Murder mystery dinners are popular. At these dinners’ guests try to guess who committed the crime based on a series of clues. Guests are also part of the show and may be prime suspects. You might have attended one of these events in the past, but have you ever been to a financial mystery dinner?
Let’s say you’re invited to a financial mystery dinner to solve a financial crime. The storyline is that four of the guests will run out of money in retirement. Why four?
According to The Employee Benefit Research Institute, 40.6% of households are projected to run out of money in retirement.[1] They have been conducting this survey since 2003 and the numbers are grim, especially for single women.
In another study from the World Economic Forum, they found that men could outlive their savings by 8 years and 11 years for women.[2]
The Federal Reserve estimates the average retirement account balance is $60,000.[3] If your IRA balance is $60,000, you can expect an annual income of $2,400 – before taxes!
If you depleted your savings and had to rely solely on Social Security, the average monthly benefit is $1,345 or $16,248 per year.[4]
Here are the guests. Can you identify which four will run out of money during their retirement?
Marty Millennial. He’s a young man living at home. He earns a decent salary but keeps his money in a low yielding savings account at a major bank. He reluctantly contributes 2% of his salary to his 401(k) plan.
Tammy Teacher. Tammy has been an elementary school teacher for several years. She contributes to a 403(b) plan and she’ll receive a pension payment from her state when she retires. Her husband is a firefighter who will also receive a state pension.
Sandy Salesman. Sandy is a hard charging salesman who drives a Ferrari and wears a gold Rolex watch. He’s self-employed, has a small IRA, and changes jobs every 1 to 3 years to pursue a larger sales territory with better leads.
Robby Retiree. Robby has been retired for a few years. He and his wife love to eat out and travel. They own a large home, live on a golf course, and drive a Range Rover. He has an IRA and a few investment accounts. He’ll receive Social Security in two years. His wife was a homemaker and she’ll receive spousal benefits from Social Security when Robby files for his benefits.
Donna Doctor. Donna is a surgeon at a huge hospital in a major city. She graduated from medical school with several thousand dollars’ worth of student loans. She is a high-income earner who works long, stressful shifts.
Peter Pilot. Peter is a pilot for a major airline. He’s been flying for about 15 years. His airline offers a pension, but he is concerned about the financial stability of his employer. He knows the sad history of airline carriers going bankrupt. He’s now a first officer. He has three kids and they all participate in club soccer.
Linda Lawyer. Linda is a trial lawyer. She and her husband have two daughters who are about to get married. Her firm has generous benefits including profit-sharing and cash balance plans. Her husband is a staff accountant for a local municipality.
Danny Developer. Danny is a computer programmer for a high-tech company. He’s paid handsomely for his coding skills and he’s been rewarded with stock options and restricted stock. His company will go public this year.
Ashley Athlete. Ashley is a professional soccer player for a team located on the East Coast. Her salary isn’t great, but she earns extra income from endorsements and coaching soccer clinics.
Frank Farmer. Frank owns a farm in Texas on several thousand acres. He grows corn and wheat and earns a decent living from his crops. He and his wife have four children and seven grandchildren. His family will have an estate tax issue when Frank and his wife pass away.
How did you do? Which four guests will run out of money? Of course, there’s no way to know with the limited clues given, so time will tell. However, here are a few things you can incorporate today to improve your odds of enjoying a successful retirement.
- Invest for growth. Over time, stocks outperform bonds and cash by a wide margin. Stocks do carry risk, but not bigger than the risk of running out of money in retirement. If you invested $10,000 in stocks ten years ago, it would be worth $26,220 today. The same amount invested in short-term bonds would be worth $10,060.
- Save early and often. The sooner you start saving, the better. Even if you’re going to receive a pension, Social Security, or other guaranteed payouts, you still need to save your money. How much? A suggested amount is 10% to 15% of your annual income.
- Contribute to your company retirement plan. A 401(k) plan is a great tool for creating wealth, especially if your company offers a match. If you contribute 5% of your income and your company matches 5%, your making 100% on your investment. 401(k) plans are efficient and easy to use. Invest for growth because you won’t be able to touch this money for 10, 20, 30 years or more.
- Pay off debt. Eliminate high credit card debt, auto-loans, student loans and mortgages before you enter retirement. High levels of debt will be a hindrance to a successful retirement. According to one study, the average debt balance for individuals age 75 or older is $36,757.[5]
- Create an emergency fund. A cash hoard will help you when trouble hits. It will also allow you to pay for things without using a credit card and accruing more debt. A recommended cash amount is three to six months of household expenses.
- Develop a spending plan. A spending plan will help you identify how your money is being spent. It will give you an opportunity to reduce, or eliminate, your expenses.
- Generate a financial plan. A financial plan solves a lot of financial mysteries. It will reveal the clues needed to produce a fruitful retirement. It will give you direction.
Don’t be caught short in retirement. Do all you can today to make sure you have financial assets when it matters most. It would be a crime not to!
Just the facts ma’am. ~ Joe Friday
June 14, 2019
Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.
[1] https://www.fool.com/retirement/2019/05/19/heres-how-many-us-households-will-run-out-of-money.aspx, Christy Bieber, May 19, 2019
[2] https://www.barrons.com/articles/outlive-retirement-savings-world-eonomic-forum-retiree-global-51560453625?mod=hp_DAY_6, Reshma Kapadia, June 13, 2019
[3] https://smartasset.com/retirement/average-retirement-savings-are-you-normal, Amelia Josephson, April 16, 2019.
[4] Ibid
[5] https://www.cnbc.com/2018/04/04/growing-debt-among-older-americans-threatens-retirement.html, Annie Nova, April 4, 2018