Who’s Living Large in Retirement?
By Dennis Miller, Editor, Money Forever
Many wonder who truly thrives in retirement: those with pensions or individuals who built their own savings? The findings may surprise you, unveiling the realities of what it means to “live large” post-retirement.
Ultimately, what defines wealth in retirement isn’t solely about income earned over a lifetime, but rather the wealth you’ve accumulated by that stage. Who are the true affluent retirees?
Retirees typically fit into one of four categories: individuals retiring from the private sector with a 401(k), IRA, or lump-sum payout instead of a pension; those benefiting from government pensions; self-employed individuals who saved for retirement independently; and those relying solely on Social Security.
The U.S. Census Bureau reported that in 2010, the top 10 percent had a median net worth of $1,864,000. For those in this category, a staggering 95 percent of the population considers them affluent—yet is that perception accurate?
When my wife and I first tied the knot, we faced a negative net worth. No silver spoon for us! By our late 50s, we had become self-employed and found ourselves in the highest tax bracket. However, after accounting for federal and state income taxes, Social Security, and Medicare, nearly 50 percent of our gross income went to taxes, leaving us with a limited budget to raise our family.
Following our children’s departure, we shifted focus to our retirement savings. Like many, we began in earnest to accumulate wealth at this significant juncture. Here lies our challenge.
Firefighters in Contra Costa County Enjoy Generous Retirements
For a self-employed individual to rank among the top 5 percent with a net worth of $1,864,000, he would need to earn approximately $3,728,000 before taxes. While this sounds affluent, is it truly so?
If this individual lives in a home valued at $564,000, they would have $1,300,000 remaining in their retirement portfolio. Assuming they and their spouse receive a combined $35,000 in Social Security payments, this is their financial picture.
Currently, the best interest rate for an FDIC-insured CD is 1.1 percent. If their entire portfolio is invested in CDs, it would generate only $14,300 in interest. Adding that to their Social Security income brings their annual earnings to just under $50,000. Despite what 95 percent of the population perceives, this is likely far less than 40 percent of their previous working income.
So, who comes out on top?
Firefighters in Contra Costa County, California, benefit from a state law that guarantees their pensions, and many retire with an annual income exceeding $100,000. (Notably, their department is also closing several stations due to budgetary constraints.) I know numerous government retirees who have enjoyed significant pension increases, placing them above 80 percent of their former salaries. Their bravery in the line of duty warrants recognition and respect.
To match the pension of a Contra Costa County firefighter, a self-employed individual would need to earn $2 million to net $1 million, which could yield an $11,000 pension. A private sector employee would need to generate over $9 million to secure a similar pension.
A Strategic Approach to Monthly Income in Retirement
Those fortunate enough to have robust government pensions can afford a comfortable lifestyle compared to their private-sector counterparts.
So, what advice would I offer to baby boomers in the private sector? First and foremost, eliminate any debt. The sooner you start building your wealth, the better off you will be. If you have access to a tax-advantaged retirement plan like a 401(k) or an IRA, aim to maximize your contributions.
After maximizing your tax-deferred savings, shift your focus to long-term wealth accumulation well before your children leave the nest. Simply saving $20 each week starting at age 50, assuming a modest 4 percent growth rate, can yield $31,573 by age 70. With compounding, the $20,800 saved over 20 years can generate an additional $10,773. Start this journey, and you’ll watch your savings grow, encouraging you to save even more.
However, don’t rush to join the fire department! Whether in government or private employment, a combination of tax-advantaged retirement income, savings, prudent investments, and possessing a straightforward, actionable plan is vital for enjoying your “golden years.”
In our Money Forever newsletter, we’ve developed a straightforward monthly income plan using some of the safest dividend stocks available. It’s easy to follow, requires no extensive investment knowledge, and doesn’t necessitate starting with a large sum—just a willingness to learn and a desire for dependable monthly income. Click here to learn more.
Sincerely,
Dennis Miller
for Economic Prism
[Editor’s Note: Throughout his career, Dennis Miller has advised numerous Fortune 500 companies, helping countless executives communicate the value of their products. His diverse clientele includes GE, Mobil, Shell, and IBM. In 1995, Dennis committed to mastering investment strategies, dedicating significant time to study and connect with various investment professionals. Sixteen years later, after consulting with Casey Research’s managing partner David Galland, he recognized the need for resources aimed at baby boomers and retirees concerning retirement planning. This realization led to his publication, *Retirement Reboot*, along with his monthly newsletter, *Money Forever*, and free journal, *Miller’s Money Weekly*. Collaborating with Casey Research analysts, Dennis provides guidance to subscribers on creating a resilient retirement portfolio and ensuring financial independence for life.
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