Owner of The Mandrell Company. Real estate investor, broker, coach, lecturer and author.
I have two major problems with the way most Americans plan for their life in retirement. But before we tackle these issues, let’s discuss a few numbers we can use to bring this to life.
One calculation of the most recently reported wage data puts the average American’s salary at just under $50,000 annually. Let’s use this as a benchmark for our conversation. Let’s also assume that $1 million is your retirement savings goal, and you plan to call it quits at the age of 65. This is a lofty goal considering that the average 60-year-old has less than $200,000 in retirement savings, but let’s keep the $1 million figure for now. If you’re the average American and you save 10% of your income (or $5,000 per year) and achieve a consistent return on investment of 6.5% in your 401(k), it would take you roughly 40 years to save up $1 million.
You might say, “But that’s not right. I’ll receive several raises over that 40-year period, and my salary wouldn’t stay at $50,000.” OK, so let’s say you work an incredible job where they give raises that exceed the rate of inflation, and you can somehow shave five years off this timeline. I think we can agree it would still take at least 35 years to get to your big goal of $1 million.
Problem one: You’ve now been working for 35 years, and your retirement account has just hit the $1 million mark. Congratulations! You’re finally ready to retire and — boom, we have a stock market crash. In 2020 (and in 2007) I personally saw some retirement accounts slashed by 40% or more. What happens if the year you decide to retire or a couple of years after you do, you take a 40% hit to your savings? The $1 million you thought you had is now $600,000. You’re now unsure of the economic climate and what you should do. In 2007, many older Americans went back to work or significantly changed their lifestyles to meet their new reality.
Problem two: Let’s look at another scenario. Let’s assume you get lucky and everything goes perfectly. Right before the stock market crashes, you liquidate your $1 million to put all your funds into a safe money market account. Whew, that was close! You’re no longer achieving a 6.5% return on your money, but your cash is safe. Unlikely, but let’s say the money market mirrors the inflation rate, and your million-dollar savings continues to have the equivalent purchasing power into your retirement years. If you continue to live a $50,000 lifestyle, you essentially have 20 years before you run out of retirement savings.
Let’s put this into perspective. You started saving for retirement at 30 years old, and 35 years later, you have $1 million. You’re 65 years old and would now like to call it quits. If you live past the age of 85, you won’t have any money left. Unfortunately, this is the plan for most of us.
My great grandmother lived to the age of 103, and that was back in the 1980s. Modern medicine is helping us live longer and longer, and to only have enough savings for 20 years is setting yourself up to be a burden on someone else in the future.
Here is the pushback most people have for me when I show them these figures:
“I’m just going to start saving earlier and work until I’m 75.” OK, but the numbers still don’t play out very well. You’re also now giving up more of your best years working instead of enjoying life.
“I’m just going to spend less money in my retirement years than I did in my working years and make my money last longer.” If you think that’s realistic, let me ask you this: Right now, do you spend more money during the week or on the weekends? For most of us, the weekends take more of your more money because you have more time on your hands. And once you retire, isn’t every day a weekend? How could you realistically plan to spend less?
I’m not suggesting that you shouldn’t contribute to your job’s 401(k) savings plan. The opposite is actually true. I think you should contribute the max, especially if your employer has a match program. I also think that you should start saving as early as possible because the compounding effect of savings (especially pretax) is a wonderful thing.
What I do not believe is that you should solely rely on this savings account as your only retirement vehicle. To believe that your 401(k) savings are somehow going to allow you to live a comfortable retirement is foolish. I would encourage you to also invest outside of your 401(k) in more tangible assets that you can control — such as real estate.
Your retirement goal should be to create multiple streams of passive income. I’m a huge fan of cash-flowing real estate as an investment vehicle because it helps plug the holes from above. Real estate can create a passive stream of income that continues to pay you month after month into your retirement years, so you’re not worried about outliving your savings. Though the value of your real estate may drop during a recession, the income stream from rents will typically stay unchanged and can even increase during a bad economy.
Find five people in retirement who are living the lifestyle you want to live when you retire. Ask them what they did to achieve this awesome feat, and see how you can emulate it. I doubt they did it simply by saving.
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