How to Quit Working and Not Run Out of Money During Retirement

How to Quit Working and Not Run Out of Money During Retirement

Prior to the twentieth century, retirement was only a wishful dream and not a reality.

Most people worked until the day they died. Then, by the 1950s, the percentage of

people working after age sixty-five dropped to fifty percent, and by 1990s, that

percentage was down to only sixteen percent of workers not retiring. However, times

are changing again, and now an increasing number of people over age sixty-five are

continuing to work. For some it is by choice, for many others it is to maintain their

accustomed standard of living, but for increasing numbers of people it will be just to

survive financially.

Most people do not plan to fail, but they do fail to plan

The main reason that most people cannot afford to retire is failing to plan and start early

to save enough for retirement. They delay, dream, wish, and hope rather than set

specific goals and seriously work a plan to achieve them. The failure to plan and save

for retirement is an overwhelming mistake because it is usually impossible to play “catch

up” during the accumulation stage for retirement and there is no turning back once the

actual retirement decision has been made. Keep in mind that retirement can be made by

choice as planned or by circumstance, which may not always be on your terms.

Unfortunately, many high-income earners are irresponsible, extravagant spenders who

typically allocate only a relatively small portion of each paycheck for retirement savings.

They foolishly believe that the cost of not planning and saving for retirement is small

and that it will take only a little bit of extra effort in the future to make up for lost time.

Not knowing what needs to be done (lack of knowledge) and putting off what needs to

be done (procrastination) is a deadly combination that steals potential wealth.

Dynamic Trends Affecting the Affordability of Retirement

Knowing the dynamic trends affecting the affordability of retirement will alert you about

today’s mounting obstacles and pitfalls associated with retirement planning and why you

must start intelligent planning earlier and more diligently than the previous generations

of workers in order to quit working when you want to and not run out of money.

People are living longer during retirement and therefore need

to accumulate more money than ever before to last a lifetime

Today, a sixty-five-year-old male can expect to live another sixteen years on average,

while a female at age sixty-five can expect to live another nineteen and a half years.

This means that there will be an increasingly large widowed population, especially when

you consider that most wives are younger than their husbands. Therefore, women are

even more likely to experience the consequences of inadequate savings for retirement.

Most workers are not making the maximum contributions allowable to their retirement

plans. Even if they are saving the maximum allowable in their retirement savings plan,

that amount alone will usually be far from sufficient to meet many accustomed

standards of living. Supplemental saving for retirement must also be done beyond just

retirement plans and IRAs.

However, research shows that the savings rate for average American workers as a

percentage of their income is near zero. In other words, they spend what they make.

Most pre-retirees and retirees do not understand how fast increases in the cost of living,

income taxes, estate taxes, and a catastrophic illness can wipe out even substantial

retirement saving accumulations. You need to account for these things in order to plan

and save adequately so you can know for sure when you can quit work.

Because of poorly structured investment management programs,

it will take a longer time and require larger amounts of money to

be accumulated in order to fund a secure retirement

For overly aggressive investors, greed often turns to grief when stock market

adjustments cause devastating losses. Alternatively, for overly conservative investors,

their money is often not working hard enough to grow and keep pace with inflation.

Consider the following, which, for simplistic purposes, have no tax consequences

factored in:

$1,000,000 over a twenty-year period, you must save $15,872 each year

during the accumulation period.

With a ten percent average rate of return, in order to accumulate

$1,000,000 over a twenty-year period, you must save $32,290 each year

during the accumulation period.

In this example, the lower four percent rate of return requires you to save more than

twice as much each year in order to accomplish the same $1,000,000 result as the

higher ten percent rate of return. By intelligently structuring your investment portfolio in

accordance with your risk tolerance comfort level, you can let your money work harder

for you instead of you working harder for your money.

With a four percent average rate of return, in order to accumulate

Social Security alone will not be a reliable source of adequate

income for retirement security

Social Security started in 1935 and was greatly liberalized between 1950 and 1975.

Since then, the demographics have changed so that today the ratio of retirees collecting

Social Security checks is increasing relative to the number of current workers who are

contributing to the system. This has made the financial future of Social Security

uncertain and unsound unless restructuring and additional funding is implemented.

