A CNBC article yesterday caught my eye, The U.S. retirement system gets a ‘C+’ grade, experts say — even though it’s worth $39 trillion. Here’s why.

I usually try to guess an article’s conclusion before I read it. My brain just works that way. Obviously, $39 trillion is a lot of money, but my thought was, “How much is it per person?” Using the $39 trillion number and a U.S. population of 329 million, it’s about $118,361 per person. That’s not a great amount to retire on, but it might be able to last a few years. It could last longer depending on whether Social Security is included in that number. It’s much lower than the $2 million that many consider necessary for financial independence*.

The “C+” grade from Mercer CFA Institute Global Pension Index wasn’t for the reason I expected, though. The article points out that the United States has a “patchwork retirement design.” It’s unclear to me whether the system counted Social Security or not. To read the report, you have to give away a ton of personal information, and I’m not that interested in their opinion that much. It makes me more skeptical that they wouldn’t release it freely.

The main reason for the C+ grade seems to be that the United States retirement system is full of “haves” and “have-nots.” Here is an eye-opening passage from the article:

Consider this statistic: Just three of the 38 countries in the Organization for Economic Co-operation and Development rank worse than the U.S. in old-age income inequality, according to the bloc of developed countries.

Indeed, poverty rates are “very high” for Americans 75 years and older: 28% in the U.S. versus 11%, on average, in the OECD.

Being #36 of 38 the countries in the OECD is terrible. I’m surprised we (the United States) even got a C+.

It seems like the patchwork system works for some people but not everyone. My guess is that there’s one group of workers who have 401ks and have been saving and investing. Investing in U.S. stocks over the last decade has done well. They could have had their money quadruple. For employees who don’t have a 401k or who aren’t investing, they’ve just got whatever they’ve been able to save. Even if they save $3,000 a year – over 20 years (without compound interest), it is $60,000.

So what’s the answer? The first thing I would do is fix Social Security. If the contribution limit has to go from $147,000 to $500,000 or more, I don’t see a problem with that. We all agree that Social Security running out of money is a problem. The fix isn’t going to come from workers making $50,000 a year contributing more.

Next, I might look to provide a Universal Basic Income (UBI) for people 65+ at poverty rates. We saw how much the child tax credit helped end child poverty. I did some searching around, and it seems that about 5 million people aged 65+ are in poverty. It wouldn’t be too expensive to provide a little more of a safety net. I would hope that would get bipartisan support from lawmakers; if they are against helping old, poor people, they shouldn’t be elected.

As for the overall United States retirement system, I’m not sure it’s so bad. I grew up knowing that pensions wouldn’t be around and that I had to save in retirement vehicles. However, I’m 46, so people in my generation haven’t gotten to retirement age yet. It looks like 401k were getting popular in the late 1980s and Roth IRAs in the late 1990s. The people retiring today entered the workforce in the late 1970s, so they likely missed the first 10, 15, or 20 years of early compound interest.

I hope that the bad grade for the U.S. retirement system reflects a transition from pensions to a system based more on personal responsibility. Of course, that system of personal responsibility is… not great. Some more quick internet searching shows that only about 40% of people have access to a 401k plan. I don’t know if that counts 403b and TSP plans, which are similar for specific professions. At least everyone earning under $129,000 has access to a Roth IRA. Those are the people who need it.

I’m not sure if we should scrap the current retirement system. I think if we ensure that we eliminate elderly poverty and help educate people that retirement is something they need to plan for, we should shoot up the charts.

* That $2 million generally comes from people wanting around $80,000 to spend per year and reverse engineering the 4% withdrawal rate rule of thumb. (The math is 80,000 divided by 0.04 for those with a calculator handy. Feel free to play around with numbers that may be more accurate for you.)

Eight years ago, I wrote What Does an Annual $200,000 in Retirement Income Look Like which projected out retirement income. The following year, I updated it with What Does an Annual $200,000 in Retirement Income Look Like (2015 Version).

The idea was to update it every year. Then I got busy fighting lawsuits from pyramid scams and raising a one-year-old and a two-year-old. Fortunately, they can take care of themselves much better now. I can finally update what our retirement income looks like.

As we get closer to retirement, we get closer to understanding what our retirement income will be. I compare it to playing a game of golf. It’s very, very hard to hit a hole-in-one, but with several (or more) strokes, a good golfer can put the ball in the hole. If we were looking at a future $200,000 in annual income back then, what does it look like now – 7 years later?

