50 Or Older? Even With A $500K 401(k) You Know You’re Not Retiring Anywhere Near Well

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So far this month, among the folks with whom I’ve spoken are four people, all of whom are in their 50s, and have over $250,000 in their job related retirement accounts. One of ’em, a 54 year old woman with just under half a million bucks in her 401k, isn’t at all happy with her retirement income prospects at 65. Gee, I wonder why? Even if she manages to build it up to $1 million in the next 10+ years, hardly likely, she’d hafta do far better than her colleagues at work. Given that the typical 401k employee has averaged — over the last 20 year period —  around a 3.5% annual yield, she’d need an uninterrupted run of about 50% better than that to get to the $1 million. But let’s not quibble. Let’s say she’s successful. Furthermore, let’s say it’s not in 10-11 years, let’s say it’s now. What would her retirement look like?

How a million bucks isn’t necessarily your answer to a magnificently abundant retirement.

Though we’ve talked about this on these pages before, I think the perception is stubborn. Let’s look at the 401k/IRA with a million dollar balance. As I write this the 10 year treasury bond sits at a 1.464% yield. Oh happy days. Put into dollars, using that bond for retirement income would produce a yearly retirement income of $14,464 — before state/fed income taxes.  But let’s assume you do much better, securing  an average yield of 4%. That’s still just $40,000 yearly, and again, before taxes. Most reach retirement with little if any tax shelter whatsoever. Put another way, they’re pretty much naked, tax wise, every April 15th. If that works for ya, your problem is solved. Just build your 401k to a million bucks and start the party.

Oh, that’s not why you’ve been slavishly putting money away the last 2-3 decades? You mean $20-40,000 a year pretax retirement income isn’t your ‘Point B’? If not, then the first thing with which you must come to terms is abandoning your employer’s qualified retirement plan as the principal means used to get you more than a pedestrian income. It’s simply not gonna happen. I don’t mean it’s not likely. A one in 10 chance isn’t likely. You don’t have a one in 100 chance. Those aren’t my numbers. They’re what’s happening in real life. I see the report, year in and year out that shows the previous 20 years 401k annual yields for typical American employees. It’s flat out depressing. These people, by the millions, are gonna work ’til they can’t. It’s as simple as that. Still not convinced? Spend the rest of the week and weekend asking anyone and everyone if they know just one person who retired ‘well’ on their employer related retirement plan.

So what should you do?

Let’s first agree on what you might wanna avoid. How ’bout puttin’ good money after bad. And no, your employer match isn’t gonna get ya there. The average American male at 58 years old has WAY less than $250,000 in their 401k. Almost all of ’em have employer matches. Heck, they brag about those matches to me all the time. That is, ’til I ask ’em how it’s been workin’ out so far. Then it gets quiet. Real quiet. It’s one thing to realize what you’ve been doin’ ain’t gonna get you to your Point B. It’s quite another not to know what will. Surprisingly enough, I have some alternatives for you to consider. 🙂

Right off the bat you’ve gotta come to terms with how long you may hafta work. The bad news is that most Baby Boomers will, if healthy, be working far beyond their 65th birthday. Though today I won’t be going into detail, the #1 item on your to-do list on this topic must be to ascertain where you are today, financially. I’d say it runs about 50/50 — half the people who call/write me learn they’re better off than they initially believed — and this is almost always after they’ve discerned their current financial standing. The other half were either relatively accurate, or worse off. Then there are the options available, of which a surprising number of folks are simply unaware. So many times it’s just as important to stop doin’ something as it is to begin doin’ something. Then there are the options for which you never knew existed. Imagine if all you were able to do was create a meager retirement income, plus $2,000 in monthly Social Security payments (don’t snicker). But the difference was that the income was after tax, not before tax. Doesn’t sound like such a big deal, but when you’re 71, it’s huge.

So this week, maybe through the weekend, get deadly serious about knowing exactly where you are financially. I will say this much. Those who’re over 50 with even half a million bucks in a rollover 401k or IRA, will be far better off with just 50-60% of that figure in their hands. They’ll be able to create a far more abundant retirement income with half of their so-called retirement plan balance, than if they simply kept it there.

In fact, I’ll go a bit further.

