I’m 56 with $1.4 million and no debt and want to retire- an expert gave me a ‘simple equation’ so that I won’t go broke
A prospective retiree has $1.4 million in the bank but said he’s still concerned about the future.
Tony called into the Ramsey show looking for advice on how to stretch his savings so that he can comfortably retire.
Dave Ramsey advised a caller on how to live off interestYoutube/ The Ramsey Show Highlights
The Ramsey Show is a financial advice podcast featuring American radio personality Dave Ramsey and cohosts.
Those seeking insight into their financial future call into the show for guidance from Ramsey.
In the case of Tony from Michigan who has $1.4 million saved ahead of retirement, the conversation revolved around the ideals of living off interest.
Ramsey explored this in what he referred to as a simple equation.
He explained that inflation is sitting at an average of 4.2%, while the average stock market rate of return is 11.8%.
Ramsey then encouraged listeners to consider their average rate of return and emphasized the word average.
He said his own mutual funds have averaged a rate of 12%.
Individuals seeking to retire this way must have a handle on preserving their core income.
“This is how wealthy people look at it,” he advised and explained that if you’re earning 12% and losing 4% in purchasing power, you’re dealing with a cost of living rate.
“You’re not gaining actual wealth but you’re gaining dollars to offset the inflation,” he said.
By relying on this method, Ramsey told Tony his money would pretty much “run like a machine” for the rest of his life, assuming the American economy functions how it has for the last 80 years.
ACCOUNTING FOR CHANGE
Ramsey also encouraged retirees to leave wiggle room when mapping out their future financially.
“What’s going to actually happen is that he’s probably going to live on less than that,” he said of Tony’s $1.4 million.
Where to save your retirement money
There are several different places where you can put the money you save for retirement. Each has different tax advantages, but not all of them are available to everyone.
401(k) – an employer-sponsored retirement account. Contributions are made pre-tax and many employers will match a certain percentage of your contributions. Taxes are paid when the funds are withdrawn in retirement.
Roth IRA – an individual retirement account. Contributions are made post-tax but withdrawals in retirement are not taxed.
TSP (thrift savings plan) – a retirement savings and investment plan for Federal employees and members of the uniformed services. They work similarly to 401(k)s but may have more limited investment options.
Pension – an employee benefit that commits the employer to make payments to the employee in retirement. Pensions are becoming increasingly rare.
He also steered the audience away from listening to financial advice articles which he says often wrongfully forecast, overestimate, and don’t account for any change, when attempting to give advice.
“They think all of this stuff is going to happen in an exact little vacuum and it never works out that way,” he added.
Being realistic about room for prospective inheritances, real estate purchases and more is important when planning for retirement, according to Ramsey.
“When you’re thirty years old, you can’t exactly predict where you will be at 70, but you can have a target,” he said in closing.
Here’s how a 61-year-old found a retirement solution in their tractor.
Plus, see how Ramsey advised a 60-year-old couple with no retirement savings.
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