The-new-three-legged-stool-for-retirement
00:00:00.000 | Hello, everybody. It's Sam from Financial Samurai. And in this episode, we're going to talk about
00:00:04.480 | the new three-legged stool for retirement. The old three-legged stool for retirement
00:00:10.560 | includes pension, social security, and personal savings. So given less than 15% of Americans have
00:00:18.320 | pensions or will receive pensions, no longer is having a pension part of most Americans'
00:00:24.320 | retirement plan. Therefore, we can throw pensions out of the window for future generations.
00:00:29.600 | And for those of you with a pension, bless you, because your pension is probably more
00:00:35.280 | valuable than you realize. Given our social security system is underfunded by about 32%,
00:00:40.640 | the government will either cut the average social security benefit by 32%
00:00:45.280 | or raise the minimum age eligible for collecting social security by at least several years.
00:00:52.000 | As a result, relying on a government that has perpetually mismanaged our finances
00:00:56.400 | is not a wise retirement strategy either. Besides, the average monthly social security benefit for
00:01:02.800 | 62-70 year olds is only $1,000 to $1,300, so you're not going to go crazy with social security anyway.
00:01:10.800 | Personal savings is the only leg of the old three-legged stool that's able to provide support.
00:01:17.600 | Everybody who has the opportunity to contribute to a 401(k) plan should, and according to the
00:01:23.920 | Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k)
00:01:29.920 | and only about 38% of the total workforce participates. So these are kind of sad numbers.
00:01:37.280 | Meanwhile, for those who do participate, the average 401(k) contribution was only about 6.5%
00:01:42.400 | of salary when employers didn't contribute and still only 11% of salary when employers did
00:01:49.280 | contribute. Only 18% of 401(k) participants saved more than 10% of their salary for retirement.
00:01:55.840 | So for 2019, it's good to hear that the IRS has increased the maximum employee contribution to
00:02:04.240 | $19,000, that's up $500 from $18,500 in 2018. Meanwhile, the maximum employer contribution
00:02:12.080 | limit also rises by $500 to $37,000 for a total 401(k) contribution limit of $56,000.
00:02:19.360 | So this is really important to note, folks. Do not underestimate the power of working for a stable
00:02:26.000 | and highly profitable employer with a strong benefits program. 401(k) matching or profit
00:02:31.600 | sharing can significantly boost your retirement funds over time compared to working at a sexy
00:02:37.040 | startup that might not even have a 401(k) plan due to a lack of profitability. And really,
00:02:42.560 | a lot of startups are just dead in the water or they just fail after 5 years, which really puts
00:02:47.520 | you behind, especially since they already pay you under market value in terms of salary for the
00:02:52.880 | hopes that your equity options will be worth something in the future. When I left my day job
00:02:58.080 | in 2012, I forewent roughly $20,000 a year in profit sharing. So I was an executive director
00:03:05.360 | at the time, I'd been there for 11 years, and I was contributing $16,500 as an employee, which was
00:03:12.080 | the maximum at the time in 2012, and then they would give me another $20,000 at year end, and
00:03:17.920 | that was really sweet. But even though I forewent all that money, at least I got them to pay for my
00:03:24.880 | MBA at the time, which cost about, I think around $80,000, and they gave me a severance, which I
00:03:31.600 | can't complain about. So now I contribute as much as possible to a solo 401(k), a SEP IRA, and of
00:03:39.680 | course my son's 529 plan to the tune of about $15,000 a year. Given times have now changed,
00:03:47.040 | and we cannot rely on pensions and the government for social security, I would like to propose the
00:03:53.920 | new definition of a three-legged retirement stool. Essentially, it's composed of three things. You,
00:04:01.600 | you, and you. So the first you is personal pre-tax savings, in other words 401(k),
00:04:08.240 | IRA, and so forth. The second you is personal after-tax savings, which compose of your after-tax
00:04:16.000 | brokerage account, CD, money markets, bonds, fixed income, private equity, venture debt, and so forth.
00:04:22.880 | And the third you is composed of personal hustle. So everybody should figure out a way to contribute
00:04:30.320 | the maximum to their 401(k) savings each year, even without a company match. Your goal is to
00:04:35.680 | minimize your taxable income, allow your investments to compound, tax deferred for as long as possible,
00:04:42.160 | and then build a large enough after-tax portfolio to give yourself options to change jobs,
00:04:47.760 | take a break, be a stay-at-home parent, or retire before the age of 59 and a half. And in the post,
00:04:54.640 | I do highlight again my after-tax investment amounts by age to comfortably retire early
00:05:00.240 | to give you some idea of how much you should have in your pre-tax accounts and after-tax accounts
00:05:06.240 | at every single stage of your life. So clearly, in order to build this type of wealth, it will
00:05:11.600 | take a tremendous amount of discipline. You can't just go blow your money on stupid things you don't
00:05:16.560 | need. You need to continuously reinvest the large majority of your savings into risk-appropriate
00:05:22.400 | investments. And yes, you do need to take risks, folks. The people who are saying, "Wow,
00:05:27.120 | I don't understand how people have so much money in their investments and all that."
00:05:31.040 | These folks don't take risks. It takes guts to come up with a 20% down payment to buy a property
00:05:37.360 | and to maintain it and all that stuff. It takes guts to invest in the market sometimes,
00:05:41.680 | especially if it's cratering. The key also is to delay your gratification. That is the key to so
00:05:47.520 | many things to being in good shape, to building wealth over time. It's delaying gratification.
00:05:54.400 | So the third leg of the new retirement stool is earning money doing something you enjoy.
