You Might Need $3 Million to Retire at Age 65

You might need $3 million to retire at age 65 (if you are 28 years old today, which I am). See how I came up with that number below.

The purpose of this post is not to scare you into thinking you’ll never save $3 million dollars. It’s to expose you to how to think about how much you need to save for retirement. You might not need $3 million. But how much do you need and how do you calculate that?

Most people have no idea how to save for retirement, how much to save, where to save that money, etc. In everyone’s defense, there seem to be a lot of questions and it seems daunting to learn. But in reality, it is not that difficult to invest your money for retirement. I have already written a blog post about how you should invest in a target date fund in your 401k (as much as you can a year) and call it good. You (may) not need any other investments.

But a good question people should have is “How much do I need to save for retirement?”
If you were to retire today some people say you need $1 million.
That number is created by using the 4% rule, meaning you can withdraw 4% of your money a year to live off of. $1 million x .04 = $40,000 a year to live off of (plus social security).

It can also be called the 25x rule. This means you need 25x the money you will need each year to live saved. If you want to live on $40,000 a year 25 x $40,000 = $1,000,000

This is fine for today’s retirees, but for people between the ages of 20 and 30 we might have a different number to shoot for.

We have to consider inflation. To account for inflation any number of year from now there is a very simple formula.

1.03^37 = 2.98 

(a quick review of powers, 1.03^37 means 1.03×1.03×1.03… 37 times)

$1,000,000×2.98=$2,980,000

What do the above numbers mean?

.03 shows an inflation rate of 3% per each year (which is a historical average of US inflation)

37 = 37 years in the future (when I’ll be 65)

2.98 gives you the answer of how much less money will be worth in those years (inflation).

So 37 years from now it will take $2.98 dollars to buy something that costs $1 today.

So you can take today’s money $1,000,000 and multiply it by the inflation rate 2.98 and get that you’ll need $2,980,000 (or basically $3 million) in 2054 to equal $1,000,000 today.

And that is why you might need $3 million dollars to retire.

So the basic formula

1.03^ (years until you turn 65) x how much you want to live on per year in today’s dollars x 25

Example:

(1.03^37) * $40,000 x 25 = $2,985,226

This means you would need $2.9 million dollars ($3 million) to retire.

Of course, this doesn’t take into account the fact that many basic services of today like food, healthcare, housing, transportation, will likely cost less in the future. You might not need near this much saved! But then again, you might. It never hurts to over plan. If you find yourself in a position with too much money you can always give it away.

I don’t want to scare people away from saving for retirement if they don’t think they’ll have $3 million. As this CNN article says, even though a lot of people say $1 million today the average person who’s 65 only has about $148,000 saved which would be $148,000 x 2.98 = $441,000 if you were to retire in 37 years. Now we agree that like CNN said, $148,000 is probably  a little low, but not starving low. So you likely want to shoot for between $441,000 and $3,000,000. Use the rule of 25x to think about how much you might need to withdraw from your investments but also remember to account for inflation!

If anyone would like to review their own personal retirement numbers with me don’t hesitate to contact me. I really enjoy reviewing these numbers with anyone.

My IRRATIONAL Fear – Short term market collapse

You NEED to understand that the market is risky, in the short term, but so is every other place to put your money, including under your mattress (inflation risk!). – Axel Hoogland (yes I quoted myself)

My IRRATIONAL fear is a short term stock market collapse (meaning stock prices go down for a year or 2, similar to 2008 market collapse) (Learn about what the stock market is here).I am afraid of this because I am continually telling people to invest their money in the stock market. Most people are already invested in the stock market (but don’t know how their money is being managed or what exactly they are invested in). Some are only invested in bonds (which is risky as you are losing money to inflation). Some will pull their money out of the stock market at the first sign of trouble or market dip, which happens often (dips) but usually the market recovers quickly and they would lose on the gains. When investing in the market people should always ask themselves “What do I need this money for?” You NEED to understand that the market is risky, in the short term, but so is every other place to put your money, including under your mattress (inflation risk!).

