Fear sells. If you follow personal finance topics you’ve certainly heard about “the looming retirement crisis” or how most American’s don’t save enough for retirement. Hogwash.

There are millions of Americans with absolutely nothing saved. In fact, there are 57 million of them. But the fear mongering which takes place in the news, often sourced from financial institutions themselves, is counter-productive to the people who are saving.

Most retirement calculators are created on a false assumption — that your retirement spending is a function of what you earn. This assumption makes retirement an age you get to, not a tangible goal that is achievable earlier than 65 or 67.

Satisfied Ghost is about financial awakening. That means a clear-eyed understanding of your financial situation. Most retirement calculators fall short of giving you actionable information that can inspire change. The truth is if you are saving today, you can probably retire much earlier than you think.

It’s better than you think

Most retirement calculators assume that you will need 80% to 85% of what you make today to retire.  As we talked about in an earlier post, the key to financial freedom is not inflating your lifestyle as you make more money. Most people make the most they will ever make right before they “retire” — I certainly did. Do I need 80% of that amount to retire? Absolutely not, since I was saving at least 50% of my income at that time and all of my bonus.

Vanguard’s retirement calculator, for instance, default’s to 85%, but does offer the choice to adjust it. It also includes data on what percentage you are “likely” to spend based on income, but I don’t find this data very useful for those of who have the ability to live frugally and intentionally.

Using a target based on what you earn means you’re always on the hamster wheel of increased spending as you earn more.

Estimate what you’ll spend

Instead of assuming you need to spend most of what you earn, estimate how much you’ll actually need and use that as one and your only guide. (Profound, I know.)

Things that are likely to be cheaper in retirement:

  • Will you need the same house when you retire?
  • Will you be able to move to a cheaper area of the country?
  • Will you be saving for kids’ education or paying for kids’ extras?
  • Will you be spending as much on cars, food and other clothes (as I discussed in my “High costs of a good job post“)
  • Will you travel more? Or less? Or at least more cheaply as you don’t need to “unwind” as much?

Things that will probably be more expensive:

  • Healthcare. Even though in our current environment it’s really hard to tell. (A great post on this for FIRE folks here.)

Find a retirement calculator that let’s you adjust

I recommend using a fine-grained calculator like OnTrajectory, i-ORP or CFireSim where you can input your budgets for various stages of life: with kids, post kids, pre-retirement, middle-retirement, later-retirement. It’s shown we spend much less after we pass a certain age. A complex retirement calculator will take these differences in spending into account. The defaults on inflation and rate of return are solid for these, but if you are more sophisticated you can adjust them.

As the When Can I Retire blog states, many of the most popular retirement calculators don’t even let you adjust for early retirement!

Like the blog above, I really like Vanguard’s nest egg calculator for a quick calculation that lets you easily visualize how much spending your nest egg can support.

Don’t forget about Social Security

The calculator above isn’t complete as it doesn’t allow you to input Social Security. It’s fashionable in many circles to bemoan the death of Social Security and/or Medicare. While it may be adjusted before many of us claim benefits, I don’t foresee politicians agreeing to take away the biggest entitlement program in our country. As the current healthcare debate shows, it’s extremely hard to take away a benefit once its been granted, even something with (previous) low approval ratings like Obamacare.

The US is one of the strongest if not the strongest economies in the world. Money still funds into our bonds as a safe haven. If anything, I expect more entitlement programs and transfers of money as automation increases and jobs decrease. The US is in a great position to benefit from automation, which could be shared as a dividend with its people. Only time will tell how things evolve, but I wouldn’t bet on social security “going broke” any time soon.

You’ll never be able to be 100% accurate on retirement calculations. But building a nest egg that is 25 times your annual spending is a great start. Think about what you want/need to spend, instead of basing anything on your current income, and the results will likely be better than you think. The key is to save and keep your lifestyle modest, as that is truly the foundation of financial freedom. Do you have a favorite calculator or tool?