Posted in Money on January 2nd, 2017
The following post addresses the challenge of saving enough money for retirement from the perspective of the author. A person should evaluate their own circumstances based on what they believe will happen in the future and take the appropriate action. It is impossible for FinTekNeeks to know every individual circumstance, risk tolerance, etc, thus we can only answer from the perspective of what we would do. When it comes to investing or trading of any kind, you should only trade with money that you’re willing to lose because losses are guaranteed.
I’m 28 with a steady job and was advised by a financial adviser to max out my retirement accounts at work along with an IRA on the side. Is this a good idea?
You should do what you think is appropriate and I’ll address the question from what I would do in your position. What this means is that this is what I would do, not what you should do. Only you know your own situation, so you’ll have to evaluate your needs for yourself.
Let’s cover the basics that I look at for myself, which most financial advisers don’t evaluate. Since I happen to know that you’re male – and gender matters here since men do not live as long as women – the suggestion to “max out all retirement accounts” is absurd from my view. Men live seven years shorter than women and in many cases don’t live long enough to even experience retirement. I’ve known many men who paid a significant amount of money into social security and other retirement accounts, only to never collect. So, men are advised to pile up a huge amount of money they never use? Makes perfect sense!
Some advisers might imply that retirement savings by an individual is for a partner or children, but that depends on the person. For instance, a person may want to be with a partner who’s financially independent, so this may not be necessary. The same is true for children – not everyone finds trust fund kids appealing. A lot of people have different views on whether inheritance is healthy.
There are three considerations I look at when it comes to retirement money that are the “elephant in the room” that we almost never hear:
Jim Rickards asserts that “before you slaughter cattle, you have to herd them into a pen” and this is probably what retirement accounts will be for. They don’t have to confiscate all the money, just provide a negative return overall like they do with social security. Stated another way, if American savers have a total of $60 trillion in wealth accumulated in retirement accounts and social security and the government provides a real return of only 60% of that total – or $36 trillion dollars – the government just received a free $24 trillion dollars. Remember, real return is what matters; a person can get a nominal positive return that’s a negative real return.
If this doesn’t make a lot of sense, think of it this way: social security confiscates 15% every year of our income over decades of our working life, yet all we hear is that “social security won’t be enough for retirement” from financial advisers. These people generally want us to save another 10-15% of our incomes for retirement, which means that we’re actually saving up to 30% for retirement (15% social security + 15% other income). Over a period of several decades, that amount of money for retirement should be an insane amount of money, yet it isn’t when we listen to financial advisers. If we take median household income as of this year ($50,000), 30% is $15,000, which means that in ten years, we’ll have saved a principal amount of $150,000 – and that assumes no growth of principal. In a thirty year career, we’ll have accumulated $450,000 of principal – again, assuming no compounding growth. This isn’t enough for retirement?
Why isn’t this enough? Because what we don’t realize is that we’re getting a negative return on our social security, which means that while we’re forced to save 15% of our income in social security, when we retire, it will only be as if we were forced to save 6%. Yes, our 15% of forced savings a year really translates into 6% real return for that year, meaning the government is walking away banking 9% of our money every year. The money was a negative return for us , but we have no choice but to participate in this system, as social security is forced. If the government does that with IRAs – and I suspect they will – they will get even more of our money. In twenty years, we’ll hear how saving 30% of our income isn’t “enough for retirement” and “people need to save anymore.”
In addition to the above points, I am especially careful about “other retirement” products offered in the mainstream system, like pensions. Pensions require high interest rates and many are now defaulting due to low interest rates. Most of these will not be able to sustain themselves in the long run, which will be a betrayal for people who were told they were good deals. Even in cases where there are bailouts, I’ve crunched the numbers and the recipients always receive a negative real return, even if the nominal return appears positive. Governments and companies know people don’t look at real returns.
No one needs to be a genius to see this being currently played around them. How many people ask why we’re not getting better returns with social security? No one cares about their money until it stops functioning.
Why do I cover the above points? Because a negative real return means that I can play my retirement cards to benefit from this. In the case of negative real returns, this means that we all pay more and more money for basic resources – like food, health care, housing, etc. Still, this means that the real retirement accounts are physical, not digital. Never forget that someone pays $0 in taxes on apples that their apple trees produce, unless they sell apples for a profit and the same is true for seeds, wood from the trees, and all other resources a person obtains from their apple trees.
Getting back to retirement accounts, what should I do then if I know the game being played? I still use the following strategies:
1. Take advantage of any employer plan that has a match up to the match; beyond that, it really depends. If possible, I always stick with a Roth since I can withdraw the principal early (because it’s already been taxed).
2. If I qualify, use a Roth-IRA on the side. If not, I might use a Traditional-IRA relative to how much I accumulated in the employer account for the year. Basically, anything over $10,000-15,000 is starting to enter the “waste” category since we know from the above points that these accounts really serve the purpose of herding cattle for the slaughter, meaning that we’ll be getting negative real returns.