My greatest fear is being wrong. I hate to give people incorrect information. It is ok to be wrong on some things. If you recommend someone eat at a restaurant they will be upset with you if they don’t enjoy it they will choose to never eat there again and might just stop taking your advice on restaurants.

If you recommend something to do with investing people’s money, something that they don’t completely understand themselves, and they seem to lose money (even if it is only for a short time and then it comes back in a year or two) they may hate you forever. People will be sure that there was a better option for them to invest their money in. They will not know what that option was, but they will be sure it was better than following your advice.

Someone is is almost always better at doing something for you than you will be at doing it for yourself. Some things require training to learn how to do. Many people do not feel comfortable fixing their own car. They take it to an expert, a mechanic. They don’t feel they have access to the right tools or knowledge (and that’s often true) so they pay someone to do it for them.

Unfortunately many people are happy to let an “expert” manage their money, for a large fee! The problem is these people are not experts, they are “salespeople”! You don’t let the car salesman fix your car and you shouldn’t let a “financial salesman” manage your money. The truth is that as a whole all fund managers will underperform the stock market. This is because of the fees they charge and because they are bad at guessing (yes they are guessing) which companies will perform better than average on any given year. Whenever someone sells a stock remember someone is on the other side of that deal guessing that that stock is going up! As a whole, all managed money will underperform (measured by percent returns to clients after fees) the total amount of unmanaged (index funds) market. Certainly some money managers will pick good and outperform the market and many will underperform and pick worse stocks than the market average, but all charge high fees. That is why index funds generally are the best place to put your money. To further diversify you should put your money in a Target Date fund which automatically transfers your money to bonds (safer investments) as you reach retirement.

A question people often ask is

Q.The stock market is high, should I pull money out of the market?

A. I ask them “What will you do with your money it if you do “pull it out” of the stock market?” The stock market should always be at the highest it’s ever been because the world is growing in population, thus businesses are making more products to sell.

As Mr. Money Mustache recently posted about, there is always a recession coming, so instead of worrying about it, it is better to understand what might bring it about, understand what you are investing in and why, and ride the storm out. A benefit of all this is that if people understand what causes recessions, over spending followed by underspending, we (may) be able to avoid wild cycles and instead keep a nice steady rise in abundance in the future, that is my hope by helping to educate people on “The Stock Market”.

Now that I’ve shared my fear with everyone, and why it’s not a rational fear, you should continue to learn about investing and why it is probably one of the most important things you can understand for yourself and for the world. You can learn more about Target Date Funds (where everyone should start investing) from this post or this video.

Target Date Funds

Here is a link to a video I made about Target Date Funds.

These are great times to be investing! Today is literally the easiest time in all of history to invest. It is also the cheapest time in history to invest. There is an incredible product called a “Target Date Fund” available for “Joe Investor” that is actually a very good tool.

A target date fund is set up to buy thousands of stocks and bonds (diversity) for the owner of the fund. It also automatically transfers more money to bonds (safer) as the fund owner reaches retirement age. This can be the only fund you need in a retirement fund, if you want.

A target date fund usually has a name like 2055 Target Date Fund. Here’s a link to Vanguard Target Retirement 2055 Fund (VFFVX)
There are target date funds available for every 5 years. 2010, 2015, 2020, etc
You can see from the picture below the comparison of the asset allocation of a 2025 vs a 2055 target date fund.

You can see that the 2055 target date fund has a larger percent of stocks, since you will be retiring in the future so you’ll have time to recover from any stock market dips. You can see the 2025 target date fund has a higher percentage of bonds to reduce volatility.

Click below picture to zoom.

Here is a picture of the path that Vanguard uses to transfer money to bonds as you age.

Here is a link to the Vanguard site where they share more data.

vanguard target date

Here is some further reading on if a Target Date Fund is right for your or not.

