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Your pension

Policy areas: 
Pensions
Rick's thoughts: 

Am I allowed to give advice here? Or will the lawyers come after me for stealing their work out from under them? Fiddlesticks – I'll do it anyway.

 

The only pension that really counts is yours, isn't it? If you figure out how to get by without working, you'll get to retire NO MATTER WHAT THE GOVERNMENT DOES.

 

And, since it is absolutely impossible to predict what those thieving scoundrels will do when we have our back turned watching the Super Bowl for just a couple of hours, the absolutely best strategy is to take care of your retirement yourself. Don't trust anybody else to do it for you, just do it yourself. That's what I did, and I took down my shingle when I was 48 years old.

 

A lot of people, not being the accounting types, think I must have sold 'my' company and made a couple billion dollars and sure of course I don't have to work any more just like Warren and Bill (except my European friends, who are pathologically unable to imagine any state of being other than collecting a public pension – they have been brainwashed to the max, but I'm doing my best to snap them out of it).

 

Wrong – it was not my company. It was a cooperative, and it was owned by its customers, not me. OK no need to go into details here suffice it to say if I had sold it and taken the money there would have been 20,000 actual owners that would have been mighty steamed, and I probably would have retired to the slammer for a while, albeit it the special one reserved for gentleman thieves, not the one for those lowlifes who smoked a little pot and got caught doing it. You know – young Negroes. The fodder that feeds the prison industrial complex and keeps it strong and creates jobs in rural America and provides union construction workers full employment through the hard times of Wall Street banker created recessions.

 

Oh look ma – I stepped in four cowpies with just two feet, and then I walked into the living room and stood on the new carpet scratching my noggin. Might be in for a lickin' an' a kickin' today I guess.

 

But some things best not go unsaid. So I said it. Sorrys all around for insulting so many of you in one sentence. The next round is on me, and we'll make it doubles.

 

Where was I? Why can't I stay on topic when I'm angry? I'd take that anger management course the judges like so much, but my insurance won't pay for it. Or will it? It covers me if I get pregnant, maybe it covers me if I get angry.

 

Pensions, Rick, pensions. They are reading this trying to learn what you think about pensions, not trying to figure out what your brain does when it's in the middle of a 30 hour bus ride and just got slammed with two Red Bulls in a row.

 

Here's the mystery, to me. How can anyone in America get a Middle School diploma without knowing how to figure out how much money they need to save in order to retire? Because all you need to know is how to multiply (that was 4th grade for me, probably 2nd grade now). And divide. And calculate a percentage. And what's more practical to know than how much money you need to have before you can throw the alarm clock into the trash and spend your day digging those freakin' dandelions out of the yard instead of kowtowing to the Man? Area of a circle? Square root of 119? When's the last time you used that?

 

Let's do the math.

 

Tell me how much money you want to spend every year when you are retired. Hint: it's probably not much different from how much you spend now. Maybe a little less, because you won't have to pay that outrageous dry cleaning bill, and no more child care invoices either. Or maybe a bit more, because you want to go fishing up at Clear Lake and those marina fees do add up. Just give me a number, dang it, because you can always change it later – I'm teaching you the math, not household budget management.

 

Let's say it's $30,000 a year. I pick that number for no other reason than it has zeroes in all the right places, and it makes the math painfully simple.

 

Now there's one thing about your 401(k) they probably told you, but you probably paid no attention to at the time, being a new employee much more interested in figuring out how to stay employed through the first three months of hazing.

 

When you take money out of your 401(k) you have to pay income taxes on it. This means we need to do an adjustment. Since this adjustment involves taxes, and taxes are set by politicians, no one on this green earth has the slightest idea what tax rates are going to be when you are retired. So let's just take a WAG at it. And if you don't know what a WAG is, see if Google does.

 

Let's just say you're going to pay income taxes at a 25% rate. It's a nice easy number to work with.

 

So, divide your $30,000 by 3, then multiply it by 4. Does this seem like magic? Please just shut up and follow along with the teacher, you'll understand in a minute.

 

That would be $30,000 divided by 3 equals $10,000, and $10,000 times 4 equals $40,000. QED. You have to be able to take $40,000 out of your 401(k) every year. You will pay 25% of it in income taxes (that's $10,000), and you'll get to keep, and spend, $30,000 a year in cold hard cash. Pretty sweet.

