Setting goals for retirement income can at best be daunting — and at worst overwhelming. What investments are the best while also being relatively safe? What’s a good yield? Then there’s the ever present anxiety caused by wondering what you might be missing. What constitutes what we’ve all heard since forever, a “comfortable” retirement, for heaven’s sake?! What’s realistic given your particular set of facts? Finally, the question most end up asking at some point is: In what tax bracket might I find myself at that point?
That last question is asked thousands of times a day, especially when people are with some sort of advisor. Many times it’s the advisor dealing with a 401k. It’s the answer many tell me they’ve received about retirement tax brackets that is so irritating.
“Really, Mr. and Mrs. Jones, you needn’t concern yourself with income taxes in retirement because you’ll be in a lower tax bracket at that point.”
Somebody please enlighten me. How does a couple making decent money, investing diligently for 30-40 years, end up with a retirement income low enough to drop their tax bracket two or three rungs? What I’ve contended for years is that they end up in lower brackets after following traditional advice for decades. In the 30-year period ending a year ago, the average annual return for an employer-sponsored 401k was under 4%.
Furthermore, the financial status quo of those 10,000 Boomers who are turning 65 every single day of the year since 2010, continuing through the end of 2030, have an average of less than $100,000 in their 401k accounts. Most of us can likely agree that the vast majority of those 3.65 million Boomers — this year and every year for another 15 years — intended to retire “comfortably.” Again, whatever the heck that means.
Their reality is $1,200-2,500/mo in Social Security, the painful knowledge they’ll be cannibalizing their meager retirement funds for 3-7 years or so, and if they’re lucky, a free ‘n clear home. ‘Course, far too many will quickly figure out they must sell that home to survive. They’ll either use most of the cash over time frugally or spend a portion of it buying a super small condo in a place they simply don’t like. Many end up with their kids once the money runs out and their income is woefully inadequate, to be kind.
The thing is their retirement income goals were “realistic.”
Realistic Retirement Goals
I’ve learned by personal observation and by talking with 200-300 people yearly that the phrase “realistic retirement goals” translates into individual stocks, mutual funds, and the occasional bond. Cycles work through their predictable journey, and there are boom and bust years. The problem is when you have a losing year, you’re transferred to the treadmill to nowhere while you wait for your portfolio to reach its pre-bust value. Sometimes that’s mere months, mostly more. In fact, if you were gonna retire in 2002 and were heavily invested in Nasdaq, it wasn’t ’til 2014 that you found yourself back to square one. Fourteen years. Wonder when they actually retired? Due to that crash many turned to real estate, a vehicle they perceived as more reliable over the long haul.
But Real Estate Goes Up ‘n Down Too, Right?
If you haven’t been working in a space shuttle the last decade or so, you know the answer to that one. 🙂 Well located residential income property will always rent for something. I read on these pages about investment goals for retirement. Many are based upon the acquisition of a specified number of rental homes. They plan on investing a house a year or every coupla years ’til they have 10 homes. They’ll all generate $XX/mo cash flow, which will immediately be applied to speeding up the elimination of investment property debt. The debt is paid off early from rents alone.
Generally speaking, they’ve created retirement income in the range of $4-7,000 monthly. Their overall capital investment from THEIR coffers is most usually in the $250-500,000 range. What gets lost in translation for many is that we don’t spend net worth in retirement; we spend after tax income. We’d all rather have $100,000/yr income with a net worth under a million bucks than $80,000/yr coming from a more impressive $2 million net worth. How’s that even possible?
Every financial geek I’ve ever talked with about this tells me roughly the same thing. Since retirees are risk averse, and wisely so, they can anticipate an overall yield on their portfolio of around 4% or so. I’m guessing most readers wouldn’t be thrilled that after dutifully saving/investing for retirement in Wall Street products, that their income would be a whopping $40,000 a year — wait for it — BEFORE taxes.
Meanwhile their friends across the street are going on another Hawaiian vacation, paid for by cash flow from real estate and a note here ‘n there. They’ve invested significantly less than a million bucks, though their net worth at retirement was far more. They’re banking $10,000/mo or so, much of it sheltered or tax-free. The advantage they had from day one was that their goals weren’t “realistic” — at least according to their neighbor’s advisors. 🙂 Ironically, if they’d not insisted on being self-taught, and utilizing the DIY approach, their ultimate retirement income coulda very well have exceeded $200,000 yearly.
What Can REALLY Provide a Comfortable Retirement?
Here’s what I’ve learned is realistic when it comes to setting goals for retirement income.
First, with sufficient capital and 20-30 years, 80% of investors should be able to create a retirement income in excess of the best year they ever had on the job.
Second, much of that income can and should be sheltered or tax-free.
Third, and most important from where I sit, the whole process should be mind numbingly boring. In other words, it should never depend on exotic “out of the box” — oh how that phrase bugs me — high risk strategies. Let others be pioneers, or much worse, on the bleeding edge.
Don’t let others define realistic for you while setting your own retirement income goals. Remember those 10,000 Boomers who are turning 65 every day? They had “realistic” defined for them, and they’re not living their retirement. They’re living a life sentence.
Investors: Where do you believe it’s wisest to put your money for a comfortable retirement?
Let me know with a comment!