Monday, June 10, 2013

WHAT IF? ... Retiring with Millions and Starting Adulthood with ZERO Student Loans ... Getting to Ten Times the Retirement Funds as Currently "Provided" by Government ... $4 million from MOM versus $400 thousand from Government ... And When We Die, Unlike Social Security Today, Passing the Remainder on to our Kids and Grandkids as Their Inheritance... Here's How

Need a good solid education and then $1 million, $2 million or even $4 million or more for retirement?

Well, there's a relatively easy way to do that, and it won't cost anything. Sound too good to be true? Well, it's not. But first, we have to take charge of the choices and money that government spends on or "invests" in our well being. Get the money in our hands and out of their hands, in other words.

We don't need any more money. All we have to do is change the way we do things today. When educating ourselves and our children, and when planning and funding for our retirement needs, we simply need to substitute personal MOM behavior for the current government knows best how to take care of us OPM centric way of life.

And to explain how we can do that, let's do a quick and simple analysis of MOM versus OPM, aka individual freedoms and personal resonsibility versus government knows best redistribution, aka entrepreneurial versus socialistic planning and actions.

We'll use round but reasonably accurate numbers throughout the individual take charge "thought experiment" presented below.

We spend approximately $12,500 annually on K-12 education, vocational training, college and graduate school. Then assuming we get a job earning $50,000 annually upon entering the work force, and since we won't have any student loans involved with getting that post-high school education, over 40 years of work we and our employer will be able together to contribute another $6,250 annually to fund what used to be Social Security for our old age retirement benefits. That's a grand total of $500,000 spent on or invested in each of us over 60 years, assuming we begin school at age 6 and retire at age 66.

For our retirement years, we currently receive ~$25,000 from Social Security each year until we die at age 86, or 20 twenty years later. That means we will get $500,000 from Social Security. Assuming an annuity at 4% would have been purchased to get that $25,000 annual payment, the current "present value" of our retirement benefit is in real rough numbers less than a lump sum of $400,000. That $400,000 represents the value of our Social Security benefit upon retirement.

Now let's see how that $400,000 becomes as much as $4 million, or ten times the $400,000 when we use MOM thinking and behavior with the same pot of money as was used in the government knows best example. Simply by using the take charge individual MOM approach, it's actually quite easy to get to $1 million, $2 million or even $5 million at retirement, or ten times the government provided amount of $400 thousand.

Here's how we do it the MOM way. Instead of having the government spend $12,500 educating us each year and then investing our and our employer's Social Security contributions for us, we'll do it ourselves. If Abraham Lincoln could educate himself by the light of the fireplace, we can do it with the computer or however else we and our parents elect to spend or invest the $12,500 annually now spent on cookie cutter, one-size-fits-all government schools. And we'll also invest that $6,250 annually while working in the American system of free enterprise, aka the stock market.

Rather than go into detail, let's assume that we have $250,000 (50% of the grand total) invested for 40 years and that the money invested earns on average 7% annually in inflation adjusted terms for each of those 40 years. That would result in the $250,000 growing to $4 million at age 66 (~ four doubles pursuant to the rule of 72).

If we make it $125,000 instead of $250,000, the number at retirement is $2 million.

If we make it $125,000 and invest it at 6% in real inflation adjusted terms for only 36 years, the number still amounts to $1 million.

Now let's see what all that means.


For Retirees, a Million-Dollar Illusion says this:

"A MILLION dollars isn’t what it used to be. . . . 

Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.
But in many ways, it’s not.
Inflation isn’t the only thing that’s whittled down the $1 million. The topsy-turvy world of today’s financial markets — particularly, the still-ultralow interest rates in the bond market — is upending what many people thought they understood about how to pay for life after work.
“We’re facing a crisis right now, and it’s going to get worse,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Most people haven’t saved nearly enough, not even people who have put away $1 million.”
For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.
Suddenly, that risk-free bond portfolio is looking risky. “The probabilities are remarkably grim for retirees who insist on holding only bonds in the belief that they are safe,” says Seth J. Masters, the chief investment officer of Bernstein Global Wealth Management, a Manhattan-based firm, which ran these projections for Sunday Business. “Because we live in this world we tend to think of it as ‘normal,’ but from the standpoint of financial market history, it’s not normal at all,” Mr. Masters said. “And that’s very clear when you look at fixed-income returns.”
Several rounds of intervention by the Federal Reserve and other central banks, aimed at stimulating a moribund economy, have helped to suppress rates, and so has low inflation. Low rates have led to cheaper mortgages and credit cards, helping to balance family budgets.
But for savers, low rates have been a trial. The fundamental problem is that benchmark Treasury yields have been well below 4 percent since early in the financial crisis. That creates brutal math: if your portfolio’s income is below 4 percent, you can’t withdraw 4 percent annually, and add inflation adjustments, without depleting that portfolio over time.
And with rising life expectancies, many people will have a lot of time: the average 65-year-old woman today can be expected to live to 86, a man to 84. One out of 10 people who are 65 today will live past 95, according to projections from the Social Security Administration. . . . 
And if you’re not close to being a millionaire — if you’re starting, say, with $10,000 in financial assets — you’ve got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today . . .
“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”. . .      
THE bond market has always been a forbidding place for outsiders, but making some sense of it is important for people who rely on bond income.
Low bond yields have been a nightmare for many investors, but that’s not the only issue. Today’s market rates aren’t stable. Steve Huber, portfolio manager at T. Rowe Price, said, “Current yields are an anomaly when you consider where rates have been over the last decade or more.”
Rates are expected to rise. While that will eventually mean more income for bond buyers, it will create a host of problems. . . .
And bond investing is likely to remain challenging for years to come. Investors may face a double-whammy — low yields now and the prospect of significant losses as yields rise. . . .      

