Saving For Retirement In Cash – Skipping Wall Street
There is an increasing number of doctors who don’t trust the retirement industry comprised of IRA’s, 401k’s and whatever mutual funds, stocks or bonds that are offered within them. These docs prefer to keep their money either in cash or invested in their business(es).
Let’s talk about this concept as a viable method in order to save for retirement and still be able to achieve financial independence. The main concern with keeping money in cash is the effect of inflation on cash and needing to save more than you would investing in mutual funds which grow (and shrink sometimes) at some random percentage year.
Inflation Effect On Your Savings
I recall at some point my parents had $300k in their savings account back in 1985 and so I’ll work off of that to talk about the effects of inflation on savings.
On the Bureau of Labor Statistics (BLS) you can play around with their inflation calculator. According to it my folks would need $670k in today’s dollars to have the same buying power as that $300k.
But let’s break that down before believing an inflation calculator. BLS is assuming an average inflation rate of 2.6% from 1985-2016. I am going to take a few common family expenses and we shall see if their numbers hold true.
Housing
The home we lived in back in the 1990’s was worth $450k and though they have since sold it the value is now at around $1 million. So that’s an inflation of around 2.8%. However, there are other parts in the country where a home can be purchased for well below $450k. By moving, my parents could have beat the shit out of that inflation number.
Groceries
This went up by a little over 3% in the same time-frame, I used bread, meat, milk and 1lb of fruits in my calculation. For a family of 4 it’s quite possible to eat a very healthy diet with around $500/mo according to various online sources. This means that my folks probably spent around $200/mo back then on groceries.
There is no good way to circumvent this. Growing some vegetable in the garden I suppose might help. And in some areas becoming part of a CSA can reduce your grocery expenses.
Automotive
I decided to not use the actual price of cars because doctors tend to be on the higher end of the scale and that data isn’t as easy to come by. Instead we’re gonna talk about how much it costs annually to own/operate a car. Back in the 80’s it was somewhere in the $3k range and now it’s closer to $9k. A large portion of this is actually inflated labor costs.
This one is quite easy to overcome. Either becoming less car dependent or doing a better job maintaining a car and not getting new cars all the time. A new car will have much more depreciation than a used one which contributes quite a bit to the “cost of owning/driving” of a car.
Wages
Well my parents weren’t doctors and they weren’t minimum wage earners so there isn’t much data to use for this. Minimum wage went up by less than 3% and doctor salaries went up by around 2.5%. Interestingly doctors’ workload went up by 1,000% (I’m guessing) but somehow our wages didn’t keep up.
This one is easily overcome by going from the wage-earning side to the business-income side. A business has the ability to overcome high or low inflation rates, depending on the business of course.
How To Battle Inflation In A Cash-Model Retirement Plan
Let’s say you are one of those who wants to just keep it simple. You want to keep all your money for your future saved in a savings account. How can you do this and still have enough value of your money come retirement time?
In the cash-model retirement plan a person just saves a ton of money and when they are ready to retire they just take $ off the top until it runs out or they die.
Retirement Age Matters
When you invest in mutual funds the theory is that your investments grow in value and they kick off dividends which you can spend. This method allows a person to not have to dip into the principal and less is needed to invest in order to generate the equivalent income as the cash-model.
If you decide to retire at age 40 with $500k then it’s quite likely that you will run out of money if you are using a cash-model. You would be left with $9k/mo to spend should you need 55 years of withdrawals.
If you stop working at age 70 with $1.5M then you likely will be fine. You would have $60k to spend per year until age 95.
Outpace Inflation By Increasing Savings
If you have $100k in a savings account the inflation concept states that it will be worth about $97k the following year. This would continue at around 3% on average every year.
But if you added $4k to your savings in that 1-year period then you essentially beat inflation because you would be left with around $1k more in value.
If you could contributed only $4k annually to your savings then I would be worried for you. A more realistic scenario is that you stop contributing to IRA’s or 401k’s. So every year you would have a minimum of $15k ($18k pre-tax 401k contribution equivalent) as well as another $36k for a total of 30 years.
With the above plan you would be left with $1.5M by age 65 assuming you are in your mid-late 30’s.
The reality is that you will contribute much less early on in your career as you are paying off debt and you will contribute much more as you get older. Your income will increase with age and your expenses will likely decrease. Of course you may drop down to part-time as well which means your gross income goes down. But then again your taxes will be lower so perhaps your net-income won’t change all that much.
A doctor making $300k a year, taking home $160k and spending $60k could save $100k a year. Saving $100k a year for 30 years is equal to $3M. That’s a lot of money to have in retirement. And if you continued working a little in retirement you likely wouldn’t need to dip into this until you are unable to work.
Is this Strategy Right For You?
When in doubt consult your financial adviser. In general most advisers will advise that you are likely leaving a lot of money on the table by going the cash-route.
If you want to do this at least consider putting a percentage of your money into mutual funds (index funds) and the rest in cash. That way you have a little of both, a sort of diversification.
What About My Parents?
Their $300k would have grown to around $700k if invested conservatively. Historically, anecdotally, using hindsight vision goggles they would have done better investing their money.
Had they kept it in cash, well, then they would have around $300k left now which isn’t bad but Wall Street would have won in comparison.