How Are You Preparing for Retirement?
As a CFP® professional over the past twelve years, it struck me how much financial planning has become centered on preparing for retirement. That is to say, how does one plan well enough in order to ensure he or she receives enough income after the working years have ended. Typically, this required that the individual was diligent enough to save approximately 10% or more of his income over a 40-year period of time. In short, the steady drip, drip, drip of savings invested prudently over the long-haul would hopefully meet that person’s retirement needs. Of course, part of the assumptions would have to include that the individual is consistently employed and in good health in order for him to continue to work and save consistently over that extended period of time. Since the advent of the Defined Contribution Plan, the onus of responsibility has clearly shifted from the employer to the employee.
So how much does a person need to reasonably have in order to retire modestly (notice I didn’t use the word comfortably). Let’s assume our hypothetical retiree wants to sail off into the sunset at age 65, and he wants an annual retirement income of $60,000, a little more than the average 2015 income of $54,462 for a US household. Let’s assume that the real interest rate is 0%. Why 0%? Because while the investor is earning 3% in his annuity, inflation is also averaging about 3%, and therefore, the real return is 3% – 3% = 0%. So realistically, the retiree would need to have $1,000,000 in order to receive an income of $60,000 annually. Additionally, that lump sum of money would last 17 years which would sustain him until death. (The average life expectancy in the US currently is 76.4 years for males and 81.2 years for females.)
But here’s the retirement reality, the average, 55 to 64 year-old American has saved $104,000. While that may sound like a decent amount, if it were converted into a lifetime annuity, the retiree would only receive $310 per month. Clearly, that’s not enough.
This is why I think the home-based business industry can be the solution for many who are staring at a bleak retirement.
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