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October 03, 2012

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Thanks for allowing me to guest post. If anyone has any questions I'll be checking in and responding to comments over the next few days.

Great post! The media thrive on negative news, and to remain sane we all need a filter when watching or reading anything they say.

There's a terrific story on Yahoo of a guy who retired at 50. I happened to meet Darrow at the Fincon conference, so I know he's real. :) The link is at http://finance.yahoo.com/topics/financially-fit/. And, of course, Joe at Retire By 40 did it. So clearly it can be done.

But it can't be done by just taking a pill or passing a law. It does take a willingness to save and to spend a little time on the retirement fund, whether it be a rental house or securities investing.


Great perspective on the article. The article is correct for the vast majority of people that are relying on forces beyond their control. They will never have enough money to enjoy a comfortable retirement. It is better to focus on what we can control and that is (as FMF always says) maximizing our income and saving as much as we can.

Regarding point number 4 and investment returns, you are correct in saying that one 10 year period is not a trend, but niether is an average over the last 50, 75, 100 years (which is what most planners plug in their calculators). What really matters is the return in the 10 years on either side of retirement. That is where the retirement train can really come off the track. So what can we control? The DCA approach you suggest is probably the best plan prior to retirement but after retirement one needs to preserve principal first, invest second.

The most important takeaway from this article for those with pensions is that pensions are not guaranteed. You no longer can expect pensions to be there as they were once solidly relied upon. I mean, look at the whole NFL referee strike example. The refs risked their careers to fight back against the NFL owners to drop their cushiony pension system in substitute for a 401k.

Overall a good post. One quibble: "Be creative and arrange your work schedules so you don't have to leave your kids in child care all day."

My husband and I (and most people I know with kids) don't have the option to select our work schedules. It's defined by my employer and driven by the needs of a highly demanding work load.

As for relatives, they are either working their own jobs during the day, or too frail to care for a small child fulltime.

The comments on this issue struck me as an overly simplistic dismissal of a serious challenge. Not an insurmountable one, but a serious one nontheless.

I'd be interested to hear from other dual income households where both parents have career jobs to see how they're compensating for this income loss.

Alex, you make a good point. The point I am trying to make is that there are ways around it. They may not involve your current job or living situation but it isn't an absolute requirement that can't be worked around. If the decision is made that daycare is the best option i have no problem with that. It will cost you a significant amount of money though. Just cutting the expense by one or two days of daycare a week might be worth it.

I was a mom in a 2 career household with 2 small kids in paid daycare, in a state where pro daycares are very expensive (Now my kids are teenagers, so no daycare).

How did we compensate for " income loss " to daycare? We kept our lifestyle very very very low. And we continued to grow both our careers (which is a good thing, because we eventually split up, and I'd be in a financial bind if I had put my career on hold when we had kids).

Mainly, to contain lifestyle creep The kids and I lived in the cheap starter home that we bought before we were married for 20 years, even after the divorce. No trading up, and I paid off the mortgage. My daycare bill was twice what the mortgage payment was per month! That was the biggest thing.p that helped...houses are more costly than anything else. We also paid off our 2 cars and drove each until it was 10 yrs old, and we didnt take any resort vacations for years ( just staycations, camping, travel only to stay with family etc).

When the kids were finally done with daycare, I just put the extra into savings for a few more years.

Now that my kids are about to attend high school, I am taking advantage of my savings, and the great interest rates and trading up into a better neighborhood with a better school. Waiting 14 years to move after having kids made all the difference to my balance sheet!

I feel like too many families try to trade up in their house, car, lifestyle too soon, ie when their kids are tiny and they have daycare bills also. I am also amazed at how many families go into debt to take resort vacations that their kids wont even remember, and buy fancy cars on credit because they think they need them to haul the kids around. My kids trashed my cars...crackers, vomit, etc... there is no reason to haul kids in a new car now that even older cars all have safety features.

I had my first staycation this year and I loved it!

If you think daycare is expensive when they are little, wait until they go off to college! :)

Timing can make a huge positive or negative difference to one's retirement.

