Why Your “Realistic” Retirement Goals May End Up Woefully Inadequate

by | BiggerPockets.com

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.

Related: Don’t Count on Social Security: Why It’s Crucial to Take Control of Your Retirement NOW

The thing is their retirement income goals were “realistic.”

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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.

Related: Want to Escape a Soul-Crushing Job, Reclaim Free Time or Retire Early? Here Are 3 Feasible Paths to Take.

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.

The Takeaway

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!

About Author

Jeff Brown

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


  1. Curt Smith

    I’m at the cliff edge right now. I’m going to quit before June with the plan to live just off the net-rent from our 30 rentals. There was a BP blog recently re personal finance tools (like mint only more). I need to add up expenses is the most important first step. Then what is the net income from our 30 rentals net of all expenses and debt service and some CAPEX? Ah having reserves for CAPEX and “oops”.

    I know if I was laid off I’d be ok since I have non-real estate assets that I could tap. But I want to live comfortably off just rental income plus my wifes small teachers pention.

    My problem re filtering our checkbooks and credit card statements is that we did 10 new rentals last year. $30k ran through the Home Depot Pro card alone. I’ve got a few more in queue into 2016. It’s a mess of large and small expenses.

    Plus there’s some credit card debt at Home Depot, Lowes and personal CC. I don’t know to what extent I should fear retiring with some amount of CC payments.

    If others are even similar to my problem, it’s difficult to filter out what are true expenses post stopping our break neck deal flow post quiting the day job?

    My problem is not income. Surely 30 rentals that have very low expenses throws off enough cash to modestly live off (I believe). Its having a good accounting of my expenses that is a challenge. And will my ability to do new deals stop in it’s track post quiting the day job?

    I don’t need more bank mortgages, I know that will stop… Atlanta has a few portfolio lenders that won’t care about me being self employed. This rambling could go on and on. LOL

    • Jeff Brown

      The main issue I see in your plan, Curt, is that at retirement there is still debt on your main sources of income. I’d take the next six months, if financially possible, to apply all cash flow to the same loan each month. I don’t know the loan balances of your homes, but it seems at least possible if not likely you’d be able to pay off a loan or two in that time period. Each home freed of debt will increase cash flow by a factor of 2-5 depending upon the beginning LTV.

  2. Dumitru Anton

    @ Jeff Brown,
    Thank you for taking the time to warn about the dangers of “realistic” retirement.
    Also thank you for taking the time to write the articles about another way of thinking about time and money.

    respectfully, newbie still earning

    • Jeff Brown

      If I could give you just one nugget of wisdom, Dumitru, it might be this: Don’t aspire to be the pioneer or ‘bleeding edge’ guy. Slow but sure, and mindnumpingly boring is the way to go. 🙂 Remember, if you’re relatively young, time is your best friend.

  3. Brock Adams

    @Jeff Brown,
    Good article. I have witness this in my own practice and know too well some of the comments you listed. You are spot on. As to your question at the end of your article: Where do you believe it’s wisest to put your money for a comfortable retirement? Diversify over many asset classes. As you know, there are many in real estate as well as in Wall Street. I would add that for most, a comfortable retirement is having your health. A second, would be to have a $0 mortgage (at least on primary residence). Also, living within your means is important as Curt Smith above seems to be doing. Most retired folks I know who can afford to spend up…Don’t, even though they can. Unfortunately, A large percentage of folks I work with are not prepared to live on less than 65% of their working income which means that they will still be working full time or at least part time after age 65

    • Jeff Brown

      Hey Brock — You make such excellent points, though I’d like to extend them a bit with some observations.

      1. My favorite comment on diversification comes from Warren Buffett, who said: “Diversification is for those who don’t know what they’re doing.” His track record speaks for itself.

      2. Entering retirement with all real estate debt free is golden.

      3. I have dozens of clients who’ve tired of their Wall Street portfolios, gone into real estate, discounted notes, and at least one EIUL. (Insurance structure to generate tax free retirement income.) The next one who regrets that decision to me out loud will literally be the first.

