Tag Archives: Retirement planning

Huge Difference Between Millionaire and Billionaire

Would you like to build up a million-dollar nest egg by the time you retire? For middle-class earners, that goal is challenging but possible if you start at age 25 and save $1750 a month. Many married couples could do this by maxing out their 401(k) contributions. Or you could take the route that many people follow and build a small business into a million-dollar asset.

What if you want to accumulate a billion-dollar nest egg instead? Starting at the same age of 25, you would need to save $21 million a year. Good luck with getting any employer match on that.

There’s a vast difference between a million and a billion. It’s completely misleading when activists, politicians, and the media refer glibly to “millionaires and billionaires” as if the two are almost interchangeable. Someone with a net worth of one million dollars isn’t even close to being in the same category as someone worth one billion.

Here are a few more examples to clarify the difference:

• One million seconds from now is about 11 and a half days away. One billion seconds from now is about 31 and a half years in the future.

• A million hours ago was 114 years in the past, early in the 20th century; our ancestors were using electricity and telephones. A billion hours ago was over 114,155 years in the past; our ancestors had evolved into Homo sapiens but were still using primitive stone tools.

• Put one million ants on one side of a scale and a female Asian elephant on the other side. The million ants, at around six pounds, would hardly register against the elephant’s three tons. Put a billion ants on the scale, however, and they would balance or even outweigh the elephant.

• One million pennies stacked on top of each other would make a tower nearly a mile high. One billion pennies stacked on top of each other would make a tower almost 870 miles high.

• If you earned $45,000 a year and stashed it all under your mattress, you’d have one million dollars at the end of 22 years. To accumulate one billion dollars at that same rate, you’d need the help of your many-times-great grandchildren, because it would take 22,000 years.

In today’s world, being a millionaire represents financial security, not vast wealth. At a withdrawal rate of 3%—the amount most experts consider sustainable—an investment portfolio of one million dollars will provide an income of $30,000 a year. Combined with Social Security, that would be enough to live comfortably but not lavishly in retirement.

Three percent of one billion dollars, on the other hand, will furnish an income of $30 million a year; definitely private jet and gated estate territory.

If millions and billions aren’t challenging enough, here’s a quick look at trillions. One trillion is a million millions, or a thousand billions. It would take one thousand elephants to balance the weight of one trillion ants. Astronomers estimate the number of stars in our Milky Way galaxy between 100 billion and 400 billion; not even close to a trillion. No wonder it’s so hard for most of us to wrap our minds around information like, “The current US national debt is more than 18 trillion dollars.”

Becoming a millionaire? It’s not only achievable, but wise if you want financial security in old age. Becoming a billionaire? You’d better plan to invent something amazing, write several dozen international best-sellers, or build an incredibly successful business. Becoming a trillionaire? Don’t waste your time thinking about it. For good reason, the word isn’t even in the dictionary.

Collecting Treasures–Or Not

Almost everyone has a story about a cousin or an aunt who bought a box of junk at an auction and found in it a diamond ring worth several hundred dollars. Every once in a while a valuable painting by a famous artist turns up in someone’s attic. “Antiques Roadshow” sometimes features odd items that have been sitting around in someone’s house for years and that are appraised for thousands of dollars.

This doesn’t mean buying and selling art or collectibles is a good way to make money.

Buying art, antiques, or collectibles is extremely speculative, in part because values are so subjective. What a given item is worth depends entirely on what a collector might be willing to pay at any given time. A piece of pottery or jewelry might fluctuate considerably in value as trends come and go. Yesterday’s hot collectible (think Beanie Babies or Jim Beam bottles) might be tomorrow’s overpriced embarrassment.

Does this mean you should never buy art or antiques in hopes that they’ll increase in value? Not necessarily. I am suggesting, though, that investment shouldn’t be the primary reason for your purchase.

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Spenders, Savers, and Successful Savers

Are you a spender or a saver?

According to Scarborough, a market research firm, only 9% of adults in the U.S. label themselves as spenders. This is the percentage who “mostly agree” with the statement, “I am a spender rather than a saver.” On the opposite side, 29% “mostly disagree” with the statement and are considered savers. Presumably, the 62% in between consider themselves to have well-balanced financial habits that include both spending and saving.

Given these numbers, it would seem that most of the adults in this country ought to have healthy savings accounts. Unfortunately, that’s not the case.

