BUSTED: Retirement Myths
April 21st, 2021 by D.C. Poc
If there is one thing we can agree on, it is that everyone has an opinion, they are often different, and just because someone has their own opinion that they’re very passionate about doesn’t make them right. Heck, not everything you read on this site is “right”, depending on individual perspectives. Rather, based on our own experiences and research we believe it is “most preferred”, but we can’t stick a flag in the ground and lay our claim to being the only guys on the internet that are “right”. That’s just not possible in 2021. But what we can do is discuss some of these myths that surround retirement savings. We can put them out in the open and see how it all shakes out.
You have to make ‘six-figures’ to retire!
This is obviously not true, but yet, people still believe it and somehow fall into the trap of thinking they’ll never be able to stop working. Using a number such as “six-figures” is also extremely ambiguous and doesn’t actually refer to a specific amount of money. Are we talking $100,000 or $999,999? There is a pretty decent gap between the two. Which areas does this apply to - metropolitan, rural, or the suburbs? What if you work longer, does the ‘six-figure’ threshold no longer matter? By now, you’re probably starting to understand how ridiculous this is.
Several things impact your future retirement, but the mere milestones of reaching a six-figure salary is not one of them. Things that will matter are how you spend your money, savings rate, geographic area (i.e. low cost vs. high cost), etc. Plenty of people have a family of four while making less than $100k a year, and yet, still find a way to retire. This can be done by establishing good spending and savings habits early, and committing to the cause.
You must save 15% of your income
I especially hate this, and it’s probably because I see it on Facebook 2-3 times per week. Someone asks for advice, a retirement “expert” chimes in and says “contribute 15% of your salary for life, you’ll be great!”, and the person then does it. They later repeat the same useless information to other people. Increasing the infection rate of financial idiocy. Question: how on earth can one contribution percentage be correct for 100% of the population? It can’t be. For the record, I’m not arguing with 15% as a good starting point. That very well may be the case, although, my preferred starting point is the IRS maximum. I speak more about this in my article “Don’t Miss Out on Massive Savings with these Tax Secrets - Contribution Limits for 2021”.
Instead, everyone should put the time and effort to forecast what their needs may look like in retirement. Then, based on the outcome of those estimates, you can work backward and arrive at a savings rate. For example: you calculate that you’ll get $30k in social security and $30k in pension. This accounts for $60k per year income before taxes in retirement. After accounting for taxes, take the total funds needed annually in retirement, subtract $60k from it and see what you get (NOTE: for the sake of simplicity, I’m not including taxes as it is highly variable). This is the number you’ll need to generate from your savings in retirement on an annual basis.
Social Security: $30k
Savings Needed: $40k
In order to generate $40k per year, you can safely say that $1.2MM (40,000 x 30 years) should do the trick. This is especially true considering I’m not even taking interest into account. Now you can play with different contribution scenarios and calculators to see what you need to do in order to meet that need. By all means, this quick math isn’t the best way to do this. I personally use a Google Sheet that has all of my forecasts built in. If the market loses 10% this year, that gets entered into my sheet and updates all of my future numbers providing me with an up-to-date forecast. If I bought Tesla and it returned 50% this year, that win gets added into the numbers.
The point of this was to quickly dispel the “15% of salary” rule that so many people live by. By the time you get done running projections, you may discover you only need to save 5% of your salary, but since you read The Wealthy Idiots and realize that a high savings rate is key, you contribute the IRS maximum instead. Good call. You may also realize that 15% just isn’t enough and would force you to save a lot more in later years. Now that you know this you could contribute 25% from the beginning and set yourself up for success. That’s how we do things here at The Wealthy Idiots.
