Retirement math can be brutal and there are fundamental concepts that greatly impact the results. This is something we refer to as the Horizontal and Vertical Levers of Retirement Planning. Our experience with retirees is that lifestyle and longevity are the major determining factors for evaluating the appropriate level of investment savings. While rate of return, taxes and inflation are important, there are factors over which we have more direct control that have a huge impact on retirement success. These levers can be moved to make a profound impact on the end result:

The Horizontal 

The horizontal of retirement planning is related to the timeframe of your nest egg: “How much longer will you be able to invest in order to accumulate retirement funds?” versus “How many years will your funds have to last?” 

For every additional year you continue to work and accumulate, you actually gain two years. This is because you are giving your investments an additional year to grow, plus that is one year less that you will be withdrawing funds. What this means for you is that the longer you can put off retirement (taking distributions from your assets), the higher the likelihood that your funds will outlast your life (if you are single) or the life of the last spouse to pass (if you are married). The additional savings required to retire four years early is over 50% greater that that required for normal retirement. If retirement is deferred four years, the required savings rate is lowered by 40%.

The Vertical

The Vertical is: “What percentage of your current income are you are spending, not saving?’ For example: if you are spending 50% of your gross income, with roughly another 30% being used for taxes, that means that about 20% is available to add to your retirement savings. The lower percentage you consume, you again get a “double benefit.” First, you are lowering the consumption level that needs to be maintained in retirement, which means you will need fewer resources in retirement to sustain that lifestyle. Second, this allows you to add the amount you are adding to your retirement savings and increase the overall amount available.

Start Small, and Take Incremental Steps

If you are living on 100% of your take-home pay, we recommend a bit of detective work to see where you are spending. Then, develop a simple strategy to take small, incremental steps to improve your “vertical.” If it seems impossible to save anything, start with $100 month. Then keep increasing the amount until you gain some traction. Over time, you will realize it is possible to improve how much you are saving, and at the same time, lower your lifestyle to a sustainable level long term.

Our approach is to be conservative on assumptions, employ risk-based variables where we can, and constantly compare short-term behavior against long-term assumptions. Retirement forecasting is challenging because none of us behave consistently and life happens. Current consumption, emergencies, demands of relatives, and our own impulsive decisions easily derail our savings rate or change our retirement plans. That’s why we recommend meeting regularly to address retirement planning as a dynamic process. Adjustments can be made as needed to help keep you on track for your goals. As always, we are here if you want to discuss your retirement planning and see the impact these levers have in your long-term planning. 

Mary McCraw, CFP®

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The Arkansas Financial Group, Inc. is a Fee-Only Financial Planning Firm located in Little Rock, AR serving clients in Arkansas and throughout the country.

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