I recently read an article from The Simple Dollar.
The author wrote that as an example $750,000 would be a good amount for retirement at 60. I am not saying that $750,000 is not enough or too much, but most people have been marketed the idea that you need millions to retire. If you read my lasts blog…”How much money do you have.” You can start to understand percentages and how much money you may need based on your investment knowledge, experience, and luck.
In 2008 I worked for Fidelity Investments as a stock broker they taught to that the average person who owns a 401k or other type of contribution plan has around 50k. It looks like now the number has climbed up to about $69,000.
The Washington Post covers an article saying basically the same thing. Here is a guy saying that you might need $750,000 to retire, the comments say it is too low, but reality is most people have around $50,000. The article goes onto saying that workers in Fidelity 401(k) plans who routinely set aside money from their paychecks with the same employer for at least 10 years had amassed an average $179,100 by the end of 2011. In today's low interest environment, most people wouldn't be able to retire with this kind of money off the interest only.
If you are a retiree typically people feel that you shouldn't dip into the principle you saved. If you do this how much money would each of these investments make?
$750,000 vs. $50,000 showdown!
If you are someone that doesn’t understand investments very well you might decide putting all the money into a one year CD. A year CD is earning about 1%. This means you would earn the following:
$750,000 @ 1% = $7,500 and on $50,000 @ 1% = $500 for the year.
Taxes @ 15% = $1,125 and = $75
Total = $6,375 = $425
Wow, taxes sure ate up a lot of your return! One of my favorite authors Robert Kiosaki says that the easiest way to save money is to reduce your tax burden. Let’s do just that. Instead of a 1% CD let’s put it in a Tax-Free Money Market that earns .1% less.
$750,000 @ 0.9% = $6,750 and $50,000 @ 0.9% = $450 for the year.
Taxes @ 15% = $0 and = $0
Total = $6,750 = $450
Increase of = $375 = $25
Percentage increase = 5.8% = 5.8%
Can you live off of these returns? Probably not.
What if you could bring in investment returns like legendary investors Warren Buffett, Peter Lynch, George Soros, Donald Trump, or Jim Rogers? Some of these investors managed to create returns of 25% per year. Let’s do the math.
$750,000 @ 25% = $187,500 and $50,000 @ 25% = $12,500 for the year.
Taxes @ 35% = $28,175 and Taxes @ 15% = $1,875
Total = $ 159,325 = $10,625
Percentage difference from 0.9%
increase = 2360% = 2361%
Could you live off of this money? People do this all the time. People live off of both amounts. In fact, the amount you pay in taxes on the $750,000 is more than some of your current salaries. My point is that how much you have for retirement isn’t the question…you should be asking what kind of return can I get off my money. The person with $50,000 earning 25% is financially making almost twice the amount than someone with $750,000 earning 1%.
Earning 25% per year isn't the hard part. The hard part would be getting a 25% return in cash. Many investments that earn this kind of return requires you to reinvest back into the business.
In the Bible Jesus talks about a parable of the three servants each given a certain amount of money. One servant receives 5 talents, one 2 talents, and a third servant receives 1 talent. It doesn’t talk about ages or investment/business experience. However, obviously the master felt that one servant was more responsible or had more ability than the other two.
This is no different than real life. As you acquire more wealth, the management of this wealth become more difficult. You begin to require other people to begin to help with managing of your wealth. People like accountants, bookkeepers, and lawyers to name a few. Your knowledge on finance needs to increase as your paycheck and investments increase.
But his lord answered him, "You wicked and slothful servant. You knew that I reap where I didn't sow, and gather where I didn't scatter. You ought therefore to have deposited my money with the bankers, and at my coming I should have received back my own with interest. Take away therefore the talent from him, and give it to him who has the ten talents. For to everyone who has will be given, and he will have abundance, but from him who doesn't have, even that which he has will be taken away. Throw out the unprofitable servant into the outer darkness, where there will be weeping and gnashing of teeth." - Matthew 25:24-30, World English Bible.
If you don't understand what this means...I'll explain to you. DO NOT BE IGNORANT ABOUT MONEY! Otherwise someone will take it away from you and give it to someone who has money. This pretty much happens everyday.
Sometimes you can’t see the forest for the trees. Look at the big picture…if someone says you cannot do something, it really means they cannot do it. Their word doesn’t mean that it cannot be done. The Wright Brothers were told they couldn’t fly…it can be fun to prove people wrong. Just don’t go around telling them I told you so.