Why Your Retirement Savings Can’t Keep Up

Why it’s a myth that your cost of living goes down after your 50s

If you follow the conventional advice from so-called financial experts, you’re going all in on your 401(k), hoping to save enough money to allow you retire on a modest income after years of hard work.

We’ve spilled a lot of ink in books and on this website talking about how awful 401(k)s (and plans like them around the world) are for retirement. Besides the fact that you have no control over 401(k)s, your match isn’t a gain, and the high fees eat away at your meager earnings (if you have them), there is one assumption when it comes to 401(k) investing that is fundamentally flawed.

That assumption is that you’ll have a lower cost of living when you’re retired than when you were working.

Poor retirement savings advice

In fact, there are so-called financial experts who make a living telling people how to live in retirement as a poorer person.

Take this article I read many years ago in the “Wall Street Journal” called “Making Your Retirement Assets Last

In the article, author Anna Prior shares six points to make your retirement assets last and stretch your retirement savings. I thought it'd be helpful to go through and discuss each one from a Rich Dad perspective—because, as you know, the Rich Dad perspective is quite different from the conventional perspective.

Poor retirement savings advice #1: Dedicate dollars for fixed expenses

"Many planners suggest putting funds to cover three to five years' worth of expenses into safe and liquid vehicles so the retiree has cash on hand, even if the market drops. ’That way you don't have to liquidate in a down environment,’ says Marty Leclerc, portfolio manager for Barrack Yard Advisors in Bryn Mawr, Pa," writes Anna.

Translation: savers are winners.

Rich Dad perspective: savers are losers.

What this piece of advice fails to take into account is that the dollar is dying. What happens if inflation spikes and you're stuck holding 3 -to-5 years worth of cash (instead of the couple decades-worth you were expecting)? Your savings become worthless and you lose.

Rather than save cash, I like to keep my liquidity in assets that can be quickly liquefied and that hedge against inflation, not lose value with it. For me, that's gold, silver and oil. For you...you need to do your research and figure out what works best.

Poor retirement savings advice #2: watch out for longevity risk

Anna suggests long-term care and/or longevity insurance.

"Some financial advisers say retirees should consider long-term-care insurance as a hedge against the future cost of nursing-home care, which has the potential to decimate even hefty nest eggs," and "’Longevity insurance is similar to an immediate annuity in that it allows holders to take a lump sum and convert it into a lifelong income stream. It is different in that it requires policyholders to pick a date in the future to start getting that income, typically at age 85,’ says Christopher Jones, chief investment officer at investment adviser Financial Engines Inc."

Translation: invest in your poor health and old age.

Rich Dad perspective: invest for cash flow.

In Anna’s scenarios, you must either be in such poor health that you can't take care of yourself or be so old that your meager savings have run out in order to reap the benefits of your investments.

Rather than hand your money over to an insurance company or stock it away at a near zero return for an old-age annuity, begin now to invest in assets that will provide the cash flow you need to cover your expenses as you grow older. This is smart because it makes your money work for you during your retirement. You get cash, and you keep your assets.

Poor retirement savings advice #3: don't be too conservative—bonds aren't always your friends

"Advisers warn against falling victim to traditional wisdom: Portfolio protection through conservative investing in retirement could actually do more harm than good. With bonds not generating enough income, 'the math is scary,' says Mr. Leclerc. 'Retirees need a lot more money than they ever thought they would to produce simple income'... Some advisers suggest intermediate-term bond funds as a way to help mitigate interest-rate risk, while still getting more yield than what's available from short-term bond funds."

Translation: bonds are bad. Invest in different types of bonds.

Rich Dad perspective: invest in a truly diversified portfolio.

Anna’s poor retirement savings advice assumes that true diversification means spreading your money around to different types of paper assets. The only problem is that when you do that, you're not really diversified because you're moving your money around in only one asset-class. True diversification involves investing in as many of the four asset classes as possible: paper, real estate, commodities, and business.

As an investor, you should be in all four asset classes, and you should be specializing in one or two. Most people are only invested in paper assets, and they have no knowledge about what they’re investing in, so they listen to financial planners and hold a basket of paper assets for the long term, hoping the market goes up.

Poor retirement savings advice #4: don't forget about inflation

”To protect themselves, retirees should add to their portfolios multiple types of assets that can keep up with or even beat rising costs. Still, many advisers maintain that the best way to combat inflation in a well-diversified portfolio is by investing in equities. 'It's the only asset class that will give them returns greater than inflation,' Mr. Gibney says."

Translation: "diversify" your portfolio by investing in other paper assets.

Rich Dad perspective: Again, invest in a truly diversified portfolio.

Mr. Gibney says that equities are "the only asset class" that can beat inflation. That's news to the ultra rich who've made their fortunes through assets that beat inflation in ways that equities can only dream of, such as real estate, commodities and more.

What Mr. Gibney really means is that equities are the only "safe" investment that can beat inflation. Of course, one can feel safe when treading water, but when you have to do that for more than a decade, you risk drowning. I'd rather be making headway.

Poor retirement savings advice #5: use alternatives to help manage volatility

"To iron out some of the big ups and downs—and therefore quell some of the urges to swing too far to 'safety'—some advisers recommend constructing a diverse portfolio that includes a slice of alternative investments, including non traded REITs, which are similar to traditional REITs but don't trade on exchanges, managed futures, which are futures positions entered into by professional money managers on behalf of investors, and long/short funds."

