View Full Version : Retirement for most people is like asking a dog to dance on two legs
Just saw this interesting article in the NYT about how seventy-five percent of people nearing retirement age in 2010, had less than $30k in the bank. The author says she's calling for the government to set up safety-net retirement accounts for workers as an adjunct to social security -
http://www.nytimes.com/2012/07/22/opinion/sunday/our-ridiculous-approach-to-retirement.html?src=me&ref=general
ApatheticNoMore
7-24-12, 3:50pm
Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.)
well that part isn't difficult (come now even the 30% isn't impossible), but it will never get you 20 times of what you earn in retirement money saved up. The way I figure to have 20 times what you earn with an assumption of working for 40 years you have to save 50% of what you earn every year for 40 years. Isn't it basic math: 40 years saving 50% of what you earn equals 20 times what you earned saved up. Never but never ever ever factor in earning a real rate of return (or maybe any return) is my philosophy! Of course the expectation that people save 50% of what they earn for 40 years is a bit crazed (though I could see it working a bit better with dual incomes than otherwise).
I couldn't access this article but the idea of having another forced retirement plan by the government (along side Soc Sec) would infringe on many people's personal freedom to much too large an extent.
Well written article. I do think that if the cost of health care were reasonable we would not need these outrageous sums. The article makes a good point that to "win" the retirement game you have to be lucky enough not to have a major illness in the family, not to have a spell of unemployment, and I would add if you are able to avoid divorce (no judgement, it is just a fact that divorce is expensive). AND I would add that you have to somehow figure out how to opt out of the crazy consumer madness of Western culture. There are people on these boards who have had all three of major challenges, but they're still living or on target to live a decent retired life because they were able to outsmart the culture.
I would like to suggest that not many of us "need" two million PLUS SS to have a good quality of life in retirement. I feel that's fear-mongering, and if you DO need two million to live out the end of your life, then it's probably because you've spent your life buying in to the culture, as cjones said.
I've some financial hiccups, and I'm doing what I can to pay off my home and save. If all goes well, I'll live in a paid-for home and have maybe one-tenth of that two million, plus SS. My MIL had exactly that, and she had a quite comfortable retirement.
I do agree that there are too many grasshoppers out there and not enough ants, however.
ApatheticNoMore
7-24-12, 4:49pm
I couldn't access this article but the idea of having another forced retirement plan by the government (along side Soc Sec) would infringe on many people's personal freedom to much too large an extent.
I look at it more as: just save Social Security. Just do that. If I thought there was both the money and the inclination then maybe an additional program but as it is our politicians half the time can't seem to wait to destroy the existing programs! (medicare and social security - medicare much harder to solve with this messed up medical system though). And they already have raised the age of eligibility (68 for me!) The article is an interesting counter push to all that destroy (or "privatize" - ie crony capitalize - in the fricken stock market) social security nonsense though.
I look at it more as: just save Social Security. Just do that. If I thought there was both the money and the inclination then maybe an additional program but as it is our politicians half the time can't seem to wait to destroy the existing programs! (medicare and social security - medicare much harder to solve with this messed up medical system though). And they already have raised the age of eligibility (68 for me!) The article is an interesting counter push to all that destroy (or "privatize" - ie crony capitalize - in the fricken stock market) social security nonsense though.
But how do yoiu determine "how much" is enough per person? Like Cathrine pointed out above, many people need (or choose to need) much less than others in retirement. Should those same people be forced to have more of their earning be taken from them in order to have a larger nest egg they may not need in the future? While I understand the premise of this "lets force them to save a certain % of their income so that way they won't be need extra governmint aid when they are retired" I'm not sure I agree that is the way to go. Maybe making more tax deferred products available (IRA's, 401Ks) and having some government backed insurance to keep those secure. That way each person can make their own choices about what to do with their earnings. I'm all for Soc Sec, and agree that it needs to be protected for the future, but I don't see the need for a second program. And what about those of us who retired early and chose to live off our savings? Will we be required to continue funding such a program out of our savings? And what's to stop the government from accessing or mismanaging those funds and they end up in the same boat as Soc Sec.? Well I'll try to read the article again as it may cover all that stuff.
Spartana, that's what I was thinking too. Maybe privately managed retirement accounts aren't doing so hot, but neither is Social Security.
I agree with Catherine and cjones too that the numbers that get thrown around for retirement are a little wacky. My dad is 64 and will retire in 2 years. He has a six figure income, but will have about $45,000 a year in retirement including social security. He lives on less than that now. He'll have a paid for house, a paid for car and in his case, because we live together, he will not have utilities and taxes to pay either so that $45,000 has to pay for stuff like food, gas for his car and his iPhone bill. He doesn't need two million dollars because his needs are reasonable.