 

If you're feeling confused work a few more examples. Try starting with $60,000 (answer – you need $80,000). $100,000 (you need $133,000). Eventually, if you stick with it, you'll at least believe in that divide by 3 and multiply by 4 trick, even if you're scratching your head about why, exactly, that works.

 

Moving on. There is a magic number we are going to pull out of our hat at this moment. Are you ready for it? Presto mamo abracadabra and the magic number is … four percent! Applause all around.

 

Once again this is a WAG (figure that out yet?), but this time, not being based too much on the whims of scumbag politicians (yes it's true – the whims of scumbag Wall Street bankers are actually better for us), 4% is a number that will serve us very well.

 

It is the amount of our savings we can withdraw every year, for eternity, with very little fear of ever running out of money. Please do read the 'investing your money' section below, before asking any questions. Thank you.

 

There is no real need to understand any more than this. It works. Do it. If you are interested in knowing more, there are plenty of other people who can explain it to you. Let me suggest you start with an economics professor and work your way up, however. Don't ask your banker, your lawyer, your accountant, your spouse, your neighbor, and under no circumstances whatsoever ask your doctor, who has a congenital disability requiring him to get this answer wrong, every time.

 

Ask the economics professor. She won't give you the explanation in English, but she will be so flattered you are paying her some attention she'll do her best to make sure you understand anyway.

 

And here's what you do with the 4% - you divide your $40,000 with it. That would be $40,000 divided by 4% … hmm … no sane person remembers how to do that, what with all the wildly more interesting things to do in life, like master the remote control.

 

So here's a little trick. Just multiple your $40,.000 by 25. Much easier. Much much easier. Back to Middle School skills.

 

And bingo you are done. $40,000 times 25 equals a cool $1,000,000. And 4% of a million is $40,000, taxes of $10,000, you keep $30,000 just like you told me you required. You need to accumulate one million dollars in your 401(k), and when you do you will be able to retire and spend $30,000 in cash every year for the rest of your life. Even if you live to be as old as Abraham, and he was quite the old dude when he passed away. Like 175. Three wives. Eight children. Must have been nice back then.

 

By the way – If you start with a million, and take out $40,000 every year, you'll still have a million to give away to charity when you die, like Warren has said he will do. Even if you really do live to be 175. And, frankly, it's a good idea to think you will live that long because modern medical progress is racing along at unbelievable speeds.

 

I am currently assuming I will live to be 120, if I can just make it to 80. The next 18 years (I'm 62 today) should produce so much new knowledge I'll be able to live a healthful, vigorous life for 40 more.

 

I'll go to the doctor for my checkup and he'll give me a little nano robot to pop in my mouth. It will go swimming around my bloodstream drilling out plaque, identifying weak arteries, implanting stem cells to rebuild critical heart valves, and generally cleaning me up just like a mechanic overhauls a good engine. That's why I'm doing my best to keep my body in good shape for the next 18 years, so it is worth saving when they figure out how to do it.

 

Just a word of advice, not trying to preach to you here.

 

And one last thing – just exactly where is that $1,000,000? Well, not in a sock under your mattress. That won't work. The answer is simple, and robust. It's in the stock market. In an index fund. Preferably an index fund that matches the world's stock markets. Both Vanguard and Fidelity can sell you these index funds. Their management fees are so low you can ignore them. And if you call them up on the phone and just read them this paragraph, they'll know exactly what you are talking about and they will have you set up in very little time at all.

 

Do it.

 

You won't regret it. And if you don't do it – you are betting politicians will start telling the truth and balancing the budget. Nobody is so wacko they believe that, are they?

 

Oh yea. How do you get the million? Easy. You work. You pour as much money as is legally allowed into your 401(k), invested in broad based index funds as outlined above. And when it hits a million, you're there. Don't plan your retirement based on a date on your drivers license. Plan it based on the balance in your 401(k). And start saving yesterday, not tomorrow.

 

Comments

William Brandt's picture

I've been reading these pages all night. Could tell you thought a lot of the same way I did but still didn't expect to come across this. I'm planning to retire early too, though a bit earlier than you did. With just an average salary you can retire after only 5-10 years by only spending money on things that truly matter and investing ~85% of what you earn. That's also true for families if they both work. Of course even a less extreme example with a 50% savings rate still gives you an incredibly short timeline compared to most people. There's a growing earlier retirement movement/community out there. I'm currently active at mrmoneymustache.com but there are other great ones too, just google for them if you're interested in more information about the 4% rule, or practical advice for cutting expenses.

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