Yes, It’ll Happen

Jonathan Clements  |  June 23, 2018

YOU WILL RETIRE one day—and, if you want to spend your final decades in even moderate comfort, it won’t be cheap. Not too concerned about saving for retirement right now? Here are five uncomfortable realities:

1. You’ll almost certainly live to retirement age. Sure, you could go under a bus before then. But that isn’t something you should bank on: If you’re age 20 today, there’s an 85% chance you will live to 65, according to 2014 mortality rates from the National Center for Health Statistics.

2. It isn’t optional. You don’t have to own a home and you don’t have to pay the kids’ college costs. These other goals are desirable, but they fall into the “nice to have” category, not the “must have.”

A retirement nest egg, by contrast, is firmly in the “must have” category. You might imagine you can work forever and never retire. But your boss could have different ideas and, even if she doesn’t, the day will likely arrive when your aging body simply doesn’t cooperate.

3. You can’t pay out of current income. This is another difference between retirement and other goals: It isn’t like purchasing a home or a college education, where you can borrow a bunch of money and then repay it over time. Instead, if you want a financially comfortable final few decades, you need to come to the retirement party with a heaping pile of dollar bills.

That said, both borrowing and earning money could play a role in your retirement income strategy. You might work part-time during, say, the first decade of your retirement—something I favor, partly because it eases the financial strain and partly because it could bring a sense of purpose to your initial retirement years. You could also borrow against your home’s value through a reverse mortgage—something I’m less enthused about, because of the hefty costs involved.

4. It’s mighty expensive. Based on a 4% withdrawal rate, you need to amass $100,000 for every $4,000 of annual retirement income you desire. Suppose you’re making $80,000 a year. To replicate just half of that income, you might need a $1 million nest egg.

To accumulate that million, you would have to save $10,119 every year for 40 years, assuming a 4% after-inflation rate of return. That’s 12.6% of the $80,000 income we’re assuming.

What if you delay saving for retirement, so you have just 30 years to sock away money? To hit $1 million, the required annual savings jumps to $17,144 a year, or 21.4% of income. What if you wait even longer? The required savings rate quickly becomes unachievable.

Those who procrastinate won’t just get less benefit from investment compounding. Their time horizon will also be shorter, which means they should probably take less risk and hence they’ll likely earn lower returns. On top of that, they will squeeze less benefit from the retirement accounts they fund, including any matching contribution in their employer’s plan.

5. You can’t afford to fail. As you’ve no doubt gathered, retirement is a hugely expensive, pretty much unavoidable goal—and that means you should do everything possible to stack the odds in your favor by making the most of retirement accounts, diversifying broadly and buying total market index funds with rockbottom annual expenses.

But, you might wonder, wouldn’t it be easier to achieve your retirement goals if you notched market-beating returns? Even if there were a decent chance you could outperform the averages by betting on a handful of individual stocks, putting everything into the technology sector or buying bitcoin—which there isn’t—pursuing such strategies would be extraordinarily foolish. Why? Think about the downside: If you fail badly in your pursuit of outsized returns, you could be faced with a retirement of grinding poverty.

At that juncture, the options wouldn’t be great. You would likely need to continue working at whatever job you can find. But while part-time work may be stimulating, fulltime work would likely prove exhausting—and the jobs on offer may be neither enjoyable nor especially remunerative. You would likely also have to reduce your standard of living sharply. That’s a grim proposition: While an ever-improving lifestyle offers a pleasant sense of progress, a falling standard of living can be downright depressing.

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