I think that what stella is pointing to is important.
what my sister and I have been planning for since we were teens is basically being able to take care of my parents when they retire.
A few things should be noted. First, my parents aren't good savers. So, we don't expect them to actually have a retirement. Thus, we knew that we would likely need to care for them. About 3 years ago, we took out long term care insurance for both of them to cover those costs should we need to.
Second, my parents don't plan on retiring until 75 or so, and even then, my father wants to retire to academia. He really *loves* his work -- and he wants to teach what he does going forward. Considering his speciality, he should be able to get an adjunct professorship and earn a decent on-going income until he can no longer do that work (whenever that would be).
I suggest that my father will likely live into his 80s (he's currently 66 as of 31 August) -- with the possibility to live into his 90s -- and my mother even longer (she's 5 years younger than my father, and will likely live into her 90s or even 100s, considering the family history).
My sister and I have already discussed housing options. One option that we have is purchasing a historic apartment building in my sister's neighborhood. it will need reno, but then because the area is gentrifying, we can rent it out at a fairly good price. Then, when my parents retire, move to my sister's neighborhood, and my father works at one of the local universities -- it's an option to have close-to care with my sister. Likewise, her husband's mother can live there (she has massive retirement, so they'd charge her rent), and then the other apartments would be rented out to quiet professionals and the like.
I've started to write up a business plan and also found a property management firm through a friend of mine (who owns property there and uses this firm), and the next step is getting a good lead on renovators. My sister's been taken to the cleaners twice already, though she and her husband enjoy and can do some of the work themselves. I have zero investment capital, but my sister has some, and I think we qualify for some SBA loans as well as historic preservation grants (my sister is fielding this research). From there, it's just a matter of getting a decent bank mortgage. No more forward progress than that, but still, a decent thing.
My "investment" is in sweat equity and such as well, though my vested interest would be relatively small.
Anyway, it's a good investment assuming there's a rebound in the property market. And honestly, my sister's property has maintained it's value since the bubble burst (and she's not in an upside down mortgage), so we might be in good shape that way. But it's good in that my parents would have a secure place to live, as the loans on the property would likely be 15 yrs, and we're looking at making sure the rent can cover more than just the basics but is still what the local market would bear. That's my work, anyway. LOL
End of the day, I think that we're just going to have to be like Stella and her dad. Even if my parents had millions, the reality is that it could all disappear in a moment, and then all you really have is family (or the kindness of friends/strangers).
While I still save for retirement, it's modest to be sure, and I hope that even if we are wealthy, DS will keep an eye out for us.
Well written article. I do think that if the cost of health care were reasonable we would not need these outrageous sums. The article makes a good point that to "win" the retirement game you have to be lucky enough not to have a major illness in the family, not to have a spell of unemployment, and I would add if you are able to avoid divorce (no judgement, it is just a fact that divorce is expensive). AND I would add that you have to somehow figure out how to opt out of the crazy consumer madness of Western culture. There are people on these boards who have had all three of major challenges, but they're still living or on target to live a decent retired life because they were able to outsmart the culture.
This is a good summary of what it takes to reach retirement with a healthy net worth. Not all of it is under our control. But crazy consumer madness IS.
I'm not up with Nanny G confiscating more of my money to go toward yet another social welfare program so that those poor fools with only $30,000 in savings because they've spent their money on consumer trappings will be safe and warm. That is their problem, not mine.
I'm not up with Nanny G confiscating more of my money to go toward yet another social welfare program so that those poor fools with only $30,000 in savings because they've spent their money on consumer trappings will be safe and warm. That is their problem, not mine.
Iris Lily, I know we're not on the same end of the political spectrum, but here's one place where I absolutely agree with you. I'm tired of privatizing profit and socializing loss, and that goes for rabid consumerists who can't save any money as well as it goes for greedy presidents of "too big to fail" banks. I'm 100% in favor of helping people who've gotten a raw deal out of no fault of their own (skin color, learning disability, freak job-related accident, refugee from a war-torn country). But the people who didn't identify the oncoming train despite many toots on the horn and screaming brakes and wheels ... nope, sorry.
cattledog
7-24-12, 10:23pm
I don't know how you can be 50-something with nothing saved and not be in a utter panic. Especially when jobs aren't safe. I remembering being in a panic about retirement at age 25. I'm glad I felt that way then because the years fly by.