      4. Living within your means is always wise. Still, that statement presumes a lower income in retirement than the investor enjoyed while working. It’s my experience that investors, given enough time and effort should be able to generate a retirement income bigger than they made in the best year on their job.

      5. Generally speaking, it’s my contention most folks end up on lower tax brackets in retirement cuz they listened to the party line put out by advisors attached to Wall Street products.

  4. Mike Lemieux

    Great article! What I would live to hear more about is suggested methods to live off the income we create as investors tax free.

    We have a similar strategy in mind for our investment goals; increase the number of cash flowing assets, snowball the profits (net of expense, Capex and reserves) into the repayment of debt, and harvest the resulting cash flow to invest in additional assets.

    We are looking at our growing RE portfolio as a supplement to our existing income streams and are focused on creating separate ventures to fund each of our needs/wants as we move forward.

    The golden rule – ” if we can find a way to make it pay for itself we are free to pursue it”

  5. Gene D.

    Lots of great points in there I agree with wholeheartedly. The one thing that I have to comment on is the statement on “average 4% annual gain in the average portfolio of a 401k investor over the last 30 years”.

    A smart, frugal investor that simply bought a diversified mix of low cost stock/bond funds, continued to buy in on a monthly basis, reinvest the dividends and received an average company match would have done easily at least double that return with literally zero effort – truly on auto pilot.

    There is something to be said for time opportunity cost of having to go out and purchase the hypothetical 30 properties discussed here.

    I am in no way discouraging anyone from taking the route of building a personal portfolio of physical property, but when all costs are factored in, the true vs stocks/bonds results may be a lot closer than outlined in the article. Particularly, if we point out the fact that an “average” real estate investor never gets anywhere close to a 30 property portfolio. If you were to take a pole on what an “average” real estate investor made over the last 30 years, I think the numbers would be pretty awful.

    Once again, it’s just good to be cognizant of facts, where this article skews to being a bit more real estate friendly.

    • Bryan O.

      How many company matched 401k plans allow for your “diversified mix of low cost stock/bond funds”? I’ve had a few 401k plans at this point and only 1 of them provided any mix of options that was worth anything.
      “Literally zero effort”. Being a smart investor in the market takes zero effort? Finally! Someone cognizant of reality because the opportunity cost of researching stocks and mutual funds is so much less than researching a property purchase every few years (depending on strategy).
      You mention facts, but didn’t provide a single one.

    • Paul Stern

      I can’t help but share my personal experience here. I recently checked my fidelity investment 401k. An interesting metric shows vested balance which breaks down my contributions and company contributions in total and as compared to the current balance. I am in my early 40s and have been contributing to a 401k for around 20 years. With a 6 figure balance and great company match here is a breakdown of my 401k balance in %’s: of my total contribution 52% comes from me and 48% from company match. My current balance is 89% of my total contribution. Wait…over these 20 or so years, 11% of my money is GONE! Until 2009 I followed conventional advice and sought “risky” investments. Since 2009 I have opted for low fee index funds. No one’s investment experience is typical, there isn’t a typical experience. But how much if my 11% went into fund manager bonuses? I prefer having more control over my investments rather than sitting back and praying for that 4% average return. Most of my 28 units analyze at 30% CoC return and perform there once stabilized (ie deferred maintenance is taken care of)

      I challenge the rest of you to see how typical your 401k performance has been.

    • Curt Smith

      Maybe mis speaking. Probably has RE in a SD-IRA or solo-401k.

      But also theoretically; if one paid off their house, car and just needed food, gas and misc cash. One might pay very low taxes on passive income sheltered by depreciation deductions when you take a very small income down in the bottom tax bracket.

      Like the author said, most folks don’t have that life style as their retirement dream. But I laud anyone and everyone who has cut their expenses down that low!!!!

