Today, Mr Credit Card from www.askmrcreditcard.com is going to write about a topic that may stir a little controversy – the problem about thinking about “retirement savings” and proposes that we should think about “generating retirement income” instead. Please check out his best credit card recommendations and business credit card sections.
The term retirement did not exist in the 19th century. Back then in the “old days”, folks did not think about retirement. Families had businesses and they passed them on to their kids. The family was a strong unit. Very often, families passed on their business to the next generation.
But somewhere in the 20th century (at least in the United States), the term “retirement” became really a catch phrase. I’m not too sure where it all originated. Perhaps it was the passing of social security in the 30s and the generous pensions that came with government jobs. It could have started because of the industrial revolution. Folks who used to work in the fields came to the cities and did manual work for big companies.
Whatever the origins, the “standard recipe” for retirement seems to be as follows:
Spend less than you earn – Extremely smart advice in my opinion.
Putting part of that savings into a retirement account – On paper you cannot really argue with this.
Withdraw 4% from your portfolio every year – Going with the assumption that one will live about 30 years after retirement, withdrawing 4% a year from your portfolio is the magical number that has the best chance of keeping your portfolio intact for those 30 years. (we are assuming a retirement age of 65).
Aim for the magical $1 million in retirement savings – For some reason, the magical $1 million appears to be the number. But I question whether this number is realistic today.
I have two big issues with the “mindset” of “looking forward to retirement”.
1. You never know if you will ever save enough – Yes, that’s right. You never know if you will ever save enough. The traditional figure says $1 million. But because we run an inflationary monetary policy (ie consumer prices go up 1% to 2% a year (on average anyway), you will probably need a much higher figure now.
You never know how your portfolio will do when you retire. You might save up what you think is enough but what happens if you had plans to retire in a year where the stock market tanked (like in 2008) and you lost 30% or 40%? That could essentially wreck your retirement plans!
You also never what your tax rate is going to be. Look, most of us save or retirement in taxed deferred accounts like a company 401k and a IRA account. You can contribute tax deferred income but withdrawal will be taxed at ordinary income tax rates. Given the enormous Federal deficits we have, one can only speculate that taxes has only one way to go (and that is up).
Saving for retirement may simply be unrealistic for many folks – I’m going to cause a stinker here but I really think it would be unrealistic for some people to save enough for retirement. Someone may be stuck in a low paying job and unless some changes are made, “saving for a retirement” may be an unrealistic situation. A family could have a member with special needs and that could be a huge drain on someone’s finances. Perhaps, you could have a long term medical problem that cost money to treat frequently and also prevents you to getting really highly paid jobs.
The Mindset Trap If You All You Are Concerned With Retirement Savings
However, I think the greatest trap in having the “can’t wait to retire mindset” is that it implies a few things. For one, if you do not enjoy what you are doing, I bet you are constantly dreaming about retirement, then there is a good chance that you are not enjoying what you are doing. And there lies the crux of something very important. Folks who enjoy what they are doing never think about retirement. They just want to keep doing what they are doing. Many folks who do not really love their work look forward to retirement so they could “do what they really enjoy”.
So if we should not be just thinking about retirement, what should we be focusing on and planning for? Here are some of my thoughts.
Focus on doing what you really want to do now – I want to suggest that rather than simply thinking about retirement, we should instead try to find what really makes us tick and perhaps figure a way to make a living doing what what we love. That is obviously more easily said than done. If you are unhappy with your job, do some soul searching. And work towards building a career that you would have fun.
Having 2 Careers Now – One of the things perhaps we can all do is to really think (right now) about a “second career” if you are unhappy with your present situation is to seriously think about what you really want to do and figure a way of incorporating that into your life right now. There is no fixed answers to how to do this and each one of us will have a different route to this. Perhaps we have to think more like sports stars (whose careers are short). They not only have to be smart with the money they earn, but they also have to think about what to do when their sports careers end. Many sports stars prepare for this by getting their coaching certifications, or perhaps getting a job as a sports commentator. Having a second job in a related field is much easier. For example, I know friends who do consulting part time and say they will continue to do this even in retirement.
Focus on how to generate income going forward – So what I am saying is that rather than simply “saving for retirement”, it is much better to think about “generating retirement income” (and not just depending on portfolio income). One method is to figure out how to turn you hobby (or something you really enjoy doing) into an income source. For example, if you like to teach, consider getting a part time job teaching somewhere NOW. Perhaps you like to do consulting – then find some gigs to do NOW. Maybe you like writing books. Then work on it now to get it published.
Ending Thoughts – I could go on and on about this topic. But here is the rub. Our parents and the baby boomers grew up in an era of prosperity and have things like lifetime company pensions and social security. Due to the state of our Federal Government finances and the fact that companies no longer offer pensions and have instead shifted the burden to employees in the form of 401ks, the whole concept of retirement savings is filled with traps and so many things that could go wrong. Furthermore, some folks will just never to able to save up enough. Many folks (I feel) also focus too much on “retirement savings” at the expense of “generating income during retirement”. That, I feel, will provide more security than just have a “retirement portfolio”. Having said all that, there is just no easy answers because the world changes too fast and there is simply not a fixed answer to help us navigate our path towards “old age”!
What are your thoughts and “retirement plans”?