A STUDY BY GOBankingRates.com found that one in three Americans has nothing saved for retirement. Women are 27% more likely than men to have no retirement savings. The average U.S. household 401(k) account had less than $120,000, and the median was around just $31,000.
No wonder people are in the workforce longer. But then again, life is short, so why golf? It’s bad for the environment anyway.
More people are staying healthier longer, taking up fun or low-stress work in stay-active jobs. I saw a story about a woman in Arizona who taught kindergarten until she was into her mid-seventies and then thought to get a real estate license! Me, I want to tend a bar where all the crazy artists and political activists hang out. What do you want to do?
Don’t be scared, is what I am saying. The median active age of Americans not struggling with a health issue is around eighty-five. “Retirement,” said Ross Slater of Toronto, now in his fifties and looking great, “is when I can’t work anymore at something l love. It’s going to be a Great Long Slowdown — GLSD — not a final retirement.”
Still, for all the freedom that retirement or the GLSD allows, you need to plan. While you are working, your primary goal should be to build wealth. If you work after you retire from full-time work, or shift to part-time work or a career that pays less, your goal ought to be to maintain your wealth.
Many also think wealth is all about The Number. You know, the number that the retirement calculator spits out based on some superficial-yet-telling variables. The Number is both important, and, as I imply in various parts of the book, not as important as many make it out to be. It is just one indicator of how you choose to organize your life, assets, income, and expense management now and in the future, and not a tail to wag your financial dog.
Sigh….
Now that you are back from checking out The Number (again) can we continue?
I truly hope you liked the result. If not, take heart, it’s not the end of the world, even if most financial planners suggest as much by the look in their disapproving eyes. As my mom used to say, “Phooey!” How can a number define you, now or in the future? We all have a choice about how we manage our affairs and life, and it’s certainly worth more than a number.
Why the cynicism?
Western industrial society is rigged against happiness and sustainability from the get-go. From kindergarten on, we are scared to death by a system (yes, I said it and it feels so good!!) that conditions us to be so afraid of scarcity that we often fail to notice abundance.
Numbers play a big role in scaring us.
The only way to get a great job is to get great grades. Then it’s how many extracurricular courses you take to augment your grades. Then it’s how much you score on your SAT. Next, the amount you need to make to live the lifestyle you “deserve.” Then it’s about how much you don’t have. Before you know it, The Number is staring you straight in the face.
At each step of our economic life, the entire economy and almost every level of government tells us to spend more, or that we don’t have enough saved. The financial industry is actively complicit in this and strikes the fear of the gods into us by telling us our lifestyle (which is really just the lifestyle their corporate buddies in other sectors tell us is ours) is at risk if we don’t save massive amounts for the life we deserve (which they will happily manage for a fee).
Spend more, save more. What about life? It’s not healthy… cue the air-sickness bag.
Inevitably, sustainability investment is about numbers too, but it’s equally about not about succumbing to numbers. Sustainability is often about the things we can’t just put a number on. The value of a pristine lake? Of a safe and vibrant community? Paradoxically, the MasterCard advertisement brilliantly gets this right: Some things are priceless.
The Number is not the end game. It’s kind of important, but not what is really important.
So, what about it?
Conventional wisdom suggests you need an annual income of around 70 to 80% of your current annual income for a secure retirement. This means you will need to save roughly 15 to 20% of your current income (if you start early!).
If that makes sense to you, well, we are done. Thanks for reading this far, skip to Part Three.
Of course, it’s not that simple, because as you age, your costs will decline, then possibly increase again. At first you will spend lots travelling, doing projects, visiting, maybe even helping your kids out financially; then you’ll start reading more and sitting on the porch as you slow down; then you get frail and then, well, you die. We all do.
My Buddha has sharp elbows, so I say what needs be said: Death is sad, but it’s a natural thing. The only thing worse than death itself is being unprepared spiritually or monetarily for it. Death is unavoidable, but preparing for it is not. I can’t guide you spiritually, but financially we can do something. And as we talked about before, being financially prepared means knowing how you want to live now, all the way into your meditative years!
How you invest is critical to this vision.
In the previous chapter, you visualized the type of life you want now and in retirement. You also calculated your income and expenses, now and into the future. You should have also organized your papers and information flow, including who will manage what.
So how do you get from now to tomorrow and to thirty years from now?
Let’s start with the bad news.
One of the two most common retirement planning mistakes Gen Xers make is not saving enough. The other is spending too much! Remember the median 401(k) of $31,000? That may not be you, but if you are like me and in your fifties, it may be “yikes” time.
