Retirement: Problems and Solutions
Financial Independence and Early Retirement is the key subject of this blog. And why did I start this endeavor? Because I believe we all can learn more and better on how to handle our personal finances, and to improve our decision-making process in order to achieve a comfortable and stable retirement.
Since the last century we have seen a rapid increase in the life expectancy all over the world. Some research say that on average it has been increasing by one year every five years. Therefore, if we continue to see this growth, we can expect that babies born today, will live over (well over) 100 years.
So let’s do the math: In most developed countries, people retire with 65 years (in terms of minimum age to earn social security benefits). In Portugal the age is 66.33 (Yes…with the “.33”. 4 more months. We like things complicated). You can retire before that age, but only in some professions and/or with some conditions such as cuts on your benefits.
Others like Norway, Iceland or Greece, the retirement age is 67. On the other hand we have countries where is sooner such as South Korea (60), Japan (62), United Kingdom (63.50) or Switzerland (64). But is safe to say that eventually the retirement age will converge into an average of 65.
This means that individuals born today, will have a minimum retirement period of over 35 years (on average). That’s +420 months, where you will have expenses, and no income from your work – assuming you are fully retired. If you plan to early retire, don’t forget to add those extra years and months.
Plus as we grow old, an event such as a health condition may increase your monthly expenses. Thus proper planning is absolutely key for a stable and relaxed retirement.
How much money one needs to retire? On a previous post, I wrote that we should have at least 25 times your annual expenses saved aside. And then invest that money wisely. If the age of retirement grows, this value should be adjusted. Why? Because your margin of safety should be adjusted to take into account factors like more years into retirement, the longevity risk, inflation, bad investment years, cuts on your social benefits, and so on.
From the World Economic Forum, you have a projection of a global pension asset shortfall of $400 trillion by 2050. As you read these lines, there are countries already taking measures to control future damages such as expanding the minimum age for retirement, increasing the contributions, linking your pension to the economy, and other similar solutions.
Others are taking desperate measures like borrowing $107 billion. (What could go wrong?)
All this means one thing: There’s a transfer of responsibility from the government budget to you.
Although there is strong evidence to believe that a shortfall is coming for all major social security schemes all around the world, don’t forget that governments are already taking action. As I mentioned before, the minimum age to retirement is being increased. Likewise the contributions of a worker throughout his professional life will likely increase too.
To be safe and increase your margin of safety, you should start immediately on building new sources of income. Let’s review some suggestions:
- Invest. People want stability on their income when they retire, so focus on investments that deliver a steady return. Here you will want to focus on less volatility, even if it means a little less return. Some alternatives are: Stocks with steady dividends, Bonds from high grade companies, Deposits covered by official entities like the FDIC, or ETFs with steady dividends. My personal favorite strategy would be a combination between deposits (covered by some public entity like the FDIC), and a passive investment portfolio with 2 ETFs (a % in stocks and another % in bonds, depending on your capacity to endure risk). These are examples only for information purposes, this is not financial advice or any kind of advice. (Disclaimer).
Read more about Passive Investments and Exchange Traded Funds.
- Build an Online Business. As I wrote on another post, the easiest and cheapest way of building a business is doing it online. Why? The costs are far inferior when compared with a more “physical business”. You can start by yourself, even as a part-time job, and then expand when things start to get traction. If you do it in English you have almost the whole world as a potential customer. Here’s the best tutorial on how to start a website on SiteGround for you to get started. An excellent way of building a new source of income to increase your margin of safety.
Read more about How to Achieve Financial Freedom and Retire Early.
Apparently there are almost 50% of American workers that have less than $25,000 saved for retirement. In my humble opinion this is VERY low. The personal saving rate, i.e., the difference between Americans’ income and their spending on goods, services and taxes, measured as a share of disposable income, is in a very low point.
As I mentioned before I believe in having at least 25 times your yearly expenses saved. And then invest it wisely.
For an emergency fund, I believe that you should focus on having between 1 to 3 years on a very safe financial instrument like a deposit insured by a public entity like the FDIC (The Federal Deposit Insurance Corporation preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000).
An alternative could be to invest in an ETF with government bonds (High grade).For those of us who want a stable retirement, or even to retire early, it is absolutely key to increase our savings rate. Click To Tweet
Our life should be optimized in terms of efficiency in order to get more value for less money.
“Choose a work that you love and you won’t have to work another day.” – Confucius
And you reader, how to you see these projections? Are you preparing alternative sources of income for your retirement?