Live Learn Invest

Do you want to retire rich or retire poor?

March 29th, 2007 by Kenric

This was a very interesting question that was posed during the Richdad weekend.  Nobody would answer “I want to retire poor.”  But what does that really mean?  It turns out that most of the population is planning on retiring poor.  In fact we are conditioned that we will make less money when we get older.  Think about it, one big so called advantage of those tax deferral programs such as an IRA or 401k is that when you’re older you should be making less money and therefore in a lower tax bracket when it comes time to withdraw the money.

Two weeks ago during March Madness I was actually thinking about this while watching the Illini slowly blow a lead.  They were up 12 points with 8:00 minutes left in the game.  Their lead was slowly dwindling down evey minute.  In the end, Virginia Tech took the lead with 0:37 seconds left.  I said to my friend, “I guess they needed a 14 point lead at the 8:00 minute mark.”  It’s no fun to watch your team’s lead slowly get eroded away and hoping that their four corner offense can outlast their opponent.

But this is exactly how I view financial advisors.  Most financial advisors start with what you want, work up a savings number that you need, take an average life expectancy hope that you don’t outlive their plan.  The basis of their plans is to slowly wither away your savings by timing it so that hopefully you die and the same time your savings run out.

In a very simple example, if you had $500,000 in the bank with 5% interest and wanted to live on $50,000/yr in retirement, your savings will last you 15 years.  If you live 16 years, you’d be screwed.  This is a classic example of retiring poor.  It’s where your yearly draw on your networth/savings is outpacing its returns.  Eventually, your money runs out.

When you retire rich your networth should be much higher when you die than the day you retired.  If you plan your retirement income correctly, you should not have a drop in income on the day you retire.  You shouldn’t have to settle for less than you’re making at your job. 

The graph illustrates both cases.  Look at the difference when your investment return outpaces what you spend.

The talk about, kids are done with college, you are going to downsize your home or you won’t go out as much is a bunch of excuses.  You have all the time in the world now, if you were living on $80,000 a year working full time do you think you can live on $50,000 a year when you have 8 additional free hours a day?  What’s sad is that you now have so much time to travel but you can’t afford to do it!

Posted in Finances |
Stumble it!