Social Security presently represents about forty percent of the retirement income that

the average retiree lives on. However, Social Security is becoming the primary source of

retirement income for the increasing number of baby boomers who are retiring. This is

because the private pension income retirement plan is disappearing, and the amount of

savings being set aside by workers for adequately funding their retirement income

needs is insufficient. As a result, the present structure of Social Security system will be

challenged by the increasing demographic and financial demands being made upon it.

Pension income retirement plans have been replaced by

employee contribution retirement plans

Historically, the pension benefit retirement plan funded by the employer provided the

employee a lifetime of certain retirement income. Today, it has been replaced with the

employee contribution retirement plan being funded primarily by the employee, which

provides the employee an uncertain amount of retirement income.

It used to be commonplace that people remained with the same employer for their

entire working life and in return the employer funded a pension income retirement plan,

which provided the employees with income for their entire retirement life. The amount

of the retirement income benefit was defined based upon the employees’ length of

employment and income level, and accordingly the pension plan in technical terms is

referred to as a defined benefit plan.

Today, the structure and funding of retirement plans have changed to an employee

contribution retirement plan because employees typically make multiple job changes and

because the pension funding requirements have become too costly for employers.

Instead, it is now the employees who are primarily responsible for funding their own

retirement income needs by contributing a defined amount of their earned income to a

retirement plan such as a 401(k), 403(b), SEP-IRA, or SIMPLE-IRA plan, which in

technical terms is referred to as defined contribution plan.

To illustrate the magnitude of this shift in retirement accumulation responsibility from

the employer to the employee, consider the following examples, which, for simplicity’s

purpose, have no tax consequences factored in:

income benefit of $50,000 a year in today’s dollars and that during retirement

increases each year for inflation at five percent a year (assume twenty-five years

of retirement), you must accumulate $843,000 and earn an eight percent average

rate of return on your investments.

In order to replicate a pension plan that produces a defined annual retirement

accumulation period before retirement), you must save $17,057 each year and

earn an average eight percent investment rate of return during the accumulation


Unfortunately, most workers do not sufficiently save toward their retirement. Furthermore,

defined contribution retirement plans typically offer limited and often underperforming

investment options from which to select. Moreover, even when employees are offered

worthwhile investment options, many plan participants make poor selections for achieving

the required growth.

Worst of all, some retirement plans encourage or require that employee investments be

concentrated in the employer’s company stock. This lack of diversification can be very

risky even if the company stock is a large publicly traded company. Just ask the thousands

of Enron employees whose financial lives and retirement dreams were suddenly ruined in

2001 when Enron’s stock, which was positioned inside the employees’ 401(k) plan,

plunged in value from $81.40 per share in January 2001 to a mere 40 cents per share by

December of that same year. In terms of total dollars, $1 million vanished to become a

paltry $4,914!

In order to accumulate the above required $843,000 (assume a twenty-year

College funding costs for educating children will delay or destroy

retirement plans for an increasing number of families

Many married couples are starting their families later in life and will be paying for college

close to traditional retirement ages. Trying to catch up and save enough for retirement

in the shorter time frame after the college funding commitment ends will severely

impact your ability to retire. Consider the following examples, which, for simplistic

purposes, have no tax consequences factored in:

for retirement at age sixty-five, you must save $5,527 each year

and earn an average ten percent investment rate of return during

the thirty-year accumulation period.

If you are now age thirty-five and want to accumulate $1,000,000

for retirement at age sixty-five, you must save $57,041 each year

and earn an average ten percent investment rate of return during

the ten-year accumulation period.

Americans typically do not save enough for funding future major milestones such as

college and retirement, and trying to catch up because of a delayed start usually does

not work. Each year of delaying savings dramatically impacts your ability to meet future

needs. Taking advantage of long-term compounding investment returns is a compelling

reason for starting early and intelligently structuring a disciplined investment program

for retirement. The challenge many families face to save enough for retirement is made

difficult because parents have to divert money to pay for educating their children and

then try to make up for lost time when that commitment is done.

If you have children to educate, how old will you be when your youngest child graduates

from college? Will you have to rob your retirement savings to pay for college?

