If you are young, it probably doesn’t mean too much. For me, it’s kind of like a mythical land so far off into the future that I have trouble wrapping my mind around it. For folks who are older, who are living it or will soon be, it may mean moving to Florida, Arizona, or somewhere else warm. To them, it may mean waking up at 9:00, 10:00 or 11:00 AM without a care in the world or a responsibility to be up early for work; To then, when it’s convenient for you, get out and travel around, see friends who are in the same position as you – retired, living in the warmth, and maybe playing cards or other games. Or, maybe it means having your hands in many different things – playing golf 3 or 4 times a week and tennis on the other days, running a business or two just to keep you sharp and on top of things. The point is “retirement” means something different to every single person on this earth but for many, they may also never truly “retire.”
Merriam-Webster defines “retirement” as the “withdrawal from one’s position or occupation or from active working life.” Dictionary.com defines “retirement” as the “removal of something from service or use,” and “the act of leaving one’s job, career, or occupation permanently, usually because of age.” That sounds like a riveting goal to shoot for, doesn’t it? We need to re-define the word “retirement,” because I hope I never get defined as someone who has been “removed from service or use.” I’ll talk more about this in a second, but like I said, many people never truly “retire” in the general sense of the word.
For the entrepreneur and business owner spirits, they may not retire because they have a drive that few others have and love what they do, so why leave it? (I at least hope they love what they do otherwise why put yourself through the pain of starting and running a business?) Others won’t retire because they don’t have the means to. They didn’t save enough, they didn’t plan appropriately, and they are forced to continue working long after they really want to. I see people all the time who are in that position. They have worked for 20 or 30 years, have saved $500,000, $700,000 or $1,000,000 and want me to wave a magic wand to help them live off of $100,000 or $200,000 per year. That’s a failed strategy and forces you to have very limited options. How can we fix this? Well, we need to revitalize the planning around “retirement.”
Traditional planning is very simple… It is a series of questions like:
-When do you want to retire? The real answer: no one really knows, but let’s go with “60 years old so we have 30 years to work.”
-How much money do you need in retirement? Like the answer to the last question, the same for this one is “no one really knows?” but let’s pick a nice number that seems like a lot today and say “$3 Million.”
Alright, now everyone get out your calculators and I’ll do your retirement planning for you, right here, right now, for free…
Let’s say that you are saving $10,000 per year, so about $833/month, and you need $3 Million in 30 years for retirement, you just solve for X. Your X is the rate of return you must get every single year, without fail, no down years, no 2001 tech bubble bursts, no 2008 housing and credit bubble bursts, no next bubble bursts. That is a static rate of return, never changing, never more or less, 12.514% each year without fail, with perfect financial behavior, which is continuing to invest each month when the entire world is selling and your account is down 37% (see 2008).
With that being said, if we save more money each year, we should be able to dial back the risk involved with chasing a high rate of return, which inevitably allows us have a little more certainty with how things play out. Let’s see…
So saving $24,000 per year, or $2,000 per month for 30 years and wanting to reach $3 Million in retirement, we solve for X and get a linear 8.112% rate of return each and every year, without fail.
Last example, let’s save $50,000 per year, same situation as above… When you solve for X, you get 4.16%.
For anyone who has children that are above a 4th or 5th grade (?) math level (I don’t know when kids start learning this stuff these days), give them your numbers and have them figure out your retirement plan for you. It’s pretty simple, and it’s better than paying a fee to a financial advisor to do that elementary math for you.
Now there are obviously some flaws with this type of planning too. First, will $3 Million (or whatever number you pick out of thin air) be enough? How will that spend in 30 years? I would argue that $3 Million 30 years ago was probably all the money in the world. Now? It’s still a good chunk of change, but 30 years from now? What 3 bills do you have now that you didn’t have 15 years ago? Cell phone, cable, and internet. Will the future bring new technologies that you have to pay for? Do new things cost more? Yes, in most cases.
Second, when you get to “retirement” which, again, is defined as “removal of something from service or use,” and “withdrawal from one’s position or occupation or from active working life,” will you be more concerned about the amount of money you have saved up, or what that money generates for you each month in order to pay bills and do fun things? Mainly the latter as retirees are more focused on their monthly income, given the fact they are no longer working. How long does that money need to last, and are you married? If you are married, must that money last for one lifetime or for two lifetimes? If you love your spouse, that answer is two, if you don’t, the answer is one. How much money needs to be generated each month or each year to provide the kind of retirement that you would be proud of? Do you only live off the interest in order to keep the principal or “nest egg” intact so that your spouse has money when you pass away? Or can you spend down the principal over time? What kind of interest will you be able to generate each year with as much certainly as possible?
Third, what happens if you don’t get the rate of return you needed to get? (Then people get mad at their advisor because they aren’t getting the return they need – when they should be mad because of the improper planning their advisor may have done). What happens if you sell when everyone else sells and then you are too afraid to put your money back in the market because of the bad experience you just had when you lost almost half of your account value in 6 short months (see 2008)? What if you don’t save that consistent amount we talked about earlier each year? “Oh we had a big project or expense this year, we can save more next year…” There’s always a “Next Big Thing.” There are more pressures on our money today than ever before.
Here’s what all this boils down to, if we continue to plan the same way people have planned for over the last century then we will retire like most people have retired over the last century. But we will do so without a few key factors they had which we may not – very few people have pensions now to supplement their lack of savings, and there is a big question mark around social security over the next 15 years let alone 30+ years. The retirement that we will have will be dependent on what we do for ourselves. Don’t rely on the market to save you, don’t rely on your company to save for you, and don’t rely on the government which is $20 Trillion in debt to save you either. You are a master of your own destiny, and it is up to you to save for you. As you can see from above, your children can help you plan for retirement if you want to plan like traditional advisors. A lot has changed though, and a lot will continue to change, which means you must take a different approach and you must plan differently. Think about the big question though, “What does “retirement” mean to you?” Only you can answer that.