According to mainstream media, those of us who are able to retire by 65 should consider ourselves “lucky”! I almost spit out my water when I read the first sentence of this recent, mainstream Forbe’s article: More Americans Say 80 Is The New Retirement Age
As a strong advocate for reaching early financial independence, I can’t help but read such an article without feeling an overwhelming sense of dissonance resonating in the air. How could someone who pinches pennies and aims to retire before 40 (hopefully 35) possibly relate? This is crazy talk, and whatever kool-aid these people are drinking, please keep it away from me!
But according to a Wells Fargo study, 30% of middle-class Americans* now believe that they will have to work until they are 80 years old in order to retire.
Can you imagine what life will be like when you are 80? I would be grateful to just be able to move about freely – not needing assistance or long term care. Forget about the thought of working!
Even though the economy has been slow to pickup in recent years, and year to year pay increases haven’t exploded like during the dot-com years, I still find it very hard to believe that a person making an average salary, saving at an average rate, for an average duration of time still cannot afford to retire by 65.
So, let’s run some numbers. Let’s say that you are the “average” American. Your take-home salary is $30,000/year, and you save 10% of your net each year. You don’t have time to invest, so you buy a simple index fund to track the entire market. To err on the side of caution, let’s say your annual return is a conservative 6%.
If you start investing at 35, you would be investing for 30 years by the time you reached 65, the conventional age at which to retire.
Let’s see how you would have done:
Over $250,000 total portfolio value after 30 years of investing, at 6% annual return.
Again, considering that the S&P 500 had an annualized return of 9.77% between 1926 and 2011, this approximation is very much on the conservative side.
Applying 4% Safe Withdrawal Rate, a portfolio value of $254,405.03 will generate $848.02/month.
Spending less than $850/month might seem difficult, but it sure beats the alternative – having to continue working! Also, by the time a person reaches 65, I’m betting that their spending habits won’t be as crazy as it was during their younger years. The urge to travel and see the world should also subside a bit as we get older. Not to mention, downsizing of the house, or moving to a cheaper location will go a long ways toward reducing monthly expenses.
Keep in mind, we are just considering the average person here. These are average results, at best. The 10% savings rate never increased, nor did the annual return of 6%, nor did the base salary of $30,000. Even without “trying”, we still couldn’t help but build a six figure portfolio, worth a quarter of a million dollars!
And that’s the underlying point here. Even without putting forth any real effort, the typical person can still stash away enough money so that they can avoid having to work well past traditional retirement age. Even if things don’t work out as planned, the most anyone should ever have to do is consider part-time work. If Social Security is still kicking, more power to you!
As someone attempting to reach early financial independence, a paltry savings rate of only 10% is incomprehensible to me. Even without trying, I will easily surpass 40% each month. By increasing the savings rate from 10% to 20%, we can double the total portfolio value and allow for more breathing room.
Here are the results assuming 20% savings rate, all other variables the same as previous:
Applying 4% Safe Withdrawal Rate, a portfolio value of $508,810.06 will generate $1696.03/month.
This is over $20,000/year. For a frugal person, this is living a life of riches and indulgences! There should be no reason why an average person couldn’t “survive” on this type of salary. Then again, according to the article, at $20,000, we are living below the poverty line 😉
And that’s the biggest problem I have with this article. Those who are able to retire by/before 65 shouldn’t be considered “lucky” because the average middle-class American doesn’t NEED to retire at 80, but CHOOSES to by electing to keep on playing the game of consumerism.
It’s a game that they will never win! Don’t boast about having to work until you are old and grey like it’s a badge of honor. If the whole point of life is to work so that you can buy stuff, so that you can work some more, probably until you die, well, that’s a pretty pointless life, wouldn’t you say?
But then again, according to this article, 70% of middle-class Americans don’t believe in investing in the stock market either.
*The middle class constitutes roughly between 25% to 66% of households in America; data obtained from Wikipedia.