Can You Afford to Retire? And What to Do if You Don’t Like the Answer

Category: Financial and taxes in retirement

March 13, 2012 — If you haven’t asked yourself this question lately we are willing to bet you are either super-rich, or completely oblivious. But, after you posed the question – did you give yourself an honest answer? Based on the evidence we see, most baby boomers are in denial about their retirement finances. Indeed, the Center for Retirement Research at Boston College estimates that some 51% of potential retirees are at risk of not having enough money to maintain their current lifestyle. In this article we will try to ask some important questions and deliver practical recommendations in case your financial retirement picture doesn’t look that solid. There are also links to related features that might be helpful.

Taking Stock
1. Income. Step 1 is to determine what your income will be after you retire. Chances are it will mostly come from a combination of Social Security, pension, 401ks, savings and investments – and from working. Obviously not everyone will have every source.
Social security income is easy to figure out. Just go to the government’s “Social Security Estimator” and there you can instantly get a pretty good estimate of how much you will get per month, depending on when you start collecting (more about that later).

Your employer should be able to tell almost exactly what you will receive from a pension – if you are in the ever-declining number of people lucky enough to have one.

Your 401k and related related funds, and your investments and savings, will generate income for you, depending on how much you have saved and how well you invest them. The rules of thumb have changed in this low-interest rate era, but one that some folks still use is that if you start taking out 4% a year from these funds at age 65 you probably won’t run out of money in your expected lifetime (other experts might suggest 3%  or even 5%). The “probably” warning  is important, because that will depend on how you well you invest the money, market and interest rate performance, and how long you live. Firecalc is a free tool that gives you probabilities of success against different rates of return. Just remember that at 4%, or even 5% if you choose to use that figure,  you have to have a lot money saved to generate much annual income. The median baby boomer aged 55-64 has only saved about $98,000 for retirement – at a 4% return that translates to just under $4000/year in income.

Employment is the biggest variable you have control over. Even a part-time job could make the difference between poverty and a comfortable retirement.

2. Expenses. Next, you need to lay out all of your expected expenses in retirement. They probably won’t be quite as high as they are now in your working days, but they won’t be a whole lot less either. You’ll probably save on clothes, commuting expenses, dry cleaning, and lunches. If your mortgage is paid for that saves a lot. But expenses for travel (vacations or to visit grandchildren) and health care could make up for those. If you have to support a parent, child, or grandchild – that could add up. In your later years you will probably have to pay for a home health aide or assisted living – if you are lucky enough to live that long. Mortgage aside, we would be surprised if your post-retirement expenses were 20% less than what they are now.

3. Compare expenses to income. If you are short (and most people probably will be), now is the time to apply some strategies to fill that gap. Fortunately, there are a lot of things you can do besides wringing your hands and complaining. Here is a sample Worksheet with typical expenses and income categories to help you in this process.

Strategies for Coping – If Your Numbers Don’t Look So Great
1. Downsize. If money is going to be tight, the first thing to do is get out of that big house you live in now. With your children gone and no need to be near work, why would want to pay more each month to heat, cool,  and maintain that home – let alone pay property taxes on?

2. Work longer. Every year you keep working gives you a chance to bolster not only your retirement savings, but to add to the amount you can collect from social security (about 8% per year up until the payment maxes out at age 70). If you are 50 or older the IRS lets you put extra into your retirement. So, if you are eligible, take advantage with maximum payments to both an IRA and 401k . And every year you don’t live off of your savings gives them extra time to grow (bear markets excepted).

3. Get a job if you are already retired. You can only control your expenses so much. After cutting them down as much as possible and you are still short, the best idea is to find a job, full or part-time. Maybe you can find one in your current field or profession. Or  perhaps you have a hobby you can turn into extra income such as childcare, bike repair, or pet-sitting. Golf courses need starters and marshals. Stores need clerks and restaurants waiters and hostesses. You probably have skills that employers in your area need, so take advantage. You can increase your odds of finding a job by choosing a place to retire where there are more job possibilities. Research unemployment rates and potential job listings before you decide.

4. Delay taking Social Security. This might sound counter-intuitive, but if the probability is that you will live past age 78, you are better off delaying social security unless at least 66, if not age 70. As mentioned, you will get more in the long run this way. If you are working until at least age 66, you definitely want to delay collecting to avoid having your benefits reduced in those years. The whole subject is quite complex – for example you might start collecting early on the lower earning spouse and delay the higher earning one until age 70 (the surviving spouse will get the higher earning benefit).  Talk with your financial advisor – before you rush off and sign up at age 62!  See “Too Many Boomers Leave Money on the Social Security Table“.  Also, here is a great chart that compares payouts over time for taking benefits at different ages. Note: There are folks who worry that Social Security will run out of money.  We’ll go out on a limb here and predict it won’t – we can’t think of one politician who would let that happen. Sure, benefit levels and/or collection ages might change for future retirees, but we are betting this potato is way too hot to catch.

