There are 3 primary retirement plans waiting for retirees. There is a significant gap in lifestyle spending between each of them. Do you know which one you are heading toward?
1) The “Government Retirement Plan” for people who have no savings. This plan consists of social security and other federal, state, and local entitlement programs such as food stamps and housing support.
2) The “Controlled-Crash Landing Retirement Plan” for people who have some retirement savings. This plan consists of withdrawing a small percentage (3-4%) of your account balance each year to supplement your spending on top of social security and possibly, pension income. The size of your withdrawals, your longevity, and investment return determines whether you run out of money too soon for a financial-crash landing.
3) The “Royal Retirement Plan” for people whose investment income (dividends, interest, rent, etc.) exceeds their living expenses. With this plan, you spend less than your investment income so there is continually new money available to buy more income-producing investments. This reinvestment continually ratchets up your investment income to higher levels.
The difference between which of these retirement plans you’ll have will mainly depend on your level of financial literacy and willingness to act on it.