I worked for the largest aerospace company in the US for my last 32 years, retiring in 1992, at age 58, when the company realized they had to downsize because the Cold War had ended. They offered a Salaried Incentive Retirement Plan (SIRP) that would pay you one week's salary for every year of service if you took early retirement. I took the $45K, retired 6 months earlier than I had planned, and used the money to become debt free on the home and condo that we owned.

The year after I retired the company merged with another huge aerospace company and eliminated the pension plan for all new workers, leaving in place the 401K plan that had been there for many years. Thus if I had been hiring in at age 26 rather than retiring at age 58 I would be a lot worse off today. I wouldn't have a pension and I wouldn't still be in my old company's group insurance health care plan, which is a good one.

I'm now 78, have been retired for 20 years and am wealthy. However, if I was only 47 years old and still working for the same company I would be struggling today to save for a good retirement.

Instead of being retired, in my early 60's with excellent investment skills and quite a lot of money to invest when the dot.com bubble hit the market I would have been a 30 year old with 3 young children, no investment skills, and hardly any money to invest outside of my 401K. This I would have missed the greatest investment opportunity of my lifetime.

Likewise, the gorgeous new home I bought for $26,950 in 1963 would not be available since all the buildable orchard land in Silicon Valley had already been developed and the same home, used, would have been over $300K by 1995.

Also, by the time the real estate bubble burst our home and condo were both paid for, our property taxes were still very low because of California's Prop 13 and our retirement was on cruise control and we were seeing the world, Africa, Nepal, Bali, Russia, Turkey, Morroco, Europe etc. Each having a pension helps a great deal. Now we basically live on our pension and SS checks and reinvest our investment income.

Bottom Line - Every generation MUST understand the economic times they are in, be aware how it is going to effect them in the future, and make their retirement plans accordingly. What worked great for your parents is almost certainly not going to be right for you. It may be better - it may be worse.

#1 - They are right that 401ks suck compared to defined benefit pensions in general. If you save a lot then you can compensate but that means saving 15-20% of your income including employer match and the vast majority of people aren't aware of this and seem to think 401ks are good enough.

#3 - I don't really see how childcare cost derails retirement in general. I mean it is an expense and its costly but its generally only temporary until the kids are in school and its an expense of working for 1 of 2 parents. There are various expenses of working and this is one of em. Its avoidable in many situations and your wages should exceed the childcare costs. Kids are expensive no matter what you do.

#4 - The article says: ", while the average annual return of the Standard & Poor's 500 Index from 2002 to 2012 has been 1.8%.”" Yet from Oct 2002 to Oct 2012 the S&P 500 is up about 7.4% annually including dividends. I'm not sure what time period they go the 1.8% from, but if that was right, it was quickly proven wrong.

I think a lot of 2 income families assume it's in their best interest to both keep working but in some cases it may make financial sense for the lower paying parent to stay home with the children. Where I live child care is anywhere from $1000-1500/month depending on the child's age. If you have 2 children under 5 this becomes a huge expense. Unless both parents are making large incomes, the added stress, less time with the children, and additional gas/wear/tear on the car sometimes doesn't even make financial sense.

The real reason why people can't retire is because they spend too much money. When it comes down to it, most retiree can live on the modest social security check. It's not a lot, but people adapt. If you want to spend more money in retirement, then you need to save more now.

Once again, they low balled the returns of the S&P 500 by not including dividends. I get mad when they deliberately ignore dividends to make a point.

The kids issue is simple. Just don't have them. Everyone knows they are expensive even in the best of circumstances...so if you can't afford them, then don't have them. It's not that difficult. That's why they invented birth control, adoption, and abortion (admittedly, that last option is my least favorite).

I agree with Mark. If someone is 100% focused on making as much money as possible and retiring as soon as possible DO NOT have children.

On the opposite side, if you can't afford them, please don't have them so society can pay for them. Please give them up for adoption and let a loving family provide a stable home.

@Mark
From 12/31/01 to 10/2/12 the annual return on Vanguard's S&P500 fund was 4.11%.
From 12/31/01 to 10/2/12 the annual return on the S&P500 index was 2.17%.

