Retirement: It's Simple Math, Do The Math


Last night I found this article from Marketwatch about low savings leading to delayed retirement or even folks never retiring. They hit on what a mistake it is to count on Social Security for half of your financial needs. The article never defined why it was preoccupied with half of expenses and never said why it was a bad idea, I think there was an implication that SS wouldn't be enough to cover half but I am not sure.

Of the many things left out of the article was how simple it is to know what your Social Security will be provided you can "retire" at a "normal" age. Retire is put in quotes because some sort of active income stream will need to be part of the equation for many people and the word normal was put in quotes because people choose to retire at all sorts of different ages. other folks have their hands forced by circumstance and others never want to retire.

My full retirement amount (FRA) is scheduled to be $2800, the amount I get by waiting until 67. My wife will get half of that when she is 67 (I would be 73), so the total would be $4200. Right now our fixed monthly expenses are $4000. That includes $1350 for the mortgage on the house we live in that should be paid off in four years (I will be 56). No mortgage when I am 67 might drop our fixed monthlies to $2700 in today's dollars. It also includes $800 for health insurance that should drop some once all of the various medicares are figured out and we assess our need for supplemental insurance. There are a couple of things like propane (we have propane here, not natural gas or heating oil) and car insurance that we pay lump sum and we will need to pay property tax and homeowners insurance directly at that time so maybe add $500/mo back in (property tax in Northern AZ is very low)/ Lets just say our all in fixed expenses will be $3500/mo in today's dollars. This means Social Security could cover all of our fixed expenses and our savings would be left over to cover one-off expenses like vet bills, new tires or home repairs as well as any fun we might want to have like taking a trip.

You can just as easily do the same math with your numbers. What is your likely SS payout, what are your expenses likely to be when you retire? Will your mortgage be paid off, will you have car payments, you can construct, even if imperfectly, what your numbers are likely to be.

Is your Social Security less than what your expenses are likely to be? What is the shortfall? Are you planning to cover that shortfall out of savings? Generally a portfolio can payout 4% and still be sustainable (meaning you're very unlikely to run out of money at 4%). So, your monthly shortfall times 12 months, divided by 0.04, that is how much you need at a minimum. If you're short by $1200/mo, you'd need $360,000 to cover the shortfall. Plus then you'd need money for fun, emergencies and one off expenses.

Where we are collectively undersaved or as Marketwatch contends, have no savings, that is where some ingenuity and compromises have to come into play. It would be far better to start figuring out how to solve any issues you might have long before retiring as opposed to waking up on day one of retirement and asking yourself "how am I going to pay my bills?"

If you want to be very conservative in your planning, assume a 23% haircut to your Social Security. One suggested fix is paying only 77% of benefits, starting in the mid 2030's to help with viability. I am not sure how likely this is to happen but like anything else, this is not something you'd want to catch you off guard.

This is the conversation that leads to downsizing your home into something tiny or very small or moving someplace much cheaper whether that is in the US or overseas somewhere. I went to college in San Diego and a lot of my college friends still live in California and we have these conversations all the time on Facebook, many of them are interested in leaving California to move someplace cheaper. Some are interested in Arizona and some are interested in foreign countries. If you look at real estate in Southern California you will see very modest homes on the market for $800,000-$1.2 million. Someone my age (I'm 52) could have bought a modest home in Southern California in the mid 1990's for $300,000-$400,000. Someone in this circumstance walking away with $700,000-$1 million could easily buy a comparable house in Arizona for $400,000, even less in New Mexico and still have a decent retirement fund left over. Here's an article from the Wall Street Journal about east coasters landing in Appalachia after downsizing.

A little less dramatically, this circumstance could easily result in adding $100,000-$200,000 to a modest 401k balance resulting in a adequate retirement fund even if not a robust one.

Anyone in this circumstance is going to have their work cut out for them, all the more so if this is a plan b because plan a didn't work out. You can either take a negative view or be positive, view it as a challenge that you will overcome and that you will feel good about having solved to make a workable retirement.

All of this not to mention some sort of active income that you create for yourself and enjoy doing.