You Are Not Entitled to a Retirement

As a worker in the medical field, I see a lot of older individuals. The one thing that always tears at my heart is when I see an 80 year old lady forced to work. She is stuck at a minimum wage job at a fast food restaurant because frankly she lacks the skills to do much else. You can tell she wishes she didn’t have to work but the bills are not going to pay themselves. The troubling part is her situation is not the result of not working hard throughout her life. Usually, but not always, it is due to a lack of planning for the future.

Let’s face it, there are many retirees facing their “golden years” with little to nothing to show for their working years. We could certainly blame it on the stock market but honestly it has been doing quite well overall. Don’t get me wrong, the stock market is not the only type of investment vehicle but it is wise to at least put a portion of your money into it. The worst thing you can do is to hold all your money in cash. A vault full of money will even lose value at the mercy of inflation. In fact, inflation will knock around your money’s value like a fight with Mike Tyson.

Young future retirees have an even more overwhelming problem facing them. Not only are they starting work later due to educational job requirements but they are forced to give away their income to student loans. The end result is sub-optimal savings and opportunities for investment. But don’t fret, the government will take care of you. Nothing to worry about. Cue obnoxiously loud buzzer. Wrong! The time will come when you need to be able to rely on either your investments to live or continue working. If you have not prepared, you will be in for a rough awakening. Open your eyes and get your head out of the sand. Your retirement is not guaranteed and you are by no means entitled to it.


The Average Saver

Contribution plans such as the 401(k) and IRA have become the prevailing forms of retirement savings in the U.S. Unlike pensions which are grossly contributed by employer, these plans require the individual to stash away their own funds. This is fine when an individual takes it upon themselves to invest. However, according to a recent study by Fidelity, savings may still be falling short. Fidelity reports that in the 1st quarter of 2017, the average 401(k) and IRA balances were $95,500 and $98,100, respectively. On the bright side, this is the highest it has ever been.

The analysis by Fidelity actually makes the situation look better than it is. A separate study by Vanguard reported a median 2016 401(k) balance of $24,713, despite similar average 401(k) balances to those in Fidelity accounts. So, half of 401(k) savers have more than $24,713 and half have less. You could argue that people may have multiple 401(k) accounts due to employer switching or that there are new enrollments lowering the median. Despite these arguments, the numbers don’t lie. It is clear that most American’s will fall quite short of what would be considered a comfortable retirement.

It gets worse. Average savings calculations only take into account those who actually save. The bureau of labor statistics reports only about half of workers participate in a workplace retirement plan. The participation rates are even lower among low income, part time and small company based workers. No wonder 1 in 3 Americans have nothing saved for retirement.


What Rate Should You Be Saving?

Determining a personal savings rate can be a complicated endeavor. What magical number will signal your ability to go into work and say “take this job and shove it”? It can depend on a number of factors such as initial age when savings began, personal debt, desire to travel, lifestyle, retirement age (full/partial), cost of living, other investments, leaving money to heirs and the list goes on and on.

Most experts recommend at least 15% of your income each year. As many things are in life, 15% is just a guideline. Say it with me, “just a guideline”. There is nothing concrete here. It all depends on your personal situation. If you want to retire early, that number should be much higher. Do you have other sizeable investments contributing to your monthly cash flow? Well, then your savings rate may be lower. Another factor to consider is your starting age. Thanks to compound interest a person who starts at 18 will not need to contribute as much on a yearly basis as a person who starts at age 40. Starting early makes an enormous difference.

I am about to say something that may scare some of you. This may be thinking outside the box but consider cutting your lifestyle permanently. One such individual, Mr. Money Mustache, talks about severely cutting non-essential expenses in an effort to save half to two thirds of your income. What? It may seem like a wacky idea but the result is an early retirement and financial freedom. One thing people forget is retirement does not necessarily mean no longer working but no longer “having” to work. Consider what an early retirement would be like while you are minimally wrinkled and fully able bodied.

