The Fallacy of Percentage Based Numbers, or Why You Can Retire

Ah, it’s just not a good week unless we have a healthy article from Mr. Money Mustache taking on another ridiculous article stating how impossible it is for a middle class family to retire. You should head over to read the original article, wherein the author states that a family with a $150,000 income would take 110 years of work to retire; or the reply from the ‘Stashe about how absurd the tone of the article is and how it draws a populist CEOs-get-paid-too-much-and-that’s-the-problem conclusion.

I clearly can’t compete in breaking down the defeated tone of the piece like Mr. Money Mustache did. So instead let’s get to the core of the article and why it’s not grounded in reality. They subscribe to the notion that percentage based accounting makes sense, and implicitly that retirement planning is about estimating based on your salary. This is a pretty common thing we see in many, many articles and it’s both dead wrong and wildly inaccurate.
We all make different amounts of money. Your family may bring in $60,000 a year. Another may top $140,000. Yet our basic needs: food, shelter, clothing, utilities – they remain the same. So why is it that we automatically assume the family making $140,000 is entirely incapable of spending the same amount – or less – than the one making $60,000 on these same items?
So why do we just take any advice we get that tells you how much of your salary you should spend on various line items in your budget? Or about how much you’ll need each year in retirement?


Track Spending, Not Income

Retirement planning is not about taking some set percentage of your income as what you’ll need to live on in retirement. It’s about tracking your actual spending and using that as the basis for what you’ll need to spend in retirement. You know, real actual numbers based in reality.
And the aim of many bloggers and early retirement devotees is to bring that number down much lower. We have a built-in bias that assumes that some pretty obvious luxuries are actually basic needs: cable TV, smartphone plans, new cars, organic food, eating out regularly, lattes and frappes. We’re all guilty. Heck, we just bought a new SUV. My wife and I have absurd smartphone plans with Verizon that bother me to no end. We’re human. The goal is to recognize that, square it off against our longer term goals of financial independence and retirement – and push ourselves to avoid giving in entirely to that mindset. And better yet, to make a conscious effort to get rid of some of those expenses.
Now back to the article: they implicitly assume $100,000 a year in expenses in retirement based entirely on a $150,000 salary. They go on to split up that take home using a percentage expense allocation, where they assume 20% could be saved. So if they’re only spending 80% of that while working, why assume spending 100% when not working? And why the assumption that all the saving would be done in a taxable account, rather than say a 401k where we can drop our taxable income? Or that you wouldn’t invest, but if you did it’d only return 4-6%? The article subtly moves on, when all the numbers make no sense and aren’t even consistent with one another. No wonder they come to the conclusion that it’d take 110 years.

More Realistic Numbers

Let’s just run a simple counter-example. Let’s say the couple is not brain dead and they save the max in their 401ks each and every year, and nothing else. Let’s even assume they want to spend a ridiculous $100,000 per year in retirement. That breaks down to $2916 in contributions per month, made with money before taxes. At a rate of 7%, they hit $2.5m some time in year 25.
Just for kicks, what if they could live on say… $50,000 a year in retirement (but still spend way above that while working!)? Done by their 18th year. A pretty far cry from 110 years.

3 thoughts on “The Fallacy of Percentage Based Numbers, or Why You Can Retire

  1. I think the biggest mistake in that article is that it assumes no interest – at all! And no inflation! Both of which are horribly bad assumptions. Even if you put all your money into TIPS, you’d still get a decent 1-4% (or more) real return every year. If you follow “common recommendations”, your money should be in the stock market at an average of 6% annual return (assuming 2% inflation, ~4% real return).

  2. Just about every retirement ‘planning’ article I have ever read seems to assume that you will ‘need’ the same amount of money coming in each month as when you were working. So we are assuming that NO one ever pays off their mortgages or car payments or their kids college etc etc etc?!?!? I have news for these people… I PLAN on NOT having any of these expenditures after I Retire! IF I get a new (used) car or some other item… I will make it FIT into my budget!

    • It’s bizarre how they just assume that expenses will remain constant through life and will be explicitly tied to your income. For the people who actually think through their finances, they’re likely to retire after the kids are done with college and any expenses they’re willing to help with are in the rear view mirror – or after they pay off the mortgage.
      Though, from looking around and seeing some real life examples, there are definitely people who don’t put much thought into any of it and are approaching retirement with an active mortgage – they’ve refinanced, pulled out equity, opened home equity loans. Now whether those people are actually reading any articles about how to properly plan for retirement – well that’s unlikely.

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