I think the 2 million dollar figure assumes: 1) you are going to live off of just the interest this money generates and 2) that you have spent every penny that you earn (using 20 times your earning, versus 20 times your spending). This is probably not the case for many of us. I don't have dependents, so I don't need to leave a large legacy. I can use up some of my principal in my retirement- though hopefully only at the very end. I've never lived on my entire salary, so why would I need to start in retirement to have a larger income stream? Day to day costs often go down, with the exception of health care and special things you want to do in retirement like travel.
Apathetic- a large portion of the money accumulated over a working career would be the compounding interest. There's what's known as "the rule of 72"- you divide 72 by your interest rate to tell you how many years your money will double. If you can get a 7% return, your money will double every 10 years (so over a 40 year working career, the initial money would have quadrupled). For a 12% return (unheard of now, but there have been many past years where this was possible), your money would double every 6 years.
I don't know how you can be 50-something with nothing saved and not be in a utter panic. Especially when jobs aren't safe. I remembering being in a panic about retirement at age 25. I'm glad I felt that way then because the years fly by.
So we should panic for the rest of our lives? Sorry, that's not for me. It's good to approach life with some reasonable caution and it's definitely good to live below your means and save the rest and have a plan . But panic is a self-fulfilling prophecy that will negatively impact health and quality of life, so I'd rather live in the moment doing what I can every day to work and save, and trust in God and my own resources for the rest.
So we should panic for the rest of our lives? Sorry, that's not for me. It's good to approach life with some reasonable caution and it's definitely good to live below your means and save the rest and have a plan . But panic is a self-fulfilling prophecy that will negatively impact health and quality of life, so I'd rather live in the moment doing what I can every day to work and save, and trust in God and my own resources for the rest.
I'm with you Catherine. I happen to be one of those pushing 50 with nothing saved. (But I do have a pension and look forward to SSI and will have my school loans and house paid off when I retire and I don't have to worry about losing my job unless they shut down the schools.) What's the point in panicking? I've done the best I could do during the time I've been working.
I've recently come to the realization that there is really no reason to worry about ANYTHING. Truthfully acknowledge what the situation really is, make a plan for it and move on. Worry doesn't make it any better, doesn't enable you to act in a reasonable, productive way and always makes you miserable. It's net impact is either neutral or negative. So what's the point?
cattledog
7-25-12, 10:21am
No, I didn’t say live life in a panic. At some point, don’t people look at their account statements, think about the future and figure that they don’t have enough? Or they just think that it will all work out without any effort or planning? I dunno, maybe they are planning to move in with family or are counting on an inheritance. Is there ever an a-ha moment that makes them change their lifestyle? Do people ever estimate what they will receive in benefits for retirement? How does their current lifestyle compare? If it’s considerably more, how will they reconcile the gap? If they can make the necessary changes in ten or fifteen years, then why not do it now and save the difference?
iris lily
7-25-12, 10:24am
I'm with you Catherine. I happen to be one of those pushing 50 with nothing saved. (But I do have a pension and look forward to SSI and will have my school loans and house paid off when I retire ...
And that's great, you don't need $2 million. With 2 streams of income and house paid off--that's reasonably stable.
cattledog
7-25-12, 10:35am
I'm with you Catherine. I happen to be one of those pushing 50 with nothing saved. (But I do have a pension and look forward to SSI and will have my school loans and house paid off when I retire and I don't have to worry about losing my job unless they shut down the schools.) What's the point in panicking? I've done the best I could do during the time I've been working.
I've recently come to the realization that there is really no reason to worry about ANYTHING. Truthfully acknowledge what the situation really is, make a plan for it and move on. Worry doesn't make it any better, doesn't enable you to act in a reasonable, productive way and always makes you miserable. It's net impact is either neutral or negative. So what's the point?
A pension is as good as money in the bank. For an income of $15K a year, you'd need around 400K to generate the income. That's nothing to sneeze at.
awakenedsoul
7-25-12, 11:01am
Interesting article. What has helped me most has just been to spend less. I remember Suze Orman saying on Oprah, "Live on half." That's what I did, and it's really worked. Right now it costs me $20,000. a year to live luxuriously. If I scrimp, it costs me $12,000. My home and car are paid off, and there are also reverse mortgages. I wouldn't trust the 401 K's with my money. Our government overspends, too. (As Spartana posted.) I feel best right now with a large cash cushion and investing in land. My orchard and veggie garden give me a sense of security, too. Food is one of my largest expenses. According to her calculations, I need $400,000. to retire. If I have a bare bones budget, $240,000. That's a lot less than a million dollars! The corporate mentality really teaches people to overspend and waste money. I like the self disciplined approach. I really don't need a car or an expensive phone, either. I could cut back even more and save that money...
It really seems like the key is to do it now.
I worry about it when I read other's retirement plans. Otherwise I don't think about it too much.
