One fine day, I was riding on my way on the subway and as usual saw a few homeless people sleeping along the way. Suddenly, the idea of why these people would be so broke struck me. Some of them looked perfectly capable of working, but yet they just lived on the street.

I think it’s got to do with the street being free, no rent nor mortgage to pay off. Also, some of them just gave up, what they’re hanging onto is just survival.

And I had an idea for my post. I don’t want any more people to be homeless. So I thought, maybe if people could figure out when they might get broke, they could start doing things in advance to prevent that. That’s what inspired this post – finding the broke point.

What’s the broke point?

It’s the age when you will be broke, based on the projection of your income and expenses. Basically, if your broke point is 70, you get broke when you’re 70 years old.

After much calculation, the broke point I came up with for a typical case is 78 years old. On average, that’s about the time a person dies (for females it’s about 81 years old, and males 75, according to sources such as US Census Bureau). But if you happen to be non-average, which will most likely happen, you’d be broke. Yes, broke and in debt, and you have to survive somehow by borrowing or declaring bankruptcy.

As each individual is in different situation, please download the spreadsheet here (right click – save as) and run your own broke point. If you find it useful, feel free to share it with your friends and family.

What about Social Security?

If they still exist by the time you retire then you might have a chance. On average, 3 people are paying for the social security of a person. That means you’d need 9 people to pay for the 3 people who will retire eventually, then 27 people for the 9 retirees in the future, so on so forth.

Ultimately, the social security will go bust because there won’t be enough people to pay to the social security fund, unless the government raises taxes (bad thing considering how much we’re already paying – 6.2%).

In fact, according to the Social Security Board of Trustees, the tax revenues will be lower than the cost in 2016, and the whole social security program is projected to go bust in 2037.

But getting broke at 78 is not so bad…

You will most likely live beyond that. I’m not trying to scare you here, just trying to raise some awareness. In the calculation, I assume the income will increase every year by 3%, and that your savings, if any, will also go up by 3% (interest rate).

Bank Interest Rate

In reality, it’s not the case. Most banks are paying less than 1.5% to your savings account, so if you have a portion of money that’ won’t be used any time you might want to move them to the CDs (Certificate of Deposits). Even then, you’d be getting 3% or less for a CD term of 4-5 years.

Salary Increase and Inflation

Annual salary increment, not to mention, is not going to be promising in the near future. Most people are probably grateful if they don’t have to take pay cut. Good thing is inflation rate also stay low at the same time, but in the long run it’s about 3%.

Age and Income

Also, as you start to play with the numbers in the spreadsheet I’ve built, you’d notice that a typical person might not start out at age 22 with $50,000 income (cause that’s for a household), and you would probably not think about investing 5% of your salary to the 401k. As each individual is different, I’d leave it to you to find your broke point.

The national median of annual income income for a typical household is about $50,000 based on the Organisation for Economic Co-operation and Development. That’s before-tax however, but since the expenses is just a percentage of the income so it doesn’t matter. So, as you change your income your broke point won’t change. Remember, it’s not what you earn, but what you keep that counts!

What should we do?

There are really 2 things we can do immediately:

1) Save more and Lower Your Debt

It’s a no-brainer. A good way to get started is to start paying off your credit card debt, which is eating you alive with it’s average of 15% interest rate. You should also set up savings account or CDs and channel a percentage of your paycheck to the account every month before you spend it. I’d suggest saving up for an emergency fund before anything else. I’ve talked about these in details in this post.

2) Invest into 401k and IRA

If you employer provides 401k match, it is basically free money for you to invest in the stock market, which in the past has averaged a long-term annual return of about 8%. Even if they don’t, you should take advantage of the deferred taxes in the 401k system (whether you go traditional or Roth 401k). Find out why you should join the 401k in this post.

An often overlooked investment vehicle is the IRA (Individual Retirement Account). It provides you with essentially the same benefits as the 401k (with some differences in the withdrawals and contributions). The maximum contribution per year is $5,000/year if you’re 49 years old and below, $6,000 otherwise.

However, you don’t need your employer to do it for you, you can set it up yourself! It’s a great advantage for especially students or those whose companies do not provide 401k plan to invest their money. If you’re interested to learn more, I’ve written more on IRA in this post.

If you don’t want to get broke, it’s time to get up and take control of your finances (again, you can download the spreadsheet here)

So, what’s your broke point? Do you have a strategy to get rich and most importantly, stay rich? Please share with us in the comments section.

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