Is the Old Approach to Retirement Broken? A Millennial Guide to Financial Planning

Katie: We've always been told to work in whatever capacity we can get for 30 years, preferably a highly paid one, so we can save enough to GTFO of the corporate world as quickly as possible and never work again. But so much has changed economically for millennials and Gen Z compared to their Gen X and boomer predecessors. Should retirement planning still be approached in the same way, or is it time to revisit this strategy? 

Welcome back to this week's episode of The Money with Katie's Show, Rich Family. Today we're talking about the tactical and not-so-tactical elements of planning for retirement when you might feel like you're way too young to be thinking about retirement. What could go wrong? And you might be questioning why I wanted to talk about this topic because I'm still in my twenties myself, but look, I've always been a planner. There is nowhere I feel more at home than inside the cozy boundaries of a thoughtful agenda, complete with at least two backup plans, preferably built in a well-labeled Google Sheet—which, 2023 Wealth Planner, anyone? We’ll link it in the show notes. But for me, the best antidote to anxiety is a plan. And while some people thrive under the pressure of an impending deadline, I would much rather wrap up a month ahead of schedule so I can sleep soundly.

Case in point: I wrote the first draft of this episode in December of 2022, so bearing that in mind, it's probably no surprise I became preoccupied with the ultimate future plan in my twenties, because the second act of life requires a ridiculous amount of financial forethought, logistics, and frankly, hope. Planning for retirement is the definition of the long game. It is almost impossible to put it off until the last minute. The stakes are that high. Moreover, the retirement landscape has changed significantly over the last century. The risk shift from institutions responsible for funding retirement to individuals being responsible for funding their retirements has placed the onus almost squarely on the shoulders of workers to figure this thing out.

That's because retirement as a concept is actually fairly new in human history. For most of human history, people just worked until they died. Super fun. The origins of retirement are traced back to Otto von Bismarck—I have not heard that name in many years—in the 1800s, when he suggested government-run financial support for older members of society, per The Atlantic. Social Security was passed in America fewer than 100 years ago, in 1935. And while it did elicit a lot of “Socialism!” dog whistling, it remains a relatively popular mainstay of American life, despite being currently underfunded. Corporations decided they'd help foot the bill, and pension plans, also known as defined benefit plans, came into vogue. They figured if they promised their employees that they'd take care of them in old age, those employees would stick around—and guess what? It worked. People stayed at the same company their entire career, because corporate daddy was writing the checks in the golden years.

But 1978 legislation introduced a new way to save, in Section 401(k)—maybe you've heard of it—of the tax code that quietly shifted the burden from the employer to the employee. It was now on you. 

In this new legislation, creating a defined contribution plan paved the way for the pensions to slowly fall out of favor, especially as people began living longer. It's kind of no surprise that today's American workers are undersaving. 401(k)s and IRAs have not been the standard through the centuries. They were legislated into existence in the last 50 years. The point is, retirement as a concept is relatively new in human history, but the way we fund modern retirement is even newer, and that has big implications for young people today, because it highlights something crucial: This is an evolving concept. Almost necessarily, it looks different for every generation, from our ancestors more than a hundred years ago, who not only did not have Megan thee Stallion and DoorDash, but definitely didn't have retirement, to the US boomers with an average net worth of more than a million dollars and a statistically higher likelihood of having a pension.

The good news is that when we plan for something like retirement, we are given the opportunity to define for ourselves what type of life we want to build more broadly. While my original retirement aspirations revolved around Pinot Grigio and beach chairs, I have done a lot of reflection around the lifestyle and habits that make me the happiest, and I realized that I actually thrive in routine. I like to do the same things in the same order, most days. It makes me feel in control. And we have to play this long game differently than those who came before us, not just in how we plan financially, but how we structure our lives.

We'll be right back after a message from the sponsors of today's episode. 

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Katie: So knowing it's the long game, how do you build a life you don't need a break from? So rather than bisecting your life into two halves, your working half and your retired half, like a budget production of the Apple TV hit Severance, and then going ham at each, mixing the two together can make the result even more enjoyable and fulfilling overall than saving all of that R&R for the back half of your life.