@Jim
From 10/02/02 to 10/2/12 the annual return on Vanguard's S&P500 fund was 7.77%.
From 10/02/02 to 10/2/12 the annual return on the S&P500 index was 5.74%.

@Noah
We had three children, the first was born in 1958, the last in 1963. They were all out on their own by 1983. They really didn't cost us a whole lot. All three had multiple jobs from the time they started high school to the time they left home. We never needed childcare because my wife stayed home during their early years. They each bought their own cars. The boy did it on his own, the two girls received interest free loans and payment books from me and bought their own car insurance. Their telephone usage cost me nothing since they used our home phone and I charged them for all message units they used. One daughter went to a junior college for an AA degree, the other daughter got a BS in marketing at our local state college and paid her own tuition. The boy became an auto mechanic apprentice and never attended college. Thus there were no tuition loans, no car loans. I did however buy their lift tickets when we would all go to our cabin at Lake Tahoe most Winter weekend to ski.

I think it's very different these days with high tuition loans, kids not working during their high school years, and the parents buying cars, computers and smart phones for each child.

My strategy to avoid almost all of these things is to invest a lot in my future when I'm younger, and hope that it grows. I have a pension through work, but I also have retirement savings.

I haven't even considered an inheritance in my retirement plans, so that's really not a thought. I can't imagine leaving my future up to a potential inheritance. I hope to be able to retire with a moderate income without even having to think about an inheritance. That's a bit of an odd argument. Many won't even get an inheritance.

I think the pension comment is very noteworthy. A little off topic but there is a brewing calamity in America with the loss of the traditional pension plans that may not show up for awhile. I think it takes a certain amount of development as a human being to be able to acquire the discipline, understanding and foresight to save for your retirement. Most people on this site have this ability but the fact is the average American worker does not. The traditional pension provided this means without the employee really seeing it. It was kind of provided for their own good. Of course, this is also why corporations want to jettison these things. They cost them a lot and they get no credit with their employees for it. I think there is definitely a pending retirement crisis on the horizon.

Another comment that I would make is that in my case I would be far, far ahead if I had received a matching 401k contribution rather than a traditional pension. The rates of returns assumed in these plans are typically a point or two below the S&P 500. So, in theory, if you receive the same contribution amount you would end up ahead by just plowing it into a Vanguard 500 fund. Over my 25 years I would have 2-3 times an equivalent asset and monthly payout but I digress..

@Lance, good points! Thanks for your reply.

@MC & Old Limey appreciate the insights. I agree that keeping our budget very low will be the way through.

@Noah, agree that it might make more financial sense for my husband not to work, but he's concerned about what that will do to his employability to have a gap in his work history. Any other stay-at-home Dads that have addressed this issue?

I did not begin saving for retirement until I was 48-50. And I began slowly because we were deep in debt. But I am surviving nicely so far. I have so little in my 503b that it is below the original FDIC insurance coverage amount. It was in a straight savings account type and was earning a good rate of 7-9%. Now it is getting 2.75%, which is great for the time.

Since I have SS & 2 small retirements, I just take the annual minimum from my account to fix up the home or travel. In the 7 years I've been retired, I have withdrawn $15k from my account and am only down $4k at the present time. That seems tremendous to me. At the current rate of withdrawal, this account should last me for about 24 years, not counting any interest I receive. So - it isn't necessary to always go full-tilt on retirement. However, it is better to have more than you need than too little. I do love your advice and always consider it carefully. Thank you so much.

Also, I retired at a good time from a state job and had the choice of two retirement options. Luckily I chose the right one. I get a guaranteed cost of living adjustment each year of 4% min. and 5% max. to or through 2016. Then I begin to get what every other state retiree gets. So, I feel comfortable as a 75 y/o retiree. My annual income, including 503b withdrawal, is close to $33k and I live in a low cost of living small town. I thank God daily for the way my life has turned out and I try to return to others what I have been blessed with. So far, it is working out.

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