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Picturing Your Golden Years

For some people, retirement is an option that can be glorious and affluent to the point of gaudiness. However, this vision is not apt for everyone. If you are like so many people, you may find that your retirement options are limited to working part time, scaling back on a lot of the optional expenses you could enjoy when you were younger and living a life of frugality that borders on austerity. The good news is that money and happiness are not linked as closely as many people imagine.

You may be able to live a very happy life during your golden years simply by taking things in stride. While you might not be able to travel the world and live in the lap of luxury, you may be able to work a part-time job and save up for a year to take a really good two to three week vacation. For a lot of people this kind of retirement is not only more likely but actually preferable to one in which they are able to stop working entirely.

The financial aspect of retirement is not the only consideration that you have to make. In most cases, your overall quality of life will depend far more on the relationships that you have forged than it will on how large your account statements are. Being able to live on a smaller amount of money may simply involve growing some of your own food in your garden, moving to a house in an older part of town instead of living in the city or scaling back on things like the kind of car you drive or how often you eat meals out. Spending your money consciously is an important part of retiring successfully.

Conscious spending ultimately comes down to knowing why you are spending money on something and being willing to slash your spending on the unimportant items. If you are not interested in spending on something, you can begin to cut it down immediately and get used to being frugal in that area. From there, you can begin to spend what you like on areas that you really care about. You do not have to have an entire lifestyle built around consuming what you “should” according to some societal standard. You just have to make yourself happy with the lifestyle you lead, both leading up to retirement and during it.

Past History of Retirement

There was a time not so long ago in which most people did not retire. During that era, a person worked until he or she no longer could, and then tended to move in with his or her children and helped with taking care of their children until old age finally claimed the elder’s life. (Blunt economists have said that instead of retiring, people used to work until they “dropped dead.”) In turn, the grown children tended to him or her more as time went on, assuming the health and physical care roles that modern medicine has placed in the hands of professionals.

During humanity’s agrarian past, the idea of going to live with one’s grown children as one grew older was the most pleasant and dignified way to age. As time went on, the notion of retiring and living independently until the end began to gain popularity with the rise of modern medicine. As the World War II generation saved heavily due to their parents’ experiences during the Great Depression and received pensions from their jobs and from the early days of Social Security, the notion of retirement became a middle class phenomenon that one could realistically strive for. As time has gone on, however, the gap between a wealthy future and an impoverished one has grown considerably.

Risks to Consider

The Future Uncertainty of Retirement

High healthcare costs, shortfalls in social security and medicare funding, low personal savings, and an increasing lifespan are conspiring against the average person’s retirement outlook. While modern medicine is making the average person’s life healthier and has greatly increased your likelihood of living to a ripe old age, it has come at a dramatic cost. That costs is the ever-increasing amount of money that you are going to have to spend during your later years financing this increase in medicine. At the same time, the average savings rate is very low, with most people putting less than 10% of their incomes into anything beyond today’s wants and needs.

Retirement will never be possible for some people. While it is romantic and positive to believe that there is always hope, in some cases hope is a tiny spark of warmth sitting helplessly on a ship that has nearly sunken beneath frigid waters. If you do not take significant and potentially drastic action now, your “golden years” may consist of working your job until you are physically incapable of doing so followed by working at least one part time job and dramatically scaling back your standard of living.

Ballooning Healthcare Costs

Healthcare is one of the most major retirement expenses that the current generations are going to have to shoulder down the line. If you have ever been seriously ill, whether you spent any time in the hospital or not, you understand that the costs of being treated for any kind of illness are very expensive. And, as time has gone on, the expenses that are associated with healthcare have gone up. The future promises to drive up healthcare costs even further than they have already gone.

Going to the hospital can literally send you a bill of more than a thousand dollars.

Often, medical bills will contain errors that may or may not be genuinely erroneous, and insurance will often only pay for certain treatments. Even visiting your doctor for a routine checkup can cost you hundreds of dollars if your insurance does not cover some aspect of your treatment. Medicine is bizarre, because the sellers do not set the costs, the buyers often do not know the costs and the entire process is overly complicated. But, like everyone else, at some point you are going to have to deal with medicine and its idiosyncrasies.

To be fair, much of the increase in healthcare cost has come from new technologies and treatments that have improved quality of life and extended lifespans. This is an amazing accomplishment on the part of researchers and healthcare professionals, and it should be celebrated! However, the impact on your personal finances is that healthcare has a higher price tag than it once did. Celebrate, but save up.

Dangerous Retirement Assumptions

Most retirement calculators make a lot of bad assumptions that will rarely end up coming true, or they place far too much emphasis on perceptions of retired life that may or may not happen. While you may not need your work clothes anymore, this will most likely only add up to an extra $30 or so per month. While you may wear $400 suits, you most likely only buy one or two of them per year and they last a long time. Another assumption that most retirement calculators make is that you are going to avoid eating meals in restaurants during your golden years.

While eating at home may be possible without having to race home after a long day at the office, most retirees like to enjoy a more luxurious lifestyle than going back to their college habits of pasta and scrounging for change to buy side dishes. Another issue that far too many retirement calculators ignore is the issue of traveling. If you have been putting off taking the big vacations for much of your working life, retirement is your last chance. Going on staycations is great when you’re in your 30s and have something to look forward to, but it isn’t as fun as taking a trip to the south of France when this may be your last major trip.

