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
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
$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
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
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 retirementThe 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 websiteswww.fmgonline.com and
www.quietmillionaire.comor telephone us at 513-984-6696.