Unfortunately not many people can say they have more than they know what to do with.
Predominantly the top 10% and above stash the most cash since they know cash is king after all. The top 1% have a whooping $4.7 trillion currently in the bank since buying another beach home and investing in an alternative asset class can get boring after a while.
It is disappointing and frankly frightening to see how late people plan for retirement, donât bother investing in the market or themselves, and gamble to only discover that they put themselves in a worse position than when they started.
Itâs a self-fulfilling prophecy. We tell ourselves something is bad then follow it to an unhealthy degree. This can be partly due to the poorly structured education system and our own false beliefs about the future.
The truth is, humans are very bad at predicting the unknown and we shouldnât fully blame ourselves! After all, whatâs certain is uncertainty and although history does repeat itself, it always turns out differently each time. The problem is we are overly optimistic we will stay healthy, prices will be stagnant, and everything will be the same forever.
We need to be realistic and at times a bit catastrophic to dig into what we can control and cannot. We cannot tell ourselves we know more than we do before a test or are best prepared for a storm when we havenât checked in with ourselves.
This is preventing millions to live the life they want when they get older. You should struggle a bit now to provide a life for yourself later not the opposite way around.
A few weeks ago I wrote a piece on why retirement is the scariest part of our lives. It is scary not because we are nearing death or getting wrinkles or donât have a job to dress up for everyday. It is scary because we arenât financially sound or prepared for it.
It is the most expensive and unpredictable period of our lives.
Here are the main stressors future retirees have according to CNBC:
-Inflation-lack of purchasing power eroding savings and budgets
-No stable or enough savings or income sources to stay afloat
-High insurance and medical costs
-Medicare/Medicaid
-Low Social Security payments
Transportation to health insurance, life-long care to housing become hellish expensive since people become high maintenance at a certain age. We become more frail, have more ailments, and our brains arenât as sharp. Up to a certain point, we arenât getting older but younger just like when we started on earth and people want to admit it. A staggering statistic from the WSJ illustrated that longevity risk, outliving our expected time horizon is damaging the economy. The world would have around $360 trillion in economic value if we lived longer.
Being positive 24/7 about the future is unrealistic. Believing something wonât happen is a dangerous way to live. Iâm not saying to not be hopeful about achieving your dreams, Iâm saying be realistic about what you can do. Donât expect to be able to work and make a living past 80 to stay afloat. Making lofty expectations never end well. Take a pragmatic view which will keep you safe and sound.
This starts with planning early, earlier than you want to.
Whenever I discuss retirement, my colleagues, twenty-somethings criticize and laugh at me that Iâm already contributing to my Roth IRA. Yet they are missing out big time. By simply delaying your contributions towards setting up your nest egg, you could be loosing out on millions by age 60! It takes little to no effort to contribute your earnings and bonuses today for a better future. The number one reason why most people arenât ready to retire is because they spent more than they could afford throughout their lives. Thereâs nothing scarier than being ready to retire but unable to.
Mis-Match
The truth is, we all attempt to find the balance between saving and spending but something inevitably always gets in the way. Usually a promotion or even burnout leads us to overspend and compensate our feelings. Thanks to the additive consumer marketplace of the 21st century of âbuy now, pay laterâ, mobile wallets, online-ordering, ghost kitchens, and quick dopamine hits through endless ads on our feeds, we feel the need to keep up and get in on all the trends.
Itâs harder than ever to put down the screen and not pay for something. The green button is so enticing. Without cash and with more online carts expiring, we feel the need to not wait and think for a sec. Our spending is on auto-pilot online making it harder to internalize and track.
Whether your goals are having enough to budget your retirement savings or appropriately allocate for future generations and your grandkids kids is your choice but what I can affirmably say about majority of incoming retirees is that they arenât ready.
Letâs look at the jarring facts about Americans leading up to retirement:
-36% of Americans say they wonât have enough to retire this year, Source: CNBC
-The Federal Reserve found that the median retirement balance in the U.S. was only $65k and the mean balance was $255k!
-Luckily, according to CNBC, Americansâ average personal savings has grown 10% you from $65,900 in 2020 to $73,100 but certainly still not enough for this hyper-inflationary higher interest rate bound environment
-Only 365,000 Americans have more than $1m or more in their retirement accounts
Every year you work, you should max out your contributions to contribute towards your 401(k) and leave more to invest than give back to yourself until you see your net-worth disproportionately skyrocket.
To find out how much you need when you retire, an easy formula to use is to multiple your current annual spending by 25 with an assumed withdraw rate of 4% each year to live on.
Depending on your situation whether you are a diligent spender or not, itâs still impossible to break down how much youâll exactly need. Thatâs why setting up a will or if you have a multiple greater holdings of assets, want to avoid probate, court fees and taxes, and want privacy, going through the estate planning route through setting up a trust is your best bet in case you donât spend a dime which will be hard not to do!
Is it possible to get down to the penny and know how to appropriately allocate the exact amount of what we need?
It starts with prioritization, time management, and realism but past that, the simple answer is no. There are so many unknowns and age doesnât always play a factor in death.
If youâre retired during an environment of high deflation, unemployment, wages are stagnant, expect your Social Security payments and investments to be lower. Every 8â10 years a bull market comes around. Plan for the worst, hope for the best, and the rest you must adapt to.
The market is unpredictable and so is the future so prioritize what you can control.
Backwards Planning
What are your main goals and really want to do?
Are they only taking luxurious vacations or just spending time with your grandkids at the local park?
All decisions have consequences but at the end of the day, remember you need more than you think even if you plan on living with your kids practically for free.
You may not have energy to go out on the town or gamble at 80 years young but you still must prepare for the other expenses that creep up and cost much more than Vegas at times.
Understand your wants, needs, and what really matters in life. If you get bored in retirement, the best thing you can do is keep investing in yourself, read, enjoy nature, stay active, and spend pleasure time with your family or kids.
Dig into experiences and the things money cannot buy you for endless happiness. Having a support cushion is more important than ever during this period when loneliness and ailments take a tool. In order to best prepare your future self, choose to eat veggies, educate yourself, fail fast and forward, and share an apartment with roommates in your 20s to save as much as possible.
Do your future self a huge favor and weigh opportunity cost.
The end of your life and later stages should be most memorable. You are relying on your whole life to enjoy the rest.
Tie a bow on it and have a comfortable seat on the couch not on a rocking chair contemplating every money decision.