Now, that's not to suggest that you have to be ass in desk chair every day for the rest of your life, or that you can't take a week to rebinge a season or two of You on Netflix, which was another mainstay of my own holiday break. It's just that even from a sheerly practical standpoint, it makes sense to devote some time, some energy, some effort to constructing a lifestyle for yourself that you're not itching to escape from every chance you get, or counting down the years until retirement. And frankly, probably making a lot of sacrifices in order to speed up that process. In fact, that may mean more midday breaks to watch TV or to take bike rides or to nap on a Wednesday afternoon, because the paradox is this: If you can build an overall life that you don't need a break from, then planning for retirement will unfold more organically and take a lot of the pressure off.

Of course, here's the rub. It might take a little bit of effort and time, both professionally and financially, to get to a place where your life, your routines, your workflows, your savings cushion is able to be molded into a form that fits that ideal schedule, whether that be working 80 hours a week for a Big 4 consulting firm, or doing part-time work as a freelance copywriter—I mean, whatever floats your boat. You may have young children right now who dictate your day. You may work in a time-sucking job. You may be in a demanding phase of your career just by nature of your professional choices. You may be too low on the corporate food chain to call these types of shots for yourself, especially if your work is location-dependent or it's closely tied to another person's schedule. Hell, you may be juggling all three of those constraints simultaneously right now. But it is helpful and it is productive to dream about what an ideal week in your life would look like, and allow it to serve as this idealized roadmap. It's about creating routines and working styles that generate the most positive outcomes for you. The kind that lead to enduring joy and fulfillment, instead of fleeting moments of happiness or excitement. 

And crucially on a show about money, we have to go there: It may not mean you're earning as much as humanly possible, but it's worth interrogating that goal and what it is ultimately supposed to provide for you. If earning as much as possible was just supposed to usher in retirement 20 years sooner, well, what if you didn't have a working life that you desperately wanted to retire from? It might not be worthwhile to grind it out in a job you hate for 30 years solely for the money, before you allow yourself to explore something you are actually interested in that may not pay as well. An ideal second act may be less about having unlimited free time to lounge, and more about having meaningful activities to fill your time. And really, for most people, that'll probably include some work and hobbies that you find invigorating. 

It's a little bit like the Type 1 fun and Type 2 fun framework. So Nat Eliason wrote a great article recently that did an excellent job of explaining this concept that fits really well here: Type 1 fun and Type 2 fun. Type 1 fun is fun that's enjoyable in the moment: We're scrolling TikTok, we're watching TV, we're playing a video game. It's quick hits of dopamine escapism, but it's not exactly memorable or fulfilling. Type 2 fun is fun that's not indulgent while it's happening and sometimes it feels like effort, but it's fun in retrospect. It provides valuable memory dividends. Running a marathon is the example Eliason gave, which I thought was really appropriate. And Type 2 fun might feel more like effort or suffering in the moment, but it's arguably going to be more fulfilling, more meaningful than Type 1 fun, which gives it more psychological staying power. So Eliason's argument is that we should strive for more Type 2 fun, fun that requires just a little bit of work. He says, “Hey, this is more rewarding.” And I would say that it's a little bit harder to find these days, when there's always the opportunity to engage in Type 1 fun in the literal palm of your hand. But when we talk about traditional retirement, we usually joke about endless Type 1 fun, just rocking it day to day: crossword puzzles, HBOMax, aperitifs, you know.

But I am advocating for constructing a life of more Type 2 fun, one that you don't wanna pull the ripcord on as soon as you spot your first gray hair. And yes, that often includes work. So before we move on to the financial piece, here are a few prompts that might help you conceptualize what this would look like for you. 

Number one: In what ways do I deplete myself or run myself into the ground? What parts of my current work or life make me feel completely drained? Number two: What does a life of meaning mean to me? Number three: If I were only allowed to work for two hours per week, what parts of my job would I want to keep and what would I want to ditch? I'm using an absurdly low amount of time to force focus here, so only the best stuff can stay. And number four: Which rituals or practices make me feel most like myself, and what is stopping me from doing more of them? 

So now that we've got some of our conceptual boxes checked, let's switch gears a little bit. Let's talk about the financial side of this picture and calculate retirement needs based on age, because fear not, Rich Human, whether you are just starting out, you have all the time in the world, or you are rounding the corner to 50 and you are realizing that your impending retirement might be underfunded, we can leverage some hashtag #math to understand how much we need to save. Whether your retirement income is going to support a traditional retirement at a traditional retirement age, 65+, or it's going to be your supplemental income starting in your forties if you begin working part-time on a passion project. The generally agreed upon replacement rate for income in retirement is about 75%, in the financial planning world. And replacement rate is really just a financial planning fancy term that means, in order for you to replace your income, how much does your portfolio need to be able to pay you? The experts suggest aiming for a retirement income that's equal to roughly 75% of your working life income.

