According to the Federal Reserve’s 2013 “Survey of Consumer Finances”, the average working-age couple in America has saved only $5,000 for their retirement. This is madness, and a recipe for disaster! Here is a chilling graphic:
- 33% of Americans have $0 saved for retirement.
- 56% have $0-$10,000
- 66% have less than one-year of median income saved.
- 74% have less than $100,000 saved for retirement.
What Is Your Plan?
Conservative tabulations say you should plan on living on 80% of your current income in retirement. The median income in the US is around $56,000 which means you’d plan to live on $45,000 when you retire, or around $3,750/month. The average Social Security benefit for a retired couple is less than $27,000 per year, or around $2,250 per month, leaving us with a shortfall of $1,500 per month just to be average. To safely withdraw that amount from your nest egg in retirement you’d need to start with a minimum of $450,000 and withdraw based on the 4% rule, which is conservative estimate of the maximum amount you’d want to be drawing down per year on your nest egg.
Again, these are very average numbers, but a real world look at a plan. It’s important to note these are also in today’s dollars, so factor in for inflation + cost of living 20 years or more down the road. Looking at the graphic above, only 18% of us have $200,000 or more saved now, with a minimum goal of $450,000 on a conservative estimate. It is time to boogie…
How Do I Start?
If you currently hold a 401k/IRA take a look at your offerings to see what index funds are available to you. What is indexing? It is a passive (non-managed) form of investing that historically has been successful in outperforming close to 90% of all actively managed mutual funds. It is simple, cost effective, highly efficient, and essentially a “set it and forget it” approach to investing that works.
When Warren Buffett wrote out his will for his trust and instructed his heirs on what to do with the money, this is what he wrote: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors … who employ high-fee managers.”
You absolutely do not have to be a stock market genius or a financial wizard to do this! In your 401k/IRA, you’re simply looking for funds that will most likely have “index” in their name, and expense ratios well under .5% and hopefully under 0.1%. We’re not interested in mutual funds charging 1 – 1.5% per year or more. We’ll look at mutual funds and fees in a future blog but for now, stay away from expensive mutual funds. Chances are they lag the market index and charge you too much money for the pleasure of underperforming.
The index funds you want may very well be offerings from Vanguard or Blackrock, as they service a lot of 401k clients. Vanguard’s VNIFX or VINIX are great choices and seen in a lot of 401ks. Other fund choices may be labeled as “Institutional Index, Mid-Cap Index, 500 Index, or Extended Market Index”.
If you have a Roth or an IRA, take a look at the fund families available to you. Fidelity, Vanguard, or Schwab are all quality offerings with very low expense rations and similar names. If you have yet to get started investing, open an account and commit to get started. I use and recommend Schwab for Roths and IRAs but there are dozens of other options.
In my 401k I invest in VEMPX, the Vanguard Extended Market Index. It is known as a “Completion Index” and it invests in every stock on the S&P except the S&P500. This index gets you into micro, small, and mid-cap businesses that over the last 15 years have done better than the larger businesses of the S&P500. In another 401k I invest in IWD, the iShares Russel1000 index fund. This fund combines the 500 stocks of the S&P500 with next 500 “mid-cap” companies below that in size. Over the past 15 years it has beat the performance of the S&P500 as well. Take a look at your index fund offerings and ensure that over the past 10 to 15 years they are matching or beating the S&P500 and their fees should be less than .5%.
Start with something. Anything. Your aim would be investing at least 15% of your household income for retirement. Hopefully your company provides a 401k match. If so, try to take full advantage of that. If you’re self-employed or investing on your own, in most cases I’d recommend a Roth IRA. Most brokerages will waive minimum fees and balances if you make a deposit and then set up a monthly auto-draft you can use to invest. Some will let you begin with as little as $50/month. This is a great way to stay committed and we’ll soon look at how buying the same amount every month no matter what (over the long haul) can be a key to your success.
If you’ve not started yet and you’re 25 years from retirement you’d need to invest $475/month with an 8%/yr average return over the next 25 years to hit that $450,000 mark I spoke about above. That’s what it looks like, let’s rock-n-roll…
Cutting The Cord:
Bruce Springstein said it best when he said there’s 57 channels and nothin’ on. How true is that? Cable TV… The Kardashians, Honey Boo-Boo, and Sharknado? I can do without, thank you. It’s amazing how many people see cable or dish as their only option.
Did you know you can make an HDTV antenna with a scrap 2×4, some wood screws, old coat hangers, and little bit of wire? Seriously, 15 – 20 bucks tops and you’ll have HDTV reception for ABC, CBS, NBC, PBS, and FOX. Add in some Netflix and maybe some Amazon Prime along with YouTube and Vimeo – you can save $100/month easily and have plenty of viewing options to glue your butt to the couch for as long as you can stand it. Take that $100/month and invest it over 20 years and you’re looking at $75,000. I’m anxious to know if someone can tell me one show on cable tv that is worth 75-grand over the next 20 years. And if you say Honey Boo-Boo, I’ll pay for your first therapy session.
Next blog we will look more at investing within your 401k or Roth and on the personal finance side we’ll look at cash – where to put it and what to expect out of it.
Thanks for reading – please leave a comment, I’d love to hear from you.
Start saving! Start investing!