May 12th, 2010 → 4:07 pm @ Kris Krohn
When I do these calculations for most people I meet with — and even when I add Social Security to the total — it’s realized that they’ll be forced to live off a third or less of what they have been accustomed to their whole lives. Try this exercise for yourself.
1. Write down how much of your income you consume annually for living expenses and recreation.
Total Expenses (A): ____________
2. Write down how much you currently have in 401(k)s, IRAs, annuities, or mutual funds.
Total Savings (B): _____________
3. Next, write down the best scenario of what you think those funds will grow to by the time you reach age sixty-five.
Projected Total Savings (C): ______________
4. Multiply your final projected number (C) by 5 percent to get the annual dividend you’ll receive at retirement. (C × .05 = D)
Projected Annual Retirement Dividend (D): _______________
5. Now calculate what percentage of your current standard of living that dividend will support. (D ÷ A = E) Convert E into a percentage by multiplying by 100.
Retirement Income as a Percentage of Your Current Standard of Living (E): __________
May 11th, 2010 → 4:00 am @ Kris Krohn
Specifically, we’ve been trained to think that the road to retirement is to work at the same job for thirty years, contribute to a 401(k), IRA, or other qualified plan, diversify our portfolio, and wait, counting on the market to bring us the returns we need to build a large enough “nest egg” that will allow us to live off the interest.
This system — this accumulation mind-set — is broken and outdated.
It hasn’t worked for the vast majority of workers. Furthermore, its chances for success only get dimmer with time as the financial crisis deepens and we continue to live longer.
Even if we assume perfect market conditions, will traditional savings plans be enough?
Almost everyone I pose that question to answers “No.”
If that’s the case, then why do we continue contributing to something that we already know is broken?
(If you question whether traditional investing is broken, read this article that explains why your 401(k) may be your riskiest investment.)
For most, the annual retirement income will provide only a small fraction of what is needed to maintain the current standard of living during retirement.
When I do these calculations for most people I meet with — and even when I add Social Security to the total — it’s realized that they’ll be forced to live off a third or less of what they have been accustomed to their whole lives.
Furthermore, when you add inflation to the calculations, the projections look even grimmer.
It’s clear to see why I call this system broken; it’s simply impossible for most people to accumulate enough money to make it work.
