The

Retirement

MAZE!

BBC

What if we have to work until we’re 100?

Retirement is becoming more and more expensive – and future generations may have to abandon the idea altogether. So what kinds of jobs will we do when we’re old and grey? Will we be well enough to work? And will anyone want to employ us? 

There’s a sizeable gap between the amount that most people are saving towards their retirement, and the amount that they’re likely to need. It’s growing every day. According to a recent report by the World Economic Forum (WEF), people living in some of the world’s largest economies – the US, UK, Japan, Netherlands, Canada, Australia, China and India – collectively face an eye-watering $428 trillion savings hole by 2050.

DYI:  The retirement maze with one article after another explaining why we all have to keep on working longer and longer.  What they don’t explain in this British Broadcasting Corporation article costs have been so “jack up” due to central bank intervention, whether the Bank of England or the Federal Reserve here in the States, having additional money to sock away for retirement is difficult at best and for many is simply impossible.  Plus the article though it does not state directly; they make light that many of the government retirement plans will come under pressure and have to be reduced to maintain their solvency.  Be as that may be I’ll address what can be done with those who do have some disposable income to work with.

Obviously before you begin any investing be sure to have adequate savings with 3 months and preferably 6 months held back for all of those curve balls life throws us.  Then the next question is debt; should you pay off loans first then invest or should it be the other way around?  Easy to answer by comparing the interest rate of the loan to the estimated return from a proposed investment will determine whether to invest or pay down rapidly your debts.  In other words which one is the better deal!

Stocks today if you go to moneychimp.com using their estimate return calculator equities held or bought today – go to sleep like Rip Van Winkle – awaken 10 years from now you can expect an average annual return of negative 0.40%!  That is using the Shiller PE at 32.54 and a dividend yield at 1.80%.  OK you say I’m in this for the next 30 years, back to money chimp and bingo you’re estimated return is a whooping 4.34%.  What about bonds?  Bond mutual funds 90% of your return will be determined by the initial yield at the time of purchase.  Vanguard’s Long Term Bond Index is paying 3.80%!  So maybe with a little luck on dollars invested today you might squeeze out a 4% return.  Basically on a 30 year horizon it is pretty much a dead heat between stock and bonds with both in the 4% range.

At such low expected returns it is obvious any consumer debt – credit cards auto/truck loans – need to be paid off pronto.  If you have student loans and the rate is about the same pay off those debts first before investing.  It is the classic case of a bird in the hand is worth more than two in the bush.  Paying off a 4% loan is a sure thing as compared to the expectation though not guaranteed return at the same level.  Mortgage rates are in the 4% range so debt pay down is job one until estimated returns are clearly in your favor for investing.  How much in your favor for investing?  At least 50% higher and preferably 100% greater estimated return than the loan rate.

Once either debts are paid off or a big change in the estimated return improves in favor of investing the name of the game is CASH FLOW.  In the beginning of your investing ignore all retirement savings plans [IRA, Roth IRA, 401k, etc.] and purchase stocks and bonds for their interest and dividends going straight back into your checking account.  The number one goal is building cash flow that can be used to offset on going bills or to be reinvested building cash flow faster.  My rule of thumb is for every 3 dollars of cash flow you can put 1 dollar into retirement plans.  Once that level of cash flow is achieved you will not have a decline in income reducing the ability to build even greater cash flow.  Simply put building cash flow over the years it is possible to increase the percentage of your paycheck to levels that is not possible with retirement savings plans.  Of course the ultimate goal is 100% of income building cash flow.

That’s it and yes it is just that simple.  As an example Vanguard's Wellesley Income Fund current yield is 3.29% - since the current yield is so low only for those who are debt free including the house – open up the account and have an amount per month taken out of your checking account - [dividends paid into your checking account] - that is doable come hell or high water.  The dividends build up increase the amount per month or get a raise [congratulation] increase the amount by ½ of your increased take home pay.  It is just that simple.  Every chance you get keep on increasing the amount of your pay till you are at the 100% level.  Yep that will take years to achieve but assure you it is better than going from one financial emergency to the next as so many do today.  Oh and of course you won’t have to work till you are one hundred unless you want to and having that choice is what its all about!

DYI