Don't Despair Over Small Retirement Savings
If you quit checking your 401(k) balance last year, because the market crash made it too depressing, now might be a good time to take a fresh look. It'll still be well down from the peak, but it's probably recovered quite a bit from the low. However small it may be compared to some imagined goal, don't underestimate the value of any amount of retirement savings.
My brother just told me about a colleague—a college professor approaching retirement age—who suffered so badly in the crash that his entire retirement savings were not much more than one year's pay. "Obviously," my brother observed, "He's not going to be retiring on that anytime soon."
The fact is, though, there's a big difference between "small" and "insignificant" when it comes to money. If you're earning, let's say, $80,000 a year (which a full professor approaching retirement might well be) and your savings are only $80,000, it's easy to imagine that your retirement savings are insignificant. It's not true, though.
A capital sum of $80,000 will support spending of $260 to $330 a month for the rest of your life (and probably forever—see my post How much can I spend in retirement for a description of the 5% and 4% rules).
Now, somebody who's been living on $80,000 a year is not going to support themselves on $300 a month—but that doesn't mean that $300 a month is insignificant. It might pay your property taxes, or your home maintenance expenses, or your utility bill. (If you have a small, well-insulated house in a low-tax community, it might pay all three.)
If you have nothing else to retire on, this is probably too little—but hopefully your retirement is not dependent on just your retirement savings, but instead gets a boost from other savings, physical capital (such as a house), pensions from previous employers, social security, intangible capital (such as a copyright on a book), and so on. Most especially, of course, your retirement is based on your ability to save more money at your regular job before you retire, and then your ability to continue to earn some money after retirement.
Finally, I'd like to point out that your expenses in retirement have only the most tenuous relationship to your pre-retirement income. Yes, those "can you retire" calculators all ask about your income and then assume that you need to replace a large fraction of it—but that's just stupid. In retirement you need to fund your expenses, not your income.
Someone approaching retirement ought to be about at the peak of their earnings—which to my mind ought to mean that their expenses are rather less than their income. It's one thing for a 20-something just out of college with a low income and a high student loan burden to be spending every cent of his or her take-home pay. For a 60-something college professor, expenses ought to be quite a bit less.
The difference, of course, is the money that's available for investment. But that's the less important part of the equation. More important is that a low cost of living means that you can retire without having to replace your entire income. And if that's true, even a modest amount of savings can support your retirement.
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