I find these numbers to be very hard to believe. I seem to remember there being studies from a couple of years ago when the market was much lower that cited averages being in the mid $40,000s an another study with a number closer to $80,000. So the market is up 75% from the low but averages savings has cut in half (or more)? Could people really have taken enough out to pay their bills such that the average balance is that low after the market has gone up so much?
Regardless of the accuracy of the number--there is no way I believe $20,000 is a representative number--none of the above dollar figures are good in terms of thinking about the country's various looming problems. The numbers are bad on multiple levels actually.
The first thing is that the entire framework is defective in that the sample size thinks they only need $300,000 to fund their retirement. Here I am thinking that by "retirement" they mean something pretty close to a life of leisurely pursuits in a conventional sense. In many past posts I've mentioned the 4% rule for portfolio withdrawal, more specifically 1% per quarter, with the context being whatever you got 4%. Generally speaking this is a widely adopted rule of thumb that I can tell you many people have trouble with and to add another layer of futility some in the industry are now questioning whether 4% is too much to be sustainable. It seems like this is gaining traction.
That people apparently think so highly of $300,000 is a commentary about financial illiteracy. Assuming someone could make it on $12,000 plus social security, they would be blown up after their first five figure unexpected event (more on this below).
It is difficult to generalize and say people should save more money but of course for everyone who does not save the way they should there is surely a story behind their lack of savings. You should save more is easy to say but actually doing this requires people taking their own initiative not someone telling them.
To circle back to retirement difficulties I've brought up before; $1 million certainly sounds like a lot of money. Using the 4% rule that would generate $40,000 per year. Unfortunately the typical person who accumulates that much in savings did so while living a lifestyle that was much larger than $40,000. This is a square peg (maybe a $100,000 lifestyle) round hole ($40,000 plus social security) situation. Something will have to give.
There is another point that I have made before that showed up in at least one of the comments on the article as follows;
I retired this year and my largest expense in health insurance that costs me in excess of $1,200 a month. I could go on and on, the facts are unless you have income from multiple sources your screwed. I set a monthly goal and every month I get an unexpected bill. I will probably have to go back to work.
The dreaded one-off expense! I don't know how many times I've written about this and the commenter has one every month. Things like new tires, unexpected dental events, unexpected veterinary events, something with your house and there are plenty more examples. While these things cannot be specifically planned for the prudent course of action might be that whatever monthly number you think you can live on, pad it by $1000. Another $12,000 per year means another $300,000 in the portfolio. I'm sure no one thinks that would be easy.
Clearly some folks who want a conventional retirement will save enough money to do so successfully but that will not be the majority. The sooner everyone looks themselves in the mirror, figures out where they are in relation to where they need to be and accepts that they must live within their means the sooner they can figure out their own solution.
Two things that I would focus on is getting the overhead down and find something you love to do and figure out how to make a little money doing it. Someone who is 55 and wants to "retire" at 65 has ten years to figure out how to do this. A monthly lifestyle of $4000, with another $1000 for one-off and another $5000 a year for a vacation requires $1,625,000 to work as a portfolio-only solution. If social security is still functioning that might be $2500-$3000 per month and if another $1000 can from some sort of enjoyable vocation then the portfolio need drops to $425,000 (although having more than that would be better).
There is nothing about this that will be easy. However much you can save, try to save more. To paraphrase Woody Allen, there is no problem where having more money made it worse.
10 comments:
Margin of error is seldom given in such reports, which can make it unreliable. Plus we don't know when the survey was taken relative to when the person was last updated on their 401K or other savings NPV. I do know a number of people who borrowed as much as they could from their 401Ks to repay consumer debt or make mortgage payments...which may have an impact as well. But the numbers trend is worthy of a story by itself.
Roger, can't comment on the survey but your thoughts are priceless!
Pushing 70 and retired with a very nice portfolio, I can honestly say for fifty years I pretty much did what you are suggesting so can verify it works.