We're 45 and 49. We've got a growing investment IRA from DH's former employer that we haven't been able to add anything to in the last 10 years and it has done well. But it's not enough to retire on. We'll have to continue to work until one of us dies or we receive our inheritances (DH's will be money, mine will be 50 acres or more + money). I hope that within the next 10 years we can get all our mortgage paid off (or sell and buy something less expensive or move to the farm) and start investing again.
Zoebird - wow, your parents are so lucky to have you! Even though you've had to arrange all of this, they must have taught you something about fiscal responsiblity and planning. I wish I had ever known someone like you growing up!
This is kind of hijacking my own thread, but - how much money up front would you need to purchase that historic building? DH and I have rented those for years, we love them, and it would only ever have been a dream to be able to buy one. I assume you'd get a loan and repay it with the rental income? Anyway, good on you for putting things together so beautifully for your self and your parents :)
I think that what stella is pointing to is important.
what my sister and I have been planning for since we were teens is basically being able to take care of my parents when they retire.
A few things should be noted. First, my parents aren't good savers. So, we don't expect them to actually have a retirement. Thus, we knew that we would likely need to care for them. About 3 years ago, we took out long term care insurance for both of them to cover those costs should we need to.
Second, my parents don't plan on retiring until 75 or so, and even then, my father wants to retire to academia. He really *loves* his work -- and he wants to teach what he does going forward. Considering his speciality, he should be able to get an adjunct professorship and earn a decent on-going income until he can no longer do that work (whenever that would be).
I suggest that my father will likely live into his 80s (he's currently 66 as of 31 August) -- with the possibility to live into his 90s -- and my mother even longer (she's 5 years younger than my father, and will likely live into her 90s or even 100s, considering the family history).
My sister and I have already discussed housing options. One option that we have is purchasing a historic apartment building in my sister's neighborhood. it will need reno, but then because the area is gentrifying, we can rent it out at a fairly good price. Then, when my parents retire, move to my sister's neighborhood, and my father works at one of the local universities -- it's an option to have close-to care with my sister. Likewise, her husband's mother can live there (she has massive retirement, so they'd charge her rent), and then the other apartments would be rented out to quiet professionals and the like.
I've started to write up a business plan and also found a property management firm through a friend of mine (who owns property there and uses this firm), and the next step is getting a good lead on renovators. My sister's been taken to the cleaners twice already, though she and her husband enjoy and can do some of the work themselves. I have zero investment capital, but my sister has some, and I think we qualify for some SBA loans as well as historic preservation grants (my sister is fielding this research). From there, it's just a matter of getting a decent bank mortgage. No more forward progress than that, but still, a decent thing.
My "investment" is in sweat equity and such as well, though my vested interest would be relatively small.
Anyway, it's a good investment assuming there's a rebound in the property market. And honestly, my sister's property has maintained it's value since the bubble burst (and she's not in an upside down mortgage), so we might be in good shape that way. But it's good in that my parents would have a secure place to live, as the loans on the property would likely be 15 yrs, and we're looking at making sure the rent can cover more than just the basics but is still what the local market would bear. That's my work, anyway. LOL
End of the day, I think that we're just going to have to be like Stella and her dad. Even if my parents had millions, the reality is that it could all disappear in a moment, and then all you really have is family (or the kindness of friends/strangers).
While I still save for retirement, it's modest to be sure, and I hope that even if we are wealthy, DS will keep an eye out for us.
ApatheticNoMore
7-25-12, 11:19am
Apathetic- a large portion of the money accumulated over a working career would be the compounding interest. There's what's known as "the rule of 72"- you divide 72 by your interest rate to tell you how many years your money will double. If you can get a 7% return, your money will double every 10 years (so over a 40 year working career, the initial money would have quadrupled). For a 12% return (unheard of now, but there have been many past years where this was possible), your money would double every 6 years.
when you know it won't be too long until you approach 10 years of saving for retirement and you have less than you put in (though only slightly less), isn't it time to throw in the towel and go with CDs entirely already or something? Because that pretty much what investing in stock market mutual funds has done for me and why I don't figure in any return on my money.
sweetana3
7-25-12, 11:22am
It must have a lot to do with the choices made in the stock market. We have bounced around but are significantly ahead of where we started. We have mostly index funds now after years of individual stocks and managed accounts. We do not use a financial planner except to get some of their research.
sweetana3
7-25-12, 11:26am
I also want to say that Mom in law now lives in an apartment in a really big senior complex fairly near us. It provides a one level, no stairs, walk in shower, activities and a 6 day a week bus system. If we need any personal or medical services, there are a number of companies we can turn to for hourly help. We are extremely happy with the whole situation right now. It is $700 a month plus cable and phone. Doubt if we could do any better.
