A Tale of Two Multipliers

In a comment to Wednesday’s post, Anonymous made a very good point. He or she said that it’s hard to adjust your standard of living. Indeed it is. Very hard. Which is what people like about a spending plan that will very likely not require them to have to do so.

Which is why it is a good idea to have a sense of where your personal poverty level lies (as recommended in yesterday’s post). Because it’s your personal poverty level that pretty much defines the spending you can’t realistically drop below. Think of it as the level at which you join the Nation of Whiners. Above that level, and you could adjust, as unpleasant as that might be. So when you’re working, and trying to determine a retirement savings target, you should actually have two targets in mind. One is based on the Present You’s current spending level, and one is based on your rough estimate of your personal poverty level. You can afford to use a realistic approach toward saving up the first target. But you should be very cautious—even pessimistic—about saving up the second target.

Here’s an example. Remember Ernie from Friday’s post. He had figured that he needed his future retirement savings to provide him with an income of $47,950. Adding projected Social Security would give him a retirement income of $65,950, which is comparable to his current lifestyle (which you may recall was $86,350, before adjustments). To translate that $47,950 into a savings target, he multiplied it by a reasonable multiplier, one that is likely to give him a sufficient war chest; he chose 17. His tentative target was $815,150 (= 2517 x $47,950).

But Ernie really needs to take a second step. He can afford to be reasonable about saving for his current standard of living, but he has to be unreasonably conservative about saving for his personal poverty level. He simply couldn’t stand entering the Nation of Whiners, and he’s willing to take any reasonable steps to avoid going there. So Ernie searches his soul. He asks himself how low his spending can drop below $86,350 without being too painful. After some thought, Ernie figures he could adjust his spending by $10,000, down to $76,350. That would mean, after Social Security and other adjustments, his retirement savings would have to provide him with $37,950 (= $47,950 - $10,000) to support his bottom line lifestyle. So he has to be unreasonably cautious about saving up that amount.

How do your translate that caution into a savings target? By using an unrealistically conservative multiplier; 25 instead of 17. So his alternative target is $948,750 (= $37,950 x 25). He has to save up the greater of the two target amounts, $815,150 or $948,750. Bummer.

It’s worthwhile to remember what these two different multipliers represent. The cavalier multiplier (17) gets you to a retirement level that is likely to be similar to your current lifestyle, but which may require the Future You to be flexible about making those difficult spending adjustment if things don’t go as expected. The conservative multiplier (25) gets you to a retirement level that is damn likely to never drop below your personal poverty level.

There are a lot of implied decisions behind these two multipliers, and your multipliers may well be different. But that’s a subject for another day.