Let’s get started.

What Does an Annual $250,000 in Retirement Income Look Like?

I find it is extremely important to take some time and review what your income is going to look like in future years. Many people simply try to build a big nest egg and then draw it down in retirement relying on the 4% rule. An overly short version of the 4% rule roughly says that you can withdraw 4% a year and live on that for 30 years or more. So if you had a million dollars, you can withdraw $40,000 a year.

From the very beginning of this website, it’s been about finding and creating alternative income streams. When I knew my wife was “the one”, I realized that she’s be able to retire with 20 years of military service… and I didn’t want to work another 20+ years after that until age 65. Nowadays, the media loves to talk about FIRE (Financial Independence, Retire Early), but there were very few bloggers motivated to write about it in 2006.

I have two tools that I use to evaluate our future retirement. One is a spreadsheet. I’ve always been a spreadsheet guy. The other is New Retirement, which has a tremendous retirement tool. New Retirement is great at visually showing me when income comes into play. Not to get too far ahead of myself, but mortgages get paid off and Social Security kicks in at different times. It also helps me model my wife’s future retirement and pension income. The year-by-year analysis is something that I haven’t seen from many other retirement planners.

How Our 250,000 Income is Built?

Wife’s Military Pension

With 23 years of service, she qualifies for a pension of 52.5% of her O-5 base pay. When I did this report in 2015, I was almost certain she’d get to O-6. We recently got the news that she missed out on O-6 once again in 2022. They’ve moved the goal posts on promotions for years. We’ve moved twice with promises of promotion-worthy career paths, just to have the rug pulled out from under us. This last year she got the promotion-worthy position and it stayed there… but it happened in February, missing the annual cut-off. We’ll have to wait another 12 months to see if it will help.

In any event, we’ll use the numbers we have. Using this year’s pay charts, 52.5% of her O-5 pension is $5,451 a month or $65,420 a year. We’ll likely pay some pension insurance (so that I get income if she dies) which means the take-home income will likely be less. I don’t want to get into expenses too much in this income report, but we’ll pay for TriCare for Life for health insurance out of this. It is very cheap, but has very good coverage and solves one of the biggest problems with retiring early.

Her pension is indexed for inflation. So I like to think of it as nearly $65,000 of buying power for life. For this report let’s estimate it as $55,000 due to the pension insurance and health care costs.

If the promotion to O-6 happens, the pension could be $80,000. While that would be nice, I’ll have to take the conservative number:

Military Pension: $55,000
Total: $55,000

Rental Income

Our real estate “empire” is doing well. That link will catch you up on our three rental properties.

This is in transition because we’re trying to sell one property. I need to emphasize “trying” because our tenant has overstayed her lease and refuses to leave. We had already sold it, but it seems like the deal may collapse because the courts won’t likely evict her before the buyers move on.

For this report now, I’ll use the assumptions before we decided to sell it. Rent has gone up a lot, but we still don’t charge our tenants much. I think we’ll get close to $4,000 a month in rent or %48,000 a year. However we have condo fees and condo maintenance, so let’s estimate this as $35,000. If we only have two condos we’ll have less coming in from rent and instead, we’ll have more from investing the money we make from the sale. It might not turn out to be a wash, but it will be fun to see how it works out.

This rental property income doesn’t kick in until 2027 when the mortgages are paid off.

Military Pension: $55,000
Rental Properties: $35,000
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Total: $90,000

Websites, Dog Sitting, Freelance Customer Support

When I did my first retirement report like this in 2014, I wrote the following:

With all that said, I’m going to estimate retirement income from websites to $25,000. It’s a complete crap shoot, as Lazy Man and Money may not exist in 20 years. Or maybe it is a huge income earner. Even without Lazy Man and Money, I could apply my software engineering skills and create websites for small businesses and/or consult on the side. There are a lot of options in retirement, but I’m counting on the fact that I’m going to be doing something that earns an income and I think it will be a decent one. I like to think this is a conservative number, again it is a crap shoot.

Nowadays, it’s very popular in the FIRE community to talk about having a second act in retirement. It seems that many people keep doing some kind of work that will make money.

I write this website and run a booming dog sitting business. Together they average about $35K a year. I’ve put more of my time into freelancing and the traditional household chores that come with raising two growing boys. (My wife’s work/rat race for promotion consumes a lot of her time.) That freelancing is projected to earn around $24,000 a year, but it can’t be counted on forever.