The pros, cons of using target-date funds in 401(k) plans
5 things you should know about target-date funds

If you want to start investing and have no idea what fund to put your money in, figure out what year target date is available for closest to when you will be 65 and put your money in that fund while you learn a bit more about investing.

Expense Ratio

If you could make an extra $1,000 a year would you? Of course you would! If you have a retirement account there is a good chance you are “giving away” over $1,000 a year in expenses to your fund adviser. The first thing you should do when you start looking into your investments is understand how much you are paying the people managing your money and how they are getting that money.

There are 2 main ways managers get money from you.

  • Loads
  • Expense ratio

Loads are ALWAYS bad.

Expense ratios are necessary but should always be low, less than 0.3% if necessary (meaning $3/$1000 invested) or less than 0.15% if possible $1.50/$1,000 invested.This is possible at Vanguard and many other places.
There are many places that will charge you a 1% expense ratio, $10/$1,000 invested! That’s 10x more money than places charging 0.1% (which is also very achievable).

Remember the expense ratio is taken out each year also, not only one time.  
Take an example where someone has $100,000 invested in a 401K.
If they are paying a 1% expense ratio they will pay $1,000 that year to their fund manager.
If they were paying a 0.1% expense ratio they would only be paying $100 a year, saving $900 a year! Does that sound important? It is!

In the Example below I share the result of a .2% expense ratio ($2/$1,000 invested per year) vs 0.6% ($6/$1,000 invested per year). You can see after 10 years you end up paying $836 more in fees with the 0.6% expense ratio.

For more information on expense ratios you should watch this video I made on expense ratios. Then you should go into your 401K or other investment accounts and try to find what expense ratio you are paying.

Paris Climate Agreement

The USA is “leaving the Paris Climate Agreement”, in about 4 years, President Trump has declared by executive action. Many countries had ratified the agreement, meaning their leader and likely some congress/senate or other governing body agreed. About ¼ of the countries in the world signed it (including the USA) which means that probably just their leader agreed to it. That being the action that Obama took. That was a mistake on his side (although probably all he was able to do as there was likely no way Congress would have ratified it, being Republican at the time). Because of that, it was easily un-signed by Donald Trump.

(Picture from Business Insider)

As far as I can tell there were not really many actual ramifications to signing the Paris Agreement or leaving the Agreement for the USA from the rest of the world. You can read the Paris Agreement by clicking the link. You can also read the 5 page document the USA sent sharing what our plans were to meet the agreement.

Here are the important sentences along with an easy to understand graph.

“The United States intends to achieve an economy-wide target of reducing its greenhouse gas emissions by 26%-28% below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%.”-  USA First NDC (nationally determined contribution) Submission

“ The United States has already undertaken substantial policy action to reduce its emissions, taking the necessary steps to place us on a path to achieve the 2020 target of reducing emissions in the range of 17 percent below the 2005 level in 2020. “ – USA First NDC (nationally determined contribution) Submission

These were self professed goals to work along with other countries in the world to reduce all our emissions together.

The US is the world’s second-largest carbon emitter, after China. Together, the countries accounted for 45% of the world’s carbon dioxide emissions in 2014.” – Business Insider

The USA is near the top of emissions per capita.

http://www.wri.org/sites/default/files/uploads/per_capita_emissions.png

If you take the time to read (Framework Convention on Climate Change) FCCC/CP/2015/L.9/Rev.1  document, better known as “The Paris Agreement”, you wil lfind reference to the “Warsaw International Mechanism” which is another body of individuals that appears to be around to provide some guidance to help make decisions related to climate change.

There is a reference to “$100 billion dollars” “from developed countries to developing countries” that some people seem to think the US is on the hook for. That is false. Here is the statement regarding $100 billion.

