When can I retire? Probably never.

By ktn699 | Miscellaneous | 24 Oct 2019

I come from a very humble family, so I was taught that hard work and penny pinching would ensure a better future. Suffer now, savor later. However, after a decade of education and another 5 years of working the equivalent of two full-time jobs, I've slowly realized that this age-old strategy has lost much of its shine. Why do I say this?

I am an American in my early 30s. My situation involves a huge amount of educational debt, a job that's only available in a city with very high cost-of-living, and a financial system that favors growth of prior wealth (which I do not have). I guess my gripe is that it feels impossible to get the financial security ball rolling in the right direction, but I'll push on endlessly, even it turns out to be a Syphysean attempt.

I recognize that readers living outside of the U.S. will have very different financial concerns and opportunities than me. However, I think much of today's younger generations can empathize with my anxiety about the future. Maybe we can all share in the process of identifying and quantifying future needs and finding options to fulfill them. I hope that this will serve as a framework to continually assessing and addressing progress towards a comfortable retirement.

Here's my approach:

Step #1: Calculate how much money retirement will cost. Some retirement advisers tell clients that they should expect to live off of approximately 75% of their pre-retirement income. But how does a 30 year-old know what income they will have in 30-40 years? Say I make 50,000 a year today, but make 150,000 a year by age 60. Should I expect 75% of 50k or 150k in retirement? Neither seems like a realistic option. I certainly wouldn't want to go back to living like my poorest self (min income), but it's equally unreasonable to believe I'll be living like my bougie-est self (max income) until I drop dead.

So what's my number going to be? The choice is harder than it seems, because you will always have to balance optimism and reality. It comes down to knowing yourself and your lifestyle choices.

I make about 90k now, but live in a big city with very high cost of living. Even if my salary seems like a lot, I sometimes struggle to pay for all of my expenses, because things like rent on a miserable little apartment can take up 40% of my income. You could say, move! But family, work, and other obligations can lock you down. I wouldn't judge anyone on where they've chosen to eke out an existence. Anyway, I know I will retire to a place that's a lot less expensive. I already see my life taking a more stable and less expensive turn over the last few years. Ultimately, I know that I would likely be very happy retiring with 100k/year (in today's money). If that seems ridiculously high, read my explanation further down the page!

The average life expectancy in the developed world is about 80 years. It'll probably be longer by the time I reach retirement, but for the sake of simple math, I'll say that means I have to save for 20 years of retirement life.

20 * 100,000 = 2 million dollars. Simple, now I just have to sock away enough for 2 million dollars over a career of 30 years, right? That's about 5,600 / month. Where the heck am I going to get that? I don't even bring in more than 5,000 / month after taxes! And don't forget my ridiculous rent! There's not much left after food, shelter, transportation, debt repayment, health insurance, etc etc.

Thankfully, the U.S. government is already forcing me to save for retirement. It's called income tax, which helps pay for Social Security benefits. I looked up the maximum benefit for 2018's recipients. It tops out at about 33k/year -- and that's if you've contributed for at least 35 years at an average annual taxable income of 120k+. I know for sure that I won't be reaching that anytime soon. Moreover, there's the constant threat of Social Security becoming insolvent and running out of money during my career. There's a real possibility that all of my contributions (which go towards the benefits of today's recipients) will not be reciprocated when it's my turn to retire. So it sounds like I have to rely on myself, because I certainly can't rely on the government as my safety net.

Step #2: Start saving early and thank god for compounding interest. That's the general wisdom. Interest amplifies your savings for the future. So, what can interest do for me? I did a simple calculation for 5% returns compounded monthly, which is a conservative, but reasonable for the wild swings of most economies. To reach 2 million after working for 30 years, you would need to still save 2,500/month. Still not really reasonable, unless I only want to eat Cup-o-Noodles twice a day, every day.

And who's going to consistently offer you 5% every day, year in and year out. The S&P 500 might be very good to you some years, or it might set you back more than 50%, like it did in 2008. Banks and bonds certainly wont. They offer a boring 1-3%, and those are the "high-yield" ones!

Don't forget about inflation. I checked a simple calculator and found that at 1% inflation (generous for developing economies, reasonable for developed economies), your dollar is only worth 75 cents in 30 years. For simplicity's sake, you can count inflation as negative interest. So now, we're down to 4%. Yea, the option of fastidiously saving for retirement is looking less and less like an option for today's young working class.

Step # 3: Take a moment to cry and then evaluate your options. After such sobering numbers, my natural instinct is to put off thinking about this for another day. But waiting just means less time to figure out this impending disaster. What else is available to me? I've thought of 3 options: 1) plan to live on less in retirement, 2) work later into life and die earlier, 3) earn more and save more starting now.

Option 1: It's pretty easy to commit to this now, but it will be harder to live it later. I will readily admit that 100k annual income is very generous. I could probably survive with 1/2 of that amount. However, I also know that as I grow older, I'll be less and less able to weather the financial hardships and stressors of life. For example, illness could strike at any moment. And in America, that could mean insurmountable healthcare costs, even if I am covered with private insurance or Medicare! So aiming for 100k is really just hedging against disaster and not actually a play for extravagance. Maybe I could move to a nation with socialized medicine and a reasonable safety net benefit for seniors (bravo to the many countries in Europe that actually offer this to their citizens!).

Option 2: Or maybe I could just work more years and die earlier to save myself the trouble of living in destitution. You think I'm joking, but over 25 million elderly Americans live in poverty. That's the wealthiest country on Earth for you! If I have no money for food, healthcare, or transportation, chances are I probably will die earlier. Working yourself to death is not a great plan for enjoying your golden years though.

Option 3: So how do I earn more and save more? Work harder, right? Right now, I'm working the equivalent of 2 full time jobs to eke out enough to pay back 1,000 dollars of student debt and save an additional 500 dollars a month. I'm pretty proud of myself for that! Maybe, if I work 25 hrs/day, I can reach my retirement savings goal! Excuse my momentary sarcasm, but I think it speaks to a truth that many people can relate to. There is a ceiling to the hustle. I can't work more than 16 hrs a day, before it literally starts shortening my lifespan. You can't work yourself to death to save for retirement (unless you really believe in Option 2, which is looking increasingly attractive...).

So I've resolved to find ways to find maximize my income/savings/interest, while minimizing my risks. Here's my progress so far:

1) Maximize contributions 401k with employer matching. This is literally free money to encourage you to save. So many millennials overlook this great employment benefit! If you expect to live off of more money in retirement than your current salary now, consider opening a Roth IRA which taxes your contributions now at a lower marginal rate and spares you from taxes at a higher marginal rate in retirement.

2) Diversified investment portfolio. I am somewhat risk adverse, so I keep a good chunk of change in a savings account. However, my portfolio has taken on sizable allocations to growth stocks as well as alternative investments, like REITS, crypto, or P2P lending, which can boost returns. These latter choices are riskier, but the time to do it is when you are young. A profitable investment would compound to even greater advantage, while a loss would still leave you with time to recover.

3) Side hustles. I thought I couldn't work any harder, but I could. I've leveraged my educational pedigree and writing ability to advise college and graduate school applicants for a fee (if you know anyone, send em my way. Seriously!) This supplemental income goes straight into retirement savings and educational debt repayment. Hopefully, this will help to make a dent in the future.

Step #4: Retire or die trying. The verdict is still out on this one, but if Publish0x is still around in 30 years, I'll make sure to update everyone on how it all worked out! In the meantime, I'll be revisiting the plan from time to time and see how close I am to living the dream!

As always, I welcome your thoughts, comments, and questions.