If you can’t, you’re not payin’ attention. People in real estate and other related vehicles are earning — safely — far more income on less beginning capital than those relying on their 401s and IRAs. This is a fact of life. You can deal with it now, or face the music at retirement. That is, IF you’re even able to retire. If you opted for the status quo job plan, the music you may be hearing at that point could very well be a dirge. That’s not meant to be humorous, as it’s anything but.

So — where are you now?

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

16 Comments

  1. Mr. Brown, I agree with what you put forward in this article. But your article does not go far enough.

    You have neglected several factor … both positive and negative … that impact your conclusions.

    First, most people will collect Social Security. I know … big whoop. Still, if a future retiree is planning his/her future retirement, planning when to start collecting can have an impact on the plans.

    Second, some people will have a pension from an employer. Even if not generous, the pension can replace some of the needed savings. I know (again) …. pensions are becoming a rare bird. Similarly for employer-provided senior health benefits.

    Marital status. Having a spouse muddies the planning steps. Will the spouse have a pension? with or without survivorship benefits? Any life insurance? What type? Cash value? Paid up?

    Is the house paid off? Planning to move to a different location (or own a second home)? How will those steps affect cash needs?

    On the investment side, very few investors/(pre-)retirees would put 100% of their savings into low-yielding Treasury instruments at age 65 with 20 or even 30 years of retirement ahead.

    As I alluded above, senior health care costs (copays and deductible and the biggie of long term care needs) can chop down the thickest savings in a hurry. Review the coverage for all health care expenses.

    The above are my own observations. A wise, responsible investor/retiree would be well served by consulting with PROFESSIONALS in the areas of investments (securities broker/financial planner), insurance (insurance agent) and estate plans (lawyer). Reliance upon internet message boards can lead to disaster.

  2. Jeff Brown

    Hey Kevin — Thanks. The post went exactly as far as I wished it to. 🙂

    Your points, however, are spot on, though I do have a question for ya on one point. You said:

    “On the investment side, very few investors/(pre-)retirees would put 100% of their savings into low-yielding Treasury instruments at age 65 with 20 or even 30 years of retirement ahead.”

    First off, I never said they do or should. Second, what are they putting their money into? Those incredibly high paying dividend stocks?

    Third, if they’re retired at 65, and have just their SS payments, and 401k/IRA, what, exactly would they look to for income? Wal-Mart? I’m being purposefully facetious here, but seriously, the vast majority of soon to retire Boomers do not have pensions, no matter how small. They don’t have much money either. They may have a home, which may or may not be paid off.

    So, again I ask. What are they putting their finite savings into in order to generate retirement income?

  3. There is a new study out that says people will lose an average of $155,000 to fees over the life of their investing in their 401K. Imagine what you could do if you invested that in leveraged real estate or Berkshire Harhaway for 20 years?

  4. Jeff, most courses and books on investments talk about the spectrum of investments from low risk to high risk (and corresponding low yield to high return).

    Your initial article mentions low yielding (and safe) Treasury securities and compares those to making private loans on real estate.

    Yet you assert that these private loans are “safe.” I certainly beg to differ.

    Will Barnard had a long thread on Bigger Pockets about “Occupants from Hell.” He purchased a California property only to discover two squatters. He has waited over a year (while paying the property taxes) and spent countless hours and legal fees in the court house trying to clear his claim. The last I read, the squatters’ attorney has offered a settlement to Will that will repay Will what he paid for the property (not sure about the property taxes or the legal fees). If that settlement goes through, this investment has resulted in ZERO RETURN for Will (mental costs … or bottles of scotch not included).

    Clearly real estate can be exceedingly risky. I know you can counter with other examples that worked out smoothly for the investors BUT the point is that investors don’t KNOW with 100% certainty what the investment will return.

    I stand by my final comment in my initial response – most people will be well served to meet with competent PROFESSIONALS in the fields of investment planning, insurance planning and estate planning. Discussing which investment (bonds vs stocks vs real estate vs foreign investments vs commodities vs lottery tickets) is well beyond the scope of a blog debate.

    • Jeff Brown

      Hey Kevin — Not sure to what post you’re referring. Surely not this one. In your comment you say,

      “Your initial article mentions low yielding (and safe) Treasury securities and compares those to making private loans on real estate.

