Editor's note: Today and tomorrow, we're featuring a powerful essay on wealth building from our friend Mark Ford.
Mark has built dozens of businesses from scratch…creating millions of dollars of wealth in the process. He knows more about building wealth than just about anyone.
Below, Mark shares some scary numbers and explains what retirement looks like for the average baby boomer today…
Waa! It’s not fair!
We baby boomers were told that if we worked hard and saved, we could spend the last quarter of our lives living comfortably and free from financial worries. Our parents told us. Our employers told us. Even the government told us.
How often, during our years of toil, did we daydream about those future days? The leisurely breakfasts, the afternoons golfing, dinners with friends, weekends with our grandchildren…
(Note to younger people: Don’t stop reading. What I’m saying here applies to you too—in spades!)
But now that we are reaching retirement age, the promise is beginning to feel like a fraud.
For many of us, a financially secure, worry-free retirement no longer seems possible.
Not to worry. I’m going to give you my best advice on how to create a very attractive retirement from what looks to be a seemingly impossible financial situation.
After scaring you with some numbers in this essay, I’m going to spend tomorrow's installment telling you how to fix anything you may have been doing wrong. I’ll also give you some realistic suggestions for acquiring wealth—no matter how much you have to start with—while you are still willing and able to work for it.
Finally, I’ll give you an idea for how you can retire very comfortably—and very soon—on a modest income. And by “modest,” I mean less than $40,000 per year.
What happened, fellow boomers? How did we fail? Did we work too few hours? Too few years? Did we spend more than we should have? Or fail to save… or save too little? Did we invest poorly?
What happened was a combination of “surprises.” Some predictable. Some not so much…
1. We worked hard, but we didn’t get meaningful wage increases.
As a group, we boomers worked more than we were required to throughout our careers. Not only did we work more than 40 hours per week, our productivity nearly doubled between 1979 and 2013 (according to the Bureau of Labor Statistics).
And we are still working hard. According to the Current Population Survey, the full-time working boomer aged 55-plus is still averaging 42.4 hours per week. (The most recent data is from 2013.)
The problem was that, over the long haul, our wages did not keep pace with inflation.
From 1948–1979, wages adjusted for inflation rose 93.4%, according to the Economic Policy Institute. The wage rate increases were beating the slow rise of inflation—big time.
Now look at what happened in the late-1970s…
In 1979 (some sources say as early as 1972), wages went flat. For the next 35 years, as we boomers passed through our late teens, 20s, 30s, and 40s, real wages increased only about 8%.
And since 2009, the tide has reversed. Real hourly wages are once again on the decline.
So while our bills continued to rise, our take-home pay, in real dollars, didn’t—and still doesn’t—keep pace with inflation.
2. We saved less and less.
According to various sources, the average boomer has had an average annual disposable income of $24,000. The problem is: We squandered a lot of it.
Take a look at the following chart. It shows the personal saving rate of Americans since 1960. As you can see, it fell from a high in the mid-1970s to 0.8% in the early 2000s.
[The personal saving rate is the percentage of disposable income set aside in savings. Disposable income is the amount of money available after taxes have been deducted.]
Americans Have Been Saving Less and Less Since the Mid-1970s
Since boomers made up 33% of the U.S. population during those years, it’s safe to say the general downward trend applies to us too. From our late teens through our 40s and 50s, we saved less and less.
3. We took on a lot of debt.
Here’s another chart, this one showing the household debt service ratio (DSR) since the 1980s.
[The DSR is an estimate of the ratio of debt payments to disposable personal income.]
From 1993–2007, the Debt Service Ratio Increased 27%
Notice how in 1980 household financial obligations represented around 11% of disposable income. That increased for over two decades.
So we saved less and, since our wages hardly moved, we were forced to take on more debt to support our bad spending habits. (I’ll talk more about this in a moment.)
For the little we did save, we put a bit of it in the stock market. Which leads us to yet another slew of “predictable surprises”…
4. We were poor investors.
Based on analysis done by Pew Research and others, the average retirement-age American today has managed to accumulate a net worth of about $230,000. About $150,000 of that is socked away in some type of retirement account(s).
Now, the average retirement-age American would have done quite well in his retirement account(s)… had he not let himself get in the way.
You see, the S&P 500 has returned an average of around 11% annually since the mid-1980s.
However, the average U.S. investor in U.S. stock funds earned only 3.7% annually over the past 30 years. (I’m using the mid-1980s because that’s when the first of the boomers hit their mid-30s. And the mid-30s are when big income increases start to happen and people are finally able to put a little aside for savings… and investing.)
So, in theory, if a 35-year-old boomer would have parked $15,000 in the S&P 500 in 1984—and didn’t touch it—the stock market would have grown that to over $350,000.
Instead, at the 3.7% return the average investor managed, that $15,000 investment in the stock market grew to just shy of $45,000.
How is it even possible that so many of us managed to underperform the stock market by so much for three decades?
We weren’t the smartest investors.
Most investors—not just boomers—chase returns. They jump on a stock after it’s already made a big run. And they cling to a sinking one far too long, hoping for a turnaround.
