Hey, Boomer! Are You Smarter Than a 5th Grader? 4 Things You Really Should Know About Retirement
Written by
John Csiszar
Edited by
Jenna Klaverweiden
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Sometimes, relatively simple concepts can seem difficult, especially for someone who is not familiar with them. This was evidenced to much amusement on the popular TV show “Are You Smarter Than a 5th Grader?” as fifth graders could often answer basic questions that older contestants could not.
While some of the questions on the television show were trickier than they may have first seemed, for the most part, the answers were things that most people should really know. The same can be said about many retirement planning topics. While the answers might seem obvious on the surface, too many boomers are unaware of what they mean or how to implement them into a cohesive plan.
In words that a fifth grader could understand, here are four things you should really know about retirement.
If You Start Saving at 20, Will You Have More or Less Money Than If You Start Saving at 40?
This seems like an obvious question that even a fifth grader could answer correctly. But many boomers don’t know the hard math about how important saving early is. Even if you’re late in life and retirement is on the horizon, starting to save and invest as soon as possible is the best way to provide a comfortable retirement.
Let’s say you earn a $100,000 salary at age 61 and make some sacrifices to save 25% of your income. That would mean you’re setting aside $25,000 per year. Imagine, since you’re getting a late start, that you work for nine more years, retiring at age 70. Not only would that maximize your Social Security payout, but it would also build up your investments.
How much could you save in that short period of time? If you earn a 10% annual return on your investments, which is the rough long-term average of the U.S. stock market, you could potentially amass nearly $340,000 by age 70. Coupled with Social Security, that may very well be more than enough to get by in retirement — a pretty major feat considering you saved for only nine years.
Do Prices at Restaurants and Grocery Stores Go Up Over Time or Down?
Most fifth graders don’t likely have a solid grasp on inflation and macroeconomic theory. However, they’ve probably noticed that the fast food, sodas, gum and video games they buy cost more than a few years ago.
The lesson for boomers is that inflation eats away the value of your capital, and you’ll have to factor this into your retirement planning. Even if you have a $1 million nest egg, for example, the purchasing power of that money would only be about $744,000 in today’s money 10 years in the future, assuming a 3% inflation rate.
According to the Famous Saying, the Only Certain Things in Life Are Death and What?
While they may not fully grasp the concept, most fifth graders could correctly respond that taxes are the “second certainty” in life. For boomers, this is an essential concept to grasp.
It’s highly likely that some, most or even all of the money in your retirement accounts is fully taxable, and that will reduce the amount that you can actually use. It will also necessitate a tax-friendly withdrawal strategy so that you can pay the least amount of taxes possible when you take your distributions.
Is It Better To Have More Money in the Future or Less?
Even a fifth grader could likely tell you that it’s better to have more money in the future, not less. This is particularly true if you’re talking about your retirement nest egg.
In addition to saving early, the best way to have more money in the future is to choose the right investments. Being too conservative could leave you with a shortfall, while being too aggressive could wipe out your whole portfolio. The key is to pick suitable investments that match your financial objectives, risk tolerance and time horizon.
You can get help with this type of planning from free online calculators or by working with a financial advisor.
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