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I am constantly amazed at the naivetť of people seeking financial advice about retirement. Advisors usually begin and end by telling us to save, save, and save again. Admonishments to save money are not a bad thing. However, the unfortunate fact is that the promise of fiscal independence in old age is largely illusory. Why?Most of us will simply not make enough money to last us till we die. Consider the following article:
Start With $10,000 and Retire a Millionaire
by Jonathan Burton Wednesday, April 27, 2011 MarketWatch
The 7% solution: Let money and time work for you, no matter your age. The millionaire next door could be you. All it takes is money and time; it always does. But what this really means is you have to save money over time, and that's where so many of us struggle.
The premise here, the hook in the con if you will, is that all you need to do to have a million dollars in the bank is be frugal and save money.
Reaching age 65 with $1 million saved requires strong discipline and sustained effort. You need to recognize the importance of starting early and putting money away regularly. But even if you don't have as much time, you still have options other than a last-ditch Hail Mary pass. It can be done -- even if you start with just $10,000.
To my way of thinking this is a huge leap from the initial premise. First we are told that all we need do to reach age 65 with $1 million large is to save money. Now it appears that before you embark on this savings journey you must first scrape together a stake of $10,000. The authorsí rationale for this nice round figure?
"Whether you're 25 or 45 or even 55, youie got to start somewhere," said Nathan Dungan, founder of financial education firm Share Save Spend.
Okay, for the sake of argument, letís assume I have a rich and generous uncle who has left me $10K. How am I to get from that to $1million?
Call it a 7% solution. Assume a 7% inflation-adjusted return from a portfolio of U.S. and international stocks, bonds and cash -- not overly aggressive, but an expected return that requires taking some risk -- and living well within your means.
Assume a 7% inflation adjusted return? From stocks, bonds and cash? This is a huge assumption. Grand Canyon huge. And what do the authors mean by ďsome risk?Ē The mere fact that the author introduces risk into the equation means that there is a chance that if the economy tanks your 7% return could just as easily become a 7% loss. The author conveniently leaves this possibility out.
"In order to save, you have to understand your spending," said Eric Kies, a financial adviser with The Planning Center, an investment manager in Moline, Ill. "Build some awareness of where you are now, where do you want to be, and what are you willing to do to get there."
Of course there will be bumps along the road -- potholes, even, that challenge your resolve. The financial markets love to shake and stir individual investors; don't give up, because it may be hard to get back in.
"It's less about where the money is invested and more about your ability to be disciplined," Dungan said. "Ask yourself, What is realistic? What can I achieve? The best savers don't have magical thinking about money. They're honest with themselves."
If weíre really to be honest about our money, starting out with assumptions like: a.) I have $10,000 to throw around and b.) that I can manage to find investments that cumulatively total 7% is the very essence of magical thinking. My Chase bank savings account yields a whopping .10%! If I purchase a one year CD I can raise it to .20%! Where is this magical investment that yields a 7% return? The author doesnít say.
25 Years Old: Starting Out Forty years is a long time. So long, in fact, that it's easy to put off saving for the future. There are bills to deal with, college debt to pay, stuff to buy, vacations to take, a career to build. Savings -- sure, but who has money for that? Indeed, one of every three Americans between the ages of 18 and 33 have no personal savings, according to a recent Harris Poll survey. What's more, 53% of this age group has zero in the way of retirement savings.
They're missing out, big time. If a 25-year old with $10,000 invested $320 a month at a 7% annual compound rate of return until they turned 65, they would wind up with $1 million.
Okay, freeze the frame here. The author quotes a Harris poll saying 30% of young Americans have no personal savings, yet he also states that for his roadmap to work, everyone somehow has to magically have access to $10K. This makes no sense. If I have no savings, if Iím living from paycheck to paycheck, where the hell am I going to find $10,000?
Moreover, $320 a month doesnít sound too bad. But multiply it by twelve and it adds up to $3840a year. If Iím making 10 dollars an hour, Iím clearing $400 a week and 1600 a month. This translates to $19,200 a year. Take out the cost of food, rent, utilities, and health care and the chance of having enough left each month to put $320 into a personal retirement investment account is slim to none. And we havenít even mentioned money taken out for social security and taxes.
"There's a reason why Albert Einstein called compounding the most powerful force in the universe," said Jonathan Guyton, a principal at investment manager Cornerstone Wealth Advisors in Minneapolis.
Whether or not Einstein really said this, the math speaks for itself. At 7%, your money doubles every 10 years.
Okay, assuming the math is correct, what about this 7% figure? Inflation is currently at 2.86%. In recent years it has been as high as 4%. Thus in order to wind up with a total 7% return I actually have to come up with one that is quite a bit larger than 7%. Depending on what the stock market does and how the economy is faring, it might be difficult to build a portfolio that nets a 7% after inflation return.
And what if you havenít got forty productive years to start socking money away? If you are approaching retirement and have no savings, even coming in to a $10k lottery payout isnít going to allow you to become a millionaire. As the author admits older workers are up the financial creek sans paddle.
At 55, the amount needed to reach $1 million with a $10,000 bankroll is both comical and sad: $5,700 a month for 10 years.
$5,700 a month? Thatís over $58,000 a year. I know plenty of folks who donít make half that in salary a year. Under this scenario thereís no way for them to achieve the magical million dollar mark. The sad fact is that even if they start when they are 25 year old, most people will not earn enough salary to be able to sock away even a fraction of the money necessary to achieve the authorís rags to riches scenario.
And even if they did, when they retire, a $1,000,000 nest egg that nets even a 3% return will only provide a fixed income of $30,000 a year. That might seem like a lot. But take out income tax, property tax, food, gas, shelter, and nursing care and the likelihood that our 65 year old retiree will have to start tapping that $1 million nest egg every year to pay for his or her health, maintenance, and welfare is almost certain. Furthermore, if our saver lives another twenty years, and if they are forced to spend their savings in order to survive, a million dollars may not even be enough to see them through. One major or catastrophic illness and they could be wiped out and just as broke as if they hadnít saved a dime.
The sad unstated fact in this whole article is that most of us really donít stand a chance of being able to save our way to financial independence. And if the author were honest with us Ė and with himself Ė he would say so and not keep touting some magical, mythical ďAmerican DreamĒ that all we have to do to be secure in our old age is exhibit fiscal discipline and good savings habits.
The only people who really stand a chance at socking away enough money for a comfortable retirement are those who start out with large inheritances or those who earn really large salaries and bonuses.
You can work your fingers to the bone, but unless youíre really fortunate, your chances of even being able to pay your bills at the end of your life are slim. Sorry to be the bearer of bad news but facts are facts.