A lot of people like to fantasize about retirement in sunny place where the waves lap and you watch sunsets. What if you don’t have enough to retire on? Well you either have to keep working until you drop dead or retire to a really cheap place that is ideally warm. The developing world! Guatemala, Colombia, Honduras, Africa! I am sure such inexpensive places are nice and warm but you don’t speak the language or know the culture! Plus you may not be used to the lifestyle there. Even in Costa Rica and Mexico you will need $25K per year to live there and that is basically $500,0000 over 20 years. Just save more money!
A recent article I saw stated the median and mean retirement balances by age. We are not going to talk about averages much meaning the mean because the averages get skewed by very rich people like say Bill Gates or Elon Musk or millionaires. Instead we are going to talk about median which is the midpoint. So 50% will have saved more than this amount and 50% will have saved less than this amount.
- 35-44: $22,123 USD mean ($61,238 average)
- 45-54: $40,243 USD mean ($115,497 average)
- 55-64: $61,739 USD mean ($171,623 average)
- 65+: $58,035 USD mean ($192,877 average)
Ok these amounts are pretty pathetic. Where do you realistically plan to retire in America, Canada, the UK or Australia for this kind of savings? I hear rural Guatemala, Honduras, Colombia, Costa Rica and El Salvador are cheap and warm. How about those places? Maybe that $60,000 will buy you a one room cabin and a daily ration of tamales. Even in those places that may not be enough. With that sort of money it won’t some fancy beachside vacation villa like you see on tv.
You are going to have to save much more than this! I suggest setting aside 10- 20% of your salary per month. If you can’t afford it you may need to cut back your spending. You don’t need that big, fancy SUV or pickup anyways. It’s 4 cylinder cute ute time.
How much money will I need to retire?
A lot most likely. It all depends on when you plan to retire, how long you plan to live and how frugally you want to live. Do you like Ramen noodles…a lot? : )
Your retirement portfolio will likely be a mix of social security, 401K, Roth IRA, pension (if you are lucky), savings, home equity and traditional IRA.
What should my 401K retirement account balance be at retirement?
I say one needs $500k to $1 million or more. Given the mean 401K balance is around $62K that does not bode well for people. Why is that?
- Let’s say you have $150K saved. That would give you a payment stream of $989 per month pre-tax at 5% interest over twenty years. That amount is taxable however so you likely only get 75% of that meaning $742 per month. That may not even cover rent and mortgage. Ouch.
2. Let’s say you get another $600 per month from Uncle Sam post tax or from a pension. Well that is $1342 per month. You can’t live well on that. Imagine if you have to pay rent! You are going to need to move to a cheap place like Nebraska cut costs. I hear that place is nice in the winter. : )
3. The other kicker is that you could live longer than 20 years and outlast your savings. All you would be left with is social security. Ouch.
4. What if the politicians decide to cut that? Then what? You know those rich politicians want to cut tax rates for their rich buddies. Well then less money is available the programs like social security will get cut so you get less money pre month. Be careful how you vote. Don’t be a chump.
5. Oh yeah at $62,000 saved you get over 20 years $444 per month. Maybe you can rent a room some place and live on food stamps or welfare. That’s not going to cut it. Even in most popular retirement places like Mexico, Costa Rica and Colombia that won’t even come close. The locals will just laugh when you tell them your budget.
What if you had $500K saved?
- At $500K balance you would get $3299 pre-tax and $2475 post tax over 20 years.
- At $1 million you would get $6599/month pre tax. Bye bye ramen packs! Hello steak, lobster and shrimp!
That is why you need to save aggressively now! Don’t delay!
- Bump up that 401k retirement plan contribution to 15%
- Cut costs
- Start a Roth IRA or traditional IRA
- Invest in diversified stock funds and index funds. There is no point to wasting money on bonds on other things that yield nothing.
- Take advantage of the power of compounding
But how am I going to save that much money? Well how do you eat an elephant? One bite at a time!
Start with a monthly payment of say $500 per month for 30 years invested at 6% return. That yields $502,225. Good.
If you saved $750 per month $753,386. Great.
If you saved $1000 per month $1,004,515. Hello steak and lobster!
If you saved $1500 per month $1,506,773. Life Styles of the moderately wealthy.
If you saved $2000 per month $2,009,030. Champagne and caviar dreams baby!
Remember too that this is pre-tax dollars so it’s not bad as it seems.
But I haven’t saved anything and I want to retire in 20 years! Ok then.
If you saved $1000 per month you get $462,040. Not bad.
Let’s bump it up to $1200 per month you get $554,449 total. That’s good!
But I want to retire in ten years.
$1000 per month over ten years is $163,879
$1500 per month over ten years is $245,819
Now you see the power of compounding! You need to save early and often.
Get going! Slackers will be punished with crushing poverty. You don’t want that. You can do it.