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In several recent blogs and podcasts, I’ve delineated different levels of retirement funding. These funding levels are identified as: underfunded, constrained, and overfunded.
I’ve also publicly stated in several blogs and podcasts that I classify myself as overfunded. Stating this publicly has always been a concern of mine because the statement becomes subject to misinterpretation. This appeared to be the case during a recent conversation with a listener.
The listener in question understood “overfunding” meant I had more money and a greater net worth than needed for living expenses. In this conversation, the listener stated that he was happy that I was overfunded, and understood that money in and of itself does not bring happiness. But, he felt he needed to continue working many more years to get to a point where he would have more than enough money for his needs.
He asked what would be the quickest and easiest way for him to become overfunded, and how he could accomplish this in the shortest time possible. In his mind, he was thinking, “I’m happy for you, but tell me about me!” His questions and conversation reinforced the idea that I had been unintentionally misleading readers and listeners.
Through this blog, I will attempt to refine and clarify what the term overfunded means, generally, and specifically in my life.
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The Oxford Languages dictionary defines “Overfunded” as the past tense of Overfund. To provide more funding for (something) than is necessary or permitted.
Example: “The widespread view is that the corporation is now seriously overfunded”
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When speaking about being overfunded, people generally understand that being overfunded means having more money than needed (by definition.) Most people incorrectly assume that this statement is about money and net worth.
During a blog or podcast, when speaking about being overfunded, readers and listeners often automatically assume that I have much more money than I need.
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In reality, being overfunded considers two very diverse concepts:
*Having more money than needed for normal living expenses.
*Spending fewer dollars than are available.
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Understanding overfunding begins with the fact that a person can be overfunded in two different situations. One is by having a lot of money, and the second is by living a conservative lifestyle.
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Overfunding and Money
Most people assume that when someone says they are overfunded, it means they have a lot of money!
That is certainly the case for a small percentage of Americans (around 1.62%) having a net worth greater than $10 million. Using the 4% rule, a person with a net worth of $10 million could potentially spend $400,000 in their first year of retirement. That amount would increase each year based on inflation. I think most people would agree that having the ability to spend over $400,000 annually would classify these Americans as being overfunded. In this situation, being overfunded is an easier concept to understand.
But what about the other 98.38% of Americans having a net worth of less than 10 million dollars? Does that mean every other American is constrained? Is the person with a net worth of $9.5 million considered “Constrained?”
Most people would agree that having a net worth of $9.5 million would allow most Americans to live comfortably.
So, there must be something else besides solely considering dollars that would classify an individual as overfunded. Let’s look at two examples:
*American “A” has a net worth of $10 million which provides a potential annual spending rate of $400,000 using the 4% rule. American “A” needs $500,000 annually to fund their particular lifestyle. Based on this example, American “A” is underfunded (even with a net worth of $10 million.)
*American “B” has a net worth of $2 million which provides a potential annual spending rate of $80,000 using the 4% rule. American “B” needs $60,000 annually to fund their lifestyle. Based on this example, American “B” is overfunded (even with a net worth of $2 million.)
Two differing net worths are provided. The individual with the lesser amount of money is overfunded, while the individual with the greater amount is underfunded.
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Overfunding and Lifestyle
American “A” and American “B” both receive an annual income of $150,000.
*American “A” drives a luxury car (which he finances), and which he exchanges for a new luxury car every three years. American “A” lives in a 4,000 square-foot home in an upscale and gated community. American “A” pays higher property taxes, higher insurance premiums, and higher HOA fees. American “A” travels extensively and dines out often. When all annual living expenses are added up, American “A” is saddened to find out that living expenses are $180,000 annually and that based on income generated each year, American “A” is underfunded.
*American “B” also receives an annual income of $150,000. American “B” lives in a 2,500 square-foot home in an upscale community. American “B” buys and owns an upscale automobile for 10 years. American “B” does not have a mortgage on his home or auto. American “B” travels and dines out often, and is thrilled to find that his annual living expenses are less than $140,000. In this example, American “B” is overfunded.
While having the same amount of retirement funding, American “A” Is considered to be underfunded, while American “B” is considered to be overfunded.
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The examples above illustrate graphically the fact that there is not any particular net worth or income level that designates underfunded, constrained, or overfunded status.
The interplay between these forces determines how comfortably someone can live, and how long retirement funds will last.
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Here is where my situation returns to the discussion. I have been successful professionally and financially, and feel comfortable that I will have more than enough money to last the rest of my lifetime.
But, before I am accused of being a braggart, please let me explain.
My wife and I have always lived comfortably. We both drive nice cars and live in a comfortable home in an upscale community. For the last ten years, we lived in a patio home in our hometown. We travel where we want to and dine out when we want to dine out.
But, there is no area in our lives that I would consider extravagant. Because we live a comfortable, but not extravagant lifestyle, the retirement savings I have accumulated are more than sufficient to fund our living expenses.
When stating I’m overfunded I’m not being a braggart, but relating the concept that we have more than enough money to fund our conservative lifestyle. Another person who lives a more extravagant lifestyle at the same income level we experience may be constrained, or even underfunded.
Each person and couple faces multiple complex decisions when approaching and beginning retirement. A complex problem has many potential solutions and is difficult to solve because of its many interrelated factors.
Because my wife and I live a relatively conservative lifestyle, we can be classified as overfunded while having a lesser net worth than most readers and listeners would guess.
The actual classification of funding level does not seem critical as individuals adjust retirement spending and utilize available retirement funds. Funding becomes problematic when an individual is underfunded, or severely underfunded. In this situation, there are not enough dollars to meet the needs of basic living. Individuals in this situation must try to live as frugally as possible and continue to work as long as possible.
Happiness does not come from a certain funding classification, but rather from the realization that one has ENOUGH. I also believe that most people can live happily while also living conservatively. When you have ENOUGH, it is not necessary to continue buying things.
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Final Thoughts
- Before I retired, about 90% of planning time was spent on financial planning and about 10% on planning for purpose during retirement. After 10 years of effectively being retired, these percentages have reversed.
- The big problem with Planning is that it’s not concrete. Planning can only take you so far! People continue to work because they want to have more confidence in their financial ability to retire.
- Most people spend less money in retirement than they anticipate. It is generally accepted that retirees spend about 80% of their pre-retirement income. If pre-retirement income is $120,000 per year, then retirement income should average around $96,000 per year. (In this example, the post-retirement reduction in spending would average around $24,000 per year. Using the rule that a person needs 25 times their annual income to retire, this $24,000 in savings annually represents $600,000 less needed in retirement savings.)
- Being overfunded in retirement has less to do with generating excess retirement funds, and more to do with being happy and focusing less on things.
- In the last few years, my wife and I have underspent our projected spending based on our net worth. We spent freely on things we felt were important but did not feel like we were missing out on anything we truly wanted or needed. Being conservative in the last few years provided some surplus dollars that we could allocate to the larger home we recently purchased. This home was not a scheduled or planned expense. Even though it created a pretty big bump in our spending, it was not a major concern and the extra dollars spent last year will be absorbed over the next few years.
- Over the last few years, I have spoken with people who are happy spending more money annually, and people happy when spending less annually.
- I now realize that most people in retirement adjust their spending based on available funds and that most retirees are happy. Most retirees would not consider themselves overfunded, but if they’re spending less than their available assets would allow, then they are overfunded.
- Being overfunded, constrained, or underfunded has less to do with available assets and net worth, and more to do with being happy at an acceptable spending level once retired.
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