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?