now?
If you have retirement assets left over after providing for your food, shelter, and health care needs, there is nothing wrong with moving one of these other expense categories into your “needs” plan. You will also have to move more assets into that “needs plan, to cover the additional expense category.
That way, you can have your cake and your cable too – guaranteed for life!
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I understand where you are standing with TIPS- but I don’t really see it as keeping up with RETIREMENT inflation.
First we are home owners and totally debt free.
Since I started really tracking- our needs have increased about 15%. The price of food, gasoline, and health care have all gone up (even the pay in for lifetime military health care). My house taxes have gone up. Shopping taxes are up to 10%.
Now, if I were young and buying a house- or silly enough to refinance at our age- our housing would go down. That one sector kept the SS admin saying that there would be no COLA because the economy is “flat”
I don’t see how being really conservative in TIPS would be the answer. They are tied to the same indicator as SS. We are finding the only way to keep up is to be in stocks- major companies like APPLE who seem to have an edge on the future. In some ways risky- but we have the time to watch and wait.
Could you help me see it differently?
Jan: I agree that government tracking of real inflation often lags actual conditions. On the other hand, stocks offer no guarantee that they will hold their value and supply a lifetime of income. TIPS and I-Bonds come closest to providing a guaranteed real return under any market conditions. That is why I want to use them to meet my retirement needs. Apple is a fine stock. For years GM was a fine stock, as was Washington Mutual. Many folks depended on stocks such as these as core stocks in their portfolio. Then 2008 happened. I don’t want to have my food and shelter needs dependent on 2008 never happening again. Do you?
Wants versus needs. What an interesting topic. I loved living in California. But, to stay there meant not being able to do the other thing I want, which is to travel the world. We recently moved to AZ with a lower cost of housing (everything else just as expensive), so we can do the things we want. I love it and am glad we made the love, but I am a spoiled baby boomer and still want it all.