Often people dont realize the options for senior living that are right in their own towns. The very good options dont have to advertise since they are really desireable and often fill with word of mouth. Worth doing research well in advance of need to help mitigate crisis issues.
Zoebird, Do your parents realize that they have a couple of amazing daughters? I am super impressed that the two of you have been aware of this issue since your teens and are actively making a smart plan to address it.
Regarding Grasshoppers vs. Ants: On the one hand, I too am sickened at the thought of having to pay higher fees, taxes, etc. to support selfish idiots like my ex-sister in law who takes 2 vacations a year, lives in a McMansion, and has a running multi-thousand dollar credit card debt...and doesn't care. And I want to go ballistic at the thought of having to subsidize all the treatment for hearing loss that is going to hit the people who listen to their "music" on earbuds that blast that sound throughout the subway car.
On the other hand, what about the good people who tried to do everything right and still ended up in a terrible place? At least half of my friends have at least one member of the family who is desperately ill and non-functioning and in need of significant financial help. That right there will suck out your retirement fund, and no amount of materialism opt-out will change that.
So how do you sort out the latter from the former? The jerks versus the unlucky? It would make the U.S. tax code look like Geico, purportedly "so easy a cave man could do it" in comparison.
I agree with the concerns about having the guv'mint develop yet another program. Let them make more subsidized housing available for seniors and fix health care and yes, show us you can at least get Social Security running properly before we let you loose on a whole new chemistry set.
It must have a lot to do with the choices made in the stock market. We have bounced around but are significantly ahead of where we started. We have mostly index funds now after years of individual stocks and managed accounts. We do not use a financial planner except to get some of their research.
We, too, have encountered some "what were we thinking" moments over the years, but we are far ahead of where we could have hoped to be with just savings accounts and CDs.
ANM, the concern with using savings accounts and CDs exclusively as a hedge against loss of principal is that they don't do nearly enough to hedge against higher prices and inflation. If inflation is mounting at 3-4% a year and all you can get is 1.5-2% on liquid savings instruments, you're still losing money. In fact, you're guaranteed to be losing future buying power, while people who invest in stocks and bonds and such on average beat inflation. That's why most folks move some -- but not all -- of their money to more conservative investments later in life. They may miss the huge bull runs, but they also lower the chance that they'll lose money when the market slips significantly just at the time they need to start drawing on the money.
when you know it won't be too long until you approach 10 years of saving for retirement and you have less than you put in (though only slightly less), isn't it time to throw in the towel and go with CDs entirely already or something? Because that pretty much what investing in stock market mutual funds has done for me and why I don't figure in any return on my money.
My wife and I both retired at 50. Much of that was possible due to investments in the stock market. I don't see how anyone would be down over the last 10 years with steady contributions over the years. My last year of full time work was in 2006, but I worked enough in 2007 to put the last $20,000 in my 401K plan, since then it has not been touched. Even it is worth more than its 2007 value, my only regret was not being to add to it from 2008 to present. I'm worth more now than in 2007, and have not had a job, pension, or any income except investments.
This is a good summary of what it takes to reach retirement with a healthy net worth. Not all of it is under our control. But crazy consumer madness IS.
I'm not up with Nanny G confiscating more of my money to go toward yet another social welfare program so that those poor fools with only $30,000 in savings because they've spent their money on consumer trappings will be safe and warm. That is their problem, not mine.
Yep
gimmethesimplelife
7-26-12, 10:56pm
I guess here is where I post my standard retirement answer....I'm not staying in the US to retire - though honestly this plan hinges on the currency retaining some value - who knows long term? But at the moment anyway, there are a number of countries one can get permanent residency for that have lower costs of living and saner health care.....I know for some leaving is not an answer but for me - once again, as long as the currency retains value - it seems to be the only practical answer. Rob
jennipurrr
7-28-12, 8:22am
I had several qualms with this article:
It looks at those nearing retirement age (50-64) but research behind the article looks only at defined contribution plans (keogh, IRA 401k/403b). While defined benefit plans (pensions) have been dwindling in the recent past, I do wonder how many of this age bracket still have them? DH argued with me that it was not a significant enough number to matter, but I think the research should have at least addressed it.
Like others have mentioned, the article says 20x income. I think looking at spending is obviously a more accurate number to calculate with, but I have yet to see a mainstream media piece do that.
The article puts saving 7% of your income in the completely ridiculous, totally impossible territory along with figuring out when you are going to be laid off and determining your exact date of death. REALLY? Saving 7% is that difficult? Its not necessarily easy to save money but its certainly not an impossible task like the other two.