  6. Curt Smith

    Great observation. The lack luster performance is in the statute creating the 401k, 403b and IRA statues that allow exorbanent fees by the plan administrators. 403bs are the worst.

    6% annual return lost to fees and poor management.

    403b fees are so bad (my wife is a retired teacher) that we’ve read of teacher couples gaming the system by moving from county to county every few years staying within the same state defined benefits retirement system but jumping between 403b systems allowing them to move their 403b savings to a self managed 401k or SD-IRA and made several times what their 403b made them.

    IMHO investing in choices “picked out for you by wall street and the layers upon layers of points shavers” is mis-managment of your funds.

    But as employees we are stuck for periods of time anyway with funds in a 401k or 403b. Its one incentive to change jobs so you can move your funds to a SD-IRA or better a solo 401k.

    Since retiring my wife’s SD-IRA invested in 100% rentals has gone up 3x in value in 4 yrs. What’s that gain? It’s hard to game the gain since a SD-IRA is a “closed system” expecially if you aren’t taking distributions. The numbers in the account don’t lie.

    • I’m not all that familiar with 403bs and the article is just referencing 401ks. My employer’s 401k has relatively low expenses. For example my S&P500 fund has total expense of 10 basis points which is on par with Vanguard funds. I know there are are others out there that charge significantly more than this but I find it very hard to believe that 401k plans are charging over 6% in fees on average. If you know the data source for the statement that 401k have returned 4% over the past 30 years please provide as I’d like to see this.

      • Curt Smith

        Hi Paul, I see annual releases from Scotttrade and Fidelity aggregate reports from their customer’s performance. No doubt not everyone has all their 401k assets in a low fee index fund like the S&P. Bonds, other stuff that lost money etc. Just guessing this is the type of source for 4%.

        You get at the fees by comparing a vangard taxable S&P index fund to a S&P index fund offered by Fidelity or Scotttrade or your employer and compare annual perf. We did and it was off by 4% in the 403b by Fulton countys 403b system. Every 401k/403b system will differ.

        My wife and I are not interested in quibbling over a few percent in some fund. We moved beyond Wall Street custom picked just for you products. We chose all in rental real estate and not including cap gain (paper profit) we cash flow in the 15% range. Including in the paper profit is where we 3x’ed her account in 4 years. The 15% cash flow was forced back into more and more rentals, making the value go geometric in later years. Also as we fine tuned our deal type to be much higher cap rate than 15%.

        Be a deal engineer and you’ll learn that sub 10% annual gain is a thing of the past.

  7. Jeff Brown

    Hey Paul — I’ll prevail on my good friend, David Shafer to do just that. Dalbar Corp. is the firm that does these annual look-backs, usually 20 years at a time, though the one I quoted was the only 30 yr of which I’m aware. It was 3.79% annual return for Americans’ employer sponsored 401k plans.

    • David Shafer

      Paul, there is a difference between what the average rate of return for mutual funds and/or stocks are and what the average rate of return individuals get when investing in these investments. Mutual fund sales people like to quote what the fund has done on average. But Dalbar actually looks at real returns from human beings investing in these funds/stocks. The difference is significant and Jeff is correct with his number above.

      Reasons? Individual psychology creates a situation were folks sell or panic after a market downturn and buy at the height of market bubbles. Also, folks find they need to use the funds when they get layed off from a job or have other financial emergencies which tend to happen when the market is down.

      The other big issue is called sequence of return risk, which means that the sequence of returns is critical when talking about funds you will use at some time. If the market has a significant downturn right before or after your retirement when you are using the funds, then you simply don’t have time to make up for the losses. This is something many found out about in the 2000s.

      The industry likes to paint it as a personal failure issue, but the truth is that it is a systemic issue proven by how widespread it is and the Dalbar numbers. Additionally, other not so easy to find internal analysis from the mutual fund companies themselves are similar to the Dalbar studies. Finally, you can look at government numbers on personal asset levels across the population to see that most people don’t have $100,000 in retirement accounts even in the 55-65 age group.