“”54. Also decides that, in accordance with Article 9, paragraph 3, of the Agreement, developed countries intend to continue their existing collective mobilization goal through 2025 in the context of meaningful mitigation actions and transparency on implementation; prior to 2025 the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall set a new collective quantified goal from a floor of USD 100 billion per year, taking into account the needs and priorities of developing countries; “ – Paris Agreement

There is no set plan where that money comes from or how it is counted for. Some of it is in foreign aid, some is hoped to be in private loans. Basically, it is just a hope at the moment and certainly not something the USA is on the hook for.
What we have done is Contribute $1 billion since Dec 2015 (when the treaty was signed by Obama) to the “Green Climate Fund”. This was ⅓ of a pledged $3 billion from Obama. Trump has canceled the rest of that money.

As Trump mentioned later in his speech, the United States has given the Green Climate Fund $1 billion already. President Barack Obama pledged a total of $3 billion to the fund by 2020 as part of a global goal of $10 billion, but Trump promised not to finance it as a candidate and Congress has not made further contributions since the election.” – NBC news

The whole $3 billion represented about $9/person in the USA (over 5 years) and only a very small percent of our $40+ billion in foreign aid each year. (US budget for 2016)

(picture from Washington Post)

Another source of money for the developing countries is the Least Developed Countries Fund (LDCF) which is administered by the GEF (Global Environment Facility unites 183 countries in partnership with international institutions, civil society organizations (CSOs), and the private sector to address global environmental issues while supporting national sustainable development initiatives. Today the GEF is the largest public funder of projects to improve the global environment. An independently operating financial organization, the GEF provides grants for projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants.- Wikipedia)

So now that we’ve established that the Paris Agreement:

  1. Was not costing the USA anything financially
  2. The Green Climate Fund (separate from the Paris Agreement, was costing the USA very little, $2 billion as part of $40+ billion in foreign aid)
  3. Emissions reductions were self imposed at 17% currently planned and a projection of up to 28% reduction (compared to 2005 levels in the USA) by 2025.
  4. Was definitely abandoned by Donald Trump personally but not by individuals and businesses.

What do we do about that?

Assuming you believe in climate change (rising temperatures) and that it could have negative implications for people related to damaged crops, damaged houses and is already happening now, what can you do about it?

I actually hope Donald Trump abandoning the Paris Agreement is a good thing. I (naively) believe that maybe people will start to take individual actions to offset their own carbon footprint instead of thinking the government will do it.

Here are a few things you can do to offset your own carbon footprint.

  1. Support carbon offset companies/non-profits. Read this great article from Mr. Money Mustache about companies that do that.
  2. Plant trees! (You also don’t have to do that personally). Here is a company (OneTreePlanted) you can pay $1 to plant 1 tree or $100 to plant $100 trees! WOW. (I am not sure how effective they are at this yet. They seem pretty new, but maybe they’ll contact me after this mention, or maybe I’ll contact to them to get more information about their work.)
  3. Buy a more efficient vehicle!

The people of the USA need to get over the idea that what the President of the USA does has much direct impact on their lives.

While the President can certainly create policies which affect your life one way or another a few thousand dollars, the fact is that what the government is doing is really not that intrusive on your life, especially not related to how you personally pollute! Not in the USA. What people need to realize is that  people have power. We can choose to influence how businesses create products and we can vote for people who will represent our beliefs. If we choose to specify to pay a little more for renewable energy, companies will create it. You can do that for many electric companies.

You can do the same with businesses. You can “vote” with your dollar, instead of just your political vote. Vote every day.

Many business CEO’s and city Mayors in the USA have pledged to keep their businesses and companies to the Paris Agreement. That is laudable and it is really what they should do also. Why should a company start polluting more just because Donald Trump says he is going to? Many companies are already on the energy efficient path (which is inherently green anyway) due to cost savings. So that should not really be an issue. It is unfortunate that the global warming thing has been “sold” to people as “saving the earth”. Most people I know don’t care that much about it. But if it was sold as “saving you money” people would be all over it. Being more efficient is saving you money AND saving the earth at the same time. Let’s try to focus on that, individually, and collectively. Hopefully other countries, companies and individuals continue on that path, largely ignoring what Donald Trump says. As I have said, he really has little power in the arena of what most people and businesses do personally. I suspect that history will look back on him poorly for this action.

