Exactly how much money will you really need by retirement? The Million Dollar Answer!
There are two inescapable facts of life: death, and taxes.
When I was a young boy, it seemed like the number of people who lived to the century mark was so small, the average person only heard about someone achieving about it in the news. If you were lucky you might reach the 80’s but living past that was extremely rare. In most cases, you were going to die sometime in your late 60’s to mid 70’s, and that was that. No one lives forever. We may not like it, but we do have to accept it. None of us are making it out of this world alive.
No one in my family has ever reached 80 , although my aunt has outlived everyone in the family thus far, and will be 77 in November 2018. That’s eleven years longer than my mother, her oldest sister who died at 66, and two decades longer than my father who died at 57, less than 2 months shy of his 58th birthday.
I’m no fool, no siree I want to live to be 103
Unlike my late father who never lived long enough to retire, I do NOT plan to work until the day I die. Accidents do happen, but failing that I’m in far better health than my late parents due to changes in diet and medical advances that keep extending life expectancy in the USA.
Growing up, one of the things I remember is Jiminy Cricket singing the song I’m No Fool for a series of educational safety cartoons on the Mickey Mouse Club TV show. He sings the chorus four times, staring with “I’m no fool, no siree I want to live to be 23, I play safe for you and me ’cause I’m no fool!” The age changes as the song goes on, changing to 33, then 53, and ultimately, 103! I always remember thinking to myself that no one lives THAT long. Now, I’m encountering many people in my day job who are well into their 80’s and 90’s and more and more people are closing in on that mythical 103 from that song. With advances in health science, medicine, and technology progressing at its current rate, I could possibly even live to be 123! Who knows?
That being said, will you have enough money saved for retirement to cover you and your spouse and bridge the span from your last day at the job to your last day on Earth? For most people in the USA, the answer seems to be no. A deafeningly loud, resounding, emphatic NO! According to a report from the Economic Policy Institute (EPI), the average retirement savings of all working-age families, which the EPI defines as those between 32 and 61 years old, is $95,776. So that’s about less than 2 years salary for the average American worker.
A fool and his money are soon parted.
If you’re not saving for retirement in a combination of 401k type plans or IRAs, you’re a fool who’s depending on a government ‘safety net’ which will not allow you enough money to live on comfortably, and probably won’t even exist several decades from now. This past Friday April 6th 2018, I got into an argument at work with a social justice warrior who basically said moving away from Social Security into the stock market was ‘madness’ because the Dow closed down almost 600 points and he was citing everything from the 1929 Stock Market Crash to a total economic hypothetical meltdown where the market hit ZERO and starving people are wandering the countryside to find blades of grass to eat. There was no reaching the poor fool. Every explanation I offered was met with another wacko hypothetical theory. He even brought up concentration camps! It is NOT my job to give history, economic, or civics lessons to people who have the sum total of human knowledge at their fingertips, yet prefer the mindless indoctrination that they have willingly subscribed too. All I can do is worry about myself and watch the tragedy unfold around me by all those fools living in a Utopian dream world.
I am the RICHEST man in my family. I attained my WEALTH not by theft, or deception. I EARNED MY MONEY. I did not inherit it, win it in a lottery, or receive it through a fictitious privilege. I worked for DECADES and invested 10% of my income from DAY ONE! No one held a gun to my head and forced me to do this, I did it. ME, MYSELF, I! Just as I took responsibility for MY choices, you must be accountable for your own decisions. Sitting around waiting for someday and spouting what-if scenarios are what fools do.
Social security is NOT the answer. Everyone in my family who depended on social security, (or still does as is the case of my last living aunt) has lived and ultimately died in poverty. According to Social security, based on my current contributions at my full retirement age (67 years), my payment would be about $ 2,342 a month. If I wait until 70 I’ll get about $ 2,906 a month, but if I jump the gun and snag early retirement at age 62, it would ONLY be $ 1,641 a month. But here’s the real kicker: My estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits. 79% of $1,641 is about $1300 rounded up. I’m certain my rent will be more than that in 2034. If I rely on social security I’ll be the starving man roaming the countryside eating grass.
The Millionaire at large.
The Millionaire Next Door is a 1996 book by Thomas J. Stanley and William D. Danko. It details the financial habits of wealth Americans. These are people who did their ‘homework’ and don’t have money troubles. Although it is over two decades old at this point, the basic wisdom has not changed. Live within your means, don’t spend all your income, don’t waste your money, and invest! Fascinating as the Millionaire next door may be, he or she does not interest me. I’m concerned with the Millionaire under my roof. The Millionaire at large, A.K.A. Michael James Oetting. At current projections, my 401k type retirement account balance should exceed a million dollars by the time I retire. I plan to retire LONG BEFORE 62, so I’m not even considering Social Security. I’m also probably going to retire before 59½ the minimum age you can make withdrawals from a 401k or regular IRA without incurring a 10% early withdrawal penalty. Now with a million dollars, if I maintain an average annual interest rate of 5% or greater, while making withdrawals of 4% annually, that would come to $40,000 per year without diminishing the million dollar balance which would still be increasing at 1%. This could continue up until the year I turn 70½ at which point I would be required by law to take the RMD or face the 50% penalty imposed by the IRS on what I fail to take. That’s because, upon reaching this age, the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans—except Roth IRAs—and pay ordinary income taxes on the taxable portion of your withdrawal. If you don’t take withdrawals, or you take less than you should, you’ll owe a 50% federal penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn. And you’ll still have to withdraw the required amount and pay any income tax due on the taxable amount. IF you ‘forget’ to do this, you can extend it to the following April 1 of the year after your turn 70½ as a ONE TIME late disbursement, but you’ll have to take out double that year, and pay double taxes should you do that because you would have to account for both the prior (late) year and the current year RMD. Failing that if you STILL missed your RMD, the IRS can waive the 50% penalty for good cause. To have the 50% penalty waived by the IRS you must correct your error. You must take the RMD amount that was not taken and file the IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. When you file this form, you do not have to prepay the penalty, but if the form is filed without payment of the 50% penalty and IRS determines that the penalty is owed, you could owe interest on the penalty payment. Form 5329 must be filed to start the statute of limitations clock. Attach a letter of explanation to Form 5329. The letter should include why the RMD was missed, the fact that it has now been taken, and that you have taken steps to be sure that future RMDs will be taken as required. This is also a onetime thing. Do not make a habit of accidentally ‘forgetting’ either on purpose or by accident, because the IRS does not play games, and you will get financially burnt if you play with fire.
Just because you have to take the RMD doesn’t mean you have to spend it, you just can’t keep it in your retirement account. You can buy investment properties, put it in bonds or stocks in a brokerage account, donate it to charity for a tax-write-off, etc. Just don’t let the IRS take half of it away because you ‘forgot’. You can set up most plans to automatically issue the RMD and I would encourage you to also have them withhold the taxes on each disbursement so you don’t end up owing the government taxes you don’t have the cash to cover. If you follow all these suggestions, your money should last as long as you do! As always, I wish you happiness and success!