Conventional wisdom claims that your ER spending should equal or exceed your income. So why could you be saving more than you're spending?What are you saving your money for?
The IRS expects estate trusts to spend at least 5%/year (they actually considered raising it to 6% in 1999 but soon abandoned that idea) and financial advisors widely regard 4% as "safe enough". I understand that some years a portfolio produces excess income and other years it produces less (or even loses value). Regardless of the variation in annual returns, the SWR concept annuitizes a retirement portfolio at some "safe" rate and you hold your annual spending below the annuity amount.
Here's another approach. Bloomberg's Wealth Magazine had an interesting article a couple months ago on funding your liabilities-- because it's no good if your portfolio beats the S&P500 but you can't pay your bills. Their theory is that instead of achieving some conjecturable SWR, you would ensure that your retirement portfolio anticipates every spending contingency and funds it with "safe" assets like zeroes or I bonds. You'd buy them for paying premiums on long-term care insurance, or for replacing roofs & vehicles & appliances, or to fund a fantasy-vacation budget. No doubt this entices many left-handed INTJ engineers to happily debate the nuances of estimating asset lifespans, replacement costs, inflation rates, ad nauseum.
A third approach is living off dividend income. Careful with this one-- you need to not only pile up enough assets to produce your annual expenses, but enough to grow that production at least at the rate of inflation without consuming principle. Good luck predicting future dividend rates, growth rates, and inflation rates.
Fourth, Bud Hebeler's "Analyze Now!" website uses a closed-loop negative-feedback iteration that adjusts the next year's spending to conform to the previous year's portfolio returns. Of course it's more complicated than that but less difficult than piling up a huge portfolio of zeroes or predicting future returns.
And let's not forget the "final" approach-- slashing spending to remain below a diminishing portfolio's SWR. While all of us could probably tighten our belts a little, this is the nightmare cat-food scenario that might even result in outliving our portfolio and having to get a j-j-j-j-job.
So, gee, as Cut-Throat points out, with all of these different retirement withdrawal methods, why would anyone SAVE money?
For some of us it's premature retirement or surprises that lead to inadequate retirement assets. Some can't afford healthcare premiums so they go naked. We can't afford 60 years of LTC premiums so we "self-insure". Or expenses spiral out of control during ER-- property taxes, prescription medications, inadequate mobility, or runaway inflation. Afterwards is the wrong time to point out that the portfolio was underfunded or that not all contingencies can be planned for.
For others, old habits die hard or you have to set a good example. While we don't have to overcome a Depression-era frugality, we can't see the value in dropping a couple large at a health spa. (Heck, I can barely achieve that in Bangkok.) And although I'm trying not to sweat expenses under $10, I'm not foolish enough to flaunt my new "skill" in front of our adolescent money-shredder.
Even if we can afford them, we certainly don't need more material possessions to care for. We enjoy an annual low-key weekly vacation or two, but we're not interested in a PT lifestyle or "extreme adventure" travel.
Another paranoia is recurring expenses. I understand an occasional capital expense but I hate paying perpetual monthly bills if I can eliminate them with an up-front purchase. We probably won't be able to install a well and a septic system on our tiny lot, but we can go solar photovoltaic and experiment with rain barrels or even a cistern. And I'll do the engineer's dance of joy when I can figure out how to meet my family's TV viewing habits cheaper than cable.
Finally, some of the "savings mentality" is a failure to re-evaluate a lifestyle. I've been mitering joints for years with a backsaw and a miter box, but now that I'm doing more of them it's worth the "investment" in a power tool. Electric weed whackers are cheaper but gas ones are faster & more powerful. I can pour concrete, too, but I'll do a lot more surfing if I leave that job to a pro. Computers & electronics are much cheaper, too, so perhaps it's time to upgrade to faster hardware and a DVD player.
Business Week has a good article on philanthropy and I particularly like Pierre Omidyar's DonorsChoose approach. (http://www.businessweek.com/@@41Hb84YQ3NQhygAA/magazine/content/04_48/b3910407.htm for subscribers.) But short of funding a CRT, I can't figure out how much charity to hand out now without bankrupting us in 40 or 50 years...
