This Shocking Silent Lurker Can Kill Your Retirement Plan

Investing for retirement is a daunting task.

You’ll need a massive amount of money to provide a reasonably safe income for your golden years, especially if you believe Social Security won’t be around.

Unfortunately, many people never factor in one of the largest threats to their retirement.

Retirement’s Massive Goal

The massive goal most people consider when it comes to their retirement is stockpiling enough assets to reach their retirement number.

Your retirement number is the amount of financial assets a person will need to have in order to provide a reasonable income to live off of in their retirement.

To calculate how much money you’ll need using the commonly cited 4% rule, simply take what you expect you’re yearly expenses will be in retirement and multiply by 25. (Note: This is just a simple calculation and you should put much more effort into your retirement plan.)

These numbers are often huge and can easily exceed $1,000,000.  Due to the enormity of these numbers, many people simply stop there. They leave out some of the most important factors to consider when it comes to retirement planning.

Just for fun, here are a couple quick examples of how to calculate a retirement number. If you think your expenses will be $40,000 a year, you simply multiple by 25 to get a $1,000,000 retirement number.

Think you’ll need $100,000 a year? Your retirement number will be $2,500,000.

The key that many people forget to factor in can absolutely destroy your retirement. That threat is inflation.

Inflation – The Destroyer Of Retirements Everywhere

You must account for inflation when you come up with your yearly expense number. Unfortunately, many people forget about inflation.

Instead, most people simply consider how much money they’d need in today’s dollars and calculate their retirement number based off of today’s dollars. This could leave you in a horrible position.

Why do people forget to factor in inflation? Usually inflation isn’t a huge factor in our every day lives. Inflation hasn’t been very high recently and we don’t tend to notice it.

However, if you think hard about how much something cost 10, 20 or 40 years ago, you’ll notice there is a HUGE difference in price between now versus back then.

How Inflation Affects Your Retirement Number

So, let’s say you do want to retire on $40,000 a year in expenses in today’s dollars. The challenge is you don’t want to retire until 40 years from now.

In order to reach $1,000,000 in today’s dollars, you’ll actually need $3,959,260 in future dollars to have the same spending power. To come up with that number, I assumed a 3.5% inflation rate. Isn’t that insane!

Now that I know I’d need to end up with almost $4,000,000 instead of just $1,000,000 to retire in 40 years, that definitely changes how much money I’ll be putting away for retirement.

Instead of having to invest roughly $284 a month at an 8% return to reach $1,000,000 when I retire in 40 years, I’d have to invest roughly $1,135 a month at the same 8% return to achieve the $4,000,000 goal.

If that isn’t an eye opener on how inflation can destroy your retirement, I don’t know what is.

What Happens If You Don’t Account For Inflation

If you only end up with $1,000,000 in 40 years, you only have 25% of today’s purchasing power. Wouldn’t it stink to live in retirement on the equivalent of $10,000 a year? That’s insanely frugal if you ask me!

Please don’t fall into the common trap that so many others do when calculating their retirement number. Factor in inflation and make sure to check whether or not you’re on track with your retirement at least once a year.

Your expenses could change drastically or inflation could differ dramatically from your predictions.

While most people tend to think that these numbers will only get worse, there is a possibility they will get better. Don’t dread your annual check up. It might give you some good news.

Another way to proactively plan for your retirement is using the tools Personal Capital offers. Simply link your financial accounts to total up your assets. Then input your retirement goals and assets into their calculator. Personal Capital will then tell you your probability of retirement success.

Personal Capital even offer financial planning services for a fee if you’d rather hand your planning over to the pros.

Do you have a retirement number you’re aiming for? Did you forget to account for inflation in that calculation? Let me know in the comments below! I love hearing about retirement planning! 

Early And Traditional Retirement Both Suck! Try This Instead!

After we’ve explored the paths to both early retirement and traditional retirement, you might be wondering why we need to pick one or the other.

Isn’t there another way we can structure our lives so that we can enjoy them more both now and later?

I’m glad I’m not the only one who is thinking beyond the obvious options.

Instead of picking one retirement method or the other, why not combine the two and find a way to make it work?

Honestly, most people never entertain the thought because it doesn’t fit in well with their current careers.

Just a few tweaks to traditional and early retirement can make things much more interesting if you can make it work for you.

Mini Retirements – The Early/Traditional Retirement Combo

Rather than retiring early or waiting until you’re 67 to retire, why don’t we work in spurts and take time off in between to do what we wish?

Work for a few years then take a year or two off to accomplish a lifelong dream, then head back to work for a few more years and then repeat the process again. It definitely doesn’t sound like a traditional employment option, but with some work you can make it happen.

This type of life plan works best in a career field that isn’t rapidly evolving. If you work in a fast paced tech job, it probably wouldn’t work for you. However, if you work in a relatively stable field, you could easily employ this methodology to retirement.

Another great way to take advantage of this method of retirements is to become a contractor that takes jobs on assignment. You won’t get benefits, but you can take jobs in short spurts and it should be easy to find new jobs based on the fact that you’d be a temporary employee.