5. We invested through some nasty market crashes.
The crash of 1987 (when we boomers were 23–41 years old) was the first big shakeout.
On Black Monday, the Dow lost 22.6%, or $500 billion. This was the largest single-day market crash in history.
Then there was the bursting of the tech (“dot-com”) bubble in March 2000. From top to bottom, the Nasdaq composite lost 78% of its value from 2000–2002. Tech fund investors were hit even harder.
I remember how confident some of my peers were about the tech market right up until the crash. Though they never told me the numbers, I know that a few of them were devastated. If you had jumped on the bandwagon and invested in tech funds at the Nasdaq’s high in 2000, you would have likely lost three-quarters of your investment just two short years later.
And despite having lived through these experiences…
6. We still didn’t learn our lesson.
Getting back to our love affair with debt—we made yet another critical mistake. Not only did we save less and take on more debt, we attempted to live well beyond our means.
When housing and land prices became too inflated in the early 2000s, we got greedy and ate up the crummy subprime loans the banks offered us. We saw low interest rates and overleveraged ourselves to buy a bigger house, a faster car, a more luxurious life. (“We doubled productivity! We earned it!”)
The real estate bubble burst in 2007–2008 and real estate prices plummeted. That triggered yet another stock market crash, which lost us many more millions.
According to the Mortgage Bankers Association, as many as 3 million homes fell into foreclosure during the Great Recession. In some popular retirement spots, like Nevada, as much as 57% of homeowners still owe more on their mortgages than their homes are worth.
What Retirement Looks Like for the Average Baby Boomer Today
So here we are now.
Given all of the above, things are looking bleak. And it only gets worse.
As I mentioned earlier, the average retirement-age American today has a net worth of about $230,000. Around $150,000 of that is in one or more retirement accounts.
Still, will these numbers support a comfortable retirement?
Let’s do the math…
Assuming a 3.7% average annual return (the average return of most stock investors), a $150,000 retirement fund would return $5,550 per year, or $462.50 per month.
Now, keep in mind that this includes capital returns. Not just cash returns. So even if you wanted to spend this entire amount, it wouldn’t be possible (without selling some of your investments and facing capital gains taxes).
But for simplicity’s sake, let’s just use the $5,550 number.
Five thousand per year won’t buy you much in today’s world. And it will buy less each year as inflation erodes the value of the dollar. Luckily for most people, retirement accounts are only one source of retirement income. Social Security is another source.
The average Social Security income for retired workers in 2013 was $1,306 per month, or $15,672 per year.
So for the average person approaching retirement age, their retirement accounts and Social Security gets them to $1,768.50 per month, or $21,222 per year.
For one in three retirees, a third source of income is pension payouts. The median private pension benefit for individuals aged 65 and older in 2013 was $8,612. The median government (state or local) pension benefit was $20,276.
Put all that information together and retirees can expect an average monthly income of $1,700–$3,400 per month.
What sort of retirement lifestyles would this range of income afford?
Consider the following:
The current median rent in the U.S. is $1,471. The average three-bedroom, two-bath apartment will cost you $1,300–1,700 per month.
The average monthly electric bill for said house will cost around $107 per month.
The average cable/internet bill is around $64 per month.
The average annual golf club dues are around $520 per month.
The average restaurant meal costs around $26 for two people, and retirees dined out an average of 193 times in 2013… or 16 times per month. That’s $418 per month on restaurants.
The average annual budget for travel for retirees is $7,700. Retirees apparently plan to travel four times per year in their golden years (though I’m unsure how $7,700 will cover that). If we break it down monthly, that’s $641 per month.
Basic housing expenses, a golf membership, a few meals out each week, and a trip every three months sounds pleasant enough… though far from luxurious.
But here’s the problem: Someone earning an average amount won’t be able to afford this lifestyle on passive income alone.
And we haven’t even considered gas, groceries, haircuts, gifts for the grandchildren, and an occasional movie.
And what about health care?
The average retiree should expect to spend $220,000 out of pocket on health care during retirement—not including long-term care.
Let’s be conservative and say your retirement will last 20 years. That’s about $11,000 per year for health care, or $917 per month.
Add it all up—assuming another $2,000 per year for the expenses we haven’t yet accounted for—and you’re looking at costs of about $4,300 per month, or nearly $52,000 per year.
Keep in mind, too, that $52,000 is going to climb as inflation marches higher.
If you’re just pulling from your retirement account to make up the difference, you’re going to run out of money several years before you die. Even if you’re earning on the high end of average, you’re still looking at a shortfall of about $1,000 a month. The return on your investments just isn’t enough to make up the difference.
So let’s assume that you are nearing or at retirement age, and you can’t even come close to $52,000 in income.
Or—forget that—what if you just want to stop worrying and stressing over your current financial situation altogether?
What should you do?
I have five solutions which I'll cover in tomorrow's essay.
Editor's note: Starting Monday, Mark will be hosting a week-long training event where he'll explain the ideas behind his top wealth-building strategies.
By signing up, you'll learn how to create a sizable net worth in seven years or less—without touching stocks, bonds, or options.
Best of all, this training is 100% free. Click here to claim your spot today.