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Retiring in America Today
Retiring in America today looks much different than it did in past decades with pensions and social security. This article outlines some things to consider when it comes to retirement.
How often do you think about retirement and the income necessary to support your future lifestyle? CNBC recently released an article titled "A quarter of Americans are expecting to delay their retirement due to rising consumer costs". With rising inflation, we know the cost of living is only going to become more expensive, and wages will fail to keep pace. It's never too early to prepare for your future, so in this article, I wanted to highlight some key information for a successful retirement roadmap.
The Nest Egg
One of the most common themes that the majority of Americans subscribe to when it comes to retirement is the "nest egg" theory. We're all familiar with it: "what amount of money do I need to comfortably step away from it all?" This feels like the right perspective to have.
Barring extreme cases like hitting the lottery or inheriting millions from a relative, there's a fundamental issue with this way of thinking: you're constantly worried about how much you have left and when you will run out. You will likely always have an uneasy feeling around finances, because a nest egg forces you to live in a scarce mindset. Instead of focusing on a specific amount of savings or investments you are targeting for retirement, start thinking about the annual income you need to support a desired lifestyle.
Some financial advisors say this income level is 80% of what you live on today. Why 80%? Well, consider the fact that you're no longer in saving mode - you are retired, after all. You'll ideally have a paid off mortgage, which more times than not, is the single largest household expense. The 80% rule is not one size fits all, however. Only you can visualize your desired lifestyle in retirement and work backwards to determine the annual income needed to support it. The easiest way I've found to calculate your current spend is simply pulling annual credit card & bank statements. Personally, I would like to live a carefree lifestyle in my elder years, with money being a non-factor...spoiling the family, golf, more vacations, excess reserves to pass on to the family when I die, etc. In my case, it may be wise to target a more aggressive income level than I live on today.
Sources of money
Now that we are focused on income, as opposed to a nest egg, let's talk about where this income will be generated.
Savings & Investments
The most familiar source of income to the majority of people is savings & retirement accounts. It includes savings accounts, 401(k), Roth IRA's, SDIRA's, and so on. Although it is not my belief that the better part of your retirement should be funded by these accounts (nest egg), they are popular and undoubtedly have a place. Another reason these accounts are not my primary focus is due to the volatility of the equities market, which they are all tied to. As a quick example, take a look at the 2022 performance of the S&P 500 (below). Year to date, in retirement accounts tied to the stock market, $3T has been lost due to the bear market.
Social Security
I'll start off by saying, many experts do not expect Social Security to last. I'm not here to speculate on that argument, but why take any chances? The way I see it, retirees should see SS as the cherry on top. It does not seem wise to rely on SS playing a big factor in your retirement income given its uncertainty. According to Robinhood, the US government recently increased SS payouts by 8.7%, bringing the monthly payouts to just over $1,800 on average. Nearly 25% of all retirees rely on these checks for most of their income. The primary factors behind the SS benefit is based on the year you were born, when you plan to take the benefit, and your average income. You can setup an account to start getting an idea of your numbers here: https://secure.ssa.gov/RIL/SiView.action
Pensions
These aren't quite as popular today, if at all. I cannot name one company or millennial who's benefiting from a pension. This doesn't mean they're non-existent, but it's safe to say they are rare. If it's something you can utilize, great! You're one of the lucky ones. Be sure to factor in your monthly payout into your sources of income.
Real Estate Income
If you are reading this today and do not own any real estate, the good news is there's still time. Real Estate can act as a major source of passive income, and for many retirees, is their #1 source of income during retirement. Quick example: Let's say you want to retire 15 years from today. With the help of an experienced investor or agent, identify a piece of real estate that breaks even on a 15 year mortgage, meaning the income from rent will at least break even against your mortgage and other expenses. In 15 years, the house is paid off, and you cut out the largest expense on the investment - a mortgage payment. To maintain, simply pay taxes, insurance, maintenance, and property management. Voila! You own a property free & clear that produces income for you month in and month out. If this sounds like too much time and effort, consider passively investing into real estate syndications.
Another real estate source to consider is your home equity. Even if your home is paid off, you can either do a cash out refinance, HELOC, or reverse mortgage to create income.
4% Rule
Now let's tie it altogether using the 4% Rule. The 4% rule says you can withdraw 4% per year from your Savings & Investment accounts to comfortably last a 25-30 year retirement (1/25 = 4%). Keep in mind the investments should still hopefully be growing in that 25 year period, assuming all of it is not cash. Cash holdings will be continually eroded by inflation. There are many caveats to note here...what the markets do in that time frame, how long you live, unexpected expenses, etc.
Let's imagine you and your spouse plan to have a $120K/year lifestyle. To figure this out, determine what you are spending annually today, and then back into what you'd like your future number to be. Consider what large expenses you have now and the lifestyle changes you believe will happen when the time comes. If you follow the 4% Rule, and plan to have a nest egg, you will need $3M saved to produce a sustained $120,000 per year.
Instead of only considering a single lump some, this is why passive investments like real estate are so powerful. They are perpetual. You have recurring income that is not affected by the ebbs & flows of the stock market. It doesn't really matter what's happening economically, or to the U.S. dollar, or to interest rates. You own something of real value that is productive month in and month out. Relating this back to the $120K/year example, you could very reasonably own enough real estate that is passively paying you $5K per month - especially if retirement is many years away. $5,000 monthly gets you halfway to your goal and is far more secure and sustainable.
Bottom Line & Key Takeaways
There's no way to predict exactly what's going to happen when you retire, but that's no excuse to ignore the fact that it will be here one day. To recap:
Play around with a "nest egg" number to give you an idea of what annual income it can produce using the 4% rule. If you want to be more conservative, use 3%
Figure out the annual income you spend today
Based on your lifestyle now, what future income is needed to support your desired lifestyle? Some experts suggest 80%
So that you're not solely relying on a lump sum, begin to strategize alternative income sources that pay you monthly. Real estate syndications are a great place to start