By BOB CUNNINGHAM
On this website, and hundreds of others like it that I read and monitor, we talk about practically anything that has to do with money/personal finance. And we should… there’s a helluva lot to cover about the subject.
But what it all boils down to, whether you’re in your 50s or half of that, is preparing for the “Big R.” What proactive steps are you taking, now and in the near future, to properly prepare for retirement?
So let me ask you, is that what we should really focus on ad nauseum?
While planning for the long-term future is certainly important, I contend that excelling in the short-term, including the ‘now,’ is at least equally vital. In fact, one often facilitates the other.
Maximizing your efficiency in saving and investing now, logically, will result in you having more money to work with later.
Let’s take a quick look at why planning for retirement has become such big business, cliff notes version. You ready? It’s because virtually all private companies have deserted the traditional pension system in favor of a 401K/IRA-led way of saving for one’s own career conclusion. And, many public and government agencies appear headed in the same direction.
Sure… just save some money with your company in its 401K, or do it on your own with an Individual Retirement Account, combine those with the scraps that are our social security payouts – assuming those rates stay where they are now – and you’ll be set. Who needs a big, fat monthly pension check when the S&P 500 historically averages a 10% annual return?
I’m tellin’ ya, it’s bananas. And yet our society has fully accepted this monumental shift in monetary focus. But what people fail to properly gauge is that, while $500,000 in a retirement account may sound like a butt-load of money, it is in fact barely enough to keep a retired couple above the poverty line.
Undoubtedly, you’ve heard that experts traditionally recommend drawing down your nest-egg at about 4% per year, so that you can live while retaining the full balance of your primary account. In other words, if you start with $500,000, and want to leave a legacy, you should take annual withdrawals from that account of no more than 4%.
Really? Hmmm… let’s see how that might play out.
Let’s say you’re an average wage-earner in the U.S., about to retire. Your household income, says Betterment.com, is about $68,000 a year gross. That’s roughly $50,000 net spendable money after taxes.
If you expect to maintain the same standard of living you’ve become accustomed to, you would have to have about $1.25 million saved. And that’s not even considering the erosion caused by inflation. At a 3 percent inflation rate, $50,000 of net spending power becomes just $25,000 in about 24 years, which is roughly the average length of retirement nowadays.
Of course, you can always sacrifice your kids’ inheritance and spend down your money – in fact, I think you should because it’s your money. But try making $500,000 last 24 years when you’re taking $68,000 withdrawals on a taxable account. According to calculators on the BankRate.com website, do that and you will be out of money in less than 15 years.
Your retirement account is a Roth IRA? Cool. No taxation on the withdrawals. But with $50,000 annual withdrawals and inflation, your investments had better return more than 14% each and every year if you expect to continue paying the bills 24 years later.
Also, we didn’t enter increased medical expenses or anything else into the equation. Scared yet? Ya should be at least nervous.
So what do we do? If we’re smart, we utilize specific strategies that take the guesswork out of money, and we start doing them now… to benefit us now, a little later, AND into retirement. We do things that allow us to live a better, smarter life RIGHT NOW and over the ensuing years, and not just obsess about what we’re going to do when we actually get old.
And I have a strategy that makes all of this relatively simple and definitively painless. Beginning in 2018, this website will be dedicated to detailing this approach and its various advantages on a regular basis. Yep… I’m going to make you wait for it.
But, if you’ve been reading this blog for any length of time, you already know what I’m talking about. DPWLI… to know what this acronym stands for, refer to earlier posts, and let me know your reaction to the suspense.
Yes, admittedly, I’m messing with my audience a little here. But teasers are good, and it won’t be long now before the info will be at your fingertips.
In the meantime… thanks, as always, for reading.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.