Several years ago I spoke at a well attended real estate investment conference. The demographic makeup of the attendees was all over the chart. It was a truly eclectic gathering. After my turn for speaking was over, several people asked if I’d sit with them and shoot the breeze, plying me with donuts and coffee. Somebody surely told ’em what a cheap date I am. It ended up being around 20 of us in one of the break rooms.
Turns out they were interested in something I’d said in passing about retirement income and income taxes. See, I often wonder aloud about the seemingly oxymoronic statement made by some, insisting they will show us how to “retire well” while magically lowering our tax bracket significantly. Up ’til about 10 years ago, I kept my professional thoughts on that assertion relatively private, only explaining my position and assessment of that statement to clients. Then, off the cuff one day at small professional gathering in Phoenix, I commented on the essence of that tenet. In a nutshell, I thought it was an excellent example of the working definition of oxymoronic.
It begs the question: Just what do some people define as “retiring well” for Heaven’s sake?
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How Americans Are Retiring
My cynical side tells me they want us to compare our potential retirement income level to our parents’ and grandparents’ experience. Well, holy crap on a cracker BigGuy, I sure hope you can help me navigate to a better ending than the retirement hell so many Boomers are living. Ten thousand moms ‘n dads a day — every day — are having their 65th birthdays. Wanna know what the average balance is in their so-called retirement account at work? Usually less than $100,000. Gee — I wonder if they’ll experience the luxury of a lower income tax bracket in retirement? 🙂
At what point do we question the logic of that advice?
Typically, Americans tell me their plans have them retiring at 65, give or take. ‘Course, many of ’em would love to retire around 4:30 yesterday afternoon. That was in fact the consensus at the impromptu group chat at the aforementioned conference. That’s when I posed this question:
Is it reasonable to expect to create more than $3-4,000 in monthly retirement income if you have 15-35 years and sufficient discipline and capital to invest?
The response wasn’t immediate. They’d never really given serious thought to that question. Ask yourself, though. Why is that? It’s my contention after hearing from literally thousands of people, that they bought the “You’ll be in a lower tax bracket” crappola hook, line, and sinker. Combine that with their parents’/grandparents’ experience, which they see firsthand, and that belief seems wholly reasonable. Add to that their own experience, and well, they pretty much drink the Kool Aid at that point, purposefully or not.
What Sort of Retirement Income is Reasonable to Expect?
A loaded question if there ever was one, right? There’s no one right answer, as so many factors come into play. How old are ya? Married? Kids? What’s the household income? Can you save money each month, or is the budget too tight now? Do you rent or own where you live? Do you have savings now? Enough to begin a modest investment plan? Do you live up to your kneecaps or your eyeballs? How’s your credit? And the list is almost endless.
If you’re counting on your 401k at work, you’ll be fortunate to end up with even mid-six figures as a balance as you drive away from the office for the last time. Even with half a million bucks, your income will very likely be no more than $20-30,000 a year — and that’s before the tax guys knock on your door. ‘Course, with that balance you’d be in a pretty small minority of retirees. In the end, most will end up cannibalizing their retirement principal long before they reach the end of the road.
Here are some thoughts I’ve found to be very helpful.
- Stop listening to the people who advised your parents. How’d it work out for them so far, right?
- For the love of all that’s holy, please stop doin’ things on your own.
- Get a pro to generate a long range plan for retirement through investing. Sounds pedantically simple, I know. But a solid plan will get you farther than where most folks end up. A well thought out and executed plan cannot be overvalued.
- No plan should be generated ’til you know exactly where you are now, financially. We can’t get to Point B if we don’t know where Point A is. Duh.
- Maximum flexibility over time is a must for your plan, as things will change almost from the first step. Murphy knows all of us and where we live. He will eventually find you, and it’ll be your turn to be in his barrel.
However, there is, broadly speaking, an answer to the main question.
Given 20-35 years most folks should be able to create a retirement income roughly equal to or better than the most they ever earned on the job as an employee. Unless income tax rates are cut, it’s not freakin’ likely they’ll find themselves paying less taxes. That won’t be true if significant portions of that income is tax free, an option pretty much everyone has on their menu — IF they have a solid plan.
The reason most folks we know don’t retire that well and indeed find themselves in a lower tax bracket than while working is cuz they listened to the same advice that undermined their parents’ retirement.
It’s now 2015. The national experiment has been goin’ on since around 1980. That’s 35 years. Those who’ve turned 65 or soon will have learned the hard way that not worrying about taxes cuz they’ll be in a lower bracket anyway, was the fastest way to a life sentence, not retiring well. I see it on a daily basis, and it’s beyond sad.
How are you planning for your retirement? Do you agree with my assessment?
Leave me a comment below!