I really don’t know what Trump is thinking overall. He is certainly connecting with people who have a certain mindset, that the USA is somehow getting “screwed” by the whole world. I just do not see that. Would you feel “screwed” if you were helping a family member through a tough time? The whole world is our family, and it’s the only one we have and some of them are going through pretty tough times. We should be ashamed that a large percentage are starving while some are living in luxury. Some of the starvation is related to the damage we’ve done to the environment with our many years of technological advancement and our gluttonous use of fossil fuels for energy and transportation. Some is related to corrupt governments (which is something I’m thinking about also and I acknowledge it’s a BIG issue, but not the topic of the day, yet).  Once we all get on a path to being more efficient we will be doing everyone else a great service as well as future generations.

Mark Zuckerberg – Basic Income

Upsate 7-24-02018

It looks like UBI potentially funded by “the 0.01% is being discussed again.

Update 9-22-02017

It looks like Y-combinator is embarking on a basic income  experiment similar to what I proposed Mark Zuckerberg do. This is a good thing as it’s still an individual/private group doing experimentation that government can’t/won’t do.

“YC will select 3,000 people across two states and divide them into two groups. The first group will include 1,000 people who will receive $1,000 a month for up to five years. The second group of 2,000 people — which the study will consider its control group — will receive $50 a month.”

Original 5-29-02017

Mark Zuckerberg gave a speech for the Harvard commencement ceremony this year (2017). In it he advocated for a universal basic income, which is something I’ve been thinking and reading about for a few years. The most important question about a basic income is “Who pays for the basic income?” Some people have thought about this more than I have. You can read about how one guy thinks we should pay for a basic income here. There have even been a few basic income programs in the past. You can read about one happening in Finland here, as well as in Kenya here.  

When you have an idea as big as a basic income you need a path to get there. You don’t just implement a basic income to a whole country. I am often trying to figure out how to implement ideas fast, not necessarily perfectly.

I am excited that someone with as much wealth (from Facebook stock ownership) as well as a desire to change the world for the better (as self reported by Zuckerberg multiple times) is interested in a basic income. Luckily Mark Zuckerberg is a billionaire and his stock is rising, literally. Facebook is worth more every year. This gives Zuckerberg the rare opportunity to implement his own basic income study! No one can stop him! And if it goes well he will be able to prove to people that a basic income is a good thing that should be implemented wider.

If Zuckerberg owns $63 billion in Facebook stock. it should grow at at least 4% a year, which means he could sell $2.5 billion a year, and use that to provide a basic income. Which means he could give 25,000 people a basic income of $100k a year!

Since this is a test and that’s a lot of money and this is supposed to be a basic income, he could provide an income of  $30k to say 500 people, this would be $15 million a year, a pittance that Zuckerberg wouldn’t even notice! I think he should do this for say 5 years, and see what happens with those people.

We need this kind of leadership to show us that this type of program could work.

$30k*500 people =$15 million *5 years = $75 million over 5 years.
How much to manage this program? $25 million maybe? (maybe way less!) For a cool $100 million over 5 years.

Until someone is willing to run this type of program and shows that the people who receive the money come out more successful than otherwise, and that they aren’t just being lazy, it won’t receive large scale acceptance.

I believe this is a program Zuckerberg should take on with his new Chan Zuckerberg Initiative LLC (not a charity, which is fine, I think businesses can potentially make more changes in the world than charities, or at least it takes all kinds!). If he wants to contact me to discuss further why I think he should do this he can find me at hooglandaxel@gmail.com

Alternatively, he could contact the nice people at Give Directly, who I mentioned earlier. They seem more versed in administering something like this and could probably run the program for less than $25 million!

