Let’s face it. There are no more pensions being offered by companies that will maintain an income for employees once they retire. Pensions started going away in the 1980’s. Very few companies offer any kind of retirement package anymore.
Instead, companies are offering a 401k savings plan and maybe, if you are lucky, they will match part of it.
So the bottom line is that if you aren’t saving for your own retirement through a 401k or other investments, then you are setting yourself up to live on social security. The government has slowly been increasing the age when you can begin to receive social security.
If you were born before 1954, then your retirement age for social security is 65 years old. Between 1954-1960, the retirement age is 66. After 1960, the retirement age is 67. If you retire early, then you get a percentage of what full social security would be.
Oh, one more thing. If you were born on the first day of a given month, they calculate your social security based on the previous month. I guess it is better to be born on the 2nd rather than the 1st.
It’s Never Too Late To Start
So, where are you now with your savings for retirement?
Several years ago, I spoke with a high school friend of mine who is a certified financial planner. He told me that on average, people who are 50 have retirement savings of about $10,000.00.
When you think about supplying money for your personal lifestyle, $10,000.00 doesn’t go very far.
What can you buy with $10,000.00?
- A decent used car
- 10 months of rent on an apartment for $1000 per month but that does not include utilities
- A few gaming computers
- 2-3 years of food for two? Not really sure there
Certainly, you cannot afford to maintain anything close to the standard of living you might be accustomed to living.
No matter what your age is, it is important to start saving right now for retirement. I have a saying.
“Retirement is a financial state.” ~Patrick O’Connor
You cannot retire and expect to live in your current standard of living until you have enough money put back so that you can live off the interest. At least that would be the ideal.
If your savings does not allow you to live for decades, you don’t have enough saved.
$10,000.00 is better than nothing. $1M is better.
Break it down
The average person can expect to take about 4% of their IRA per year and not affect the principle in the IRA. In other words, if you take out more than 4%, you will slowly deplete what you have in your IRA and each year you will ultimately have to live on less or you could run out of money before you expire from the planet.
Here’s what it looks like.
If you have $1M in an IRA and you remove 4% – that gives you $40,000.00 that you can add to your income in retirement. If you add social security at a pretty high rate, say $22,000.00, you would have $62,000.00. You would have to pay taxes out of that as well but it still gives you a decent amount of money to live on. Hopefully, you won’t have a mortgage or credit card debt to worry about in retirement so that should be pretty good.
What happens if you only have $500,000.00 in your IRA?
Well, 4% of $500k is $20,000.00. Add in that large social security again and your total is $42,000.00 before taxes. Now it’s getting pretty tight.
But what happens if you insist on having the $62,000.00 each year?
That would be taking 8% of the $500,000.00 the first year. That’s fine but you are eating into your principle that way.
The first year you would be fine but then the balance in your IRA would no longer be $500,000.00. Instead, your balance would be $480,000.00.
Doing the math, another 8% would not be $40,000.00. Instead it would be $38,400.00.
Still doing ok but now your IRA balance is $441,600.00.
As you can see, you will be pretty good for a while but as you remove the principle from your account, you will see the balance decrease at a more rapid rate each year.
Here is what it looks like each year starting at $500,000.00
Year 1 – $500,000.00 – 8% = $460,000.00
Year 2 – $460,000.00 – 8.7% ($40,200) = $419,800
Year 3 – $419,800.00 – 9.6% ($40,300.80) = $379,499.20
Year 4 – $379,499.20 – 10.6% ($40,226.92) = $339,272.28
Year 5 – $339,272.28 – 11.8% ($40,034.13) = $299,238.15
Year 6 – $299,238.15 – 13.5% ($40,397.15) = $258841.00
Year 7 – $258,841.00 – 15.5% ($40,120.36) = $218,720.64
Year 8 – $218,720.64 – 18.5% ($40,463.32) = $178,257.32
Year 9 – $178,257.32 – 22.5% ($40,107.90) = $138,149.42
Year 10 – $138,149.42 – 29% ($40,063.33) = $98,086.09
Year 11 – $98,086.09 – 41% ($40,215.30) = $57,870.79
Year 12 – $57,870.79 – 69.5% ($40,220.20) = $17,650.59
Year 13 – $17,650.59 – 100% ($17,650.59) = $0.00
As you can see, by the middle of the 13th year, you will be broke and relying on social security for your entire income. Talk about a limited lifestyle.
Having more money in a retirement account means that you can set your standard of living, live worry free about running out of money, and leave something for your children and your grandchildren.
You can review a ton of other sites that talk about how much money you need to retire. I don’t claim to have all the answers and maybe the numbers I am using are way off. I hope that the numbers I am using are extreme and that a more conservative decay in your savings is more the reality.
My wife and I would rather have plenty of savings so that we don’t have to worry about it.
What about you?