I don’t know if I’ll be able to count on $50K a year from all these in the future. It’s hard to dog sit if we are traveling. Also, the income from the website is going down a little each year, especially as I devote time to freelance gigs.

With all these moving pieces, I’ll go with a long-term average of $40,000. I might make twice that this year, but I have to be conservative. I have to presume that I’ll want to do less in the future. I’m hoping this keeps pace with inflation. I’ve been able to charge a lot more for dog sitting this year.

Military Pension: $55,000
Rental Properties: $35,000
Websites and Dog Sitting: $40,000
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Total: $130,000

Retirement Investments

Up until now, I’ve covered income streams that most people don’t have. I suppose there’s a good chance that some of you are real estate investors, but few of you have military pensions or websites. The typical path to early retirement is about having a big nest egg and spending it down at a rate of around 4% a year.

I don’t follow that typical path. I’d rather have businesses and income streams. However, there’s no reason why we can’t do both, so we’ve built a big nest egg too.

Thanks to the bull market of the last decade (and continuing contributions) our investments have done exceptionally well. We have Roth IRAs, SEP-IRAs, and TSPs (a government 401K) accounts. If we started to take 4% now, we could withdraw $50,000 a year. That may theoretically only last for 30 years until we’re age 75.

It’s hard to say what this nest egg is worth in retirement because we have no specific age where we say, “We are retired!” Even when my wife retires from the military, she is considering entering the private sector after a year off. There are many ways to slice and dice this kind of income. I’ll give you all my thoughts and you can decide for yourself what seems most accurate. (I’d love it if you’d let me know your thoughts in the comments.)

The age that everyone attaches to retirement is 65, so let’s run the numbers with that in mind. That gives us 20 years to grow this retirement nest egg before we start to withdraw from it. I presume a 4% growth over inflation. I’m using inflation to keep the numbers in today’s dollars. That might be difficult because inflation is so high right now.

The net result of another 20 years of growth yields $105,000 in annual income. This is why financial experts suggest that you invest in your retirement accounts early. Years of compounding do make the numbers look crazy. That number has been as high as $120,000, but the markets have slumped a bit this year.

So this number could be considered somewhere between $50,000 and $105,000 depending on when we start to withdraw from it. Since it is a retirement account, we can’t withdraw from it now.

Note: It is important to mention that there’s a huge difference in taxes in Roth IRAs and 401Ks. One-third of our retirement money is tax-free (Roth IRAs) and two-thirds are tax-deferred (401Ks and equivalent). When the time comes for my wife to retire, maybe we’ll move some money to the Roth IRAs. We’ll be in a lower tax bracket then which will make it easier.

Military Pension: $55,000
Rental Properties: $35,000
Websites and Dog Sitting: $40,000
Retirement Investments: $55,000 or $120,000
—————————————————-
Total: $185,000 (now) or $250,000 (age 65)

Non-Retirement Investments

For years we’ve been focused on maxing out our retirement options. After paying for expenses (including primary residence and the rental properties at 15-year mortgages) and those retirement accounts, there wasn’t a lot of money to save in regular after-tax brokerage accounts.

I have a small Vanguard brokerage account and my wife has a bank account where she’s been saving up cash. We’ve been keeping them separate since they were earned from our businesses, but I think it makes sense to merge them and use them as a bridge until the rental property mortgages are paid off or we can draw down from retirement accounts and Social Security.

Combined it’s about $100,000. I’m hopeful we can invest it conservatively at 6% for an extra $5,000 a year. Here’s one plan to do that.

We also have partial ownership of a small business that pays a monthly profit sharing check of $1,000. That $12,000 a year, plus the $5,000 a year we can make from merging our accounts is $17,000 in passive income.

When we sell the rental property that I discussed above, we’ll add around $250,000 to this. That would be a total of $350,000, giving us about $17,500 a year that we could add to the profit-sharing for a $30,000 total. However, we’re not there yet and I don’t want to double count this with the rental income from the same property. We’ll stick with $17,000 until next year.

Military Pension: $55,000
Rental Properties: $35,000
Websites and Dog Sitting: $40,000
Retirement Investments: $55,000 or $120,000
Non-Retirement Investments: $17,000
————————————————————–
Total: $202,000 (now) or $267,000 (age 65)

Social Security

Social Security benefits vary greatly by when you choose to take them. I change my mind all the time on when is the best time to take them.

