Today, I came across an advertisement on Facebook for a “financial knowledge” quiz, hosted on “Rule One Investing,” to determine “what type of investor” I am. Figuring this would be crap, but still insatiably curious, I clicked the ad and took the quiz. I had to put in fake information for email address and name to get the results (red flag one), and then I came across this gem in the grading:
Let’s dissect this, shall we? I’ll even ignore Social Security, to give Rule One Investing the benefit of the doubt.
How much does this average American actually spend? Well, the average American between ages 55 and 64 makes $58,145 pa and saves very little of that. To give Rule One Investing even more benefit for their calculations, let’s say that this average American pays no taxes and saves no money – they spend every penny of that $58,145 every year and plan to continue doing so into retirement.
The average retirement age in the United States is currently 63, and the average life expectancy in the United States is currently 78.8 years. Let’s just round that to 79 for easier numbers. That means that the average retirement last for 16 years, and your retirement funds need to cover you for that time.
Since we’re talking about a traditional retirement age, we should be conservative with our withdrawal estimates; this theoretical person won’t be easily able to go back to work to earn more. Instead of the 4% withdrawal rate I’ve mentioned in the past, let’s say that a safe withdrawal rate for this retiree is 3%. That means they would need close to $2 million in their retirement accounts to retire.
But wait! That’s for a retirement lasting 30+ years – and likely coming out the other end with lots of extra money. But we already know that our average retiree is only going to enjoy their retirement for 16 years. For a conservative investor spending 15 years in retirement, Vanguard recommends a 6.2% initial withdrawal rate. Let’s drop that down to 6% to cover that extra year. At a 6% safe withdrawal rate, this retiree only needs $1 million to keep their spending levels up in retirement.
Now, several of the answers on this quiz were geared toward convincing me to sign up with this Rule One Investing site to learn to pick stocks and beat the market, so of course they’re going to try to make me think I need more money. But, even giving them the best benefit of the doubt I can, I can’t come anywhere near that $3 million figure. And, when you take a more realistic view of retirement – that the average retiree pays taxes and saves while working, and that expenses go down for them even while Social Security starts supplementing their income – you find that the $500,000 number is actually closer to the truth.
So don’t get too discouraged if you don’t have millions in savings. Stay the course, keep saving as much as you can, and you’ll be just fine.