Translation: diversify by investing in "alternative" paper investments.

Rich Dad perspective: Again, invest in a truly diversified portfolio.

This is now the third point in a row that recommends moving your money into diverse paper options without a mention of other asset classes. You'd think these "advisors" were getting a commission or something.

Poor retirement savings advice #6: limit the tax man's bite

"Be aware that taking money out of a retirement account or selling securities at a sizable taxable gain—rather than pulling cash from a certificate of deposit, money-market fund, savings or checking account—could result in higher taxes on Social Security benefits if it bumps income above a certain threshold."

Translation: stay poor and lower your standard of living so you don't get taxed on your government handout.

Rich Dad perspective: Use taxes to your advantage.

The rich know how to invest in ways to pay little-to-nothing in taxes. It takes financial intelligence to invest this way. So, rather than spend your time figuring out how to move your money in a way that keeps you poor to avoid taxes, put in the time and effort to learn how to invest your money in a way that makes you rich and decreases your tax burden.

In the end, Anna's advice is good advice...if you're financially ignorant and want to be poor.

Can you really live poorer in retirement?

But underlying all these types of poor retirement advice is the simple fact that it’s very unlikely you’ll live poorer when you retire.

The general logic is that because you have things like your mortgage paid off, travel less, buy less, and live a less active lifestyle, you’ll spend less when you’re retired. While this might have been true when life expectancy was lower and people weren’t living as healthy lifestyles as they are now, it’s no longer true that once you retire you’re on the slow downhill slide.

I’m in my mid-seventies and I still travel around the world, work out regularly, and love to live life to the fullest. I couldn’t imagine retiring into oblivion, sitting in an easy chair and watching television until I fall asleep during the six o’clock news. To me, that’s living a poor life. And doctors agree. Those who are active later in life live longer than those who aren’t.

Can your retirement savings keep up when you spend more?

Turns out the logic that you’ll spend less in retirement is flawed. According to a report that studied tax data, “The median taxpayer's spendable income at three years after claiming Social Security was 103% of their income from one year before collecting, the report said. It followed individuals from 1999 to 2010.”

The conclusion of this report is that most people end up spending more when they retire—at least at the beginning.

As CNN reports, “For many individuals, retirement appears to be a multi-year transition rather than an action taken at a discrete point in time,” the researchers wrote.

This speaks to what is true in all of us, once we are used to one standard of living, it is very difficult to go back down to a previous standard of living. Nor should we have to. That is why I’ve always considered conventional retirement advice to be poor-person advice.

The retirement cost of living goes up!

The report does hedge on its findings, however, saying that the trend of spending more in the first years of retirement doesn’t mean that you won’t spend less later.

But I’ve written and talked about this for years, and the numbers don’t add up. In reality, you’ll spend as much or more money after age 50 than you did leading up to 50.

According to an article on Yahoo!, “Living to 100? That Will Be $3.5M,” the average money spent by age 50 is $1.5 million and the average spent between 50 to 81—the average life expectancy —is $1.4 million. Plan on living to 100? That will cost an additional $630,000, for a total of $2.3 million in the last half of your life. That’s nearly a million more than the first 50 years. Life isn’t less expensive in retirement, even if you’re trying to live frugally. It’s more expensive.

Why would life get more expensive even as your costs are expected to go down? Because you don’t take into account future costs that you aren’t experiencing today.

As MarketWatch reports, starting in your 70s, your healthcare costs will rise 30% on average, reaching $48,400 (with $8,100 in prescription costs on top of that). If you make it to 80, your health insurance costs end up being 57% higher, and in your 90s you might need assisted living, which comes in at a whopping $89,000.

The long and the short of it is that the older you get, you don’t spend less, you just spend differently. The fun goes down and the healthcare goes up.

Most Americans don’t have enough retirement savings

This is bad news for the majority of Americans who don’t have enough money to retire even with a lower quality of life in the golden years.

“The median family of retirement age has $12,000 in savings. That is a terrifying figure for a country where Social Security, the state pension, pays out a maximum of roughly $2,500 a month, and pensions for both public and private employees are underfunded,” writes The Economist.

If that’s not enough to frighten you, check out these stats from a survey of 1,007 Americans by GoBankingRates:

  • 49% of Americans are currently living paycheck to paycheck

  • 61% do not have enough money saved to cover six months of living expenses

  • 64% do not have multiple streams of income

  • 68% say their investment strategy does not account for a recession

America is facing a retirement crisis. It is a ticking time bomb and most people have their heads in the sand. The conventional advice on retirement is wrong, not helpful, and gives a false sense of security. It’s time to face the reality that life will only get more expensive, and the only way to thrive during your retirement years is to think differently about money.

The best plan for retirement starts with financial education

As more and more boomers reach retirement, there will increasingly be two kinds of people, the poor and the rich. Those with a poor financial education will be poor and those who are financially intelligent will be rich.

Very simply, those who understand the importance of investing for cash flow in assets that hedge against inflation will prosper while those who take the easy route of throwing money in a 401(k) will face poverty as the costs of retirement far outpace their meager earnings and savings.

Today is the day to start and improve your financial education.

Are you ready for retirement? If not, what have you been doing wrong? How will you begin to fix your path to retirement so that you can live actively, live fully, and be rich in the last half of your life?

Original publish date: August 22, 2017