How to break your income addiction before retirement

Peter Dunn | Special for USA TODAY

Why do lottery winners go broke? Why do we hear so many stories about professional athletes falling on hard times after earning tens of millions of dollars? And why do so many retirement attempts by "average Americans" fail? The answer to all three of these questions is the same: We get distracted by the assets, and virtually ignore the financial dependency created by our habits.

A lottery winner, a professional athlete and, arguably, you win or earn enough to create a sustainable financial existence. What’s missing from the equation is often resourcefulness. The addition of resources in the face of a lack of resourcefulness almost always ends with a tragic story of waste and missed opportunity. The perceived difference is the lottery winner and the professional athlete has a large influx of money over a short period of time. If a lack of resourcefulness exists, the wasteful habits are magnified by the number of resources. You and I are different. If we aren’t resourceful, our financial struggles feel like a four-decade death march toward an unsuccessful retirement attempt.

Resources don’t matter if you aren’t resourceful.

It pokes at an elementary question: What's better than having a bunch of money? I believe the answer to said question is: not needing a bunch of money.

The retirement industry has mostly been built on the idea that we need a bunch of money. While that may or may not be true, our dependency on our work income is what causes us to need a bunch of money in retirement. Dependency on high levels of work income is synonymous with a lack of resourcefulness.

This is why I believe the most forgotten idea in retirement today is the elicit attempt to eliminate the need for a bunch of money. If you choose this path, which you should, it’s only natural to identify the largest expenses in your life. Our debts are often our largest ongoing obligations. From mortgage debt to Parent PLUS student loans, being debt free in retirement can prevent you from needing a bunch of money.

But debt is not the only culprit. Lifestyle creep can hamstring retirement plans as well.

As you sit and read this, it's quite possible your retirement shortcomings aren't necessarily your lack of retirement assets, but instead your challenges may be based in a wanton need for money.

Years ago when I was a financial adviser I had a client who earned in excess of $500,000 per year. His plan was to retire with an income of $100,000 per year. This seems reasonable, no? Well, it wasn't. For the better part of 30 years, he and his wife had spent every dime they earned, no matter what their income was. When they were making $100,000 30 years ago, they spent it. When they earned $200,000 20 years ago, they spent it. Not only did they spend these healthy incomes, but they used the incomes to create new obligations — boat payments, car payments and house payments. When one obligation was nearly vanquished, they upgraded and created another one.

When the idea of retirement came knocking, they blindly assumed they could reduce their income dependency by 80%, with no prior successful track record of doing so. Did I mention they had a bunch of money? They had $1.5 million. And it didn’t matter.

As we progress toward income independence (retirement), it's important that we keep in mind our need to become independent of our work incomes.

The best advice to prevent you from becoming too dependent on your work income is to start ignoring dollars and start respecting percentages. It’s great if you saved/invested more dollars this year than you did last year, but if your income increase surpassed your savings increase, you may have saved a lower percentage of your income. In this instance, you actually created more dependency on your income. Absorbing pay increases leads to more dependency.

You simply need to break your dependency over time. You cannot, under any circumstance, increase your financial obligations down the stretch of retirement. You don’t want to need a bunch of money.

How to climb out of the income-dependence trap

If you want to break your dependency on your income, you must save a higher percentage of your income every year until the day you retire. For instance, if you are saving 10% of your income at age 40, you should resolve to save at least 1 percentage point more per year of your total income, every year, until retirement. Using this strategy, at a bare minimum an investor would only be living on 65% of their income at age 65.

There’s a hidden benefit to this philosophy. You will accumulate a bunch of money. But this time, you’ll have a bunch of money and no income dependency issues. What I love the most about this idea is that it gives retirement hope to many people who never thought retirement was in the cards.

Peter Dunn is an author, speaker and radio host. Have a question for Pete the Planner? Email him at Pete@petetheplanner.com.