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So You Didn't Get Rich...

By Mark Ford, founder, The Palm Beach Research Group
Wednesday, September 14, 2016

It's not fair...
We 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.
But as we approach (or pass) retirement age, the promise is beginning to feel like a fraud.
Not to worry. Today, I'm going to give you my best advice on how to create an attractive retirement from a seemingly impossible financial situation...
What happened to the retirement dream?
•   Since 1979, wages have increased only about 8%, even though worker productivity continued to rise. So while bills continued to rise, take-home pay didn't – and still doesn't – keep pace with inflation.
•   The percentage of disposable income that Americans set aside in savings fell from 17% in the mid-1970s all the way to 0.8% in the early 2000s.
•   People saved less and, since wages hardly moved, they were forced to take on more debt to support bad spending habits.
•   The S&P 500 has returned an average of around 11% annually since the mid-1980s. But the average U.S. stock investor earned only 3.7% annually over the past 30 years.

So here we are now...
Things are looking bleak. And it only gets worse.
Between investments, Social Security payments, and pensions, the average American aged 65 and older can expect to earn $31,742 per year.
What sort of retirement lifestyles would this income afford? Consider the following:
•   The average mortgage payment among retirees is $617 per month.
•   The average electric bill runs around $110.21 per month.
•   The average golf-club dues are around $520 per month.
•   The average American spends $232 per month eating at restaurants.
•   The average annual budget for travel for retirees is $7,700 – or $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 income won't be able to afford this lifestyle on passive income alone.
We haven't even considered gas, groceries, haircuts, gifts for the grandchildren, and an occasional movie. On top of that, the average retiree should expect to spend $220,000 out of pocket on health care during retirement – not including long-term care.
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.
So what should you do?
1. Expect no more than average returns from your investments.
First and foremost, you will not be able to "make up" for the past by implementing any sort of short-term stock strategy in hopes of catching a big takeoff.
Based on historical returns, you should expect about 8%-10% from your stocks. Corporate bonds will return 5%-7%, while municipal bonds will return 3%-4% (though we haven't seen rates this high in some time). And rental real estate will deliver about 5%-8%.
Don't be tempted to tell yourself you will make 15% or 20% every year. It is possible. But it is more likely that you will end up poor.
2. Increase your income now.
My view on this subject is that one should never give up active work entirely. Work provides great and sustaining fulfillment. You don't have to keep doing the work you have been doing... You might be able to move into a consulting or freelance position with your current employer. Or follow a dream and start your own business.
3. Consider – or reconsider – real estate investing.
Contrary to common opinion, you don't need a massive investment to get into rental real estate. You can get started by pooling money with one or two friends and going in on a few properties.
4. Retire this year on $40,000 or less.
Finally, your next step should be to decrease your expenses. Because there is a way to enjoy a dream retirement, even if your income is limited to $40,000 or less.
Imagine... You wake when you want to and spend a half hour walking on the beach. On the way back, you buy fresh red snapper from your favorite local fish vendor.
You enjoy breakfast on your private porch. Afterward, you work on your novel or you paint. Then you take a nap.
You have lunch at your regular table in the corner. After lunch, you check on the money you made from your side business today ($500). Then you take another nap.
In the late afternoon, you visit some of your friends. At sunset, you have drinks with your spouse at a beachside bar and listen to a young man play his guitar.
Does that sound good?
What I just described to you is a typical day in Nicaragua for many retired American expats – many of whom started with a smaller-than-average retirement fund.
Even in nice areas in Nicaragua, property costs and rents are low. Taxes are low. The cost of living is low. Health care is affordable, and the quality is on par with the care in the U.S. And here's another great perk: There is no tax on a pension or any other money being brought into the country, as long as it was earned outside the country.
Imagine earning just $40,000 per year and enjoying this lifestyle...
Doesn't it sound a lot like the retirement you always dreamed of?
Mark Ford

Market Notes


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