You need millions to retire and more misconceptions about retirement savings

Retirement planning can be hard. Annuities, estates, health care, retirement calculators, safe withdrawal rates, Social Security, taxes. There are many pieces to a successful retirement plan.

But almost all of those topics boil down and feed into the one question that outranks all others: How much money do I need to retire?

Ive been a serious student of the retirement equation and retirement lifestyles for more than 10 years. There is a lot to be said on these topics. (Witness more than 200 articles on my blog, and thousands more spread across the internet.)

Im also a fan of simplicity, but beware oversimplifying the retirement analysis. When it comes to the question of How much? it is tempting to fall back on easy answers or expert opinions. But a realistic retirement plan, updated as you go, will be much more useful as you navigate the retirement years.

When it comes to retirement savings, there are three misconceptions that outrank all the others. Avoid these mistakes in thinking if you want to maximize your freedom, comfort, and peace of mind in retirement.

Misconception No. 1: You dont need to save because the government will take care of you

Most of you reading this dont make this mistake. But you arent the average worker. For whatever reason, many Americans simply dont think much about retirement. To be fair, some are too busy making ends meet day to day. Some perhaps are intimidated by the numbers and the financial complexity. And some are lulled into a belief that government, in the form of Social Security, will take care of them.

But that confidence is unfounded. According to the 2017 report by the trustees for Social Security, the main Social Security trust fund is projected to pay full benefits only until 2035 18 years from now. Without legislative action, the fund will incur a huge shortfall, able to pay only about 75% of benefits going forward.

That news is bad enough, but consider that even if full Social Security benefits were preserved, they would likely be unable to cover all of your retirement living expenses. The average Social Security benefit is $1,369 a month. That comes out to about $33,000 annually for a couple (assuming both worked equally). While that is about twice the federal poverty level for a family of two, it would hardly allow for a comfortable lifestyle in retirement. Thats especially true in an urban area, and given rising health care costs in later years.

NewRetirement reports that the median retirement income for households aged 65-74 is more than $47,000. Our own retirement budget is currently closer to their reported median for households aged 55-64: about $63,000 a year. Social Security even if the politicians shore it up doesnt come close to funding that lifestyle.

Read: Your 401(k) plan could be a gold mine if you do these two simple things

In a recent survey from Merrill Lynch, 81% of Americans reported not knowing how much money they need to fund their retirement years. The National Institute on Retirement Security reports that median retirement account balances for all working-age households is a mere $2,500, and for near-retirement households its just $14,500 maybe enough for a few months of retirement living, at best. Not only do the majority of Americans not have a clue how theyll fare in retirement, but once they find out, the news is going to be very bad indeed.

Sure, there are wealth inequalities in our society that exacerbate these numbers. And the simple fact is that those of us who work in higher-paying careers will have an easier time saving for retirement. But the fact remains: no matter your income level, if you want to maximize your freedom in life working or retired you need to plan on providing mostly for yourself, rather than relying on others, including the government.

Misconception No. 2: You need millions to retire securely

Ask a higher-end financial adviser the kind who advises clients with net worths approaching seven digits what you need to retire, and theyre likely as not to throw out a number of $3 million-$4 million. (Friends who are physicians and other high-earners confirm this anecdote.)

I retired more than six years ago with a fraction of that big number in the bank, and we are doing fine.

But financial advisers can have serious conflicts of interest when it comes to computing your retirement number. Unfortunately, the profession has strong incentives for being overly conservative, and lots of cover for doing so. For starters, the most prevalent compensation model for advisers is still a percent of assets under management. And guess what happens when you retire? Yes, you start spending those assets that your adviser is collecting fees from, and their income goes down. Secondly, liability for the adviser is more clearly connected to you running out of money than you having too much money in retirement. There is little risk to an adviser in you working five or 10 years longer and dying with a few extra million on hand. (And your kids will love them for it.) However, if you run low during retirement due to professional advice you received, there will be hell, and possibly lawyers, to pay.

