I am calling on BS to want $ 1 million to retire (and different unhealthy guidelines for retirement).
Ann Brenoff’s “On The Fly” is a column about navigating as we get older – and a few other things.
The big question people always ask themselves in retirement is “How much money do I need to save to retire comfortably?” And the big answer – $ 1 million – gets many of us on a head-first-tail spin.
But before you say, “I’ll take the cat food in bulk, please,” consider the following:
A lot of what you hear about age counseling is 50 shades of wrong. And yes, I would include the idea that you have to save $ 1 million in it. It’s time to reconsider some popular “truths” about retirement. (No, this doesn’t give you permission to stop saving!)
1. The advice “you need $ 1 million” has never really been general.
When the financial planning and money experts said that $ 1 million was the magical amount you need to retire comfortably, they didn’t really mean everyone of any age. It really only applied to people who were currently at or near retirement age. Indeed, if your retirement took decades, you would need more money. So raise the bar for your impossible dream.
This is due to inflation, which is falling apart.
Mark Avallone, president of Potomac Wealth Advisors and author of Countdown to Financial Freedom, told CNBC last year: A 67-year-old baby boomer retiring today with $ 1 million can have an annual income stream of $ 40,000 Generate Dollars assumes a payout rate of 4 percent.
But Gen-Xer, who is 42 and retiring at 67 with $ 1 million in the bank, will only have $ 19,000 a year after inflation devastated his savings. And 32 years of millennial planning to retire with $ 67 million in savings will actually be below the poverty line.
Yes, million dollar poverty. This universally applied piece of advice, “You need $ 1 million to retire”, has never been a one-size-fits-all solution.
2. It also ignored the elephant in the room.
That $ 1 million goal also has a fatal flaw: the projected annual income from your investments is actually pretty fluid, not set in stone, and certainly not guaranteed.
What you will make by investing $ 1 million or any amount will depend on the direction the markets are headed. When the markets collapse, your portfolio can quickly shrink from $ 1 million to $ 500,000. Do you think it couldn’t happen? The Dow hit its pre-recession high on October 9, 2007, when it closed at 14,164.43. Less than 18 months later, on March 5, 2009, it had fallen more than 50 percent to 6,594.44.
3. Most pension recommendations are based on the 4 percent rule, which is flawed at best.
This rule was introduced by William Bengen, a financial planner who believed that retirees could take 4 percent off their investment portfolio every year and run out of money for at least 30 years. To do this, retirees needed a portfolio that was 60 percent stocks and 40 percent bonds, and a commitment to deduct only 4 percent per year (adjusted for inflation).
This is a case where the devil lives in the details.
The 4 percent rule is based on the idea that all of our portfolios are a precise 60/40 mix that doesn’t take a person’s risk tolerance into account. That is a big deal and a big omission. How much of a gambler are you with your retirement savings?
If you are risk averse, like many who are about to retire, you may prefer to put 80 percent of your investments in bonds, which are believed to be safer but have less financial impact. If your risk tolerance is such that your investments are split other than 60/40, the 4 percent rule will be messed up.
4. The rule of ‘multiply by 25’ is also imperfect.
The rule “multiply by 25” and the 4 percent rule are often confused with one another, but have very different purposes. The 4 percent rule is an estimate of how much you can withdraw without going broke. The rule “multiply by 25” tells you how much you need to save based on how much you want to spend.
The rule “multiply by 25” states that you have to multiply your desired annual income in retirement by 25. So if you wanted to have an annual income of $ 50,000 per year, you would need to save $ 1.25 million. To withdraw $ 60,000 a year, you need $ 1.5 million.
This calculation is incomplete for several reasons, one of which is because it does not take into account the other sources of retirement income you may receive – specifically social security, private pensions, or income from other sources such as rental property or parts. Time jobs. All of these things should be considered before determining how much income you will need for your savings.
But it also doesn’t answer a much bigger and looming question: How the hell is someone in their twenties or thirties supposed to know how much they need to live 50 years in the future? How can you guess exactly what financial events are ahead of you? Will they inherit money or spend their own savings on caring for a parent? Have they bought a house and paid it back or will they still be paying the rent? Do you need to help your adult children repay student loans?
You can also ask the Magic 8 ball.
5. Many tips for retirement planning should have an expiration date.
This 4 percent rule was developed in the mid-1990s when bond yields were higher than they are today. It’s a shame that bonds are no longer growing as they did years ago. Long-standing low interest rates have made bonds and CDs less attractive compared to stock returns.
Why do we still base a retirement plan on the idea that 40 percent of our investments should be in bonds?
And another dated premise for retirement: with the 4 percent rule, you can extend your retirement savings to 30 years. However, some of us may not need a 30 year retirement income. we may need less or more. Many people are now working past the traditional retirement age. And while longer life expectancy has changed the picture, it’s still only 78.7 years in the US
The Pew Research Center analyzed data from the Bureau of Labor Statistics and found that 19 percent of 70 to 74 year olds were still employed in the first half of 2017. That is around 8 percent more than in the mid-1990s, when the 4 percent rule was first introduced. And while optimism is a beautiful and miraculous thing, only 10 percent of today’s 65-year-olds will be over 95 years old, according to predictions from the Social Security Agency, which begs the question of why we all need to plan a 30-year retirement. Most of the “elders of the elderly” will be women who, as a population group, earn less and save less money than men, but have a higher life expectancy.
But why are we encouraged to prepare for the nuclear retirement option when it is not necessary for most of us?
6. The $ 1,000 monthly rule is either the cherry on your cake or the pie in the sky.
This rule of thumb is that for every $ 1,000 per month that you want to retire, you need to save $ 240,000 (some say $ 250,000).
What could be really useful, of course, is to attach this advice to a little guide, since we clearly fail the savings test. (Make this guide related to public order.)
Around half of all US households have no retirement accounts at all, says the Government Accountability Office. No pension, no 401 (k) or IRA. And these are not just young people who are enjoying themselves now and want to take care of it later. According to GAO, nearly 30 percent of households aged 55 and over have not saved anything for retirement.
And yes, that’s scary.
According to the recent 2018 report by the nonprofit Transamerica Center for Retirement Studies, we are all quite concerned about having enough money to retire, with Gen-X being the most concerned. Only 55 percent of Generation X workers said they were “somewhat or very confident” that they can retire fully, compared to 67 percent of millennial workers and 62 percent of baby boomers.
To sum up why our retirement rules may not exactly lead to the promotional picture of a hand walk on the beach: Nobody can really tell how much money you will need to retire. Nobody knows how long this money will take you, what lifestyle adjustments you might want to make in retirement, or what unexpected expenses can disrupt your best plans.
The best answer might be: own your retirement instead of letting it own you.
Save as much as you can and remember that it is not only the goal of retirement that matters, but the way you get there too. When the music stops, you have what you have and you will adapt your lifestyle to it. You can do it.