Remember, your retirement plan savings alone is probably not enough to financially

secure your retirement. It is going to take a lot of money to retire. Do you know how

much? By following the cost-reducing college planning strategies which are detailed in

FMG’s book by Brett Wilder,

money for retirement that otherwise will have to be used for college funding.

If you are now age fifty-five and want to accumulate $1,000,000The Quiet Millionaire, you will be able to allocate more

Failing health, rather than choice, will become the primary reason

for retiring

An increasing number of people are working to age sixty-five and beyond for various

reasons such as to retain their group health insurance coverage until they are eligible for

Medicare at age sixty-five, to survive financially, or just because they enjoy working,

which many quiet millionaires do. As a result, many people continue to work until they

physically can no longer commit to maintaining employment. This uncertainty of how

long you can physically remain in the workforce before failing health forces retirement

can complicate the financial planning analysis and cloud what preparation is required for

adequate funding.

Long-term-care expenses, out-of-pocket prescription costs,

and other medical expenses are becoming a major financial

factor for accelerated depletion of retirement savings

Long-term care can devastate retirement resources. Most people do not incorporate

quantified “what if” medical expense scenarios into their retirement cash flow analysis. A

fact of reality is that more women than men will suffer the consequences of not

planning for high medical expenses during retirement. This is because wives are more

frequently the surviving spouse, and furthermore the husband may have already

seriously impacted the family’s savings with a costly illness prior to death.

Retirees will have higher levels of debt than previous generations

to repay out of their retirement cash flow

Credit cards did not exit for previous generations of retirees, and auto and consumer

credit loans were not available to anyone without earned income. Furthermore, it was

considered intelligent retirement planning to pay off a mortgage before retirement.

However, during a low-interest-rate environment, this may not be the best strategy to

implement. If the mortgage debt interest rate is low relative to the expected rate of

return on investments, maintaining a mortgage during retirement could be an intelligent

leveraging strategy for additional retirement capital. In addition, the mortgage interest

deduction can offset the income tax liability incurred as money is being withdrawn from

tax-deferred retirement plans.

Using low-interest-rate borrowed money that a mortgage can provide enables you to

utilize the spread or differential in interest rates. This is what skilled lenders such as

bankers do very profitably, and for pre-retirees and retirees, it is an opportunity to

utilize the lender’s money for a more profitable retirement. With a fixed low-interest-rate

mortgage, the monthly repayment amount remains the same (significantly, a mortgage

payment does not increase with inflation) while the interest cost steadily decreases each

month. Meanwhile, the residence’s market value continues to appreciate whether or not

there is a low interest mortgage loan outstanding.

The home equity money becomes available for investment instead of being dead or

wasted retirement capital, which, outside the house, could be providing compounding

investment growth in order to extend the length of time before retirement money might

run out. Furthermore, if desired, the invested home equity money is available to reduce

or pay off the mortgage balance at any time.

Caution: This intelligent mortgage leveraging approach should be done only with the

careful guidance of a comprehensive financial advisor. As with all debt management,

there are many planning considerations that need to be discussed and evaluated, and it

is not recommended as an appropriate strategy for everyone.

Accumulating and keeping wealth require financial skill

In retirement, the primary financial objective for most people shifts from accumulating

and growing their wealth to preserving and protecting their wealth. However, it is just as

important during retirement to still grow assets as well as preserve and protect them in

order to keep up with the increasing living costs and to manage the uncertainties that

can occur with today’s long retirement duration. The biggest uncertainty of all is how

long you are going to live. FMG’s book by Brett Wilder,

how to quit working and not run out of money during retirement

The Quiet Millionaire discusses

FMG Welcomes Referrals for New Clients to Assist

Today, many people are financially and emotionally distressed about their retirement

hopes as a result of the financial crisis and do not know what to consider when looking

for retirement security. FMG is available to offer with no charge or obligation an

introductory, get acquainted consultation to determine if and how we might be able to

assist others with our services. Our most important resource for deriving new clients is

from satisfied clients and professionals who refer others to us. We welcome referrals

and prospective clients can view our Internet websites and

or telephone us at 513-984-6696.

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