These jobs generally pay pretty well if you’re in the right field. Each time you head back to work, you’ll need to make sure you’re staying on track for two different retirement goals.

The Two Retirement Goals To Monitor

The first is your permanent long term retirement for when you turn 67 or whichever age you’ve decided you want to retire. You must always make sure you’re on track for this retirement goal first and foremost.

Why? The younger you are the more time you can allow your money to work for you. If you get off track today with this goal, it will take even more money to get back on track in the future which can cause big problems down the road.

The second retirement goal you need to keep track of is your mini-retirement goal. Once you figure out how long you want your mini-retirement to be, you need to save up enough money to live off of for that period of time.

You’ll probably want a little bit of extra buffer room in case you can’t land a job on your way back from your mini retirement as quickly as you had hoped. Once you have these two financial goals in good shape, you’re ready to take your first short mini retirement.

Enjoy your time off and figure out what you want to do for your next working stint. With a lot of planning and some hard work between mini-retirements, it is definitely possible to make this method work for you!

Do you think mini-retirements is an option for you? Would you ever consider such a non-traditional version of retirements?

Is The Traditional Path To Retirement The Perfect Solution?

The traditional path to retirement might be right for you if scrimping and saving every last penny to retire early doesn’t sound fun.

The traditional path assumes you’ll retire at the normal retirement age, which is 67 for most people.

For me that is decades away.

Luckily this retirement plan allows for a more enjoyable journey to the finish line for most people.

Benefits Of The Traditional Retirement Path

The biggest benefit of traditional retirement is having time on your side.

If you’re young, you still have decades before you retire. That time will allow the power of compounding to significantly impact the size your retirement nest egg.

Due to this awesome power, you won’t have to invest as high of a percentage of your income as an early retiree would.

When you’re not planning on retiring early, you can take a job that isn’t in a super high paying field. You don’t have to invest massive amounts of money up front like you do with early retirement, although it does help.

Instead, you can find a job that you love. While finding the perfect job is difficult for many, once you find it you may never feel like you have to work another day in your life. Just invest at a sufficient, steady pace and you’ll eventually make it to retirement.

One of my favorite parts of taking the traditional route to retirement is enjoying some of the luxuries life has to offer. Normally, these luxuries come with price tags that are outside of the realm of affordability for early retiree candidates.

Due to the strict budgets of early retirees, you simply don’t have room to splurge on anything that isn’t necessary.

By taking your time to get to retirement you can probably fit in a few luxuries, like a cruise or a tropical vacation, that you wouldn’t be able to afford if you wanted to retire early.

Unfortunately, retirement savings never grow exactly like you plan. Luckily, with a traditional retirement you have time to adjust should your plan get off track.

If investments don’t return what you thought they would, you can invest more money before you have to delay your retirement date.

Early retirees may not have the time to make proper adjustments and their retirement date might get moved out by many years due to a market crash.

Drawbacks Of The Traditional Retirement Path

The path to a traditional retirement isn’t filled only with benefits. By choosing this path, you’ll have to work for 40+ years until you reach your traditional retirement age.

By not saving aggressively, you’ll be forcing yourself into working longer even if something changes that would make you consider dropping out of the workforce early. If you don’t have the money to retire, you’d have to live a much reduced lifestyle to quit your job early.

When you have to work for those 40 years, you won’t have freedom to do whatever you want with your time. You might have to miss a big event in your child’s life if it coincides with a major deadline at work.

Hopefully you can work around the conflict, but if you rely on your job for income for living expenses and investing for retirement, you may not have another option. You could be chained to your desk instead of being financially independent at a young age.

As with any future path, you can’t predict the future and you aren’t guaranteed a job that pays well every year until you retire.

Relying on being able to work for 40+ years might be unrealistic if you have certain health conditions or if your field of specialty disappears from the job market as technology advances.

This might leave you short on your retirement goals at a time when you need to be kicking up your investing into overdrive.

Finally, while it is a morbid thought, no one knows for sure when they’re going to kick the bucket. Wouldn’t it be awful to save and invest for 30 years only to die 10 years before you reached your retirement.

Would you regret having worked those jobs for just a few extra luxuries at the cost of giving up time doing what was most important to you and your family?

There is no clear answer whether the traditional retirement path is right for any given person. It is a deeply personal decision, but hopefully these benefits and drawbacks have given you a bit more insight into the huge decision you’ll have to make.

Luckily, early retirement and traditional retirement aren’t the only options you have available. We’ll discuss a much less mentioned path in the near future and you’ll have to let us know what you think.

What do you think about the traditional retirement path? Do you think it is a good fit for you, or even for a majority of Americans? Or do you still think early retirement is the way to go? Why or why not? Let me know in the comments below!

Do You Miss Out On Or Finally Live Life With Early Retirement?

Early retirement is almost a religion in some corners of the internet.

People like Jacob from Early Retirement Extreme and Mr Money Mustache have grown large followings behind their philosophies of their ideal early retirements.

I truly believe that they have picked the best retirement option for themselves and their families. 

I don’t think everyone else in America would agree that the lifestyles exhibited by these people are ideal for every single person.

Why Extreme Early Retirement Isn’t For Everyone

Retiring early is no easy task. Due to the early retirement date, you don’t have nearly as much time to let compounding work for you.

