Erik Hansen is a graduate student pursuing a Master of Public Policy and the “When I Was a Mustang…” columnist.
As you get ready to leave Cal Poly, join the working world and do whatever it is you learned by doing, the last thing on your mind is getting old and wrinkly, retiring and dying.
However, the choices you make now will play a big part in determining if you die 1) playing shuffleboard at the local senior center, or 2) surrounded by all the booze, drugs (your prescriptions) and hookers money can buy.
Because Social Security won’t kick in until you’re 67 years old — and rest assured, there won’t be any money left in the pot by then — you’d better be proactive if you have your sights set on what’s behind door number two. Don’t fret, Social Security wouldn’t have covered your lavish lifestyle anyway.
Due to the glut of job openings out there right now, careful consideration should be put into which employer you choose and the type of retirement they offer. In trying to clarify your retirement choices, let’s keep things simple and assume you’ll have to choose between a retirement account — if you’re industrious and decide to work in the private sector — or a retirement plan if you’re lazy and decide to work in the public sector.
Retirement Account
401K, 403(b), Roth, not Roth … blah blah blah. Let’s just look at a normal 401K. First thing’s first, contribute — 10 percent (or more!) of your annual salary would be ideal. Also, because you can be picky, choose an employer that matches your 401K contributions to at least 5 percent of your annual salary.
Now we can imagine that you start off making an annual salary of $50,000 a year, you contribute $5,000 a year to your 401K and your employer matches you with $2,500 a year. That’s $7,500 in your retirement account in your first year. If, starting at 22, you continue this practice through your 20s, up your contribution to $10,000 a year in your 30s, up it again to $15,000 a year in your 40s and max out your contribution at $22,000 a year in your 50s, by the time you hit 60 and retire, your retirement account will have more than $3.2 million in it.
As a caveat, that’s assuming an average yearly return of 8 percent, and of course, you’re not going to get a yearly return of 8 percent every year. As a second caveat, I did that calculation myself in Excel, so $3.2 million could be way off.
Details aside, with $3.2 million in your retirement account, you could pull $250,000 a year from your account until you’re 100 years old. The money that sits in your retirement account will continue to grow — hopefully — until you’ve pulled the last of it out. However, with your lifestyle, you probably won’t live long enough to spend every last dime.
Also, keep in mind that at 60 — when you retire — while your husband or wife may be past their prime, your school loan, mortgage and gambling debts should already be paid off. This means you’ll have $250,000 a year of fun money to blow as you see fit.
On the downside, if it’s not a Roth account, you’ll be paying taxes when you make withdrawals from your retirement account. You didn’t think the government wasn’t going to take their “fair share” of your hard earned money did you?
Retirement Plan
Slowly bankrupting our cities, counties and great state, retirement plans are awesome. What’s even more awesome, if you don’t have any self-control, retirement plans are almost compulsory if you are a member of CalPERS, CalSTRS or some other public employee retirement plan.
Dummied down, a lot of retirement plans will allow you to slowly build a percent of your final salary when you retire … at 55. For instance, on the low end, some cities and counties will offer a plan that states you will earn 2 percent a year of your final salary at 55. So, if you work at some random city from the time you’re 22 to 55 (33 years) and are so ambitious that you work your way up to middle management and retire with a final salary of $150,000 a year, you will pull down about $100,000 a year — or 66 percent of $150,000 — for the rest of your life. And because you’re vested, you’ll get health insurance too.
On the downside, your retirement will be slightly less luxurious than if you had a 401K — but hey, you get to retire at 55, when you still have some life in your tires. Also, a lot of retirement plans require that employees contribute a small amount every paycheck to their retirement plan, and average their final salary over their last few years of employment. Oh yeah, and you’ll be paying taxes after you retire too.
If you’re on a retirement plan, and you want to up your “retirement lifestyle” a little, with all that money you save not contributing to a 401K you could open your own Individual Retirement Account (IRA). Anyone can open one right now; most banks even offer them. The max yearly contribution is only $5,000 —until you hit 50, when it bumps up to $6,000 a year — but if you start contributing the max at 22, when you retire at 55, your annual income after retirement would increase significantly.
So, what’ll it be — shuffleboard or booze, drugs and hookers?