More Generation X retirement doom today from both Bloomberg and Yahoo. Grim numbers aplenty with average 401k balances in the very low six figures and median numbers much lower than that. Part of the Bloomberg article cited a study from Schwab that showed respondents believing they need $1.8 million for retirement which is up from $1.7 million last year. It's interesting that the bump at a little over 5% is just a little head of reported price inflation.
To the idea of a goal for retirement savings, I've never had one. For plenty of people it makes sense that having a goal makes it easier to understand what they are working towards, it just doesn't fit for me. A point we've made many times here is that no matter what your goal is/was or what someone or some website calculator once told you that you need to retire, once you get to retirement age, the only thing that matters is how much you have at that time.
Working backwards, $1.8 million should safely kick out $72,000 before taxes (taxes are owed on traditional IRA distributions) assuming a 4% withdrawal rate. If you are at least 50, I think it is reasonable to have some understanding of what your expenses are likely to be once you hit retirement age? We went through this exercise recently. What are your monthly expenses now, how will they change (like paying off your mortgage), how much should you budget for annual expenses (like property tax or homeowners insurance) and how much should you budget for unexpected one-offs (veterinary bills or new tires)?
What are your numbers? What income streams will you have to cover those numbers? Social Security is probably the first income stream to consider. How much are you getting? And just because, assume a 25% haircut to be conservative in case Congress drives that bus over the cliff. Is your SS enough to cover your numbers? It probably isn't but you never know. If you have retirement savings, how much do you have and between future contributions and assume some conservative annualized return like maybe 4-5%, how much will you have in retirement savings when you hit retirement age? If you're 50 and think you need the money in 15-20 years, that's a lot of time to catch up.
What is your reduced SS plus 4% taken from your likely retirement balance? Does that cover your numbers? The goal you set for yourself or what someone else told you at 35 or 40, means nothing in this process. If you're getting close in age, your reality is starting to take shape. Where does SS plus 4% leave you in relation to what you need as of today? Are you close? Great, just keep saving.
Are you far away? Ok, you've got to start figuring some things out. Are you going to save more, spend less, create another income stream, maybe a couple of other income streams, maybe something else? A long time ago we explored the idea of an income stream equating to having more money in the bank. If you have piece of rental property and you net $20,000/yr from it, that is like having another $500,000 accumulated regardless of the value of the property. I took that idea from comments Jack Bogle made about SS. In the last couple of years, this idea has come into greater prominence being called the Reverse 4% Rule.
With visibility for retirement accounts to be underfunded when people need them, I think the more attainable answer becomes cobbling together income streams and maybe cutting back on some nice to haves. Maybe figure Social Security (less a haircut if you think that makes sense), plus 4% of half the retirement fund you were hoping for, each spouse figures out how to side hustle $10,000-$15,000/yr working very part time and maybe as an example of cutting a nice to have, instead of buying something like a used Class C RV (it looks like there's pretty good choice where I live between $85,000-$125,000 for 2017's) you just rent one on the occasion you want to take that type of trip. That seems workable for people who might come up short of what they think they need and for whom buying investment property won't be a good fit.
As a repeat idea, this is a problem that we need to solve for ourselves. It is solvable. The more flexible you can be, the better off you will be. That is harder than it sounds. The sooner you get started figuring out your solution, the better off you will be.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
2 comments:
While I agree with your post in whole, I don’t think a person 50 years old can forecast what his expenses will be when he reaches 65-70 years of age. The rate of inflation has varied from 2% to 9%, and that does not reflect the much higher increases on cost for insurance, both property and health, as well as variable increases in food and utilities.
Personal experience, forecasting out more than 5 years is very difficult.
You are on the money, as always, regarding planning early, considering multiple income streams, and scaling back expectations.
50 is not too late to get an aggressive plan in place. Unfortunately, those are the years that are most demanding on families as you mentioned with parents and children having support requirements as well. it does not leave alot of room for savings.
@anon,
Good counter to my point about forecasting expenses. I guess I am thinking about knowing where you'd be mortgage-wise, like paid off or not, doing some planning around car purchases and maybe weigh probabilities of providing financial support to your kids. Health insurance should be expected to be a nasty variable and agreed that you can't account for every scenario.
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