The standard advice is to defer it as long as possible. That’s probably great advice for most people, but not for everyone. In the past, I tackled the question: Take Social Security Early or Late? What I learned was that if you take your Social Security benefits early and invest them (assuming an 8% return), you’ll do the same as you would if you delayed taking them. The benefit of taking the money as soon as possible is that if you die at age 68, your estate has at least been getting 6 years of payments. If you wait and die at age 68, our estate would only get one year of payments.

On the other hand, it may make sense to wait until 70 anyway. It doesn’t look like we’ll need the money. I like the idea of “betting on myself” that I’ll be healthier and medicine will be a good deal better then. Also, statistically, wealthy people live longer.

Our projected retirement age is 67. The Social Security website has some great calculators and it looks like my benefit will be $24,408 and my wife’s will be $36,252.

Combined that’s about $60,000. Social Security does adjust for inflation, so this is a real $60,000 in dollars at the start of the year (it might be 7% higher now).

Social Security is looking like it will run out of money when we turn 58, so we’ll probably get some amount less than this. We might be still increasing our benefit, so I’ll guess that they’ll balance each other out. It’s far enough in the future that we can just stick with the $60,000 number for now.

The final results look like:

Conclusion

To justify the title of $300,000 I used the average of the money we have now and at age “65-ish.” (I’m calling it age “65-ish” because I did the calculations on our retirement accounts for age 65, but Social Security is age 67 for us. The difference isn’t enough to matter.)

I realize that the $300,000 number is intimidating. I hope you don’t compare your situation. A significant chunk comes from the military pension and that was never part of my master plan. The rental properties look good now, but they looked really poor in the crash of 2009. I included money from dog boarding that I may limit in the future. While we never know what the future brings, this isn’t that far off of where we thought we’d be in 2015.

I hope you’ll take the time to run the numbers for yourself. The exercise is to plan and think about where the future is going financially. Please look at different ways to create income and how they can all play a part in ensuring a solid retirement plan. Then leave me a comment about what you learned.

Happy Summer!

I know it isn’t officially summer, but with Memorial Day behind us, it feels like it. My kids only have 1 and a half days left of school. Actually, one kid is done with school because he tested positive for COVID this past weekend. He’s fine – enjoying the freedom. This school year went by quickly.

I was recently reading Joe from Retire by 40’s ten years of early retirement. It’s a great read. Check it out if you haven’t already, I’ll wait.

Did you read it? Well, I bet most of you didn’t. That’s okay.

In a lot of ways, I consider Joe my west coast twin. We both had engineering jobs, got burnt out, and transitioned to stay-at-home-dad status. He’s a couple of years older than me, so I like to check in with him now and then to see what I can expect coming down the pike for me.

There is one big difference between Joe and me though. His family reached a certain amount of wealth and decided he could retire from his engineering job. He did just that and started a blog that makes a little income. His wife still works a government job (as mine does), but she doesn’t need to. They live a frugal life and they have enough money from saving and investing over the years.

In contrast, I was let go from my engineering job in 2007 but just continued to earn some money with my blog. I was doing well enough back then – enough to make half of my engineering salary. I occasionally took on some other jobs such as advanced tech support because they paid well. In some ways, I reached my definition of retirement. However, the longer I continued to run the blog, take tech support gigs, and add a dog boarding side hustle, I realized that I was really self-employed.

Some people say that if you put a frog into boiling water, it will immediately jump out. The same people say that if you put a frog into a pot filled with room temperature water and heat it to boiling it will stay in the pot and boil to death. I feel like Joe jumped out of the boiling pot to freedom. He could probably tell you the day he retired (or at least look it up). On the other hand, I’m boiling in the water of self-employment.

Fortunately, the water still feels fine… I think. During times of high inflation and down markets, it helps to have income coming in. It does make me think though, “Should I ever get out of the water? When would be a good time to get out of the water?” The money from this self-employment is very useful, especially since we spend about $100,000 a year between housing, other necessities, education, and a few wants. Perhaps when the mortgages are paid off and the kids are no longer it school it becomes easier to “retire.” Perhaps I’ll never retire and just keep doing the same kind of work as long as it provides value to others.

That’s today’s insight. Retirement can be boolean, either on or off, for some people. For others it can be like a volume knob with infinite gradients. There’s no right or wrong definition, is there? Let me know your thoughts in the comments.