In addition, it does not once mention the employer match benefit, common among these retirement plans. I wasn't sure how common it was, but I did find this doc (selling 401k services to companies I believe - https://www.am-a.com/company/research/wp_match.pdf) from April 2012 "more than 93 percent of companies make some sort of contribution to employees’ retirement savings, and nearly 40 percent use a matching formula in order to do so." So, there are a lot of employer funds available. For instance, my employer matches dollar for dollar up to 5%. My previous employer matched 50 cents to 10%. So, right now for me to achieve the 7% savings rate I would actually only have to put in 3.5% of my own money!
DH and I have never been super fans of the 401k...we had other goals, such as paying off student loans and now paying down our mortgage, but for the past 8 years we have been putting up to the match in our 401ks (now 403bs), 5% for the majority of that time, and we have amassed a nice little cushion. The market hasn't been doing spectacular, I believe our earnings are fairly flat, but with our contributions and the match each of our retirement accounts has grown to more than the median of any group in the stats! And we are not raking in big bucks, based on the research linked, I have been in the third quartile for the duration of my career, DH eeked into the top bracket a few years ago, so no 1%ers or anything like that.
People bemoan the loss of pensions, but pensions aren't free ride for the participants. 7.5% of my income is taken out off the top of my check each month for my pension plan and I don't have an option regarding that. My suggestion to the 401k issue would be to make the 401k an opt out rather than an opt in program for a small chunk of income, for example 5%. The plan could then put the money in a very conservative investment option like a money market account. I think a lot of people aren't signed up due to sheer laziness and these people could easily make due without that 5%.
ApatheticNoMore
7-28-12, 11:25pm
Like others have mentioned, the article says 20x income. I think looking at spending is obviously a more accurate number to calculate with, but I have yet to see a mainstream media piece do that.
The article puts saving 7% of your income in the completely ridiculous, totally impossible territory along with figuring out when you are going to be laid off and determining your exact date of death. REALLY? Saving 7% is that difficult? Its not necessarily easy to save money but its certainly not an impossible task like the other two.
7% isn't impossible (i'm hitting 20% almost without trying - not counting employer "matching" though as "matching" consists of .7% of income - yea less than 1% - and professionals go into work day after day, year after year for such generous benefits). 20 times your income (the gross income?) does sound completely impossible! Oh right, it's suppose to work: 1) save 7% of income 2) miracle happens 3) you have 20 times your gross income to retire on! :) If dreams came true ... oh wouldn't it be nice?
DH and I have been saving since our early 20s (now mid-late 30s), often way more than 7% so I'm hoping we'll be OK. However, if I calculate 20x our spending then that's what we need to shoot for, and as such we have about a quarter to a fifth of that saved, depending on the market. Which I only look at once per quarter. I do know several people who haven't saved anything, which is probably a minor crisis at 35 but becomes an increasingly major crisis as time goes on. Some of them really kind of don't have it (single parents) and some of them just haven't thought about it for one reason or another.
ANM, the concern with using savings accounts and CDs exclusively as a hedge against loss of principal is that they don't do nearly enough to hedge against higher prices and inflation. If inflation is mounting at 3-4% a year and all you can get is 1.5-2% on liquid savings instruments, you're still losing money. In fact, you're guaranteed to be losing future buying power, while people who invest in stocks and bonds and such on average beat inflation. That's why most folks move some -- but not all -- of their money to more conservative investments later in life. They may miss the huge bull runs, but they also lower the chance that they'll lose money when the market slips significantly just at the time they need to start drawing on the money.
That's about my line of thinking, too. I purchased the maximum amount of I-bonds every year for a few years. Most of them pay 1% or less above the inflation rate but have generally done better than cd or savings. It is an example of the benefits of diversity in investing, as I would have never guessed at the time, but it has turned out to be one of my better performing investments. The compounding of inflation rates over the years for a young investor earning less than inflation in cds or other savings is going to add up.
I don't know whether I have kept goo enough track of my mutual funds stocks to say how I've fared, but I did get up enough courage to re balance my investments when stocks were down, so I think I've done ok. Next to diversification, I think occasionally re balancing is one of the top rules for investment planning. As Mitt already knows, there are also some tax advantages in the capital gains from the stock market. Interest from savings is taxed at your normal tax rate, which makes the current pitiful rates even more painful. Our tax laws are set up to encourage us to make risky investments in the stock market and punish the conservative saver.
