A reader posed this question — what is the difference between retiring comfortably vs. extravagantly? In a world in which retirement is increasingly being marketed as a trip to the Emerald City, this is an especially relevant question.
Let’s look at the differences between the two.
The words “comfortably” and “extravagantly” mean different things to different people, but let’s try to come up with a workable difference between the two.
Defining the Difference Between Retiring Comfortably vs. Extravagantly
By comfortably, I think it’s safe to assume we are talking about a standard of living consistent with the one you have during your working years. Whatever level you’re living at now, if you can retire into something similar, you will at least be comfortable. A little bit higher or lower is within the realm of this definition.
By extravagantly, let’s say we are talking about a standard of living significantly higher than the one you have now, during your working years. Though it seems unlikely that one could live life comfortably and retire extravagantly, but there is enough expectation of this outcome to consider it in a serious vein.
Reality Retirement vs. the TV Version
Let’s cut to the chase — there’s a lot of marketing hype surrounding retirement these days. Projections of million (or multi-million) dollar retirement portfolios are all around. And who hasn’t seen slick TV commercials or ad brochures hawking luxury retirement homes on the beach?
There’s a saying in marketing: sell the sizzle, and the sizzle will sell the steak. And so it is with all things retirement.
The prospect of an extravagant retirement can be used by marketers to sell investments, investment strategies and advice, investment management, and yes, even beachfront property. The prospect of a multi-million dollar pot of gold at the end of life’s rainbow can be used to sell not just retirement, but The Retirement Dream.
For most people, however, there will be a significant difference between the reality of retirement and the TV version. Though it is possible for a person with even a relatively modest income to save and invest an amount out of all proportion to his or her earnings, the great majority of people won’t.
In addition, there are factors beyond retirement planning that could reduce an extravagant retirement to a merely comfortable one. These include inflation, healthcare costs, pension and Social Security issues, and even future investment returns.
Perhaps it’s best to prepare for extravagant, but to be emotionally prepared for comfortable. Considering millions of people won’t even have that, it’s not a bad outcome at all.
To Retire How You Want Takes Preparation
Between Social Security, any pension income you have, and your retirement portfolio, you’ll probably be able to achieve at least retire comfortably, even if you have to supplement it with some form of earned income on at least a part-time basis.
But if you want extravagant, meaning a retirement in which you live better than you have during your working years, you have your work cut out for you.
Some of what you’ll need to do includes:
- Living well beneath your means.
- Staying out of debt.
- Maximizing your retirement contributions.
- Saving over and above your retirement contributions.
- Investing consistently, but not recklessly.
- Developing relatively passive income sources (like rental real estate).
If you want a retirement more extravagant than the life you have now, you will have to invest virtually everything you have –- time, money, and effort -– into achieving this goal.
Most people find this to be more than a little bit uncomfortable. That’s why they’ll settle for a retirement that is merely comfortable.
Prepare for Reality Not Your Dreams
Financial projections aside, planning for retirement is really about predicting the future, and no one can do that with any degree of certainty.
There are variables that have a material effect even on the best laid retirement plans. For example:
- Investment returns can be higher or lower than we expect.
- Inflation can be higher or lower than we expect.
- Inflation doesn’t stop when we retire, it will be a factor even after we do.
- Your retirement plans could be materially affected by either a significant bull market or bear market, and timing of either is equally important.
- In a perfect world, you’ll fund your retirement plan each and every year; in the real world, there may be entire years where you won’t be in a position to fund it at all. There may also be times when you’ll have to make early withdrawals.
- Heath is an X factor not easily predictable or controlled.
The point of this list isn’t to discourage you from preparing for retirement — even an extravagant one — but to accept the reality that your retirement may not look at all like your plans, comfortable or extravagant.
When it comes to retirement planning, particularly if it’s decades into the future, it’s best to keep your plans loose and flexible. Maximize your efforts to retire at the highest level you can, but be prepared to make changes as circumstances dictate.
This can work in both directions. A prolonged job loss, or lower-than-expected returns, could lead you to struggle to achieve even a comfortable retirement. On the other hand, higher-than-expected earned income and retirement contributions, in combination with higher-than-expected stock market returns, could produce an extravagant retirement.
Aim high, and be prepared for whatever happens. Whether your retirement is comfortable or extravagant will still put you on the winning side of the retirement equation. Many people will struggle with something considerably less.