Has the stock market’s meltdown wrecked the Baby Boomers’ retirement dreams? Not necessarily, provided one is prepared to spend less now and retire at 70 rather than 65. That’s the gist of the plan that my friend Doug Behnfield, has laid out below. Doug, whose back-of-the-napkin thoughts on the economy were featured here last summer, is a top-producing stock broker who has always lived well within his means. Here’s his tough-love advice:
I am going to use as a template for the Baby Boomer, someone my age (55) and in the 80th percentile of household income, which I assume to be about $150,000. Due to the real estate mania and the favoring of real estate “investment” over traditional savings, combined with home equity extraction for consumption, I am guessing that mortgage debt ($200,000) exceeds retirement savings ($100,000) leaving this household upside down by $100,000. They spend all their after-tax income ($115,000) leaving a 0% savings rate because, although they put $15,000 or $20,000 into the 401K, they also borrow for
a car, a tuition or a kitchen remodel every year. If they were to replace their employment income with retirement income, they would need to save over $2 million, because, at a 4.5% distribution rate, they need over $90,000 pre-tax per year to supplement Social Security. Since they can’t save $100,000 to $150,000 per year for the next 10 years to retire at age 65 with dignity, I am proposing an alternative solution composed of three basic parts:
1) Postpone retirement to age 70. This gives you 50% more time to accumulate retirement savings and reduces the duration of retirement, possibly allowing for a higher (5.5%?) distribution rate and a larger Social Security benefit.
No New Kitchen
2) Cut your annual budget and increase your savings by $40,000 per year. This means do without the new car or kitchen and also cut $20,000 from lifestyle expenses. This has one very important and overlooked benefit beyond the actual increased savings. It also resets the lifestyle to a new level of frugality that leads directly to a reduction in the retirement income goal. Instead of needing $150,000 in pre-tax retirement income or $115,000 after-tax to replace pre-retirement income, you only need $75M. That means you only have to get from upside down $100,000 to right-side up $1 million in 15 years. That equates to $55,000 income on savings plus Social Security. Saving $40,000 per year for 15 years doesn’t get there, even with high single digit returns, so one more step is required:
3) Liquidate your debt! Let’s assume that the $200,000 mortgage plus consumer debt is primarily a function of believing in a very aggressive, linear assumption of real estate appreciation. You believed it so strongly that you gave very little thought to issues such as cost of carry, liquidity and tastefulness. Now you own a 4-bedroom, 4-bath 4000 sq. ft. house with a 3 car garage on 3/4 acre and nobody shows up. And you don’t garden. You paid $550,000 and now it is worth $425,000. Or at least that’s what the realtor thought, if there were any buyers. Now it all seems so wrong. All that maintenance, taxes, interest…and for a depreciating asset. Best to dump it, move into a nice, tasteful (and frugal) two-bedroom townhouse and get back to the serious business of retirement income building. Come to think of it, why even buy the two-bedroom. Now that you’ve opened your eyes to what a “ball and chain” this stuff is, it makes more sense to rent.
(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)
Goodsport writes:
“I will sell a fully paid house and buy a smaller home in a community with a much lower tax rate. This will enable my future income to go further. Home ownership will protect me against exorbitant rents if hyperinflation sets in.”
How come this approach, so very common today, is always pointed out in a neutral way?
Does no one see that this tax-driven refugee status, where one locality drives people away after perhaps decades of residence, is a severe lifestyle impact, that many would describe as a loss of life?
The nomadic existence has been for most humans for millenia now, not the desired norm.
Yet, one never senses that people who make or talking about this move see anything negative in doing so. Is that denial?
In our not so long ago past, the whole family, (the kids, grandkids, etc) would return to their parents or grandparents home for Thanksgiving, Christmas, etc.
Now, the parents or grannies have no extra bedrooms, and the “family” home was sold long ago, prob. when the last kid graduated from high school.
Sure some people do this because they are sick of Wisconsin or NY winters, and want to go be bored in the sun in Arizona, but many do not do this out of choice.
For those forced out, this should be seen as a neg. impact on quality of life (caused by long term money depreciation and ever inflating taxes), but one never hears this pointed out.