The short answer? Terrible. The long answer is, as usual, somewhat complicated and nuanced — or that’s what the media preaches. The other day I saw something on TV that had me playin’ it back to ensure I’d heard it right the first time. In a nutshell, they said . . .
If a couple making around $75,000 a year manages to save about $800,000 — they’ll be fine in retirement.
First off let’s show how they’re likely to be — fine. (Read: OK)
The Social Security website has a retirement benefit estimator. It says that a couple making that much will end up at 66 with roughly $23,300 (rounded) a year. (That figure will change a bit per tax payer history.) That’s before taxes, which, if they live in a state like New York, Illinois, or Heaven forbid, California, will be more than a smidgeon. ‘Course, their SS checks aren’t their whole retirement, as they arrive at 66 (Yeah, I know, remember 65?) with $800,000 in their 401k. Like most Americans, that’s where their ‘savings’ end up, their employer’s qualified retirement plan. Since Moses’ son died, the advisors for qualified plans have been telling their clients to transition to more and more risk averse positions as they approach retirement. Fair enough. Makes sense.
Once they pull the retirement trigger, they’re then advised that they should expect their invested capital to generate, give or take, about a 4% annual pre-tax return. In this case that means roughly $32,000 a year. That brings their gross income at retirement to approximately $55,300 a year. If they live in California as I do their total tax bill (state/fed) could well be about $5,500 annually. We’ll assume they own a home, and have successfully paid off any loans. This leaves ’em with real estate taxes and insurance, which we’ll peg at about $5,000 a year. Add to that auto insurance, home repair and maintenance, utilities, and there’s another $4,200 — and that’s being generous. Let’s fix groceries at $400 a month, then round up to $5,000 yearly. That’s not including eating out. No entertainment. No travel. Oh, and the cost of gas wasn’t included.
After state and federal taxes, and the modicum of normal living expenses mentioned above — clearly not an all inclusive list — they’ll have just under $3,000 monthly for travel, hobbies, visiting far away family, clothing, and the acquisition of a replacement car when their 2005 sedan gives up the ghost. This doesn’t account for health insurance, an expense somebody told me is goin’ up, and might continue. See what I mean? They’re probably just . . . fine.
However, 4½ years later the feds notify them that they’re ‘not takin’ enough out each year from their retirement plan’. They’ll then be instructed to begin cannibalizing principle, which involuntarily puts them in the race they — and you — never wanted to enter. It’s the race between the day you die and the day you run outa money. Still thinkin’ $800,000 in your employer’s retirement plan is ‘fine’?
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
An Alternative to Consider
Yeah, I know, this is a real estate investment site. It’s a real mystery what I might be about to suggest. I won’t go through the whole script. However, the same $800,000 in equity would yield in the range of $4-6,000 monthly, much of it tax sheltered if well planned. Furthermore, you’d have a de facto ‘bank’ in that your property would be debt free. Need $100,000 quickly? Pick a property, pull it out tax free. But, what about the money you didn’t put into your 401k every paycheck the last 15-40 years? I have a suggestion for that too. Call David Shafer about diverting that money into an EIUL. Those still in their 20s and 30s can generate an income at retirement of $5-15,000 and more — tax free — via an EIUL. Recently a client called me to thank me for bringin’ EIULs into their plans. At 20-something they’ll hit 60-something with about $200,000 a year in tax free income. That’s over and above what they’ll do in real estate. Oh, and don’t forget the discounted notes they’ll be acquiring in their Roth type self-administered plan.
By the time they hit retirement age the income they’ll collect by the middle of February AFTER taxes will more than our example couple makes in a year BEFORE taxes. Now granted, they’ll be benefitting from the decision to go this way in their 20s, a distinct advantage to be sure. Their current combined income now is more than many, fewer than some, but not spectacular. They live up to their kneecaps. They work hard and keep their noses clean. But the key factor separating them from the herd, is that they have a Plan and are executing it on Purpose. They’re definitely not repeating the mistakes of the BoomerHerd. Those mistakes are now comin’ home to roost in a very big way.
Don’t follow the BoomerHerd to what is at best an OK retirement, and at worst a complete calamity. Learn from their mistakes. Boomers are fast becoming the generation that’ll work themselves into their graves. The common denominator? They followed flawed plans, and then tried to remedy the unacceptable results with a Do-It-Yourself approach.
They’re none to happy with the retirement most of ’em are facing.
Photo: Pedro Ribeiro Simões