Recent Retirement Study

posted in: Everything Else | 0

I read a very stunning recent case study on the retirement balances of Baby Boomers’ (ages 55-65) retirement accounts.  I want to give them the benefit of the doubt, after all they didn’t have all of the wealth of information we have today on financial planning.  No one told them the power of having a 401k and/or investments like we read in the news today.  However, I wanted to shed some light on the staggering numbers in this study.

  • Study covers just over 31,000 respondents aged 55-65
  • Desired retirement income: $45,000 per year
  • Average account balances: $136,200 (which would only generate about $9,000 per year, if invested, which it’s not based on next bullet)
  • 65% of balances were in cash or cash-like assets
 

These numbers are completely horrifying for a huge group of people.  A desired income of $45,000 sounds pretty great, and can more than support a semi-frugal retirement lifestyle with some travel involved.  Unfortunately, a very large percentage of these respondents will never attain close to that based on where they are today due to 2 shortcomings…

 

  1. Lack of savings. Look, $136,200 is a huge amount of money, but not compared to the amount of money these people made in their lifetimes.  I’ll go into some calculations later, but having $136,200 is an extremely low amount for what the average American makes in salary in a lifetime.  Assuming the majority of these respondents made an average salary for their whole lives, they have squandered a lot of money over their careers.
  2. Lack of understanding. Having the majority of money in cash is a completely ridiculous choice, given that the money is losing value instead of gaining value over the years. The average person in this study has taken no risk and chose what they consider the “safe” route, and therefore will never be able to retire.  You tell me what sounds risky about the stock market now.

 

Before I go on and start judging EVERYONE in this category, I completely understand there are some outliers in this group.  Some people experience medical issues that prevent them from working, others fall on hard times and get into debt without choosing to do so.  These aren’t the people I’m talking about.  We can safely assume the majority of these people are over-consumers and poor planners.

 

So let’s stop assuming things and look at the facts:

  • The average American with a high school diploma earns 1.2 million dollars in their lifetime (for 40 working years - $30,000 per year)

  • The average American with a college degree earns 2.1 million dollars in their lifetime (for 40 working years - $52,500 per year)

 

Let’s now look at a person getting on track and saving money at age 25, and the huge numbers we see will indicate that you don’t have to start saving so young to get on track for a nice retirement.  In these calculations, I make some assumptions about tax rates and just assume the averages across all working years (obviously in real life you’d make less than average starting out and work your way up to over the average) .  I can safely assume 7% stock market returns are in play since we actually looking at past performance here. The tax rates respectively for high school/college degree are calculated at 15% and 20%.

Scenario 1: High School Diploma ($30,000 annual salary, $25,500 after tax)

 

  • Person A decides to save 10% of his take home pay every year and invests it in the stock market.
    • Account Balance at age 62: $440,000.
  • Person B: 20% savings rate and invests = $880,000
  • Person C decides to get aggressive: 40% savings rate and invests = $1,760,000

 

Scenario 2: College Diploma ($52,500 annual salary, $44,625 after tax)

 

  • Person A: 10% savings rate and invests = $770,000
  • Person B: 20% savings rate and invests = $1,540,000
  • Person C: 40% savings rate and invests = $3,080,000

 

It’s obviously tough to make completely accurate assumptions for these scenarios, but I expect these to be pretty close estimated.  All of the above savings rates would lend itself to a nice retirement life.  Even the lowest number on here, $440,000 would lend itself to around a $25,000-$30,000 income in retirement.  You can see the discrepancy between all these numbers and an account balance that we see of $136,200.  So…..where the fuck did all the money go?! My guess is you’d get a lot of “interesting” answers.

I find it hard to read regularly about this type of retirement because if you had a free form question at the end of this case study, you’d get 31,000 different excuses as to why their balances weren’t higher.  People tend to have zero accountability for themselves in this case.  If you go to one of these retirement articles you’ll hear half the fucking people say something along the lines of “how can I save money when Obama is ruining my life with all these taxes??”  These same people are driving new cars, going on vacations all the time, smoking, drinking too much, spending money on credit, etc and are offended when something shows them what they haven’t accomplished.

On the bright side of things, I’m sure you will find plenty of people who DID reach their retirement goals while overcoming obstacles along the way.  The fact of the matter is we need to hold ourselves accountable for our financial actions and never put ourselves in situations where we need to make excuses.  The great thing about this country is so many people are doing it wrong, when WE do it right it will seem even more fantastic.  Although, I’m sure all of us would go back and slap some sense into our 20-22 year old selves, there is always time to get back on track.  Many of us make more than these salaries right now and have even MORE room to save.  Get extreme to realize your retirement dreams if you have to.  No one that is reading this blog is likely to go hungry here by living frugally, it’s a matter of cutting out the excess, and as we’ve discussed, there’s a ton of excess in the average person’s budget.  If you are older, in your 40s, 50s, or even 60s and are behind on retirement savings, the same advice holds true.  Better your situation today.  Having to work 20 hours a week is a whole lot better than having to work 40.  There are always attractive “partial” retirement options that any of these study respondents would love to have.

I don’t mean to “call out” anyone with this post; I’m just trying to point out things to avoid it happening to the next set of 55-65 year olds.  We all are going to make a giant amount of money in our working lifetimes, and you would be wise to hold onto as much of it as you can.  Take accountability and do something to better your situation! After all, we want to roll our mini coolers out onto the beach, throw out feet up and our heads back and have not a care in the world during our retirement!  Then when our heads hit the pillow that night, we can think about the endless possibilities for the next day instead of worrying about how we’ll pay for it 🙂

 

 

 

 

 

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