Millions Could Die From Drought/Starvation

I read “The Last Hunger Season” in 02016 about the NGO One Acre Fund, who is working in Africa to provide seed, fertilizer and planting techniques to help farmers there produce more.

I am currently listening to the book “Enough: Why the World’s Poorest Starve in an Age of Plenty” which is talking about how providing seed and fertilizer is not enough, if the farmers there can’t sell their food into a developed market, they will have to sell when the price is low which puts the farmers in basically the same place they were before all the help.

The Last Hunger Season was published in 2013 and Enough was published in 2010. I figured that it’d been enough time that maybe the actions being taken by the people would be having an effect in Ethiopia, Kenya and other countries in Africa that they are working in.

Imagine my surprise when the first article I find when searching “Are Africans hungry” yielded the below headline “United Nations issues ultimatum as millions face starvation” and with this comment in the article “More than 30 million people need food assistance in Yemen, South Sudan, Nigeria and Somalia due to conflict and drought….Wars in Yemen, northeastern Nigeria and South Sudan have devastated households and driven up prices, while a drought in east Africa has ruined the agricultural economy.

I like to think I keep a pretty close watch on major news. I had not heard any ultimatum about millions of people starving in Africa lately, have you?

After I continued searching for a few more topics related to Kenya, Ethiopia, Africa, etc and getting in a short Facebook discussion with a relative about what causes a country to have a lack of food, greedy leadership, actual lack of food, etc, I found the below articles.

Looming ‘catastrophe’ in East Africa proves why world must tackle climate change, says Oxfam

Issuing a “desperate” appeal for the international community to meet a request from the United Nations for about £1.5bn of aid, the charity also said the worst drought in living memory demonstrated why the world must act to reduce global warming. While some still deny the severity of climate change and question the need to combat it, others are struggling for their lives as climate change makes a bad situation worse,” Oxfam said.

Kenya: Do Not Be Fooled, Food Shortage the Result of Misrule and Graft

“Anyone with a modicum of education today knows that while drought may, indeed, be a natural calamity, famine is man-made, an outcome of mismanagement, incompetence and criminal dereliction of today.”

I get pretty sick of seeing articles from fellow Americans that are discussing their “problems” like too many GMO foods or how they think climate change is not real because of a bad snow storm. I’m also frustrated by people driving gas guzzling trucks around while you have a perfectly good option of buying a Prius or even better a Nissan Leaf! Now I am not a perfect person myself. I own a few old vehicles that are not particularly environmentally friendly. I am still not sure what exactly to do with them. We don’t talk much about “how to make the world a better place for everyone” and I am not sure why we don’t do that? Why is the 3 year drought in Africa not a headline?

I watched this great video by NubmersUSA.org and Roy Beck about immigration. After that short presentation it’s pretty simple to understand that immigration is not the answer to helping most people in the world improve their situation.  

On a positive note, and recognizing someone who seems to be trying to help in Africa, I want to highlight Akon Lighting Africa. Akon, a rapper turned businessman, is working to provide solar lights, which can lengthen working and learning (productive) hours, provide safety (lighter places are safer) available to the people he is helping.

I also want to recognize Mobius Motors, a company that is working to provide rugged, durable, vehicles, built for the African market.

Are these entrepreneurs, working to solve problems and still make a profit, the right answer to solve all the problems in Africa? If so, how can we in the developed world help these types of companies accelerate their growth and impact? Is it even our problem to consider helping people in foreign countries? Shouldn’t we worry about all the problems we have in our own country?

I will admit that I don’t have the answers to these types of questions. But I think about them a lot. I think the best thing I can do for now is raise awareness of these issues and get other people thinking about them also, and that’s why I wrote this post.

What do you think?
Did you know there was a 3 year drought in Africa causing starvation to 30 million people?
Do you think entrepreneurs are a more effective way to solve problems than charity?
Do you help support anyone in a foreign country through Charity (Children International or Imagine Missions) or loans (kiva.org).
Do you think we should intervene militarily to displace bad governments or should we let people solve their own problems?