      The actual data demonstrates the abysmal failure of the 401K system for retirement income. Pay attention to Jeff, because he speaks the truth.

  8. Frank Sanchez

    Hi Jeff,

    Good message! People should develop a plan and prepare their nest egg. Outliving ones assets should not be a fun experience for anyone.

    I enjoy exchanging ideas about finance and your message is powerful.. The vast majority of Americans will have trouble during their golden years. It’s a sad story.

    Some notes below:

    1. REI can provide interesting cash flow. REI can also bankrupt people due to over-leveraging. Unfortunately, people don’t brag about how much money they lost and confirmation biases affect us all.

    2. REI presents systematic and unsystematic risk like every other investment vehicle. This is grossly ignored by the RE hype.

    3. Nasdaq. Let’s be honest, don’t pick small chunks of the market during short times to build a point, it undermines your good message. Sure, one can bring up ENRON as well as Detroit to make a case. Market averages have been positive ( as of today), even after black swans. For instance, the market last week sucked, but I made tons money in the last 10 years and if I sell today, I am selling high ( specific id, of course!)

    4. I loved this point you made. Yes, 401(K) fees chew up the retirement accounts of Americans. Index funds can help. This section of the IRS code was never meant to be retirement savings, it was a bonus. The industry took away American’s pension plans. Pension plans can be cheaper than 401(k)s.

    5. “Well located residential income property will always rent for something” The word “always” directs this back to point 2. For example, imagine spread factory closures followed by massive layoffs in Northwest Somewhere. Rents are the first things that gets delayed, and if the investor is over-leveraged without sufficient cash to cover this downturn, he/she will be wiped out -including their 401(k), car, brokerage accounts, cat, and dog.

    6. Many RE investors ignore Recapture Tax, cost basis, depreciation, inflation, and building appreciation. Recapture Tax should always be inferred when making a point to wealth building through RE. The 25% cut to Uncle Sam will hurt – Unless it’s used by the rich-another discussion. It can be avoided, but one has to die to get there. The tax advantage is often overstated by ignoring the Recapture tax.

    7. Investments are taxed at the capital gains tax which MAY be lower. The bracket today may be a lot different in 10 years. They could even be higher. Do you want to see something scary?

    8. All property depreciates not all property appreciates. A roof doesn’t get any better with the years. See item 2.

    9. Tax Loss Harvesting juice may be worth the squeeze.

    REI is a good way to diversify investments for many people and it should be seriously considered based on education. That’s why I joined BP. Is it the only way or the best way? Well, that depends.



  9. Dustin Graham


    You’re saying that people are not preparing for retirement correctly.

    You say it should be tax free, and easy to do, 4 out of 5 people can do it in 20-30 years, but no examples given.

    Then the article is over. Did I miss something?

  10. Jerry W.

    Jeff, thanks for the article. I had a wake up call about 3 years ago. I had a partner who wanted to retire about 4 years ago.He sold his construction business. The guy who bought it went bankrupt so the payments stopped. My partner had to come out of retirement in his late 60s. I bought his share out of the business, but even it only came to $300K, which he used to buy a nice house and shop. He had other investments, but his total income was at least half of what it used to be. I decided to get serious about retirement income as I was only 13 years away from full retirement and I had wanted to retire early. Had I not gotten aggressive in real estate and been the one to sell out, the most I would be able to get in retirement might be $4K per month. It is my sincere hope to be more like $5K per month when I retire, but that should jump by $2K in 2 years after retirement and then go up much more as loans pay off. Had I not decided to go full speed in real estate retirement would be ok but I would have to be frugal. It comes faster than you think. It is my hope to have my retirement income be much more than my current income, but it would include managing rentals. I have no personal debt on my house or cars, or credit cards etc. I do have a lot of portfolio debt which I hope to get paid down.

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