It would be interesting to do some research on the topic, but it seems to me like modern families are not well versed in financial basics and assume an infinite stream of cash from credit. For example, expensive cell phone plans and cable TV seem to have become necessities. This isn't like a house payment where you hopefully build up some equity, but a routine spending outlay that over a lifetime is scores of thousands of dollars. Assuming there is an opportunity loss is this were invested, the net loss is even more. So maybe for the common non-frugal family retirement is indeed like a dog dancing on two legs.
There seem to be article that pop up like this every now and then and I think there is something to them. There are some trends for people to live further beyond their means in large houses, with nice cars, and careless spending habits. I think to get a more accurate picture, a person should use a good retirement planning calculator where you can tailor spending and saving at a personal level.
I thought the article was very good especially this point:
"Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you.
First, figure out when you and your spouse will be laid off or be too sick to work.
Second, figure out when you will die.
Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.)
Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.)
Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college.
Sixth, time your retirement account withdrawals so the last cent is spent the day you die."
Our 401K model has failed us. I am so glad we both took our money out of 401K investment funds and decided to manage our own money in CDs and BONDs - we continue to earn between 5-6% each year and we have hit our "number". However, I spent many years learning how to do so. I especially would like to thank YMOYL and these forums for helping me understand about money.
Also the article said 20x your salary when you retire. Our salary is not very high so it is completely doable.
In regards to the taking more money out for a forced retirement, I think it would be a great idea, because so many people do not do anything, but I thought that was what social security was. And I am not counting on SS, because the older generations will use it up before I get to that age. Neither my DH and I are planning on that money.
But we will save as much as possible on our own.
Oh, and one last point. People always talk about high inflation blah blah blah... Right now inflation is really low, and has been for the last several years. We do not buy lots of stuff and I think you really need to see how your own inflation is in comparison to what the economic folks say. Last year we were at a -4% inflation. This year, maybe not. So our investments in CDs and Bonds will keep working for us for a long while. Putting money in 7 year CDs was one of the best things we could have done, and 30 Year bonds are working out well too.
Oh, and one last point. People always talk about high inflation blah blah blah... Right now inflation is really low, and has been for the last several years. We do not buy lots of stuff and I think you really need to see how your own inflation is in comparison to what the economic folks say. Last year we were at a -4% inflation. This year, maybe not. So our investments in CDs and Bonds will keep working for us for a long while. Putting money in 7 year CDs was one of the best things we could have done, and 30 Year bonds are working out well too.
Inflation for the last few years hasn't been too much below historical averages. I think the most recent six month figures through May 2012 was an annual rate of 2.3%. I guess "really low" is relative.
http://www.usinflationcalculator.com/inflation/current-inflation-rates/
Where I get tripped up is that the government figure always seems less than that of a frugal person with the basics of health care, energy, and food being the a larger percent of the budget. They are saying food prices will be up 3-5% because of the drought.
SteveinMN
7-29-12, 11:56am
Inflation for the last few years hasn't been too much below historical averages. I think the most recent six month figures through May 2012 was an annual rate of 2.3%. I guess "really low" is relative.
Agreed. I would be quite amazed to find that we had deflation last year to the tune of 4%. Gasoline, diesel, and heating oil aren't cheaper. Food certainly isn't cheaper, and, as you noted, is likely to go higher as an effect of the drought. All depends on what one is measuring, I guess. I'm always a fan of knowing the sources and assumptions behind statistics.
ApatheticNoMore
7-29-12, 12:43pm
Agreed. I would be quite amazed to find that we had deflation last year to the tune of 4%. Gasoline, diesel, and heating oil aren't cheaper. Food certainly isn't cheaper, and, as you noted, is likely to go higher as an effect of the drought. All depends on what one is measuring, I guess. I'm always a fan of knowing the sources and assumptions behind statistics.
There's inflation, it isn't horrible, I've seen worse (peak of the boom - inflation threatened to get completely out of control!), but it's there. I don't buy diesel or heating oil, and it's hard to say gas is up that much as it's actually down the last few months from when it actually was going up (I'm continually surprised to see it below $4 a gallon lately - that seems so cheap). Food is DEFINITELY up (what can you do just try to use food more efficiently - loved the chopping up and freezing onions idea I linked to - and not waste it - it's not like I'm going to start eating at McDonalds all the time because food is up). Healthcare is up. The phone company raises the minimum landline bill every month. Much else is pretty stable in price though.
try2bfrugal
7-29-12, 1:12pm
We put a fair bit in TIPS and I bonds. I was surprised the rewrite of YMOL didn't mention TIPS. Historically the 30 years TIPS have been inflation plus ~2% yield, which solved the problem of putting money in Treasuries for safety but they keep up with inflation. As long as you buy at auction and hold them to maturity you are guaranteed to get your principal back. Right now 30 year TIPS are barely yielding above inflation because of low real interest rates, but still they will at least keep up with general inflation and if your personal inflation rate is low you can still come out ahead.