But this advice is given under the assumption that you'll pay less in taxes as a retiree, stop saving, and benefit from other cost cuts. But the problem in my mind is that almost nobody makes the same amount of money throughout their entire career, and wild swings in income can make identifying one pre-retirement income number kind of difficult. Here's why this matters. Only 22% of people currently approaching retirement age believe they will have enough money to maintain a comfortable standard of living, down from 26% two years ago. And 56% of people say they expect to have less than $500,000 by the time they retire, which provides an annual income of around $20,000 per year, according to the 4% rule. So supplement that with the average Social Security check and that's about $3,200 a month to live on. Now depending on your needs and timing, this may be enough, but it might not be, as the same study found that only 3% of retirees deemed they were “living the dream,” while around 37% said they were comfortable. And I want all of Rich Girl Nation to live the dream. So let's unpack the math that can show us how to get there. We'll be right back after a message from the sponsors of today's episode.

Sponsored content: We've recently partnered with TaxAct to create a custom episode of The Money with Katie Show, all about changes you should be aware of in tax season 2023. The full episode is up on our YouTube page, but we're also going to be playing excerpts during our other episodes for the next few weeks in lieu of traditional advertisements. Here's a little bit of my conversation with TaxAct’s VP of tax operations, Mark Jaeger. 

Katie: I remember my first time filing, it was terrifying, and I spent the whole time on the phone with my dad. So what are your biggest pieces of advice, Mark, for people who are taking charge of their taxes for the first time this year, besides calling your parents?

Mark Jaeger: That's right. Well, honestly, you know, one of the big things I'll always say is, talk to family and friends, right? That's just a great way to get started. It's a great way to build confidence, right? Taxes is about being confident in what you're doing overall, but really it's just about getting organized and getting started. You know, you hear those stories about individuals who get those documents in the mail and then they just stuff 'em in a shoebox or stuff 'em in an envelope. Quite honestly, it's a great way to start, and that way you don't lose anything that happens throughout the year. And then when you do get started with a tax preparation company like TaxAct, you really get stepped through easy-to-understand questions. I will tell you, I've looked at the IRS tax code, 80,000-some lines of code—it's even more than that—where you know, the tax software companies will provide easy-to-understand questions that just walk you through it as if you are definitely, in this scenario, a new filer. 

Katie: I hope you enjoyed that excerpt from our conversation. Now back to our regularly scheduled programming, and as always, happy tax season.

First, we need to identify a general goal, bearing in mind that this is a ballpark, so let's get the obvious out of the way first. The earlier you start, the easier this will be. There's really no getting around this. For every decade that you delay starting, you need to roughly double your monthly investment contributions. Over half of your final portfolio value is determined by what you saved in the first decade. For example, imagine you have a 40-year investing timeline. You end up after 40 years with a million dollars. Theoretically, more than $500,000 of that final total is attributable to your effort in the first 10 years. 

Now, to be fair, the idea that you'll invest when you earn more can definitely be true, to some degree. Savings are often correlated to income, but this can be a dangerous assumption, as some surprising studies have revealed that those who earn more often end up with more credit card debt than when they earned less. The reality is that when we earn more, we tend to spend more, especially if we haven't already reflexively built the saving and investing muscle into our monthly cash flow. 

So what grand number in the bank should we shoot for? I recommend using your monthly spending plus a buffer as a guidepost for how much to invest, as opposed to traditional retirement advice, which suggests a 75% income replacement rate. The challenging part about focusing on your monthly spending is that it, too, fluctuates through different life stages, and it'll be impacted by factors like where you live, how many dependents you have, if you have any medical or financial needs outside of the ordinary—though insurance can help set an upper limit there, if you're really struggling to quantify those types of unpredictable costs. 

