Should we retire retirement? With 43% of Americans having $10,000 or less in retirement savings, and 27% with less than $1000, it is obvious that many people do not think for the future. In fact, recent research on people’s brains shows a tendency toward the use it or lose it mentality extending to people’s money as well.
So when we understand this, what does that mean for retirement? Without Social Security or pension plans, most people would not have enough saved on their own individual merit (that is, outside of some government or corporate plan) to retire. Most people, in fact, probably would not be able pay their income taxes if it weren’t for tax withholding!
Even in “standard” retirement planning, they say you need to have 80% of your pre-retirement income. You do NOT need 80% of your pre-retirement income you actually need 80% of your pre-retirement expenses! By saying income, the conventional wisdom is saying that people generally spend (expend) ALL of their take-home income. However, if you are a prudent saver, you should not be spending anywhere near what you take in.
For me, we only spend about a quarter of what we take in. And with that 75% saving, we are actively looking for investments to help it grow. Because we would like to be able to not work a traditional job by about age 35, this is about the only way to go. But there is no way to figure that in the retirement calculators most people use.
For instance, in the aforementioned retirement calculator, they need to know your current age, your current income, when you want to retire, what percent of your income you’d need to retire, how long you think you’d live, how much you’d get in pensions, and how much you’d get from Social Security. Well if we want to “retire” at 35, how would they calculate that? Do they calculate Social Security when we turn 65? Our 401(k)s that we can’t use until then? Pensions that we couldn’t use until then? Would we be able to count our passive income streams as pension amounts? Would I put 25% of my income since that is all we use now? Or would I put less since we wouldn’t need all the work peripherals? The calculator just does not apply for people who think outside of the box. It is not for Fruitfulistas.
So if retirement is not really a possibility for most people without Social Security or corporate pension plans and it is not really considered retirement for people who are active savers and investors (like us and you reading this!), do we need to have a new paradigm as it relates to retirement?
Maybe we need to have another end goal. I’ve talked to many people about their retirement goals, and because to them it seems so far off, they say things like, “I’ll just keep working till I can’t” or “I like working, I like knowing where my next paycheck will come from”, things of this sort. And working in and of itself is not such a bad thing. If people like to work, then why force or otherwise pressure them to stop? And if people have the means to stop early and change paths, why don’t we allow for that? Even though retirement is a fairly recent concept, why is it that it has become a prescribed standard? Why is everything so standardized?
I was looking into annuities the other day, and I couldn’t even buy one because of my age! Just as you can’t use your own retirement money that is placed in a system (like 401(k)s and IRAs) until a certain age, I could not buy an annuity until a certain age. That basically leaves us with the options of direct investments with our after-tax take home money. And for everyone else, it leaves working…and all of their financial future at the hands of someone else which is never the safest route, even if it is the most comfortable. If you are working because you love it, that is one thing, if you are working because you have to, that is another.
For many people, retirement should be similar to work before, but at your own pace
I think we need to come up with another word other than retirement. And it’s not just because the standards don’t apply to everyone either. A large number of people have their whole identities are wrapped up into what they do experience a huge loss when they officially retire, and many people feel that they have been “put out to pasture” and no longer are useful to society. To many, their work is the purpose in life. Without it, they quite literally die.
So, perhaps in the future, Social Security may or may not be around and the word retirement may have to be retired. Retirement was, after all, just an experiment. Those who we say retire early are not really retiring, but doing what they would prefer to be doing, and making money at it to boot. Those who enjoy working should continue doing so until they find something else they like better, but they shouldn’t stop working because of a prescribed pattern.
This isn’t to say that we should stop saving or encouraging so-called retirement planning because it is always good to save. It will always bring more security and as you get older, you lose a little of this. But retirement should not be thought of as standard or a single event, but rather a very individual, specific plan to not only live sustainably financially but also emotionally well into the future. And to many whose life’s purpose is in their work, that may mean continuing to do so, but perhaps at a different pace or time schedule.
So glad you wrote this I think about these issues often.
Thank you for mentioning the 80% income needed in retirement. That’s a great explaination. I could never figure why I’d need 80%.
When I ask people about saving and retirement, I get a big glazed look and no real response. To the thinking people I know, I have asked why do I get this glazed look? They say it is too overwhelming for people to ‘wrap their minds’ around the concept. This in itself scares me. What else scares me (and I try to remain logical, not emotional) is that I am confident that Soc Security will not exist in the future, and since no one is saving, how will local, federal taxes, mortgages, healthcare costs, etc be paid. It’s a much larger issue that we’ll experience in the next 10(?) years by my estimate. So all this collapses around the few that have thought, saved, and are responsible. And this thought then brings me to deduce…I think some people have already figured this collapse will happen, so why not live now! They spend and figure they will worry about the future later. (Sort of like the investment banks, and we saw what happened there). Some of this may be human nature?
I’d love to hear others thoughts on this. Really I would. Please show me I am wrong.
Also we must remember, corporations want cheap, uncomplaining, and an unthinking workforce. Therefore, to keep the population on edge, feeling unstable financially and by keeping 401k, pensions, retirement monies out of reach, it fulfills this goal.
Wil
Wil,
I like what you’ve wrote and I agree with almost everything. I don’t know a whole lot about the social security issue but I’ve read it will last as long as something like 40years without changes and after that they will have to pay reduced benefits. That is of course based on no changes.
Besides that Social Security really wasn’t ever meant to be a retirement plan, it was meant to be an insurance. I don’t think that is the general population’s perception however and far too many people will DEPEND on it.