In order to amass the large amount of assets you would need to retire in your 30s or 40s, you’d have to earn a ton of money and spend a very small percentage of your income.

Neither of these conditions are easy to achieve, but they’re both completely possible if you put your mind to it and make smart decisions.

In order to reach early retirement the way many personal finance blogs depict, most people find a high paying job and live off a very small amount of their income.

We’re not talking about living on 50% of their income. Usually these people live on 30% or less. Due to their high incomes, 30% is still a decent chunk of money, but I wouldn’t consider it a middle class lifestyle by any stretch of the imagination. 

Early retirees plan to maintain this lifestyle in order to invest and eventually reach financial independence with no breaks.

When Do You Reach Financial Independence?

Financial independence is the point where your assets will provide enough income to cover your expenses and theoretically never run out of money.

When you reach financial independence, your expenses will have to remain the same small amount you lived off of each year while building your nest egg.

You would already be used to living this lifestyle, but your lifestyle will never increase unless you go back to work to earn more income or invest more money.

Some people are perfectly happy living that lifestyle, but I have to wonder if they ever feel they missed out on opportunities throughout their lives.

You wouldn’t likely be able to splurge to go on a vacation of your dreams because you were too focused on reaching retirement early. You might not have a child or more than one child because they’re too expensive and don’t fit into your financial plan.

When you finally get to early retirement, do you live a fulfilled life or are you empty now that you’ve hit financial independence and are just now realizing what you may have missed out on?

The Amazing Side To Early Retirement

Of course, early retirement isn’t all doom in gloom. Once you’re financially independent you can change your mind and find a way to earn income that you’ll truly enjoy.

You can use that extra income to support the extra activities you may have missed out on earlier due to financial constraints. Some opportunities will pop up again later in your life, but some may have permanently passed you by.

Is it worth it to sacrifice so much to reach financial independence ahead of schedule and retire early?

Many would argue yes. Why? You no longer are constrained by the requirements of your job. You now can do whatever you wish whenever you want!

Walking your kids to the bus stop every morning and picking them up from school every afternoon is now an option. So is spending 80 hours a week working on art projects in your garage.

You can do whatever your heart desires without a worry about making money, assuming you can stick to your early retirement budget.

Wouldn’t it be awesome to be financially independent and have no money worries for the rest of your life? Or are you worried that you’d miss out on too much of your life? Let me know what your thoughts are on early retirement. Is it worth it or not? Share in the comments below!

The Two Main Paths To Retirement Couldn’t Be More Different

We can all take one of many different paths to reach our retirement.

The question is, which path is the right path for you?

Some advocate for the short and direct path to retirement by earning a high income and living off a very small portion of it.

Others want us to save a little bit over a long career and eventually retire when we hit the traditional retirement age.

Which way to retirement is the right way?

The First Two Decisions Dictate Your Retirement Strategy

The first two decisions you must make when considering your retirement strategy are “What type of retirement do you want to live?” and “How do you want to get there?”.

Let’s examine these one at a time.

What Type Of Retirement Do You Want To Live

Deciding what type of retirement you want to live can be a very tricky question.

People have a hard time imagining what they will want to do once they no longer have to work a 9-5 job, yet it is essential question you must answer to figure out which retirement path you want to take.

Some people would just be happy staying in their local community and taking advantage of what it has to offer while others will want to travel the world and live a luxurious life.

Obviously, living in luxury will cost much more money than just hanging out around your local town in a modest home.

Once you have an idea of the life you want to live in retirement you can begin figuring out a rough estimate of how much it will cost to live that lifestyle.

Then, the last step you’ll need to take is figuring out how much money you’ll need to have in your nest egg to provide enough income to match your future expenses.

Of course, how long you’ll be retired will play a large factor in your nest egg size.

How Do You Want To Get To That Type Of Retirement

Now that you have an idea of what type of retirement you want to live, you need to figure out how to get there.

Want to retire young? You’ll need a high paying job. You’ll also need to save a very large portion of your income, sometimes 50 to 9o percent, if you want to have your money last throughout your entire retirement.

Of course, if you’re willing to work in retirement here and there or pick up a part time job, you might not need quite as much money. Still, the large amount of money you’ll need up front will be daunting.

Don’t want to retire as soon as humanly possible? You have a lot more options available to you. You can focus on putting away a reasonable chunk of your income, around 20% or more depending on your age, and still reach retirement in the traditional sense.

In fact, you probably don’t have to worry quite as much about getting a super high paying job if you diligently invest a decent chunk of your income consistently. Instead you can find a job you enjoy that might pay a bit less if you can still live a comfortable life on a lower income.

You have more time to invest for retirement than the super early retirees, but the earliest years still give you the most value due to the magic of compounding.

We’ve covered the basics of the two main paths to retirement and how you can get there. In the next couple of weeks we’ll examine these two different paths in more detail to see which is right for you.

Which type of retirement are you leaning toward? Is the big up front sacrifice and small income in retirement worth retiring earlier? Or are you planning on working for the long haul in a career you might enjoy more so you can live a more well rounded life financially?