I like buying TIPS and I bonds because you can buy them direct from the Treasury and not pay any commissions to Wall Street. I would also like to move away from mutual funds and just start buying dividend paying stocks directly to cut out any management fees to middle men. It gets hard because we have tried to utilize our 401Ks and some of them have limits on the kinds of investments we are allowed. Fostering 401K plans that do not allow people to buy TIPS directly for retirement accounts is another way Wall Street forcibly skims money off the middle class. The TIPS funds do not have the guarantee of principal return and the managements fees are around .20 to 1% annually out of what is already a negative real yield on the shorter term TIPS.
Some of the 401k mutual funds take up 1% annual fees. There is a new service called Financial Engines that takes another cut of 401K money by advising people what funds to put their money in. So after inflation many people end up getting 0% real rate of return, if that, because any real returns they would have made after inflation is being skimmed off by Wall Street fees between the mutual fund fees and the advising fees of which mutual funds to pick.
Consumer Reports has a recent article on how mutual funds skim money off retirement accounts -
http://www.consumerreports.org/cro/magazine/2012/07/fees-skim-big-bucks-from-401-k-s/index.htm
T2bF, My mutual funds are mostly low management fee index funds, but I get tempted to have a few other things. I was looking at the Vanguard Dividend Growth Fund (VDIGX). It has some protection with its diversity and very low management fees. Just thought I'd mention it.
try2bfrugal
7-30-12, 1:07am
T2bF, My mutual funds are mostly low management fee index funds, but I get tempted to have a few other things. I was looking at the Vanguard Dividend Growth Fund (VDIGX). It has some protection with its diversity and very low management fees. Just thought I'd mention it.
Thank you for the suggestion, Rogar. I will be sure to check it out.
A pension is as good as money in the bank. For an income of $15K a year, you'd need around 400K to generate the income. That's nothing to sneeze at.
You can also save less if you decide to use up some of your principal over your lifetime and not just live off the annual interest amount. Takes a bit of finesse to figure out the amount of principal you can use each year without out living your money, but it's something many people do. Especially those who don't have heirs - like me. My retirement plans are already in effect (retired at age 42) and were pretty basic when I first quit work - paid off house with low property taxes, low utilities and low maintenance. A small governement /military pension (that i contibuted to over my working life) and medical benefits, a bit of savings in tax-deferred things like Bonds, IRAs, etc..., to suppliment my pension as I age, and debt free. I have discovered I onbly need a very small amount of money to live on - MUCH MUCH less than the article seems to think people need - and that inflation has been pretty much non-existent.
Spartana,
I know you've done this before, so could you either repeat or point out the link where you list your expenses? It's very inspirational, and I'd like to see it again.. someday, I MAY get to where you are.. once I can shake DH's business loan and his MIL's house, and the need to pay for health insurance, etc.
try2bfrugal
7-31-12, 4:47pm
Spartana, I have also found your posts very intriguing. It sounds like a fun life with very modest expenses. You have definitely given me some food for thought in retirement planning.
Spartana,
I know you've done this before, so could you either repeat or point out the link where you list your expenses? It's very inspirational, and I'd like to see it again.. someday, I MAY get to where you are.. once I can shake DH's business loan and his MIL's house, and the need to pay for health insurance, etc.
No links but back when I first retired I spent around $500/month for my basic expenses - i.e. food, pet food, utilities, gas for the paid for compact car, all insurances and taxes, etc... Then I budgeted another $500/month for extras that may arise (often didn't use that amount). Either for fun stuff like budget travel (camping road trips), entertainment (most of my entertainment is free or low cost), or to repair something if needed. I pretty much stayed in the $500/month range most months. Again, mostly due to having free or low cost activities, not having cable or home internet, very low property and income taxes, utilities, etc... For example my average electric bill was around $10/month. And the best part is that I never felt deprived in any way, shape or form. I had/have a VERY full life. I sold my house to travel full time awhile ago (and that has not worked out as planned becasuse of the sweet but yappy little dog I inherited) so have been renting a shared place that includes all utilities so spend a bit more now then when I owned a house. But I also no longer have to pay for insurances, taxes, maintenance and repairs and my "house" money is sitting in the bank earning interest. So I probably break even. But I will probably be coming a home owner again soon - by the winter most likely - so my expenses will probably change again. I'll be buying a small place with cash so am hoping my expnses go down again.
rodeosweetheart
9-17-12, 11:26am
Thanks, Spartana, you are most definitely an inspiration for me, too.
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