Corporations/gov do not like individuals to be empowered. It is my thinking that corporations have influenced this whole system to benefit them. Schools, governments, media, etc to keep people buying and working indefinitely.
Welcome to the Matrix.
“So all this collapses around the few that have thought, saved, and are responsible.”
It was kinda predictable that the wall street folks, banks and investors would think about a way to scam the billions of dollars that baby boomers and others had put into 401k’s and other controlled (by others) investments. In fact, one of our clients, a former chairman of the SEC, said exactly this would happen, sometime in the mid 2000′s. The ax began to fall in 2008, delayed by the machinations of the fed and the gravy train of the failing but money pumping loan industry.
It’s always been true in investing that following the crowd is a loser way to go. Individualists buck trends and win.
That said, I think you millenials (age 20 -30 or so) are a bit pessimistic about the system. Social Security is a bedrock of the economy and financial system as money given to seniors and the disabled is usually rapidly recirculated and in some cases taxed. The feds may tweak it, but it is not going away.
Retiring at 35 is entirely possible, and I applaud your discipline and hard work. Many folks buy into the early marriage and many kids, poor education and lack of job skill mentality which is pushed by many religious and some parents. Parents of young families’ chances of early retirement are low.
As someone who retired at fifty, I can see how raising two kids, their educations and welfare affected our bottom line. It was worth it, but it cost. Another factor is health care. As you age, health insurance continues to rise. Even the new “health reform” of Obama states that folks over 60 can pay 3 times more than under 60. Often these plans don’t cover most of the bills, have high deductibles, etc. I hope this situation improves!
So, go for early retirement knowing that you will later need a cash flow to cover rising health insurance, and health expenses not covered by the insurance. Property tax and utilities also grow if you are property investors. These rising expenses are not always easily transferable to tenants. If you have kids, you will be spending somewhere over $200,000 on them before 18 (it seems an amazing amount, but that’s what the statistics show, see
http://www.babycenter.com/cost-of-raising-child-calculator
for a personalized estimate!).
I would like to see you achieve your goals. Good luck!
Hey Annie,
I completely agree about the herd mentality when it comes to ANYTHING, not just financial instruments. For example, when I saw HGTV showing average 20-somethings buying $400,000+ homes when they were just starting their first job, it was a clear signal that something was very wrong!
I am 50, not a millenial, who was lucky/smart to sense something wrong with mutual funds/stocks and so I cashed out in early 2008. I am not enjoying the low interest rates. I maybe in ‘retirement’ unexpectedly because my industry was replaced by technology. I’m not seeing real gov’t regulation, or any sense of responsibility by the financial industry to create safety for the average investor, so I’ll stay on the sidelines, treading financial water. Are you comfortable with the current market fluctuations and the reasons for those ups/downs? (just curious, not being snarky here)
As you pointed out taxes, healthcare, utilities, etc. will continue to rise, and I’ll add… with incomes stagnant. The only solution seems to go back to the land and get off the grid. There are indications this is already happening, and rather than waiting for the herd…..any thoughts on that?
Really curious what the ‘thinking people’ are anticipating in terms of financial options and life style going forward…….
Wil
Will,
“Are you comfortable with the current market fluctuations and the reasons for those ups/downs?”
We are almost totally invested in real estate rentals. This brings a good income, which has been rising, even as property values have lowered. More tenants are out there now, as fewer are buying homes (makes sense, huh?) We almost never sell anything without making a profit, so we hold on to properties until they do and 75% of our rentals were bought before 2001, so have not lost value. All have been completely paid off, which is our long-term business plan.
We continue to save to buy more properties, and during the saving period know how you get 1% on savings and no tax relief. This is a very sad situation for conservative investors. However, saving is necessary to allow buying property with max down. This keeps rents reasonable (tenants are paying the mortgage and taxes). Owners should have enough resources to weather vacancies and maintenance and improve the properties (we have added garages, remodeled baths and kitchens and redone mechanical systems in older houses).
So – rent out a room and start making money. Put it aside until you have enough to buy your first rental. This is basically how we started out (we rented out our downstairs for 10 years, paid off the mortgage, sold the house and with the profit bought rentals and built a house).
“The only solution seems to go back to the land and get off the grid. There are indications this is already happening, and rather than waiting for the herd…..any thoughts on that?”
Living simply, which is the theme of this blog, is key. We don’t need new cars, except if you’ve saved for one (recent statistic: 98% of new car buyers borrow most or the entire amount, and end up paying two or three times for the car — amazing!).
We personally like living in nice homes adjacent to parks/open space so this is a priority.
Other than that luxury, we are off the grid in many ways: we have a dual metering solar system (on grid as backup, but our panels cover 80% of our use, 100% without the electric hottub). We bought the panels, batteries and converter when we built the house instead of a new car. Although we only save about $1200 a year with this system, a new car would have cost at least $1500 a year to insure and maintain, so we are saving almost $3000 a year with this choice alone.
We shop at Costco, limit vacations to outings with family and friends (unless subsidized by our clients), exercise a lot with inexpensive sports, limit insurance, cable, and computer costs to the basic, etc.
Probably the biggest money saver is keeping track of expenses and income, and budgeting. Every year we set goals and track throughout the year. Many changes have occurred in our lifestyle due to thoughtful analysis of the financial outgo.
Thanks so much Annie, I really appreciate the time you took to respond. All good information. Thanks for sharing.
(Thanks to Britton and Cassie for hosting!)
Wil