In working with successful clients, I’m reminded often that just maxing out your 401(k) rarely cuts it. For most of the families we work with, it takes more than just retirement plan assets to effectively retire.
Because your income is too high to replace under the restrictions imposed upon you. Depending on whether you are over 50 or not, your retirement plan deferral is limited to $19,500 (under age 50) or $26,000 (over age 50). I know, that sounds like a bunch of money but it’s not as much as you may think. I had a client in the office yesterday who makes around $300,000 per year. He’s 40 years old and maxing out his 401(k) that has a current balance of $275,000.
What are his chances of retiring successfully at age 67?
Are you ready for it? … LESS THAN A 10% PROBABILITY OF SUCCESS! I know that sounds crazy, but it’s true. He’ll be projected to have around $4,822,356 at retirement, along with $67,869 per year in Social Security income, but he’ll most likely run out of money before he’s 80 years old. Taking into account taxes, inflation, etc., he will need to draw more off of his retirement portfolio than it can generate in return during retirement.
So what can we do?
We must come up with other ways to invest, save, and accumulate wealth. Here are some ideas:
- Open and fund an investment account that’s not “tax-advantaged”. I put that in quotes for a reason. For high income earners, non tax-advantaged investment accounts are many times more tax-advantaged than IRA’s and 401(k)’s. Note: I will do a separate post on this, but in the meantime, email me if you want to discuss.
- Pay off your house before retirement. Your house is an asset and an expense all wrapped into one. Living mortgage-free in retirement reduces your monthly expenses so you don’t have to pull as much money from your investments. As an asset, it gives you options, which are always good to have.
- Create other sources of income. There are lots of ways to create income in retirement using real estate or other means. Many of our clients consult during retirement. Part time consulting creates additional income and they enjoy the work. Others may have a rent house or two that keeps them busy and provides additional income.
We can model all of this using our financial planning software and provide you with clear solutions. My new 40 year old client? His plan is actually going to work out great because we found an easy way for him to invest over and above what he contributes to his 401(k). Probability of success? 78% and climbing.
What concerns come to mind when we talk about investing in stocks during retirement? We’d love to know what you think.