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Retirement Reality Check
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- Your retirement plan is a work of art!
- Your nest egg is the envy of your family and friends!
- There is no doubt you will have a long, secure retirement with plenty left over for your heirs!
Right? ...No? ...Not exactly??
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We’ll you’re not alone. According to Federal Reserve data the median value of retirement accounts for a family with head of household age 35 to 44 is $27,900, and $55,500 for the 45-54 age range.
It is becoming increasing difficult for middle class Americans to make ends meet, never mind get ahead of their savings plans.
Sad to say, but that data does not bode well for most people to live comfortably in retirement.
Are you on track?
The best way to determine how much you need to retire is by using a financial
calculator,
but there are some quick rules of thumb you can use:
- The end goal: When you are ready to retire your nest egg should be at least 10 times your current annual income. (Take your current annual income and add a zero -- that's your minimim target nest egg balance to begin a comfortable retirement).
- To checkpoint your nest egg growth: By the time you reach age 40, the balance in your nest egg should roughly equal your annual income at age 40. (If your annual gross income is $70,000, you should have at least that amount in your retirement account by age 40).
Yikes! If you are like most people we know you are getting this sinking pit in your stomach as you apply these rules against your own situation.
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What to do?
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Many hard working, middle class people find it very difficult to make ends meet, never mind make the appropriate contriubtion to their retirement savings.
Even those that are making regular contributions to retirement savings
find it unlikely their nest egg will grow large enough to let live the dream retirement. How about you?
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There is a hope!
Step 1:
Find out how much you need to retire. Use one of the
online calculators to find our your number and write it down.
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Step 2:
Understand and embrace the power of a consistently high rate of compounded interest.
Whatever number you came up with in Step 1, chances are it indicated that you should be saving more for retirement, correct?
But what if you've read all the budgeting books (see right column of this page) and you really have cut back as much as you can, and you still can't find that extra money to fund your retirement?
Answer: If that extra income in not available in your budget, your retirement funds must earn more. Not paying attention to this fact is the single biggest risk you have to a happy, financially secure future.
One of the great things about retirement accounts is that your earnings grow tax-deferred so you can realize the full power of compound interest. So what is the big deal anyway about a few percentage points over time? Does it really make a difference whether your retirement account earns 8%, 10%, or 15% a year?
YES, YES, YES! It matters! In fact this is THE most important factor you need to consider.
You vaguely remember that Junior High School math lesson on simple and compound interest don't you? Obviously you and everyone else in the world knows it is better to have a high rate of return, but have you ever paid attention to the enormous impact that compound interest has on your future financial security and happieness?
Let's take a simple example:
Suppose you are 40 years old and have
$10,000 in an IRA account. For the purpose of this example, let's assume you will never add another dollar to that account out of your own pocket. How much will that $10,000 be worth at age 65? As you can guess the answer depends drastically on your rate of return.
If you were getting a 6% annual return on your investment, then in 25 years that $10,000 would turn into $42,918. How would that same amount grow with a higher rate of return?
| At 8%, in 25 years that $10,000 would turn into $68,484.. |
| At 10%, in 25 years that $10,000 would turn into $108,347.
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| At 15%, in 25 years that $10,000 would turn into $329,189. |
| At 20%, in 25 years that $10,000 would turn into $953,962! |
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Think about that. Without adding a dime to that account you could turn
that $10,000 into almost 1 million dollars.
But who's going to give you 20% interest you say?
You are.
We'll let you in on a 3 little secrets,
- Wealthy people don't get wealthy by settling for market returns.
- The money managers and brokers managing your 401K and mutual funds will get paid millions of dollars from fees and commissions regardless of the return they produce for you.
- As an individual investor, you have advantages that the big fund managers don't have. Once you understand this, you can exploit these advantages
Now what would happen if you were to add a small amount of money to that account each month, how would your nest egg change then? Look at the chart below and pay special attention to the columns with the higher rates of return.
| Monthly addition |
6% interest Over 25 years
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8% interest Over 25 years
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10% interest Over 25 years
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15% interest Over 25 years
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20% interest Over 25 years
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| $0
(no monthly contribution) |
$42,918 |
$68,484 |
$108,347 |
$329,189 |
$953,962 |
| $50 |
$
77,647 |
$115,564 |
$172,764 |
$474,420 |
$1,289,068 |
| $100
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$112,377 |
$162,645 |
$237,181 |
$619,652
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$1,624,175
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| $200 |
$181,835 |
$256,805 |
$366,016 |
$910,114 |
$2,294,388 |
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Step 3:
Take Control.
"Proverb: He who fears something gives it power over him"
So how do you consistently get that 15-20% return with almost no risk? You need to manage a portion of your future for yourself. It is not that difficult once you learn how, but most people won't get started because of fear. Fear that they will lose money. Fear that they will not be able to do as well as the market.
The greater risk is *not* taking some responsibility for your own future. "But I can't beat the market", you say. As we'll explain that's the wrong yardstick to begin with. You don't want to beat the market, you want to earn a consistent level of return each year. If the market looses 8% one year, who wants to "beat the market" by losing only 5% that year? Not us. And hopefully not you. We want to earn at least 15% on our retirement investment.
So why are we sharing this information?
Let's put it this way. We're advocates for the little guy. There are a lot of people in the financial services industry that want to manage our money because that is how they make money. They don't necessarily want us to know what they know, because then we wouldn't need them. Luckily for them, there are many investing myths out there that keep us in check. We accept these myths as truths, and that keeps us from taking action. If you want insight into the extent of these investment myths in our society, check out Ken Fisher's latest book,
The Only Three Questions That Count: Investing by Knowing What Others Don't.
If you haven't heard of Ken before, he has been a columnist for Forbes for the past 20 years, he manages 30 billion in investments for high worth individuals and he is 400 richest person in america. We though it made sense to listen to his opinion on investing myths...
We're not suggesting that you try to manage your entire retirement nest egg yourself. Rather think of it as a new definiton of diversification. To start, leave the majority of your funds with your 401K or IRA, but move a small percentage, maybe 10-20% to a self-directed IRA account.
Can I do this by myself? Absolutely. If there is one book you should read it is
"Rule #1" by Phil Town.
Mr. Town does not come from the finanical services industry; in fact he was a river guide when he was fortunate enough to meet an investment "teacher" that changed his life. It is not only an inspiring story, but Mr. Town shares in very clear terms the approach that Grahm and Buffet follow to gain signficant returns year after year. He explains that there are many investments that the "big guys" can't or won't get into, and he explains how it takes sometimes weeks for the "big guys" to get into a stock. With the right information the small investor can "see" these moves and exploit that advantage to take profit.
Our Free Report, "MyMillionDollarNestEgg Strategy" goes a step further to offer additional useful information such as where to open an account to get $0 commission fees on trades and additional research to help you get started.
"Never be afraid to try something new.
Remember, amateurs built the ark, professionals built the Titanic."
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