Episode Transcript
Brenton: [00:00:00] It's easy to watch and read stories in financial media that lead you to believe you'll always be behind the eight ball when it comes to the amount you have saved in retirement. But in this episode, we'll tell you how many of the assumptions made by these organizations are woefully outta step with the way people actually live their lives, and why you should never be discouraged by how much or how little you have saved at any age.
Let's get started.
Hello, this is Brenton Harrison of New Money, New Problems, and your host for the New Money New Problems podcast. In the last episode, we interviewed Dr. Ted Klontz, the author of Mind Over Money, and he gave us some insights into how some of the things we pick up in childhood carry into our adult lives as it pertains to how we deal with money.
And we want to take that mantle, of the emotional component behind how we spend, how we attain wealth a little further with this episode. And I wanted to talk about some of the things we see in financial media that tell us whether we are on track [00:01:00] ahead of pace or behind pace when it comes to the amount we have.
I am of the opinion that the overwhelming majority of the things we see in financial media can be very misleading when it comes to telling us where we stand in our journey to wealth. And as a matter of fact, for the average person, it can be really depressing.
If you've seen me talk in public, you're very aware of the story that I tell about being a child and watching TV and seeing these commercials where there were people walking down the street or in their offices or spending time with their families, and the entire time they'd be walking around or spending time, there'd be this floating orange number above their head.
And it seemed very arbitrary, but when you got to the end of the commercial, the premise was
that the number floating above their head was the dollar they needed to save by the time they retired in order to be able to meet their retirement goals. And as a child, I remember seeing these numbers and first wondering, Oh my goodness, how are these people ever gonna [00:02:00] save that much money? These numbers seem so astronomically high .
But second, how did ING the company who put on these commercials, come up with these numbers in the first place?
If you're following along with us on our YouTube channel, you'll see that I have pulled up a document from JP Morgan that they release every year called their Retirement Savings Checkpoints. And if you're listening, then I will make sure that we leave the link for this document in the show notes of this episode.
But every single year JP Morgan comes out with this long research project where they talk about economic indicators, where they talk about retirement savings checkpoints, where they talk about consumer sentiments as it relates to how the economy is doing at large. And one of the things that I always highlight each year when they come out with this
is the amount they say people should have at particular ages, depending on the income they want to live off of in their retirement years.
[00:03:00] In reading this table, you can find the income closest to the amount that you wanna live off in retirement. And on the left side, you can see the age closest to your current age, and there's going to be an intersection of these two tables, the income and your age. And at that intersection you'll see a multiple for the amount of money
you should have saved by a particular age. For example, we're gonna take someone who wants to live off of $125,000 a year in retirement. If that is the case, if they're at age 30, they can find the intersection between 30 and 125,000, and they will see that at the age of 30, they need to already have one times $125,000 saved if they want to be able to live off of that amount in retirement.
By the time they're 40, they need to have three times $125,000 saved. The numbers go on and on, and to me, they seem even more unrealistic the older you get. But even in the [00:04:00] younger years, I don't know many 30 year olds who had $125,000 saved by the time they were 30.
If you're one of those 30 year olds, kudos to you, but keep listening to this episode.
JP Morgan is not the only entity that puts out these type of markers or lines in the sand. I'll pull up another interview from CNBC entitled, 'Here's how much money you should have saved at every age', and if you scroll through the article, it will tell you that by the time you're 40 years old, you need to have three times your income saved in order to have a sustainable retirement.
Now these numbers are seemingly random, but they're very similar when you go from one entity to the next. If you recall, when we were looking at JP Morgan Chase, if you wanted to live off of $125,000, by the time you were 40 years old, you had to have about three times that amount saved.
Just like CNBC said that by the time you're 40 years old, you need to have three times your income. So clearly they [00:05:00] are pulling from the same well of information when they're setting these obstacles or these goals as they put it.
But where does this information come from? Well, in my opinion, many of these organizations are operating off of the assumption that in your retirement years, you're gonna be adhering to something called the 4% Rule.
The 4% rule was created by a financial advisor in the early 1990s who was trying to figure out just how much a person could live off of in their early retirement years without worrying that their money would expire before they died.
And in doing their research, they found that by withdrawing 4% of the amount you had saved in your first year of retirement and adjusting that withdrawal percentage year after year by the rate of inflation, you could have a retirement portfolio that lasted in many cases over 50 years. And in almost all cases over 35 years.[00:06:00]
Let's use an example so you can see this with real numbers. If I retire with a million dollars in my portfolio at the day of my retirement, in that first year, I can withdraw $40,000, 4% of the million dollars I saved.
It's all about finding a sustainable withdrawal percentage and adjusting the amount you're withdrawing each year based on that rate of inflation.
Now that you understand the premise of the 4% rule, you can start to see why so many of these media outlets and financial institutions say you need so much saved at such an early age. Because 4% is not that much.
And it's my opinion that adhering to the 4% rule and using it as the basis to determine who is on track ahead of pace or behind pace in retirement does not take into account the ways that many people attain wealth and when they attain it.
The first shortfall in the 4% rule is that it assumes that the way that you save is linear and that when you start saving at [00:07:00] a particular age, you're gonna save the same amount all the way through till your age 60 or 65 or 70.
And I used to fall into this too, when I was giving presentations, when I first got into financial services, I used to use this illustration that in my mind was telling people the importance of getting money into the market early. I would give them the example of two different investors, and I would give these two investors 40 years in which they could save for retirement.