According to a report released in March 2013 by the Employee Benefit Research Institute, 57% of U.S. workers have less than $25,000 in total household investments and savings, not including the value of their homes. The Social Security Administration’s current figures show 34% of American workers have no savings set aside specifically for retirement.

Something doesn’t quite add up. Either a lot of Americans aren’t willing to admit that they are spenders, a lot of Americans are so poor that they can’t afford to save, or a lot of Americans are delusional.

Or maybe a lot of us just have different definitions of “saving.” Here are a few money habits that might encourage people to think of themselves as savers, but that don’t necessarily add up to being successful savers:

1. Buying things on sale. Waiting for discounts on items you need and want is a wise and standard practice for frugal shoppers. But you aren’t a saver if you buy bargains that you don’t need, might not even really want, or can’t afford. Maybe that $150 pair of shoes is half price. Yet if they will just sit in your closet, you haven’t saved $75. You’ve spent $75.

2. Having money in the bank. Yes, putting money into a savings account is the first place to start saving and a great habit to teach your kids. But once you have accumulated an emergency fund, keeping your money in the bank isn’t a good savings habit. Over time, savings accounts and CD’s don’t pay enough to keep pace with inflation. Money in the bank may be safe, but it isn’t really an investment because it isn’t growing. Mutual funds that include a well-diversified range of investments are far better places for your long-term retirement savings.

3. Not spending anything. There are times when choosing not to spend money now will only cost you more money later. Failing to maintain your car or do home repairs are two common non-spending habits that may seem like saving but actually turn into spending.

4. Saving for someone else. The time-tested advice to “pay yourself first” usually means taking money off the top for savings before you spend anything. Yet this has another application, as well. Make saving and investing for your own retirement your first priority. It needs to come ahead of saving for your kids’ college educations, weddings, or first homes. This may seem selfish or greedy, but in fact it’s the opposite. When you provide for your own financial well-being in retirement, your kids won’t end up having to help pay your bills.

When we’re asked to label ourselves, it’s normal to tend to choose answers that fit the way we would like to think of ourselves. I’m sure most of us would prefer to think of ourselves as savers rather than spenders. But if we really want to become successful savers, we can’t settle for the money habits we wish we had. We need to look at the money habits we actually practice.

What Is a Middle Class Income?

The middle class. Marketers target it. Politicians champion it. Economists talk about it. Most of us consider ourselves part of it.

Yet, when I’ve asked for a clear definition, I have not found anybody yet that really can tell me what “middle class” is.

I recently posted on Twitter that $90,000 was a middle-class household income and that it would take a nest egg of $3 million to generate that income in retirement.

A couple of my colleagues responded that my figures were way too high and accused me of being out of touch. As a lifelong South Dakotan, I’m used to being seen as “out of touch,” but the idea that $90,000 was beyond a middle-class income intrigued me.

I figured a few minutes with Google would point me to a definition of “middle class.” It wasn’t that simple. I soon discovered that neither politicians, economists, sociologists, nor financial advisors can agree on what makes someone middle class. It is a little easier to define a middle class income.

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Proposed Cap on IRAs Would Touch Middle Class

“Max out your retirement plans every year” has long been standard advice I’ve given to working adults who want to secure a reliable income when they retire. Individual Retirement Accounts (IRAs), along with 401(k), 403(b), and profit sharing plans offered by some employers, are among the most accessible ways for middle-class workers to provide for retirement and build wealth.

If a proposal in President Obama’s budget plan is approved by Congress, however, retirement plans may no longer be the first and best stop along the road to financial independence.

The proposal would limit a person’s total balance in all tax-advantaged retirement plans to the amount it would cost to purchase an immediate annuity paying $205,000 a year This appears to not be indexed for inflation. The articles I’ve read and my own calculations suggest this would mean capping retirement accounts at around $3 million.

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Does Uncle Sam Want Your IRA?

“The Feds Want Your Retirement Accounts.” This was the headline of a February 22 post on the American Thinker blog recently forwarded to me by a reader. Normally I hit delete on articles warning of some type of impending financial doom. I read this one, since Argentina confiscated its citizens’ retirement accounts shortly before I first visited there in 2009.

According to the article, in 2007 a professor of economic policy from the New School for Social Research, Theresa Ghilarducci, wrote a paper calling for the US government to eliminate private retirement accounts. She suggested confiscating the assets in those accounts and replacing them with a “Guaranteed Retirement Account” (GRA) guaranteeing a return of 3%, which is essentially another program like Social Security.

This is basically what Argentina did one year later.

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