Everywhere we go, everywhere we turn we hear about retirement accounts, how much we should be saving to survive, how much we should be saving to retire early etc. Unfortunately, scrimping and saving for 45 years (assuming you start at age 20 and retire at age 65) is one of the worst things you could do with your money. This is very old-school thinking and it’s time to open our eyes to the fact that this doesn’t work and move onto a more productive mindset. This may have worked for the older generation with government pension plans, but with the newer generation, there will be no Social Security to fall back on and we’ll have to deal with our retirement on our own. Here’s why saving for your own retirement is a bad idea:
First of all, in order to save up enough money to comfortably live off, you are required to live below your means for your entire working years. It takes years and years to save up a bit, but in one mid-life crisis your entire retirement savings could be gone. Secondly, let’s take a look at the basic math – If you can survive now on $50,000 a year, you’ll need to have approximately that much money coming in during your retirement in order to maintain your lifestyle. Assuming that you’ll save for 45 years and you’ll be retired for 20 years before you kick the bucket, you would need a total of 1 million saved up. In order to save up a million dollars you’ll have to set aside $22,222.22 each year or $1851.85 per month. To save up that amount of money on that kind of salary is ridiculous; what kind of lifestyle would you have to have in order to pull that off consistently every single month for 45 years?
I know what you’re thinking, “But with all the compounding interest from various retirement plans, isn’t that more than enough to get me through? What if I invest my retirement funds in a well diversified portfolio of stocks, bonds and mutual funds just like my Sacramento financial advisor tells me to?” The short answer: it’s still not good enough. The long answer: even though you can get a compounding interest on your retirement savings, you are investing your money in currency which means that you are placing your faith in paper which can be printed at will (the process is more complicated than that but I’m trying to keep it simple). If an economic crisis were to happen (which is more than likely in the next decade, you would be left with as much value as the paper your money is printed on – nothing.
Let’s assume that a hyperinflation and future economic crisis doesn’t occur and you can just save as much as you can for your retirement. Even in this scenario inflation is marked at 2% per year. So in 45 years of saving up, you would lose almost half of your purchasing power because your basic necessities will be worth almost twice as much by then. But wait, there’s more – this statistic doesn’t include many items such as food, energy etc. A bowl of instant noodles that used to cost $0.65 last year now costs $0.97 this year. An entire shopping cart filled with food to the absolute max used to be $100 at the checkout 10 years ago and is now $300-$400. $100 at the grocery store doesn’t go very far anymore and that is way more than 2% per year. Plus as the oil and gas prices continue to rise, inflation is only going to rise higher in the future still.
Here’s another math fact I wanted to point out – even if inflation as a consistently steady rate of 2% a year, you can’t just multiply and say “2 times 45 years is 90 so the price of goods and services will be 90% higher when I retire than they are now.” No no no; even in the simplest terms where this was possible, this should be calculated as a 2% increase on every year. So for example something that would cost $100 in year 1 would cost $102 in year 2 (using the inflation rate) but then the next year’s inflation rate should be calculated as 2% of $102 which is $2.04 making the price $104.04 for year 3. This doesn’t seem like much extra but when calculated over the course of 45 years, something that used to cost $100 will end up costing close to $238.40, so as you can see, this isn’t a 90% increase in inflation, it ends up being over 138% inflation not including food!
And unless you know exactly what you’re doing, don’t invest in stocks, bonds and mutual funds simply because your financial advisor or banker told you to do so. Remember, these individuals are employed and it is their job to tell you what would make their company money. No one is going to tell you to invest in something that is going to make their company lose money and put their job at risk. If you want to invest in stocks, bonds and mutual funds, please be very careful and thorough about where you are putting your money and do the research of the companies you are investing in; a fool and his money are soon parted and nothing could be closer to the truth with the gamble of stocks you haven’t researched.
What if you have your house paid off? Surely you don’t have to save up $50,000 per year if you don’t have a mortgage to oblige to? True, you can skimp a bit if you’re mortgage is paid off but don’t think you’ve got the easy road just because one bill is gone. With rising gas and energy costs, it’ll catch up quickly, not to mention that as you age, your medical bills will likely increase. You never know when you’ll be required to take a monthly prescription or have to go into surgery. And what about an emergency fund for those unexpected expenses? Most people count their emergency fund as part of their retirement savings so if something comes up will you be able to sleep easy knowing that you might have taken out half a year of retirement?
And the final big question of saving for retirement – if you work hard to save for a comfortable lifestyle for 45 years of your life and actually succeed and pull together $1,000,000 for your 20 years of retirement, what happens if you end up living longer than you had anticipated? Are you going to spend the last few years of your life in poverty or burden your children even though you had planned and worked at it for your entire working life?
So what am I getting at here? The point is, you need to change your mind set. The poor and middle class focus on saving money for their retirement whereas the rich focus on making money for their retirement. Instead of having cash sitting in the bank, put your money into something that can bring you more money month after month, year after year; this way you won’t have to worry about ever running out. If you moved your retirement fund into physical commodities that you could lease out afterwards, you could reap passive income each month, increase the leases to correspond with inflation as well as have the option to sell down the road if needed for an unexpected expense.
For example, if you bought 5 condos which ended up bringing you $400 passive income each and 1 small apartment building with 20 units netting you $200 per unit, you’ve got $6000 in your hand each and every month without having to worry about poverty if you live long. Once a noticeable inflation sets in you can adjust your rents accordingly; even just a $15 increase per unit will net you an additional $375 per month. Another idea is to own commercial space in the city and lease it out monthly to businesses for store space and corporations for office space. Having land is also very valuable to hold onto for all the different productive aspects that can be utilized if needed and you know that the price will never go to zero (unlike other “safe” investments such as stocks) because of the actual value.
In conclusion, instead of putting your money and your future in the hands of someone else, become your own boss; learn what would work for you so you don’t have to depend on others. By being in control of your own passive income you can have true financial freedom.