A monthly spending range is usually useful enough to provide a ballpark. For example, I know when I was single, I lived on about $3,000 per month, and when I got married, my half of our monthly spending jumped up to about $4,000 per month. When we have kids, that might go up to $5,000 or $6,000 for my half. For consistency's sake, this means our dual income needs to range anywhere from $6,000 to $12,000 per month, which is admittedly a very wide range, but thankfully I can use those numbers to tell me quite a bit. If I multiply by 12, I get our annual spending, somewhere between $72,000 and $144,000 per year, depending on the stage of life, in today's dollars. And if I multiply those numbers by 25, I get the portfolio target that'll allow for a safe withdrawal rate of roughly 4%. That means my ballpark goal is anywhere between $1.8 million and $3.6 million. So what do these numbers tell me? I can take the upper bound of $3.6 million and know that it would likely suffice as my sole source of income in retirement if my ideal life involved no work at all, or work of some kind that just wasn't paid, like caring for family or community. That is the threshold at which paid work would become optional, financially speaking.

But I can take the lower bound of $1.8 million and know that it would likely suffice as a less-traditional retirement buffer for my costs, providing the majority of my monthly expenses, if enjoyable part-time work could provide the rest. To state the obvious, these numbers are very large, because comparatively speaking, my husband and I do spend a lot of money. But the good news is, this is all proportional. For example, if you spend $4,000 per month, your goal number would be around $1.2 million, which is still a lot, but surprisingly achievable with consistent effort and compounding. 

And lest you think, “But Katie, I do not dream of labor of any kind. Why would you suggest we sandbag the OG retirement vision with something as silly as part-time work?”, consider this: In a recent study from American Advisors Group, a reverse mortgage company tailored to older adults, they found roughly half of the 1,500 people aged 60 to 75 surveyed said they planned to work part-time in retirement. 12% said they never planned to stop working, which is an increase from 6% in 2019. So this is already reality for many retirees, but it's hard to say whether it's by choice or out of necessity. But work sure feels different when you are choosing it, which makes saving and investing for the future a good idea no matter what your plans are. And by making intentional shifts toward fulfilling work earlier in life, you are less likely to hit traditional retirement age and feel disappointed if you slogged it out for 30 years doing something you didn't like, and you still don't have enough to live a comfortable retirement. 

So let's figure out how close you already are to your long-term goal, because remember the compounding magic we talked about? It can help us understand how close we already are to reaching that goal amount. So for the sake of simplicity, we'll use a lower average rate of return that takes inflation into account. That way we can arrive at a number that more or less accurately represents the purchasing power that the money will have. For example, maybe you are 30 years old today and you've got $100,000 invested. By the time you're 50, that $100,000 will be worth $320,000, assuming a 6% real rate of return, even if you didn't invest anything else.

To reiterate, I like to use 6% as a post-inflation rate of return because it helps more accurately represent what the money will actually be worth in today's terms. Simply plug your existing invested assets into a compound interest calculator. We'll link a good one in the show notes. Use a 6% rate of return and plug in a realistic number of years between now and when you expect to make this type of transition. If you wanna be even more conservative—so higher inflation, lower nominal returns, what have you—you can use 5% or even 4%, and you'll see that depending on how much you have already, you may be closer than you think. For example, if you're someone who's been at this for awhile and you've got, say, $250,000 invested, 20 years at a 6% real rate of return is as good as $800,000 in your pocket, and that's $800,000 of purchasing power in today's dollars, without adding another dollar. In this type of situation, you may already be in a position where you can safely downshift and make life adjustments without meaningfully threatening your future security. 

To put an even finer point on this, you may already have enough saved and invested for future use needs that any stress you are currently experiencing about sticking around in a highly paid field that isn't right for you might be unfounded. 

Because we don't know what the individually funded and personally responsible retirement is going to look like at large, it's worth interrogating whether or not the traditional model for retirement still makes sense for today's generation of young people. Instead, you can determine what a life you don't need a break from looks like, and set your financial goals accordingly with a range based on your spending. Depending on your age and how much you've already saved and invested, you may be closer to safety than you think. And having a general command of financial frameworks, like the 4% rule and compounding, can help contextualize your choices if you want or need to downshift or simply change course. 

All right, y'all, that is all for this week. I'll see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Kate Brandt. And don't forget, if you enjoyed the excerpts from today's episode of my conversation with Mark Jaeger from TaxAct, to visit my YouTube channel to hear the full conversation and learn even more tips to help you file confidently this year.