Random Thoughts on Retirement (or Old Age Funding)

Calling it ‘retirement’ doesn’t really mean anything to someone who is 30 years old. Yet it is precisely that decade that can make such a huge difference in someone’s retirement 35 years from now.

• ‘Paying for yourself in old age’ is probably a little bit better than calling it retirement.
• How about making sure you aren’t a burden to your children in old age?
• Or, invest now so when you are old you can do all of those things you don’t have time for now.

Planning for old age isn’t very appealing but having a good time when you are old will be. I think we each could do ourselves a favor by sitting down occasionally and imagining what old age would like with too little money in the bank. This is a sure reality for about 70 million baby boomers.

While you are doing that exercise, take some time to imagine how great life will be if you have plenty of money in the bank and the dignity of having worked and saved to get there. Social Security – this is a promise that no one wants to keep. Young tax payers resent paying into a system where they will likely not see a dime. Raising the ceiling on how much income is taxed could cost jobs and could send us into an economic slowdown that would thwart efforts to salvage Social Security.

Lump sum illusion is when someone has $100,000 or $1,000,000 and thinks it is enough. The correct number to look at is the annual income this can generate. 4% withdrawal rate is a good number to use so $100,000 provides $4,000 annually at retirement or $350 per month. $1,000,000 provides $40,000 in annual income or $3,333 per month. If you are used to a gross income of $15,000 per month, then $3,333 is only 22% of the way there. A million isn’t as big a number as it seems to be!

To replace $180,000 in annual income, you need a portfolio of investments that equal about $4,500,000. How’s that coming along? Employer matching of 401(k) contributions is a gift from heaven; one that too many people are not getting because they are not contributing into their 401(k). Longevity risk means that people are going to live a lot longer than they have been planning for. This means that their money needs to last longer so they need to accumulate more and manage their other risks better.

Inflation on milk is different than inflation on health care or college expenses. When the government reports inflation numbers, it is for a basket of goods. Your basket of goods in old age will likely be made up of travel and health care, both will inflate more than the inflation numbers given by the government.

Compound interest is like magic.