As a saver, the “4% rule” allows you to calculate your overall retirement savings need. The 4% rule proposes a safe yearly withdrawal rate to sustain savings through a lifetime. In other words, you will not run out of money if you only take 4% of your nest egg each year. For example, if you need $50,000 per year to live, then your nest egg needs to be $1.25 million (i.e. annual spending multiplied by 25). Depending on your yearly expenses, your overall savings need may be lower or higher.

Using the 4% rule, let’s examine the retirement savings of those currently nearing retirement. A report from Vanguard found those ages 55-64, had an average 401(k) balance of $178,963. If we use the 4% withdrawal rule, this amounts to about $7,160/year or $600/month. Yes, social security could boost the total but do you think this is enough to live comfortably? Not likely. My suggestion, would be to strive to be far better than “average”.


What about Social Security and Pensions?

I don’t know about you, but I don’t anticipate social security being a huge part of my retirement income. A system that broken and depleted will likely be nearly extinct by the time I am able to take part. Research suggests that social security will likely run out of money by 2034. At that point, the only way to maintain the system will be through ongoing tax revenues. Without question, benefits will drop unless full retirement age or taxes increase. With individuals living much longer and people having fewer children than in past generations, the outlook looks bleak at best.

My thought is to consider social security like a bonus. Based on the average $1,360 benefit, it is not possible to live off it alone anyway. Placing a heavy reliance on the government for your retirement welfare is, well, idiotic. Don’t be the person that puts too much trust in the government and ends up forced to work to survive. Personally, if it is there for me, I plan to use it to splurge on trips with the grandkids or give it away. If you have planned to not have social security, you will be living large when you are still able to partake.

Okay, now let’s move on to the pension. Unfortunately, very few companies still offer pension benefits. The main reason is pensions are flat-out expensive. Also, I suspect more frequent employee job changes may have had an effect. More job changes make a transferable retirement plan like the 401(k) more desirable. It is really too bad because a pension is a far more guaranteed source of income than social security. Even when a pension fails, if ensured by the Pension Benefit Guarantee Corporation, the participants can still get benefits. In 2016, only 15% of U.S. private sector workers had a defined pension benefit. This is in stark contrast to nearly half of workers having pensions in the 1980s. As you can see, it is a dying retirement saving strategy. So, if you have one, be thankful but again don’t solely rely on it for your retirement.


College Reduces Investing Opportunity

A college education can be pricey. Why do you think the average student loan debt is $37,000?. There are two main ways that a college education reduces future investing opportunities. First, student loan payments steal disposable income that could be earmarked for investing. The problem, i.e. interest, is perpetuated when graduates keep these loans around much like a family pet. Loans are like robbing from your future self. Second and perhaps the largest effect of a college education is wasted time. Some would call this an opportunity cost. Because compound interest has such a large effect, forgoing as little as 4-6 years can have a drastic impact. To simplify it further, consider what an 8% gain does to an account of larger magnitude such as $1-2 million. Think about what an extra 4-6 years at 8% gains could do. We are not talking chump change by any measure.

In some ways the importance of a college education has been overemphasized. Yes, when the right degree is chosen, college can have a profound effect on earning potential. But let’s not confuse an education with success. After all, it is what you do with the education that matters. There are far too many people that simply choose a major in order to “get through” college. That is why many graduates with art and social sciences degrees experience elevated unemployment rates. As my 3 year old daughter would sarcastically say to me, “think it through”.


Wrap it up

Well, this is where we finally wrap it up. I hope you have an itch to start saving for retirement or investing in other passive income streams. At the very least, I have gotten you thinking. Getting older is inevitable and you cannot hide from it. You will get older and you will run out of the desire and ability to work.

There are many obstacles that will try to rob you of a comfortable retirement. Life has a habit of getting in the way. Do yourself a favor and set investing as a priority. I like to imagine my future self would embrace me and say “thanks son”. Nobody wants to be stuck in a job to which the only retirement is death. The choice to save and invest is completely yours. No one can or will force you to do it. My best advice is to stop thinking someone else will coddle you and step up to the plate.

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