An old friend of mine from college caught up with me the other day. I hadn’t talked with him in well over a decade as life happened to get in the way. It was truly a pleasure to have had the opportunity to catch up with him and to hear how he and his family were doing.
Not unlike many of us, many things had happened to him in a decade. A move across the country, raising a couple of boys and subsequently a divorce from his wife of almost twenty years within the last year. It was this last life change that we spent a significant amount of time chatting about.
The financial toll of Life
It didn’t surprise me much to hear him tell me how much that his divorce set him back financially. Neither he nor his wife were ever high wage earners, choosing instead to spend their entire careers working in non-profit organizations.
He used to always tell me that they were ‘vocationally challenged’. The move that he and his wife made, although good from a lifestyle perspective, actually cost them way more in housing than they anticipated and the overall impact was an inability to save for retirement within the past decade as they had originally planned.
The bottom line was that my friend confided in me that at 50 years old, he had no retirement savings and was basically starting over from scratch.
As depressing a thought as it was, it dawned on me that although my friend had the ability to be in a much better place financially he was essentially just like 50% of American households, who have nothing at all in retirement savings. In fact, 29% of Americans aged 55 years old don’t have either retirement savings or a pension (according to the General Accounting Office).
The Epiphany
Knowing how much time I spent over the years on planning, saving and investing for retirement my friend asked me for my advice. The initial firing of the synapses in my brain were calling for a delicate way to let my friend down gently in light of the financial disaster that he appeared to be in.
Then all of a sudden came the following words across my lips, “You know G, we’re all just 15 years away from retirement if we want to be”. Upon hearing my own words I was momentarily stunned. This allowed my friend to respond in the void, “Do you really think so?”.
It wasn’t really an epiphany as people describe epiphanies happening. In fact, I had been going over a similar exercise for a bunch of my students for the past 3 years where I would show them that a significant amount of households could actually have a very modest (read that as MODEST, okay?) retirement in just 15 years if they committed to it.
No, they weren’t going to be down at the bottle club or the casino every night. No, they weren’t going to be buying that little vacation bungalow in the islands. And No, they weren’t going to be buying a Mercedes or a country club membership either. However, they were going to be able to retire if they could figure out how to get their expenses to a certain level.
Anybody can retire in 15 years – If they’re committed to the cause
It is true, just about everyone that can make a modest income is about 15 years away from retirement. Coincidentally for my friend, I based my figures on a 50-year old man who is set to retire at 65 years old and who currently makes $60,000 a year in salary.
In addition, this individual is single, has worked his entire life under the Social Security system and at the age of 50 doesn’t have ANY retirement savings outside of Social Security. Nada!
Let’s stop here for a quick reframe. I realize that in the not too distant past, a few years ago in fact, if you were to have used a retirement calculator it would have projected that our test case would need somewhere around $1 million dollars or more to retire. I get it.
Those old retirement calculators hung their hats on using final annual income figures, projecting the need to make 100% of a persons ending salary and projected the same level of lifestyle expenditures in retirement as they had while working.
Now I also get the fact that it would be nice for all of us to actually retire on MORE money than what we actually made while working and to enjoy the identical, if not even better, level of lifestyle in retirement than we had while we were grinding it out ‘for the Man’. Unfortunately, that’s not what we’re talking about here.
Reducing expenses in Retirement is the Magic formula
We’re talking about a reduced level of expenditures in retirement at approximately 66% (two thirds) of what we had while we were working. From here it’s just all simple math.
For starters, if our test case was able and expecting to live on 66% of his working salary then he would need $40,000 in annual retirement income in order to be able to retire. Considering he would have put his entire working career into the Social Security system, he would certainly be eligible for full Social Security income benefits.
In fact, his Social Security income benefits would be approximately $2,127 dollars a month or $25,533 a year. This leaves a gap of $14,467 dollars a year in income ($40,000 needed) that must be made up by other retirement funds.
It’s just Math…and Dedication
So this is where the hard work for our test case begins. Starting at scratch with no retirement savings at 50-years old and with an intended retirement at 65, our buddy needs to immediately begin to establish and fund a retirement account that will be worth $361,795.91 when he retires.
How did we get to $361,795.91 dollars? Because that is the amount that at a 4% draw on assets annually gives us $14,467 dollars. This $14,467 dollars annually added to our test case’s annual Social Security income benefit of $25,533 gives him an annual retirement income of $40,000. Now a little more math.
In order for our friend to build a $361,795.91 retirement account over the next 15 years he will have to put $1,261 a month in a retirement account that can yield an interest rate of 6% a year for 15 years. That comes out to our friend having to invest $15,132 a year, which is roughly a 25% annual savings rate on his salary of $60,000.
Although a 25% savings rate would seem to be incredibly high to most Americans, it is more than achievable without paralyzing a person’s ability to live (now if you’re someone who wouldn’t mind eating rice and beans and being a bit more frugal, you could cut down the amount of time needed before retiring or cut down the amount of money needed in retirement. These are the variables in this equation. There really is NO Magic).
Conclusion
Not having long-term fixed expenses going into Retirement is a Must
Now let’s step back from this a moment. I realize that based on many individual American’s cost of living or the lifestyle that they currently enjoy, that living on $40,000 annually is not a lot of money for even a single man.
As a result, our friend would have to ensure that he is not carrying a mortgage, car or credit card payments into retirement and is in good health. That MUST be a given.
But should that be the case, it is VERY doable to live in a low cost of living location in the United States and still live a decent existence even with just $40,000 in income a year.
As I said, we’re ALL just 15 years away from retirement.