      Yet you assert that these private loans are “safe.” I certainly beg to differ.”

      Please indicate Kevin, precisely, and verbatim where the post says anything close to that. Where do I even mention any comparison except for treasuries to 401k/IRA yields?

      Don’t answer. It’s not there, as I didn’t write it. I’ll never get this five minutes back.

  5. Hi Jeff,
    Great article.
    A clarification – when you mentioned “real estate and other related vehicles”, did you mean related vehicles like self directed IRAs?.
    Thanks

  6. How about

    Jeff Brown writes “In fact, I’ll go a bit further.

    If you can’t, you’re not payin’ attention. People in real estate and other related vehicles are earning — safely — far more income on less beginning capital than those relying on their 401s and IRAs. This is a fact of life. You can deal with it now, or face the music at retirement. That is, IF you’re even able to retire. If you opted for the status quo job plan, the music you may be hearing at that point could very well be a dirge. That’s not meant to be humorous, as it’s anything but.”

    Notice the offset word in the above paragraph —— SAFELY —–

    So I guess if I made a private loan to Will Bernard to purchase the above mentioned California SFR currently inhabited by squatters I could have SAFELY (there is that word again) earned “far more.”

    And there goes my 5 wasted minutes. I hope somebody learned something from reading this.

    • Jeff Brown

      Kevin — The only thing they may learn, is that you’re skilled at putting words in my mouth, or rather post that aren’t there. Are there alternatives to qualified plans? You bet. Are some of those alternatives real estate or related? You bet. In California? Not on my watch. You get what you risk there, as the horror story you passed on, related.

      You’re firing blanks.

  7. And perhaps others will learn that you have a very broad definition of “safely” and a very limited definition of “risk.”

    Your original message developed a profile of a worker who contributes to a retirement account and arrives at age 65 (or 70) with inadequate savings to generate any retirement income.

    Then you jump to how wonderful real estate and related investments are and how they can safely provide that desired retirement income. Are you cherry picking the winners after the results are in? In so, why not just calculate the results from buying and selling (and shorting) Microsoft since the IPO.

    No investor KNOWS what the return will be until after the investment is sold. Since lots can happen to any investment (even bank CDs and US Treasuries) every investment has some risk. For you to claim that RE is the Holy Grail of investments leading to the retirement income bliss is just verging on fraudulent.

    • Jeff Brown

      Again Kevin, you continue to tell me what I think, how I define concepts and the like. Do it for yourself, not me. You’re tiring.

      However, there could be breaking news here, thanks to you, Kevin. I’m surprised to learn real estate isn’t the most wonderful, safe investment ever. I’m thinkin’ Larry Kudlow would easily be interested in this epiphany. To think there may be other non-real estate related investment vehicles which might, perish the thought, be relatively safe while yielding more than treasuries, undoubtedly qualifies as breaking news. The fact such vehicle(s) exist is good news, and a delightful bonus.

      In fact, folks here on BP should write about the non-real estate vehicles available for the creation of retirement income. It would be interesting without a doubt, and possibly even informative and educational.

      You listening, Josh?

  8. Hi Jeff,

    “around a 3.5% annual yield”

    So that is a pretty poor number.I guess a 401k is for people that can’t save for themselves??

    Wouldn’t you want to take those funds and put them elsewhere?? A long term strategy I like is triple net properties.You can achieve great cash on cash on a great cap going in.You get mailbox money for the cash invested.

    I was shocked by your return of a 3.5% annual yield.So what people are doing if they are lucky is keeping up with inflation and not really growing the money at all.If they leave in a treasury or similar they are losing money to hedging inflation over time and the IRS is taxing there (laughable gain) on top of it to add insult to injury. I don’t consider that a great use of money for investing purposes especially for retirement.

    I am not counting on social security to support me in my glory years at all.I am not counting once cent of it.

    • The trick is, certain things will act inflationary, while other things deflationary. You can’t base your entire prognosis of inflation on the CPI released by the government. The cost of loans may be down, but the cost of gas and beef is up. In fact, if you examine the CPI’s history, they keep altering what is counted. An unfortunate factor is that certain government programs are indexed to the CPI so this puts pressure on keeping this number lower to reduce certain government liabilities. At my old job, this would be called a “managed” number.

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