3. Depending on what I did in my 20s as far as retirement savings, there’s even less pressure to save. Most people start “catching up” in their 30s, which shows us how behind most people are. For retirement, it’s our teens and 20s that matter the most. What this means is that if I’ve maxed out all my retirement accounts throughout my 20s, I could choose to opt out for the rest of my life, or choose to use up to the employer match and that’s it. This is even more true as a male, because men live seven years shorter than women and don’t need as much money in retirement. Consider that maxing out for a decade using the max limits of $18,500 for an employer IRA, plus $5,500 for an additional IRA, plus $3,350 for an HSA (can be later flipped to an IRA) equals $273,500 over a decade and that assumes 0% growth and no employer match. This is much lower if you’re employed than if you’re self-employed; self-employed individuals have much higher limits.
Other retirement tactics I use:
1. I spend my time in a manner that stretches out the day. I like long days, weeks and years. It makes 1 year feel like 10 years. Since there’s no guarantee that I’ll live long enough to retire (I am a male after all), I’m not going to live on an eventual life plan. As a note here: hedonism tends to make time fly, while challenging yourself tends to stretch time.
2. I set aside a small percentage of my money for experiments. Bitcoin, as an example, was an experiment. Sometimes these work out; most of the time, these fail. To me, these are as fun as playing around with a chemistry set when I was a kid.
3. I invest in local ideas, after due diligence. These are by far some of the best opportunities and almost all of them will crush the S&P 500.
4. I position myself to gain from industries about to explode in growth, the most obvious one right now being health care. Whether I do this in the form of pursuing an MD or coming up with an idea, medicine can even benefit me if the industry is doing poorly as I can take care of myself in poor health. Win-win.
5. I constantly learn something new. Premium students in retire early with cryptocurrencies can enroll in every other premium course, which means they could be learning something new every week or month – relative to their preference. I find it odd that people will spend $50 a month on the gym, but $0 a month on their mind. Why? I invest more than $50 every month on my mind and am well rewarded for this. This point alone has been worth millions in my life.
6. I position myself for a US Government default. The US Government will default, either through inflation or outright default. The latter is more honest, which means the former is more likely. Knowing this means knowing what benefits in this scenario.
7. Steve and I have written The Little Book of Positive Returns In Negative Rates, covering twelve ways to beat negative returns, which don’t involve retirement accounts. The book will later be on Amazon, and is now in early-access for LBRYians.
8. Since I’m a numerical person, I tend to aim for the target wealth of the price of a median home in my area by the age of 30. For an example, if I live in a city where the median home price is $120,000, then by 30, I need that amount of money in wealth, at least. How much of that is for retirement/non-retirement is up to me, but it’s a good number that adjusts according to area, since wages are often determined by location.
In addition to the above techniques, when financial advisers tell me that retirement accounts are tax-advantaged accounts, I always laugh because there are numerous things in life that are tax-advantaged. For an example, the IRS can’t tax discipline and it’s more valuable than any amount of money. Also, in some cases, there may be “untaxed insurance options” that I may obtain for insurance early during the innovation curve where I won’t call to collect it unless I absolutely need it later; using the theoretical example of receiving 100 bitcoins for free back in the early days when bitcoin was less than $0.001 each. Most people might sell the bitcoins, but if the cost was $0, why? Again, it’s like having insurance that can be used later if it continues to exist and there’s no need to invoke a gain and pay taxes. With things like this, the key is early and if I accumulate enough of these “early innovative items” that are later rewarding, those will be more than enough for retirement and usually at a much lower cost basis than retirement accounts. Notice the underlying theme on both of these points: I think and act for myself.
Finally, another best retirement practice is understanding the world around me. I have a huge advantage over most people because I know the national debt and I know how financial advisers are unintentionally leading people “to their slaughter” to quote Rickards. They may not realize it, but the elephant in the room is getting bigger by the day. This doesn’t mean I am stuck with these problems; quite the contrary, it means that I know what not to do and I know why. When people were shocked by the recent pension defaults – and consider that financial advisers said this would never happen – this did not surprise me at all because I knew the impact of low interest rates. I also know it’s going to get much worse, which is why some smart Texans are taking “lump-sum” withdrawals now. Don’t be surprised to see others do this. Most won’t care or why understand why, but the signs are there.
Always be careful about playing by the rules of the status quo. My grandfather dedicated his life to teaching kids and helping charities and he played by all the rules from the financial advisers in his day, thinking that they would honor their agreement since he honored his side of the agreement. Many people exploited my grandfather’s honesty to succeed, but didn’t have any qualms betraying him – a lesson in game theory. The result was that he spent most of his retirement earning 0% on his savings, which really hurt his retirement and caused him a huge amount of stress – something older people shouldn’t experience as much given their age. He played by the rules of the system and the system betrayed him. Play by their rules and I promise that the same will happen to you.