Despite this market instability, bonds tend to be the investment of choice as people retire, because they throw off steady income. But . . . over-reliance on bonds leads to financial quandaries. . . .      

Consider again the 65-year-old couple who are starting to draw down $1 million in savings this year: if they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions.       
There are ways to improve these outcomes, but they have their own hazards. Adding stocks to a portfolio is an obvious counterbalance. And there is now a broad consensus among asset managers and academics that stocks have an unusually high likelihood of outperforming bonds over the next decade. That was the finding of a recent study by two economists at the Federal Reserve Bank of New York. . . .    
"ASIDE from recalibrating a portfolio, what can be done to improve a would-be retiree’s financial situation? One answer is to work longer and retire later. Yet many people can’t do that, often because they are physically unable to do so or can no longer find a suitable job.

Still, the expectation of working longer seems to be the trend. An annual survey for the Employee Benefit Research Institute found that in 1991, only 11 percent of workers expected to retire after age 65, while this year, 36 percent said they would retire after 65 — and 7 percent said they didn’t plan to retire at all.       
Working longer improves your financial prospects, and one reason is morbid: you won’t have as long to live on your savings.
Working longer helps in a happier way, too. Professor Munnell notes that by delaying retirement, monthly Social Security benefits rise substantially. For example, if you delay claiming benefits past what the government calls your “full” retirement age — 66, for people retiring this year — your monthly benefits increase by 8 percent a year until you reach 70.
Compared with current bond yields, that’s a fabulous rate of return, for people who can afford to delay starting the Social Security income stream, she said.
It’s also a much better return than a commercially available annuity will provide. Vanguard estimates that a basic fixed annuity that ends at death will produce an annual inflation-adjusted payout of only 3.7 percent if bought today for a healthy 65-year-old couple. (But the money is definitely gone when they die; there would be no surplus to pass on, as there could be in an investment portfolio). . . .     
The maximum Social Security benefit for a retiree at 66 this year is $31,000 — about the equivalent of drawing down 3 percent a year on a portfolio of $1 million....      
There are a few steps that people can take on their own, she said. “When you’re younger, and have a lot of human capital, you can save more and put a lot of the savings into stocks,” she said. And then you can gradually shift into bonds as you age, fully understanding that the bond income may be quite limited. “When you’re in your 50s,” she continued, “you can try to save as much as you can, and try not to get accustomed to a lifestyle that you won’t be able to afford later on.”
You can also try to pay off your mortgage, so you have the option of tapping home equity if you need to supplement your income later. And, she suggested, if you’re lucky you’ll find work that you like and can stick with for a long time — until 70, at least.
That might not be the way you imagined your life. But the numbers suggest that even if you’re a millionaire, you might have to start."
Summing Up

The message is simple. Don't get into debt and save and invest early, continuously and wisely. MOM thinking and actions will do the rest. The future we should take is clear, at least to me..

And while there are no guaranteed "riskless" ways to a secure and comfortable lifetime, both as individuals and as Americans, we have the best chance at that secure and comfortable life by taking charge of our own lives and not looking to the government gang to protect us from ourselves and each other.
In that vein, we must work hard to get government out of the way and begin to let MOM run the show. Huge benefits to each of us will be the result.
And in order to reap those benefits, we simply must know enough to understand the benefits of investing in America and free enterprise by saving MOM and then buying stocks for the long run.
And we must also know enough to avoid buying bonds.
Further, we must take charge of our own and our children's educational needs, including financial education and the need for limited government spending.
In other words, we must bet on our kids, ourselves and the American way by investing our time, energies and money accordingly.
The way to limit government spending and waste is to limit its revenues, aka taxes, its borrowings and its money printing tendencies.
That's my MOM based take on things.

Thanks. Bob.

No comments:

Post a Comment