I probably won’t get social security
This one is particularly fun. Honestly, who knows. If you are smart enough to predict the future on this then you also should have owned Tesla and Amazon stock at their respective Initial Public Offerings (IPOs). The forecasts of doom and gloom have been going on for decades when it comes to social security. There is some merit to it as the social security trust fund is, in fact, in trouble. That’s indisputable. But that doesn’t mean an entire generation of retirees won’t receive payments. It is highly likely that the shortfall gets filled in somehow, and that, ultimately, people will continue to receive social security payments. What this will look like is beyond my ability to predict. Personally, I assume that I’ll get 75% of my current estimate that can be found on the social security website. If you haven’t signed up, you definitely should as it allows you to review earnings records and benefit amounts at different ages. It is a very useful planning tool. Just don’t put all of your eggs in this basket, just like you shouldn’t any others.
Worst case, I’ll work until I’m 70!
Do you really want to actively work at age 62? 65? 70? I don’t, and I’m taking every planning step necessary to ensure I won’t. My savings goals are so far past what I’ll actually need in retirement, that I should leave myself plenty of room to wiggle, and that’s how I want it. Worst case, I’ll still retire at 57 or earlier and just skip one of my five annual vacations I have planned and maybe pass on purchasing the Porsche 911 GT2.
Remember this: you may not be able to work as effectively or efficiently as you did in the earlier part of your career. You also may not be as valuable to an employer as you were in the past. As you age, your skills do as well and younger individuals will be motivated to take your spot. Don’t discount this as you begin to enter retirement age. Working for the same income you were accustomed to may not be feasible. You also shouldn’t assume that you will be in good enough health to work in retirement. As we age, our bodies start pushing back against tasks that we once took for granted. Don’t underestimate the downsides of aging.
If the market is bad, I’ll wait until next year
One of the focuses of The Wealthy Idiots, is to completely delete this line of thought from your brain. If you plan appropriately, and take reasonable risks, you should not have to delay retirement because of bad market conditions. Not to mention, what guarantees the market will recover in a year or two? Some bear markets can last a decade. Are you willing to push your end date from 57 to 67? I’m not. Don’t start repeating this myth at a young age. You’ll regret it.
Instead, start developing a sound financial plan that will bring you into retirement on-time, on your terms, and with the correct amount of risk. As you continue on your path to retirement, your progress will be very clear. Your forecasts should get tighter and tighter as you move closer to retirement. So technically, you should have less uncertainty in the couple of years leading up to retirement than you did 20 years prior. Make a plan and execute it.
I’ll be good, I’m getting an inheritance
You know the saying “a bird in the hand is worth two in the bush?” Yeah, that applies here. An inheritance should never be your retirement plan. You have no idea what the future holds, and until that money is in your hand, there is no guarantee that you’ll get it (NOTE: there are exceptions to this, and there are ways that this could be guaranteed through an estate plan, or trust, etc. In these situations it would be advisable to speak with your attorney before making plans for the money).
There are so many ways that counting on your inheritance can go wrong. For one, the money could get spent on a myriad of things just prior to death, including in-home care, nursing home costs, assisted living, home repairs, and the list goes on. So even if Grandma is 101 years old and still has $1MM, it doesn’t mean that can’t change. You also have to accept the possibility that Grandma may not leave you that money. Maybe she has aspirations to donate the entire sum to charity, but she hasn’t had the courage to tell you. Or, perhaps, she knows someone in need and has decided to leave the inheritance to them. There are countless ways this could go sideways, and I honestly couldn't name them all if I tried, but I think the point is clear - don’t include a prospective inheritance in retirement planning.
To summarize all of the above, the best thing you can do is set financial goals, strive to reach them, and track your progress continuously! By doing this, you’ll know exactly where you stand at all times and be prepared for any bumps along the way. Rather than have an unplanned emergency derail your financial train, why don’t you plan ahead so those unexpected events are just a small bump on the tracks? Keep planning, Idiot Nation!
D.C. joined the Marine Corps right out of high school. When he left active duty, after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time) he quickly realized he needed to learn how to save to secure his future. After nearly ten years of research, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!