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Your Retirement Plan Sucks

March 7, 2018

 


My uncle Pancho(Tío Pancho) was 60 years old when he retired from working at a school in Mexicali, Mexico.  About 4 years into his retirement he opened a torta restaurant down the street from his house.  Not long after that, he died in that same restaurant one Saturday morning.  I'm glad to say that at his funeral there were lots of people who came to pay their respects; a testament to a fulfilling life.  

 

If I could talk to my uncle Pancho 30 years ago and told him that his retirement was only going to be 4 years, do you think he might re-think his retirement strategy?

 

I'm sure that my uncle's retirement strategy is the same as yours.  Work for decades in a job they hate or at least tolerate, save up a pile of money to live off of, then retire.  The problem with this strategy is it just doesn't really work for most people.  Statistics show that the vast majority of Americans are behind in their retirement plans. Below are some statistics on retirement in the USA.

 

  • The average Social Security retirement benefit for January 2017 is $1,360/month or $16,320/yr.

  • About 24% of workers said they had less than $1,000 saved for retirement. A whopping 55% had less than $50,000.

  • According to Fidelity Investments, a 65-year-old couple retiring this year will spend, on average, about $260,000 out of pocket on healthcare in retirement.

  • Income Households Aged 75 and Older: $30,635/year (median)

  • Retired households spend on average $40,938/year

 

The Figure 45 below shows that the expectations of retirement income are different from the reality.

 

Expectation vs Reality: Retirement Income

 

It's hard to say why so many Americans are behind their retirement goals.  Most people work for about 40 years before they are of retirement age. Don't you think that's enough time to build up enough cash, investments, and assets to live off of?  My belief is it's very difficult to plan for something so far into the future and maintain the discipline to do so.  Humans are just not good at that!  So don't you think the traditional retirement strategy is flawed in that respect? 

 

Retirement vs Financial Independence

 

If you ask most people, retirement is their goal to stop working.  However, does that mean they are in a position where you don't need to work anymore?  From Figure 45, many people find that they become heavily dependent on Social Security as a major source of retirement income.  Do they have any control over how much they get each month?  Can it ever be taken away?  

 

With financial independence you have control over your income.  Whether it be in stocks, bonds, or real estate you have some degree of control of how those funds are handled.  

 

 

FIRE: A Different Paradigm

 

What if I told you there's a retirement strategy out there that let's you become financially independent and retire within 20 years?  What we are good at is planning on a per month or per year basis. It makes more sense to figure out how much your ideal lifestyle costs(Freedom Number) and build up passive income producing assets to sustain that lifestyle.  

 

  1. Determine your Freedom Number

  2. Lower your expenses

  3. Increase your working income, if possible

  4. Increase your passive income until it's greater than your freedom number

 

The basic idea is to live as frugally as possible, save as much as possible, and invest in passive income producing assets.  This strategy is Simple, but it's Hard. It takes a lot of discipline, a strong mindset, and a great support network. 

 

You will need to take a side job to make more money or better yet build up a small side business.  Remember, we want to get away from trading our time for money.  We want income sources that scale well. 

 

You will have to give up shopping for expensive clothes. You will have to drive a old car. You will not be taking expensive vacations every year.  You will have to live in a much smaller house than you want.  

 

You will have to learn about investing in passive income assets like real estate and dividend stocks.  You will have to figure out how to get paid to do something that you are inspired to do.  You will have to reach out to like minded people to help build up your professional and support network.

 

Conclusion

 

I often ask people, "If money wasn't an issue, would you go back to work tomorrow?".  I have yet to meet someone that said yes. Would you?  So many of us day dream about that one day we leave our job for good, never to return. We think, "That's the day I'll finally get to live my life with absolute freedom".  I keep wondering if that's what my Tío Pancho thought. 

 

 

 


 

 

Sources:

 

https://faq.ssa.gov/link/portal/34011/34019/Article/3736/What-is-the-average-monthly-benefit-for-a-retired-worker

 

Employee Benefits Research Institute, 2016

 

https://www.newretirement.com/retirement/average-retirement-income-2017/

 

https://money.usnews.com/money/retirement/slideshows/the-high-costs-of-the-retirement-dream

 

https://www.fool.com/retirement/2017/12/16/6-facts-about-your-retirement-savings-you-didnt-kn.aspx

 

https://www.usatoday.com/story/money/personalfinance/retirement/2017/04/28/10-retirement-stats-that-will-blow-you-away/100543308/

 

 

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