More emphasis should be placed on doing something you love. If you love what you are doing it isn't work and you don't have to worry about quitting it or being forced to go back to it. If you don't like what you are doing for a living, it should be priority one to change that for the better. Again, EXCELLENT post.
thanks, anon
good post. the only thing missing from it is a reference to your neighbor and his backhoe :)
I'm in my mid-50s and retired. So I get a lot of people asking me how can I do it? I explain some of the basics, like the 4% rule - they get agitated. I try to get them to read The Four Pillars of Investing - they won't do it. When I ask them why, they tell me they know they are screwed and there's no point. Here are people with college degrees earning 50,000+ a year (some much more) and they will not read an investment book or even think too hard about the issue because it scares them so badly. Just like the article says, they have their heads firmly stuck in the sand. A few have told me their financial situation in some detail and it's even worse than what that article states. $30-60K in savings, $80K in student loans because they had to "re-tool" after the dotcom bubble, $10K or more in credit card debt, a car loan or lease, and BTW their mortgage is underwater too. Maybe this is a west coast thing but I know so many 40 and 50 somethings in this sort of situation I think the Yahoo article deserves some credence.
great comment 5:33, TY.
I did not mean to imply I doubt the general tone of the article just the numbers which as you say very well could have some salt.
$29,000 isn't a lot of money.
In fact, it'll only buy you a coffee a day for 25 years, if prices don't go up.
I don't agree with the 4% rule entirely, though - you can't take your money to the grave - so my maths might be a little off.
Realistically, the average retirement pot will be way off a million; who can save if they're averagely well-off, don't have a bank of mum and dad, not blessed with a skill that puts them into a very profitable career, have mortgage payments and need transport, like the odd holiday, have kids to feed and water etc?
If you're looking at saving a decent amount (and the above applies) you're probably hoping that you'll receive an unexpected windfall but still living like you're out of luck. This spending pattern will continue into retirement, so a million would be easily sufficient.
Going on the above example (which, I believe, will apply to many of today's twenty-somethings) you're going to need to bunch up your savings into a 20-30 year period, up to the day of your retirement party. $500 per month could be achievable if you are careful and on an average wage, which would give you a pot of $180,000 at best. If you've been lucky you could double that with your property (sans mortgage), downsizing when the cash runs out.
Then again, if you decide to do without a Starbucks/day, choose a car based on the price of maintenance, start a hobby which doesn't cost much (cycling and photography both have more benefits than many realise), buy clothes when you need them and not when you're feeling blue, leave expensive meals out for special occasions, make your own home pc, swap books online, spend the same on high quality second-hand furniture that you would in Ikea, ignore fashion magazines and read more on investing you could make a meaningful difference to your overall quality of life and the amount of capital you have stashed away for the future.
Unfortunately our education doesn't give most people the attention personal finance so deserves. Until this situation changes it's up to us to take the initiative ourselves and read books, articles and blogs.
Thank you, Roger, for providing such an essential service for anyone to read and learn from. Your advice goes a heck of a long way and, I'm quite sure, will do more for me than the hundreds of hours I spent in boring history classes in school (I prefer to read history books in my own time).
I agree with the overall message/point that most people have nowhere near saved what they are going to need.
That said, in my opinion, I think most of these numbers that assume you need 1-2 million are based on no government assistance of any sort which I don't think is likely, and secondly on annual expenses well above what is necessary.
Right now, my ALL-IN monthly expenses are $1600 a month and I'm a 270 pound weight trainer that eats like a horse. A sizable chunk of that is groceries and supplements. I live in a modest apartment and the rent is split. I drive a 15-year old car that is fully paid off. I go out to eat once a month with the GF.
I guess my point is that when you cut it all down to the basic necessities of food, shelter, clothing, and presumably the house is paid off by retirement, I just don't think it takes that much to live halfway decent. I'd say I can't conceive of a 65-year old needing 40K annually to live when I'm living just fine on 20K.
There is book called Your Money or Your Life. Definitely a good read, and I think it just really demonstrates how much you can get your basic living expenses down
I wouldn't believe anything from Wells Fargo. They are the most cheatingest(new word) bank on the planet. Just try refinancing with them to see what I mean. Bait and switch at its best.
I find the idea that savings of any kind will be of any value in the next few years, a joke at best. A cruel joke. Good luck. Hope your savings are not in a bank.
Even if you are holding actual gold or silver, good luck. How do you spend a bar of gold to buy a loaf of bread. What security or countermeasures do you have in place.
The dollar is tanking, bonds are going for a dive, ETFs will become a laughing matter and derivatives are a scary place to be.
If you can't get your savings out of the bank, what good are they?
There are answers but these are not them. There is a paradigm shift in play and it will not include retirement income. Irregardless of what book you might have read.
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