Let’s Talk Retirement

It seems like almost every week there is an article saying how American’s don’t have enough for retirement.  Here is a nice graph from the Economic Policy Institute.  It looks like people at the top may be alright with $163,000, but really that is simply less than $1,000 a month over twenty years.  Coupled with Social Security you’re not going to have the same quality of life you had previously, unless you were making around $24,000 a year.  Yet, the news gets worse.  The first graph is just the average which is driven up by people who have saved a ton.  The typical person in that category has only $17,000!  I think we all know that’s not going to make for a lovely retirement.

Problem

There is clearly a problem.  People who are trying to determine whether they have enough money to retire often use the 4% rule.  This means to have a very certain probability of not running out of money you need to spend only 4% of your money per year.  So if you want to have $50,000 a year then you need $1.25M.  Meanwhile the people with $17,000 can safely spend $680 a year.

Solution

Clearly the solution is to never retire.  Just kidding, that’s certainly not the path I plan on taking.  The solution is to treat saving as an expense just like you do for your home and car.  You need to save because no one is going to bail you out in retirement.

Options

Many jobs have an option to save in a 401(k).  If you are lucky then your company may even provide matching.  My last company was great.  They put in 3% of my salary in automatically and then matched up to 4% which means I could get 7% FREE MONEY just for saving 4% of my income.  If you company offers matching, try to contribute at least to the max where they stop contributing because that is the best return you’ll ever get.

Another tool is an IRA.  This is available to practically everyone and is better than just savings because you get tax benefits.  In a normal one you don’t have to pay tax on the money you put in which allows for a larger sum to grow.  On the Roth IRA you don’t pay taxes on the growth.

Stocks and bonds are a way to retire, but it may be difficult for you to get to 25x your expected expenses.  Another way is to look for passive income investments.  You can have a business or rental properties which provide a monthly cash flow.  A apartment building for $500,000 may provide over $5,000 in rents.  There are a lot of considerations that go into doing that though.

The future

Trump’s tax plan was considering limiting the 401(k) contribution limits, but it appears that’s not happening.  That can and likely will continue to change, so make sure you are prepared.  If you have a pension, that is great, but beware that companies and cities go bankrupt and they make have to reduce or eliminate your pension.

Conclusion

One of my favorite bloggers has found a way to retire without having to pay taxes.  The best advice I can give you is to prepare.  All my advice is to save more while enjoying what you have.  If you are moderate with your expenditures you will have a better chance of maintaining your lifestyle in retirement.  Good luck and keep saving.

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