Most Americans have enough money in their 401K to live three to six years, if they’re lucky, once they retire.[i] Why? The answer is simple. People get discouraged and disillusioned when the earnings on their savings/investments don’t grow as fast as they had hoped due to market corrections, low interest rates, fees and penalties that steal what they disciplined themselves to set aside.
Consider this. When a twenty-two year old sets aside $5,800 a year in an IRA or 401k plan and earns an average 8% per year there will be close to $125,000 by age thirty-five in their account ($75,400 from their own contributions.) However, of the 12 million 401k plan participants age fifty-five and older the average balance is only $165,200[ii] and 78% of that increase comes from positive stock performance, not contributions[iii]. So what happened between age thirty-five and fifty-five?
Here’s what happened:
Of course, everyone remembers the market correction of 2008 where many lost up to 48% of the money in their retirement accounts. Interestingly market corrections are not uncommon. It just so happened that 2008 was an extraordinary correction. But there have been sixteen market corrections since 1929. That means, on average, the market corrects about every five years.[iv]
The problem is you never know when a market correction is going to wipe out your retirement fund and you hope it won’t happened the year you plan to or have to retire.
Inflation is another problem. It is insidious in that it creeps in and stealthily steals your hard earned dollars before you know what is happening. Which means a dollar saved in 1970 is now only worth $0.61. That’s a 515.0% cumulative rate of inflation[v] and to counter that rate of inflation you’re going to need earnings much greater than the 8% that most fund managers are promising 401k and IRA owners today.
Finally, life gets in the way of setting aside more money for retirement. Many Americans are married, have children, homes, schooling debt and additional needs in their life by the time they turn thirty-five. Besides, all work and no play makes Jack and Jill boring people to hang with. Americans tend to get discouraged with saving because there are other things that are more urgent in life. And so at the period in life when most Americans are earning the most they tend to save less of their income in proportion to what they are earning.
$40,200 is added to most American’s retirement accounts between ages thirty-five and fifty-five and that as mentioned earlier is mostly from stock earnings and not contributions. This leaves many vulnerable to running out of money three to six years after retirement.
And so the only sure way of making sure you never run out of money is to die before you’ve been retired more than three to six years! But that isn’t an acceptable option that Americans want to plan for and rightfully so. The better way is to make sure that the money you save isn’t locked away in someplace like a 401k or IRA where you can’t use it when you have those extra needs and desires arise in your life. Those of you who have had to use money from your 401k or IRA know how costly this becomes! You not only have to pay that money back within 60 months, you have to pay it back with interest! AND you have to pay a ghastly penalty on top of that. This is robbery!
How much more conducive it is for you to use a cash flow guaranteed savings plans that allow you to access your own money without any penalty when those extra needs and desires arise. Then when you pay it back the money is readily available for you to use again WITHOUT another penalty or taxation. And any interest you pay will be used to increase dividends that you can earn as well.
This beats the other option of dying before you’ve lived three to six years in retirement because now those dividends and guarantees have added to your ability to enjoy retirement instead of locking you in to a three to six year window.
Nobody wants to run out of money, now or in retirement. Starting today with guarantees and dividend options is the best way to kill the three to six year plan that most Americans are on. But today is the day to begin, not tomorrow, because time is of the essence.