One of the worst oversights that most retirement calculators make is in not accounting for the most dramatic cost that most people will incur, healthcare. While Medicare will undoubtedly cover you to some extent, you cannot depend on the government to pay for all of your healthcare costs. While it is tempting to think that your most dramatic costs are going to be during your last few days of life, the overwhelming likelihood in our highly-medicated society is that you are going to be on at least a small number of prescription medicines by the time you reach your 70s. From around your 40th birthday, the amount of money you are going to spend on visits to your doctor for routine testing will steadily begin to rise. You will most likely become sick more often than during the hale and hearty days of your 20s and 30s. And, medicine will become a more common part of your life. While exact figures are impossible to calculate, as much as 35% of the figures quoted above for how much money you are going to need in retirement will come down to medical insurance premiums, deductibles for medical treatments and prescription medicine costs, much of which you will have to shoulder during retirement.

Social Security may be patched up and workable by the time you reach retirement age and it may not, but if you are under 50 years old today you must not expect to receive your full benefits when you retire. While it may seem negative to think this way, ample cash is a lot like the NRA’s vision of guns: it is better to have and not need than to find yourself in need but not in possession of something useful. It’s a lot better to leave your children with a substantial nest egg than to have your deathbed be their couch.

How Much Money Will You Need to Retire?

While it would be nice to simply retire when you want to without having to put forth any significant effort toward thinking of the money you are going to need, this is simply not the way the world works. For nearly everyone, retirement involves saving up a significant amount of money during their working years.

There are some useful assumptions about retirement planning:

Assume inflation. While inflation may be a small figure that typically reduces each dollar’s buying power by an amount in the 3% range each year, over time the compounding of those small percentage points become extreme. Your money will be worth roughly 10% of what it is today in 30 to 40 years if inflation continues as it has since World War II, which means you need to plan more conservatively than most people imagine. Based on this assumption, we will have to think in terms of today’s dollars. Inflation also forces you to invest mostly in equity-type asset classes, since bonds and cash get inflated away.

Assume a life expectancy of at least 90 years. To retire in your mid-60s you will need to have enough assets to live on for 30 years in order to have a good chance of not outliving your money. Also, you should expect to spend more than you are making today in most instances. This goes against conventional wisdom about thrifty retirees, but it is sensible in light of increasing healthcare costs.

Targeting retirement savings usually involves some assumptions about how inflation will compare to investment returns in the future. This is ultimately impossible to predict. Based on this wisdom, we must be conservative and save a large portion of our income for retirement:

If you earn $100,000 per year, you will need $3.45 million (in today’s dollars) in order to maintain your lifestyle comfortably throughout your retirement. That’s 30 times 115% of your current annual income. To achieve this retirement position as a high wage earner, save 20% or more of your income and plan to have eliminated your major debts by the time you retire.

If you earn $60,000 per year, you are going to need $2.25 million (in today’s dollars) in order to maintain your middle-class lifestyle during your retirement years. You will need 30 times 125% of your annual income if you are a medium wage earner, save 10-20% of your income and plan to have few significant debts when you retire.

If you earn $25,000 each year, you will most likely still need to have accumulated $1.0 million to maintain your lifestyle. You are going to need 30 times 135% of your annual income if you earn low wages.

Everyone who intends to retire should plan to have at least $1.0 million in assets, regardless of how modest you envision your retirement.

Jim’s Retirement

Let’s look at Jim the car salesman. He leads two other salesmen and makes $60,000 a year at 27. For him, saving up $1 million in cash if he saves 10% of his income will take 166 years. So even with compound interest and a company match, Jim will need to step up his game if he wants to retire while he’s still alive. He has to save 40% of his income, not counting compound interest, to have $1 million in cash by the age of 67. That’s not easy but compound interest can be a tremendous help. If he can save 20% of his income for one year and 10% thereafter, the traditional after-tax gains of stock will propel Jim’s initial $12,000 into being $120,000 over 40 years (assuming 6% annual gains). Every year thereafter will also contribute heavily, with each of the first 10 years more than tripling.

Becky’s Retirement

Let’s imagine the top end scenario with a person named Becky. Becky earns $200,000 per year as a 20-something top tier attorney and can expect (and demand) regular raises because of the value she adds to her clients. Becky has an extremely high standard of living that involves world travel, eating in the best restaurants and taking in the best culture the world has to offer. The upside of this is that Becky has enormous opportunities for a good time and supreme job security. The downside of this kind of lifestyle is that it can be tempting to save the bare minimum and end up with a sparse retirement. Becky’s lifestyle can become a hindrance if she wants to continue to live the high life after her working years are done with.

The good news is that she can save up the $4 million or so she needs if she can slightly curtail her spending today. Keep in mind that for an extremely high-income individual, even a few thousand extra dollars put away in a year from the beginning can have a tremendous impact on where they end up later on down the line. So, if Becky saves and responsibly invests 10% of her income, which will start at $20,000 per year and average 5% more per year, she will have $1 million by around age 75 not counting compound interest. If she can cut back on a few luxuries such as living in a slightly smaller or less well appointed place or travel coach, she may be able to save 30% (starting at $60,000) per year without a substantial drop in her lifestyle and have $1.3 million by around age 50. Counting compound interest, if she starts out by age 27 she will have close to $5 million by the time she is 57 years old.

Keep in mind that this assumes an annual rate of return of 6% and does not account for inflation or short- term market fluctuations. While high income individuals initially have a huge advantage, particularly if their incomes start out far higher than those of their poorer contemporaries, they often fall into the trap of having to have the best of everything immediately. Each year of compound interest Becky can tap into can add tens or even hundreds of thousands of dollars to her retirement bottom line. By the end of her career, each additional year she puts off retiring will add an average of around $300,000 in interest alone to her bankroll.