The last 12 months are clear demonstration how ordinary working people are left behind and the growing gap between the rich and the poor. By no stretch of imagination, I consider myself a rich person (for me a rich person is somebody with $50 million + in various investment vehicles). Last year alone my investment money grew by 19.5% or $168K. I don’t expect this to last and, as I have posted in the December 2024 post, I think that the market is overpriced.
Even I will take a cautious approach – no further investments and 2% real growth (after inflation a year) I will have 1.5 million in 20 years in today’s money.
This is important as number of retirees will grow rapidly in the US in the coming years, which could even lead to a recession. Social security fund maybe exhausted as early as 2034 in “do nothing” scenario, as there is simply less active workers will contribute. For many years social security was collecting more money that it needed and was “lending” those money back to the government (to fund wars, illegal migrants’ assistance and so on). Now the social security will collect those money back and by 2034 the fund will be exhausted. For many retirees (about 60%) social security is the main source of income, as 50% of people between 55–66-year-old have no retirement savings. What might happen is a ripple effect where retirees will be spending less (in case any change to the social security system), leading to the contraction in the economy.
It is important to note the social security meant only to replace part of the retirement (78% for the low earner, 42% for medium earner and 28% for max earner). This three-legged stool (social security, pension and savings). For me personally I have been discriminated at work so I was only counting on my personal savings and hoping to get something from the social security. By law social security cannot borrow the money from anywhere else.
4% inflation rule doesn’t work anymore. For example, people who retired in 2022 experienced simultaneous declines in stocks and bonds and high inflation, a combination that is especially challenging for new retirees. Someone who retired with $1 million in a balanced portfolio at the end of 2021 and took the recommended 3.3% inflation-adjusted withdrawal in 2022 and this year would have about $825,000, despite the stock market’s rise this year. If the investor continues withdrawing the same inflation-adjusted amount in future years, the odds of running out of money by the end of a 30-year retirement are now above 50%.
Those already retired should stick with the recommended withdrawal amount they began retirement with and adjust it for inflation, rather than switch to 4%.
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