I would assume that they were going to receive an 8% return for whatever money they invested. Now the first investor would save $200 a month for the first 10 years, and then they would stop. So they have 40 years in which they can invest. They would choose to invest $200 a month, and then they wouldn't put another dollar into the market for the remaining 30 years of that period.
The second investor would wait 10 years maybe because they chose to, maybe because they had to. They had a child in [00:08:00] daycare. They had an MBA program that they had to get through. For whatever reason, they weren't able to start at the beginning, so they waited 10 years and then for the remaining 30 years, they invested $200 a month.
At the end of that 40 year period. Our first investor who invested for 10 years and stopped, ends up with around $400,000 as their account balance.
But our person who waited 10 years before they start investing ends up with a little under 300,000. They have over a hundred thousand dollars less in their portfolio, even though they invested three times as long and thus invested three times the amount as our early investor. Now, when I would tell that story, I was intending to let people know that the earlier you can get into the market, the better.
But in reality, with age and wisdom and experience, I'm actually furthering that narrative that in order to retire well, you will only do so if you can put [00:09:00] money in the market early. And for many people, that is just not the case of what's possible for their early years.
And after the break we'll tell you more about what is possible, what's statistically likely, and how no matter when you start accumulating assets, there's still a way to make sure you have a retirement worth saving for.
Before the break, I told you a story about two investors who were able to put money into the market for 40 years. One investor invested $200 a month for 10 years and stopped and didn't put another dime in the market for the ensuing 30.
The second investor waited 10 years and then put $200 a month in the market for the ensuing 30 years. And unfortunately, our second investor ended up with almost a hundred thousand dollars less than their counterpart. Now that story assumes that when that second investor begins to put money in the market, they will do so at the same $200 a month that the first investor did.
[00:10:00] And if their income was the same throughout the 40 years, maybe that would be the case. But a big reason that I think the 4% rule is misleading is because it does not take into account that for many investors, their peak earning years are later in their career. And in those years, they may have a substantially higher amount that they can put in the market as compared to what they could do when they first started.
Last year, Forbes came out with an article entitled 'Millennials High Earning Years Have Arrived. Here's How to Prepare'. And in this article they were talking about the years in which we have our peak earning potential. And according to the Bureau of Labor and Statistics, workers earn the most when they are between the ages of 35 to 54.
The biggest jump in their earnings occurs when they move from the age bracket, 25 to 34 to 35 to 44. And as a matter of fact, when it comes to the millennials that were observed for this [00:11:00] study, they saw on average a 22% income increase when they shifted from one age bracket to the other.
Now this is huge because while you might see on average a 22% jump when you go between these two different age categories, I don't think it's an extreme thing to say that for many people out there at some point in their career, if they're focused on development and earning potential, they're gonna be making double what they made at the start of their professional development.
So if they're looking at all these savings goals, and even if they're looking at my illustration of the two investors,
it's very possible that in their late thirties or in their mid forties, it would've been easier to put aside double the amount into the market than they were able to save at ages 25 and 30.
So going back to my example, if I have a person who waits 10 years and now puts $400 a month aside for 30 years, now that investor who waited until a later age and a higher income potential will see an account balance [00:12:00] of over $500,000 with an 8% return.
Now in future episodes, we'll get into how realistic it is to have an 8% return every year. I'll give you a little preview. It's not realistic. But the point is that one of the biggest things that the 4% rule doesn't take into account is the jumps that most people experience in their income, and the fact that once they have cleared debt, once their kids are out the house or out of daycare, once they have gotten a few promotions, it is significantly easier for the average person to save in those later years than it was in their earlier years.
And lastly, my final beef with the 4% rule is it does not take into consideration things like passive income sources or entrepreneurship. If you think about some of the ways that a person would attain wealth, if they're trying to adhere to the 4% rule, you can understand that it takes a tremendous amount of savings to increase your income, even an insignificant amount.
As an [00:13:00] example, if I wanted to increase my retirement income by $4,000 per year under the 4% rule, I would have to save a hundred thousand dollars in my investment account to generate $4,000 of additional income. Now, I'll ask you this question: if someone is in their later years when it comes to working, do you think it's easier for that person in those last few years to save an additional a hundred thousand in hopes that it generates 4,000 of income?
Or would it be easier for them to find a passive income source, a part-time job, or even things like investment real estate that could generate that $4,000 a year? I would argue it would be easier to do the latter than it would to save that amount of money in such a restricted period of time.
And that is how we see many of our later career professionals attaining wealth through asset creation, through business creation and through passive income sources, none of which [00:14:00] are reflected in the 4% Rule. So I want you to use this episode to understand what it really means when they're telling you how much you should save.
But I also want you to have the comfort of knowing that for your typical person, they do not establish wealth in a linear fashion. Most people wait until their peak earning years, or their peak asset gathering years to make up for the years they lost early in their career. And it's something you can do too.
That's why in this podcast, in future episodes, you will hear me focus much more on things like income potential, income creation and asset gathering, than you will see me talk about things like how much you should have saved at any age or how much you should budget. I would much rather you focus on what you can do to increase your ability to earn and gather
than I would you checking off a list of something that someone else told you is the right thing to do. So I hope you enjoyed this and I hope you're ready for more. If you haven't, please subscribe to this on [00:15:00] your favorite podcast platform and leave us a review. It really helps. And look out for the next episode on your favorite platform, and we'll keep bringing them to you as often as we can.