Millennials can relax a bit more; you have more time and flexibility to get to retirement, save for a home or a sustainable business project, etc. Want to pay off your home quickly? Take a year or two off? These things can be planned for and are not a great big deal in the scheme of things. You can save and plan for being “unconventional” without affecting your retirement goals much — assuming certain income and expense conditions, of course. You may not know exactly what you want to do, but simply knowing you want to do something outside the great humdrum (with commensurate expenses needs and savings goals) between now and the Great Long Slow Down is not enough.
What do I need to be responsible to my goals and be sustainable? you might well ask.
A widely accepted rule of thumb is that you can withdraw 4% of your retirement nest egg to live from in your first years of retirement (adjusted for inflation, but don’t worry about how that works for now).
That might sound good until you crunch the numbers. 4% of $200,000 is a mere $8,000.34 Even if you add an average annual Social Security benefit of about $16,000, you’re all of $8,000 above the poverty line of about $15,500 per person. Even if you are not a financial geek, you can see that all that lies between you and poverty is your investment portfolio. If you live with a significant other (SO), you can add another Social Security check to the mix, and top out at $41,000 pretax. Not bad, but still not much compared to most, and not enough for most of us, especially the youthful ones.35
If we accept a 4% return rate, you would need to have a portfolio of $930,000, combined with Social Security, for two to top out at pretax income of $70,000, or the amount experts say maximizes your happiness. If you are lucky enough to have a pension plan from work, or can stash a bunch of cash away from downscaling your home or selling a second home or property, or have alternative income from rental properties or what not, then you need not have such a large investment portfolio.
If you are young, the world is your oyster. If you start saving only $363 a month, at age 25, and assume a 7% rate of return (the stock market average is about that over the long term), you would have the $930,000 Happy Number by the age of 65! Think about it; that’s only $12 a day.
Try as I might, I just can pass up on the oh-so-cliché “Just don’t drink your daily Starbucks” advice. But it’s so true! Don’t drink your Starbucks and you are almost halfway to the twelve dollars a day you need to save for a happy retirement.
We make so many little decisions every day that we perceive, psychologically at least, as financially insignificant. The Starbucks example reminds me of my friend Alex. Alex is a hardworking assistant to a state governor. His wife Lulu doesn’t work outside the home, and his salary is the sole source of income for the family. Alex’s father worked all his life to start and run a successful custom pump-making factory and taught Alex the value of saving and investing. Lulu knows the value of money too and is careful at home — but she has the Starbucks bug, once a day, sometimes twice.
Alex, the gentleman he is, did a bit of research and decided if he bought a modest but good expresso maker, Starbucks coffee beans, and some Starbucks mugs he could replicate the experience for Lulu at half the cost of going to Starbucks. He even got a Starbucks apron and offered to make the coffee when he could. Now, I’m not sure about you, but the savings would be just a bonus to seeing my SO in a Starbucks apron making me coffee most mornings. Ahh! The joys of saving!
It’s all so simple, right? So simple, in fact, there is not much more to say about it. You are an adult. Make wise spending choices now, or suffer the consequences later. It’s not differential calculus. Don’t buy a McMansion. Don’t buy a Porsche. Eat healthy. Don’t run up the credit cards. Live comfortably and sustainably.
Sermon over. But the question remains: What will you need, given your current and anticipated economic context to save and invest? What is The Number?
Cue the (in)famous retirement calculator...36
Retirement calculators are online applications in which you pop in some income, life, and inflation expectations and Bam! out pops The Number, or the theoretical amount you need to have upon retirement to meet your chosen lifestyle expectations.
Please be cautious. Most of these calculators can scare the crap out of you (and I am sure they are supposed to, as they are offered free by financial planning companies, mutual funds, etc., to get your business).
Many of these calculators are limited because they are one-dimensional. Some can also be deceptively simple, as they are hardly sophisticated enough to do more than provide an order of magnitude guestimate of your future financial needs. Put in a regular savings amount today, under certain assumptions, and learn what your assets will be worth at retirement (or whenever you want to start using your savings).
But calculators don’t include much about real-life events that get in the way of or help with your investment goals. These events will happen, and we can’t be sure how or when. Major real estate events like downscaling or selling other valuable assets may or may not be on your schedule when you do your calculation. Don’t forget inheritances, or the fact that you can save once the kids are gone. Then there are the negative events I am sure you worry about: health issues, job losses, market downturns, etc. A couple of calculators do try to incorporate these types of events into their algorithms, offering multiple income stream options, date specific asset sales, etc., and are worth checking, even if they are a bit complicated to use. See Appendix Three for examples.