But it can make sense for some to take on a bit more risk and retire earlier. For example, I retired more than six years ago with a fraction of that big number in the bank, and we are doing fine. We havent had to sacrifice much, nor have we taken on a dangerous level of risk. In the early years of our retirement we watched our money extra carefully, but in recent years weve been spending more on recreation. And still, thanks in part to the rising bull market, a small inheritance, and modest earnings from this blog, our net worth has increased since we retired. Our finances are on track to last our lifetime. And we are enjoying a decade or more of free time denied to more conservative planners.

What did we give up to retire early without having several million on hand? Two things, primarily: owning a large home, and international travel. Yes, Homeownership is very important to many people, part of their vision of the good life. Just understand that owning a plush home is an emotional need, and often an expensive one at that.

Likewise, international travel is a prominent image in retirement scenarios: white-clad seniors frolicking on exotic beaches. For me, at least, this too is an emotional or symbolic need. Ill get a lifetime of enjoyment playing in our western mountains, mostly within a days drive of our home in Santa Fe.

If youre willing to search carefully, and visit when the crowds are gone, you can find an exotic beach in the U.S. Even international travel is on the table, if youre willing to cut in other areas.

In the end, by capping those two potentially huge expenses travel and housing we can indulge in what we think is a luxurious retirement lifestyle. Whether it be food, clothing, electronics, gear, or domestic travel we have spent freely, without damaging our savings. We havent missed out on much by foregoing a big house or overseas travel.

An essential ingredient for a happy life is to be in touch with your own needs and wants, separate from what Madison Avenue or your neighbors are doing.

To maximize your freedom, live modestly within your means. And that doesnt mean doing without: Craft your own, personally rewarding retirement lifestyle. Dont be hostage to somebody elses vision of the good life. If you look into your heart, chances are that only a few things are really important to you. Optimize your retired life for those, and cut spending on the rest.

Misconception No. 3: Your financial adviser can give you an exact answer

The final and largest misconception of all about retirement planning is a mistake that is easy to make and perfectly understandable for those who havent studied the problem in depth. This is the belief that there is a precise answer to the retirement equation, that you can go to an adviser with your numbers, they can plug those numbers into a formula (calculated by the computer), and give you a yes/no answer about whether you can retire or not.

This is pure bunk. Why? Because even if we had a single equation that could represent your entire retirement picture debatable the inputs to that equation are not known reliably in advance! Lets take just three simple examples of retirement uncertainty: the growth rate on your investments, the general inflation rate in the economy, and your personal life expectancy. Not one of those variables is known with much certainty even one year out, much less five years out, 10 years out, 20 or 30 years out. And without those variables, you cannot reliably compute how your retirement nest egg will perform or survive in the years ahead.

Advisors take advantage of their cleverness and technical knowledge to peddle a certainty that is rarely justified. Buyer beware.

At the very best, a knowledgeable adviser can help you choose sensible ranges for those retirement variables and ultimately give you a probability of success of your money lasting for various periods at various spend rates. But that probability is subject to significant interpretation and revision as every year ticks past.

In reality, even the best retirement planning gives you only a hazy view into an uncertain landscape to be traversed over many years, not a detailed itinerary for your journey.

In my post on uncertainty in retirement calculations, I go through a set of scenarios for a typical couple showing that, depending on how future events unfold, the difference between best and worst case could be well more than $1 million. My conclusion: A retirement model is a compass, not a map. It can tell you where youre going, but not if and when youll arrive!

Those with a track record of prudent money management, plus middle-school math skills, may be better off taking personal responsibility for their retirement decision and lifestyle. If you dont take on that responsibility, but instead hire somebody else to do it, you will pay dearly, and the results may not be to your liking.

For true freedom and peace of mind in retirement, accept that the future is not perfectly knowable: You will need time, money, resources, and flexibility to deal with it. And nobody else can make your life decisions as well as you.

In the end, there is no exact answer to the retirement question, but you can still make the decision to retire. As I conclude in my second book:

Reality will always be a series of tactical decisions based on new events, logic, and emotion. So, ultimately, with retirement, you have to make a big decision in the face of uncertainty. But, thats not so bad. Anybody whos gone to college, gotten married, raised children, or pursued a career, has already done that many times.

Darrow Kirkpatrick retired at 50 after a career as a software engineer. He writes on his blog, Can I Retire Yet, where this first appeared.

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