00:06:00.080 | This is your personal hustle. So one of the most dangerous things about post-work life is letting
00:06:05.760 | your mind and body atrophy. This is one of the reasons why I let my dad edit most of my posts.
00:06:12.400 | It keeps him on his toes. It keeps him sharp. He's 72 years old and he actually has said,
00:06:17.920 | "I appreciate you letting me edit the post." He's a pretty brutal editor and he changes a lot of my
00:06:24.000 | meanings. It's tough sometimes to see it as a creator, but I think it's for the greater good
00:06:30.400 | and he does catch some things and it helps his mind. So the more you can stay active post-traditional
00:06:36.000 | work, the better your retirement lifestyle. I truly believe this. So in my case, I stay active
00:06:42.880 | in post-work life by one, being a stay-at-home dad. It's a full-time job that any stay-at-home
00:06:50.080 | parent will realize how hard it really is. Two, I coach high school tennis for three to four months
00:06:55.680 | a year. And then three, I write daily on Financial Samurai and sometimes I do this podcast. So all
00:07:02.800 | three activities have a monetary component that enables me to better preserve my retirement nest
00:07:08.400 | egg. What you'll discover after leaving full-time work is that it becomes extremely difficult to
00:07:14.400 | spend down principal. You've spent years, if not decades, accumulating your wealth. So it's really
00:07:21.280 | hard to go in reverse. Being a stay-at-home parent, both of us, allows us to save about $3,000 a month
00:07:28.400 | in childcare costs. Coaching high school tennis brings in about $1,250 a month and allows me to
00:07:34.560 | build relationships with other members of the community. And there are some really interesting
00:07:38.560 | parents who are doing interesting things, such as one parent who is the CFO of Lyft and Lyft is
00:07:44.000 | going to go public in 2019. I think that's pretty cool. Another parent is a district attorney of San
00:07:49.520 | Francisco. So these are all really interesting people to meet and we get to talk and hang out
00:07:55.920 | and it's really fun. And then finally, while riding daily on Financial Samurai, it does keep
00:08:01.760 | my mind sharp, it also brings in some spare change to boot, right, through advertising, revenue,
00:08:06.960 | just random opportunities and so forth. So one of America's biggest retirement failures
00:08:12.800 | is allowing people to decide how much they should save for retirement. If you were to give people a
00:08:19.280 | choice between spending money on cheeseburgers, nice cars, fancy clothes, shoes, vacations,
00:08:25.520 | electronics, and more cheeseburgers, or saving for a retirement that is decades away, obviously,
00:08:31.520 | obviously the majority of Americans are going to choose the former. Thus, it is unsurprising that
00:08:36.400 | roughly 66 of Americans are overweight, and the median retirement savings for all families is less
00:08:41.840 | than $10,000. It was $5,000 as of 2013. So I'm assuming it's gotten better since the bull market
00:08:48.320 | has run quite well since 2013. But even if it's $10,000, that's just not enough. Our lack of
00:08:56.400 | discipline is literally ruining our lives. I mean, do you really want to be overweight and kind of
00:09:02.000 | broke in your latter part of your life? No, it's just like terrible. There's like some statistic
00:09:07.760 | that says that 80 plus percent of men in America over 50 are overweight or obese. I mean, that's
00:09:13.520 | not good, folks. We got to like, really take back that discipline. We should have adopted a forced
00:09:21.280 | retirement savings system when companies automatically deduct money from each employee's
00:09:25.840 | paycheck for retirement, much like how payroll taxes are automatically deducted. You know,
00:09:31.280 | the government knows that if they don't take money out of your paycheck for taxes, people
00:09:36.720 | aren't going to pay their taxes, right? I think it's pretty obvious because we lack self-discipline.
00:09:42.160 | You know, this forced retirement savings system, it's worked in countries like Australia and
00:09:46.720 | Singapore. You know, Australia has the largest inheritance amounts in the country because
00:09:53.520 | they're forced savings and they're buying property and they've got these great savings,
00:09:57.920 | retirement savings accounts. But unfortunately, it's already too late for change, right? We're
00:10:03.360 | just, I think, kind of in this situation through our own demise. Therefore, the only thing we can
00:10:09.520 | really do is count on ourselves. If we can depend on our own hustle to survive in retirement,
00:10:16.080 | all other government benefits will simply be a nice bonus. I'm going to be pretty psyched if I
00:10:22.800 | start getting, let's say, $2,000 a month in Social Security, let's say, after the age of 65. I'm
00:10:29.120 | going to use that, I don't know, probably to go on a cruise, travel, eat some food. But I'm
00:10:33.920 | definitely not counting on that to spend in retirement. You know, I want to get my own
00:10:40.240 | finances right and so should you. Don't rely on anybody else but yourself. So please spread the
00:10:46.480 | word about the new three-legged retirement stool. I think it's going to be great for our country.
00:10:51.200 | Let's focus on building our you number one with personal pre-tax savings, our you number two with
00:10:57.200 | personal after-tax savings, and our you number three with personal hustle. I think if we do that,
00:11:03.440 | America is going to be a stronger country and we're going to do much greater things going forward
00:11:08.640 | and live a much better second half of our life. Thanks so much everyone. It's been a really,
00:11:14.880 | really fun week. I went public with the launch of the Financial Samurai Forums, so hopefully I can
00:11:20.560 | see you guys there interacting. There's over 1,150 members now and it's just great to see people
00:11:27.200 | interacting and sharing their ideas and thoughts. My parents were here for about a week and it's
00:11:33.360 | been great for them to see and spend time with our son and that's really all I really want
00:11:38.480 | because they're in Hawaii and I'd love for them to visit more often.
00:11:42.800 | So thanks so much everyone and I'll see you guys around.