Life events affect the calculators’ straight-line savings curve. Don’t fear the word curve, it’s not as puzzling as you think; indeed, it is so simple it took me a month in Economics 101 to learn that a curve can be a straight diagonal line! Calculator asset-appreciation curves are like that, algorithmically straight, though we know life is hardly like that at all. Our ability to save and invest warps positive and negative over time; or, unlike the calculators, actually curves! Your ability to save is usually higher when you are young and lower when you are middle-aged, especially if you have kids. (They can get expensive around 12 or 13 and even more so for a few years after that.)
Flat-line savings assumptions, I can tell you from experience, don’t really work. If you are like many Millennials these days, your income curve may also look (quite deliberately) like waves on the shore: some years high, some years low, as you take time out of “conventional” life patterns to explore or mess around. As Ken Jacobs of Sustainable World Financial Advisers and a First Affirmative Financial Network adviser out of Golden Colorado reminds us, this is the moment to recall that “one size financial planning does not fit all! One client will have kids, others won’t; one is single, another is married; one wants to retire at 60, another will work much longer; one will pay off her house at 55, another, likely never will. We need to be careful with rules of thumb and examples. With or without the help of a financial planner, people must be prepared to adjust each piece of the financial planning puzzle to their own circumstances.”
Calculators are still instructive. The one I like to use is from Bloomberg. It shows that if you invest 11% of a $70,000 pretax income starting at age 25 for ten years ($641 monthly) in a fund that tracks the Dow Jones Industrial Average, and then contributed nothing more for 30 years, your portfolio would be worth over $930,000, assuming a 5% return (or a conservative 2% less than the long-term stock market average of 7%).
An average 5% annual yield on that amount will give you a $37,200 income (pretax). If you add $466 more a month to this portfolio between the ages of 55 and 65, you get another $70,436, topping out at a tidy, you guessed it… $1M for an estimated average $40,000 pretax annual income. (Again: Figures in current dollars and include only your investment portfolio and no other assets, e.g., real estate.)
Think of it. If you and your SO between you make only $70,000 — less than two combined average Millennial starting salaries of $47,000 — all you need to save is 5.5% of your annual income each to retire with over half of your pretax income! Now that’s not just The Number, it’s the Happy Number!
Wait a minute, Marc! You calculated poorly, surely it’s less! No I didn’t. Remember you will likely be in lower tax brackets when you retire, so you get to keep more of this income than if you were working! This is the rough equivalent of $70,000 annually!
If you are Millennial, think about saving 11% of your annual income for five years before starting to save for retirement. This would net you around $24,000 or so, just enough in many cities for a down payment on a modest apartment or starter home, a stepping stone to bigger assets or rental income. If you can do this, you should be able to continue to save the same amount without affecting your savings-led lifestyle.
Some of you might have noticed that I included Social Security in my retirement outlook. Is that a smart thing to do, asked ILYGAD interviewee Jesse: “I mean after all, who really believes it will be around when I hang up my playing boots?”
This is a good point. The current estimate for when the Social Security fund will run out of funding is around 2035. That’s 28 years from now, so for many of us Gen Xers this is less a concern than it will be for the Mills. This estimate assumes no changes to the way money is collected and distributed. A more likely scenario is that sometime before 2035, changes will be made to up the retirement benefit eligibility age, or decrease the amount beneficiaries will get. Some believe, for example, that the current Full Retirement Age of 67 will be increased to 69 or 70 to resolve the system’s potential insolvency.
A lot will happen between now and the time you retire. So be smart about Social Security. Read up on it. Decide among the several options available for when you can begin taking it. Delay it, and your checks may be bigger. Take it early, and they could be smaller, only more of them. There are also some other smart strategies to consider as well. A good financial adviser can help maximize the outcomes of your choices.
Most of all, if you don’t believe it will be there to help you, save more.
• The average American simply does not save enough to retire on. Scared yet?
• You will need to save 10 to 20%t of your current income to retire with 70% of that income (depending on market conditions and when you start to save, of course).
• A $70,000-a-year household income is the happy number for most; what is it for you?
• To have $70,000 a year during retirement requires saving $641 per month from age 25 to age 35, and then $366 in savings per month from age 55 to 65 to become a millionaire and retire with an estimated $40,000 to $50,000 annual income (pretax, current dollars).
• You can plan for unconventional income streams and still meet investment goals.
Put your feet up, relax a bit. You deserve it, this was a stressful chapter.