Karen lives in Texas and is age 46. Her annual income is $55,000. Her goal is to retire on 80 precent of her income at age 65. She asked me for help to verify the numbers that proves she can retire at her goal age.
Karen said she should easily be able to accomplish this objective because she is saving the 5 percent maximum she is allowed in her employer’s retirement 401(k) and they match her contributions. So the number to use is 10 percent per year of $55,000, which is $5,500 going into her tax-deferred retirement account.
Using my Hewlett-Packard 10bII hand-held calculator and a 4 percent rate of return (which is a common return rate for employees unfamiliar with playing the market and without the time or means to take a chance on riskier investments), I calculated that her annual $5,500 deposits would be worth $156,141 in 19 years when she retires. I then asked Karen what she currently has in her account. Answer: $52,435. Adding the $52,435 and the $156,141 together means she will have $208,576 at retirement.
For Karen to retire on 80% of her current income at age 65 she will need $44,000 annually. She wishes to use her Social Security benefit in this calculation, which is $1,500 a month. This means that Karen will need to withdraw $2,166 from her 401(k) retirement fund each month after age 65 in order to meet her needs. My calculations show that if she has a balance of $208,576 at age 65 and receives a 4 percent rate of return annually on that sum while withdrawing $2,166 monthly, she will run out of money after 9.5 years. She would be 74 years old and be totally dependent upon Social Security income alone.
When I discussed these numbers with Karen she totally objected. She asked why in the world she would only have 9.5 years of income at retirement when she puts in the “maximum amount of money allowed”? Answer: The math doesn’t lie. When a person takes the time to prepare accurate numbers, they discover that 98 percent of all workers will only have five to six years of retirement money (largely because they’ve bought into the idea of saving for retirement using a 401(k) or IRA alone). And in terms of today’s mortality rates, the average person reaching age 65 will live to age 83 for men and 87 for women. You can see the dilemma. What can a person do to make ends meet when they will literally be out of money so soon after retirement?
Short answer: Work longer, and spend less so you can save a whole lot more money before and after retirement. In Karen’s case, she went from ecstatic about her retirement future to fully-depressed. She was so shocked to find out she would only have $208,576 she became humbled and very teachable. We then started talking about solutions.
Important Points to Consider
- It’s not about getting a bigger rate of return on your invested dollars. Rather, it becomes necessary NEVER to lose any of it. Will Rogers has said, “I am more concerned about the return of my money, than on the return on my money.” As a person gets within five to 10 years of retirement, they should vigorously protect their money from any kind of loss.
- A wonderful tool to be used to get more income at retirement is to use an insurance company. They spread the risk out over millions of people and can give you income you cannot outlive. And don’t be misled by the bad reputation insurance annuities have gotten because of the loss in the market of variable annuities. Not all annuities are “variable,” in fact only 7 percent of all annuities are variable. An annuity can provide extra income if a person needs long-term care. Annuities can add extra life insurance upon early death soon after retirement. Annuities can be indexed with the S&P market and if it goes up, you get the up. If it goes down, there’s no loss of principal.
Other Strategies that Can Help Solve Retirement Woes
Get a part time job and stay involved after retirement. As you could live to age 83 or 87, why not earn your basic expenses so you can have confidence that you won’t run out of money. It isn’t ideal to keep working after age 65, yet maybe for you it is. Some people feel younger and stronger when they stay involved with others and active in the work force. One example is the amazing life of Colonel Sanders, who established the Kentucky Fried Chicken fast food restaurants. At age 68 he had an idea for chicken that he thought was worth offering to many local restaurants. If they would use his special seasoning to cook their chicken, he would split part of the profits they made from the chicken. He cooked up his chicken recipe for over 1,000 restaurant owners without much luck until he found Pete Harmon in Salt Lake City who actually took him up on the deal. From Harmon’s restaurant on 39th South in Salt Lake the famous KFC franchise exploded and the rest, as they say, is history — and all after Colonel Sanders should have been long “retired.”
Don’t compare yourself with others. When you compare and you don’t really know the details of whoever you are examining, you are guaranteed to be wrong. It can depress your thinking and your confidence wanes. Don’t worry about how massive your family or friends’ retirement is going to be — just focus on what you need and work to achieve it. If you worry that you don’t have as much saved up as someone else or that you don’t have a guaranteed pension, or that others are already traveling while you still have to work, you will not have what it takes to look for creative solutions. “Retirement,” as defined by our culture has come to mean the magical age of 65 as the time that you suddenly “stop working.” But I have found in coaching thousands of people that this can be a very limiting view of life. We need to stop thinking about retirement in this way. Define what it means to you and the age it actually needs to happen for you and work to meet the goals surrounding those decisions.
You are what you are. You have made many decisions that have determined where you are to this date. Face your own reality and don’t kick this “retirement can” down the road any further. Do exactly what I prescribe at the beginning of this post and see for yourself when you might be able to retire. It may not be 60, like you wanted, or even 65, but that doesn’t mean the end of the world. Remember this is your life and you only pass this way one time. Nobody knows what the future holds. Decide now what you want to do for the rest of your life and go after it. Have a purpose for retirement planning and what you might accomplish so you can get excited about what you are doing to help others and help yourself.
I started with Karen’s story, and I will end with it. Karen was so glad she found today that she will not have the money she thought at retirement rather than discovering it 19 years down the road when it will be too late. Now she has a plan in place to help her do more than just squirrel away 401(k) savings, hoping it will be enough. She has been able to consider other options, including real estate and a small home-based business she has always wanted to run for extra profit.
Don’t delay. Do what I have suggested and learn to use a financial calculator (or find a coach or mentor who does) and forecast your specific numbers so you will know exactly what you are up against, now before it’s too late.