Let us say you are an average American Baby Boomer. You are thinking about retireme nt.You probably have $75,000 in assets available for your retirement per Fidelity. This is your dilemma.
What exactly does this mean? Can you really use this $75,000 for your retirement? What are you going to do:
- Consume your assets to supplement your other retirement monies?
- Only consume the interest (growth) to supplement your other retirement monies?
- Consume the asset and the interest it generates a certain time period to supplement your other retirement monies?
Let us look at these three strategies which represent most of the strategies Financial Planners will recommend to you.
The Analysis:
Step 1
- What will it cost you to live after retirement?
- How much do you have coming in to support retirement?
- How much will you have to take from your $75.000 retirement assets to make up the difference?
1 - 2 = 3
It doesn't matter which option the Financial Planner recommended, Step 1 is the reality. For example, if your maintenance is $100,000 and your annual retirement income is $50,000, then the very first year of your retirement you are going to need to deplete your retirement assets by $50,000. This will only leave you a little over $25,000 in your asset account.
You will be BROKE in six months. There is no Step 2.
So what are your REAL OPTIONS?
- Work until you die.
- Cut back your lifestyle (drastically).
- Move to another country.
- Grow that $75,000 to more than a million dollars.
If you really want to be able to retire without cutting back your lifestyle or moving out of the country, what can you do?
First you have to come to grips with the idea that your $75,000 has very little utility.
If the first option, "work until you die" is your only real choice, that $75,000 either represents something to leave to your heirs or something to consume to make your life more enjoyable. Since you are not going retire it is NOT retirement money.
If those choices aren't that desirable, you might want to consider the fourth option: "Grow your $75,000 to more than $1,000,000."
Therefore your utility for that $75,000 is quite low (you don't really need it) , but your utility for one million dollars is quite high (you would really benefit from having it). Any risk is OK if it leads to your goal because your utility for the money put at risk is quite low.
Most Financial Planners and Advisers will tell you that as you approach retirement age you need safety such as bonds, CDs, and dividend stocks because these are your retirement funds. Just how wrong can they be?
You can now see the stupidity of that advice. "Safety" means a low return on investment (ROI). This strategy will probably get you a net return somewhere between 1% and 8% per year.
An ROI of 1% doesn't even keep up with inflation. Maybe an ROI of 8% will keep up with inflation, but who knows?
What we do know is that 8% compounded will double your investment approximately every eight years. And the gain will be taxable unless it is in a ROTH IRA or tax-free bonds. Matter-of-fact the entire asset is probably taxable.
You figure it out, the longer you persue this strategy,the worse off you will be.
This isn't a vehicle to take you somewhere, it is a merry-go-round. You keep riding but go nowhere.
If you want off that merry-go-round you need to change your attitude toward RISK.
The utility of that $75,000 is almost zero, but the utility of $1,000,000 (which just might allow you to actually retire) is quite high.
If you insist on LOW RISK, you will NEVER RETIRE. Keep your eye on the prize.
Retirement can be achieved if you have enough assets. Your number 1 strategy must be to grow those assets.
Remember, if you lose that $75,000 it won't affect your retirement choices, but...
If you grow your retirement assets to at least $1,000,000, you have affected retirement choices. It is a matter of UTILITY vs RISK.
An interesting blog post that I enjoyed reading. Thank you for sharing it with us!
Hi Bill,
That was sobering, and perhaps a little scary for most if not many. We tend to fit our lifestyle to our income ( or sometimes beyond) and your illustration clearly makes the case for not doing that. Very well thought out.
Mr. Roberts, Hi Bill,
If you ask: "How much will you have to take from your $75.000 retirement assets to make up the difference?" Forget retiring!
There was a time when retires were not excepted to live more than 3 years at that time $75,000 was siginfent, not today! Add a zero and it's not enough. Two zeros and you still can't "take" from your savings.
If you're going to live like you've lived accumulating your retirement account you're going to have to have enough savings to earn your living.
The most cruel thing we've endured is low interests rates! I wrote of this more than 15 years ago to much scorn, but it's true! With low interest rates on long term financing we're in trouble! We need raTES to be high enough so that retirees savings can support them.
Pity Joe Paycheck, like his parents he saved all his life. Money in the bank, little risk. (Actually a garnteed lose!) His savings were to take him from surviving on Social Security to a comfortable living. He was lied to. Now even the Social Security he invested in for 52 or more years won't support him! The Medacare he paid for cost more and pays less than the system it replaced!
To bad the damn fool sold all those voted for empty promisses!
It's not to late! If Joe gets the epiphany that he's been ignoring for 50 of his 65 years!
Bill
Hi John,
You really should put your name on things.
William, I hoped to make the case for reaching for a better ROI. On my next post I will show them a couple ways to get a higher ROI and pay less taxes.
Bill A, I've got a ten year plan for him to make up for all his "mistakes." Stay tuned.
Thank you all,
Bill Roberts
Good job, Mr. Bill Roberts!
Bill C., Thank you very much.
Bill Roberts
Work until I die has been my plan! I need to start investing in real estate and put my money where my mouth is!
Hi Renee, You bet! Especially since you are in one the best places to invest.
Thanks for stopping by.
Bill Roberts