Are you ready for retirement? Well, for many upcoming retirees, the answer is probably no.
As retirement looms for the millions of baby boomers entering retirement in the next few years who will be relying on their 401(k)’s, the stark reality is that most 401(k)’s will fall short of providing retirees with sufficient funds to last them throughout their golden years. That’s because the average 401(k) balance stands at $241,200. With the general rule of thumb being that retirees should have $1 million to retire comfortably, this number falls well short for most retirees.
The problem with retirement planning is that Americans are playing defense when they should be playing offense. They’re planning to have just enough to be comfortable when they should be planning to be wealthy. Why wealthy? Because being wealthy means you don’t have to worry about money. That’s a position most Americans want to be in but feel is out of reach or don’t know how to achieve it.
Planning to be wealthy in retirement versus planning for retirement requires a shift in mindset as well as a shift in where to invest. If stocks and 401(k)’s are not cutting it for most Americans, then why continue on that path?
To zig when everyone else is zagging, it’s essential to shift from traditional retirement planning to a wealth-focused strategy. This approach involves altering your mindset and investing in income-producing assets such as real estate and private equity, rather than relying solely on stocks.
The Reality of Average Retirement Savings
As discussed, the average 401(k) balance is $241,200 and is not sufficient for providing a secure retirement. Contrast that with retirees being considered wealthy. A 2019 Survey of Consumer Finances reveals that retirees in the 90th percentile of wealth hold a net worth of around $1.9 million, while those in the top 1% have $16.7 million or more. These figures highlight a significant disparity between the average retiree and those considered financially comfortable or even super-wealthy.
Achieving wealthy status in retirement requires a household net worth of $1.9 million to $16.7 million, depending on the percentile. Given that many baby boomers are retiring with far less, it is crucial to rethink traditional retirement planning strategies and consider building wealth through alternatives to traditional assets like stocks and bonds.
Shifting from Retirement Planning to Wealth Building
The key to bridging the gap between average savings and a comfortable retirement lies in planning for wealth rather than merely preparing for retirement. This shift in mindset involves focusing on income-producing investments that offer greater returns and stability compared to traditional stock investments.
Diversify Beyond Traditional Stocks
While stocks have been a staple of retirement planning, the data shows that traditional strategies centered on stocks just aren’t cutting it. Looking beyond traditional assets like stocks and bonds, alternative investments offer the best options for building wealth in retirement.
Why Real Estate?
Real estate is a powerful wealth-building tool. Investing in cash-flowing properties can provide a steady stream of income and appreciate over time. Unlike stocks, real estate investments offer tangible assets that can generate consistent rental income, provide tax benefits, and provide a buffer against recessions and inflation. Best of all, real estate can continue to generate income and preserve wealth even during retirement.
Why Private Equity?
Private equity involves investing in private companies, offering the potential for cash flow and high returns without the volatility of the stock market. Unlike public stocks, private equity investments are less liquid but can provide the opportunity for above-market risk-adjusted returns. By investing in private equity, retirees can diversify their portfolios and potentially achieve higher returns than traditional stock investments without the volatility.
Shift Your Mindset
To transition from a traditional retirement plan to a wealth-building strategy, change your mindset with the goal of diverting more of what you earn towards productive assets and away from needless expenditures.
Start with the following foundational concepts:
- Create and Follow a Budget. Effective budgeting is the cornerstone of any financial strategy. By tracking your expenses and income, you can identify areas where you can cut back and increase your savings.
- Pay Down Debt. Reducing non-mortgage debt frees up more funds for investment. High-interest debt, such as credit card balances, can drain your resources and impede wealth-building efforts. Prioritizing debt repayment will enhance your financial stability and increase your capacity to invest in income-producing assets.
Embrace the Wealth-Building Mindset
Planning for retirement should not be limited to merely saving enough to cover basic expenses. By adopting a wealth-building mindset and investing in income-generating assets such as real estate and private equity, retirees can significantly enhance their financial outlook and provide them with the peace of mind they deserve at retirement. This approach not only prepares you for a more secure retirement but also opens the door to a higher quality of life and greater financial freedom.
In conclusion, as you think about retirement, rethinking traditional savings strategies and focusing on building wealth through diverse investments can bridge the gap between average savings and a more affluent retirement. By taking proactive steps and making informed investment choices, you can better position yourself for a comfortable and prosperous retirement.
