Below I'm showing a picture of a spreadsheet I made. It shows a fictional person with a career that spans 45 years, assuming the person starts work right out of college at 22 and works steadily until 67, the current Social Security retirement age. This fictional person starts out his/her career making $30,000 and receives a 3.5% salary increase each year. The person consistently contributes 15% over the course of his/her career. The person's retirement account earns 7.5% interest every year.
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| Hopefully you can click on to make it bigger |
Is this reflective of a normal person? Probably not. Of course, salaries will vary, the person might be out of the workforce for a couple of years, the person probably won't always contribute an exact 15%. The biggest fallacy is that investments will earn a precise 7.5% each year. Hopefully the dips will balance out with the exceptional years to earn roughly 7.5% overall.
Despite not being exactly reflective of your specific situation, the spreadsheet does tell us some things. After 20 years of diligent investing (age 42), the person has $282,000. After 30 years (age 52), the person has $732,000. After 40 years (age 62), the person has $1,700,000. After 45 years (age 67), the person has $2,500,000.
The first years of investing are tough. Not only are you earning a much lower salary and amassing retirement contributions slowly, but you also don't see the power of compounding that easily. It takes a good THIRTY years to start seeing the effects noticeably. After 40-45 years, the compound interest principle really takes hold.
Another thing the spreadsheet tells me is that delaying retirement by even just a few years makes quite a bit of difference in your retirement balance. This spreadsheet isn't taking into account distributions from your account when you retire. I'm merely looking at amassing a retirement nest egg. If the person retires at age 60, the person will have about $1,500,000 to last the rest of his life. But if the person delays retirement until 65, the person will have $2,200,000 to last the rest of his life, which is about $700,000 more than he would have as compared to retiring 5 years earlier.
Financial planners talk about only taking 3-5% of the retirement nest egg balance in distributions each year. I tend to be more conservative by nature, and I personally think 4% is a good rule of thumb unless your retirement portfolio goes into the crapper, and then perhaps 3% is a better rule of thumb. But for most people, 4% should be a withdrawal amount that ensures you do not run out of money.
So when using a 4% rule of thumb, the person will take a first year retirement account distribution that could vary widely. If the person starts tapping into the account at age 55, then the monthly income would be $3,177. If the person starts tapping into the account at age 60, then the monthly income would go up to $4,857. If the person waits until age 67, the distributions go up to $8,617 per month! Waiting definitely pays off.
However, it's a delicate balance between amassing enough and waiting so long to amass enough that you don't get to enjoy retirement. The vast majority of us don't know when our number will be called. A chunk of us might never even see retirement. A chunk of us might live until age 100+. It's hard to tell.
As you've been hearing for years, Social Security is running into issues due to there being so many Baby Boomers and not enough current workers to fund the system. There seems to be murmurs of lowering benefits as one solution or delaying the retirement age even longer. The likely solution will be a hybrid of the two - lowering benefits some and delaying benefits some. Personally, I wish there was some way to elect which you would personally prefer. I doubt that will happen though.
1 comment:
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