5. Consider switching to a Roth IRA. Future tax rates are a great unknown and always subject to change. If you have substantial savings in an IRA or 401k, and/or are continuing to work, consider moving as much money to an Roth IRA as you can (after consulting with a qualified financial or accounting professional). The disadvantage of a Roth is that your initial investment is not deductible from your earnings (and you will have to pay taxes if you convert an IRA or 401k to a Roth). But there are big advantages: once you get the money into a Roth, that principal and all of its earnings are not taxed. Also, you are not required to start taking money out at age 70 and 1/2 (and paying taxes on it), as you are with the other plans. Here is  very informative video,”Is it Time for a Roth”? See also, “10 Ways to Get More out of Your IRA“.

6. Cut your expenses. Take a hard look at your budget if your expenses are overwhelming your income.  Obviously you can cut vacations and travel.  Medical expenses are not so easy to cut, unless you are a veteran and can rely on the VA for cheaper drugs and no co-pays. Do you really need cable TV – maybe you can watch shows online?  You could rent instead of own, or perhaps share a house with a relative or friend.

7. Move to a lower cost, low-tax state.  Particularly if you are receiving a substantial pension, moving to a state with no income tax or favorable treatment of your type of pension could mean big dollars.  One of the seven states with no income tax might be the right solution. States in the Northeast tend to have high property taxes, so maybe you should consider moving to one where those taxes are lower (but remember, property insurance can be high in some hurricane prone locations). In the Northeast particularly, the extra money you pay for real estate taxes can be substantial – the median property tax paid is $6579 in New Jersey, vs. $508 in Mississippi.

8. Get a qualified, reputable financial advisor. A good one should be able to help you get more out of your assets. But just as important, he or she might be able to help you reduce expenses and balance your budget.

References:
New York Times article: “After the Storm: The Little Nest Egg That Couldn’t

10 Things to Know Before You Start Taking Social Security

When to Start Taking Social Security Benefits

IRS Explanation of Roth Rules

TIAA-CREF Explanation of Roth

Your Magic Number in Retirement

Comments.  Will you be able to retire? If not, what strategies are you taking to cope?  What advice would you give to someone just starting out – or to someone just about to retire? Please share your thoughts with your fellow members in the Comments section below.

Posted by John Brady on March 13th, 2012

5 Comments »

  1. I have read articles that say a goal IF you do not have a mortgage or supporting adult children to be at 70% of your last working years NET income. For example, if you netted 8,000 a month then plan on needing 5,600 a month when retired. If your estimated costs for retirement exceed 5,600 or your total retirement income is not going to reach 5,600 then don’t retire if you don’t have to. I would like to know from those that are retired, is that goal a good one? 70% of final years net income? What do you say? Thanks

    Editor’s note: We havent heard of the 70% figure before. But we have heard of 80% as a rule of thumb. Obviously having a mortgage vs. not having one can mean a huge difference. The same for supporting children at home or in college. It might be easier to think of what expenses you will and won’t have once you retire, and compare your total expenses to your new income. Unless you downsize or move to a new state, chances are your post-retirement expenses won’t be that different from what they are now.

    by Bill Bap - CA — March 14, 2012

  2. Bill – while we’re not retired yet, but expecting both of us will be within the next 5 yrs…I have seen/heard the “rule of thumb” of 70-80% as well and tend to disagree. We do not have children, mortgage is paid off, and we’ve ensured we are debt free. We analyze our expenses regularly, revisiting when necessary. We set up an “escrow” as part of our monthly expenses which covers car & home owners ins/property & vehicle taxes and have a comfortable buffer. We know what our expenses are and do estimates based on continuing to live where we are (an expensive state, but may move South). We do not believe we will need 70-80%. We have been conservative all our lives, but we also live happily. Our financial advisor basically said..those who are the saver’s have a tough time spending what they’ve saved in retirement, those who are spender’s..well…as a general rule, they either haven’t planned for the future, or will need all of their income to support them later on. I agree with the editor’s note – you have to do the analysis of what your expenses are – it’s what we’ve done, and we are very much aware of what they are – we plan for the increases in expenses through the years as we project out, and then there’s always the possible health expenses which could crop up in later years. We both have several hobbies, therefore we allow ourselves money to support those hobbies and also take those into consideration in the planning. We are not big traveler’s but try to consider where we might want to go if we had more time available (ie-not working!). There are plenty of tools out there, and then there’s always the basic excel spreadsheet – list out your expenses – add for inflation/increases – buffer with some spending money and also add in for those things you want to do – ie travel annually/every other yr – and you have a base for what you think you will need. My humble opinion. :smile:

    by LC — March 16, 2012

  3. Bill – I just realized I mis-read your statement – 70% of NET income (not gross – ) – the figure we came up with is just shy of 70% of our net income..so for us..I guess that figure is about right! :grin:

    by LC — March 16, 2012

  4. [...] further reading: What is Your Number? Is Even $1 Million Enough? Can You Afford to Retire and What If You Don’t Like the Answer Firecalc is a free tool that gives you probabilities of success against different rates of return. [...]

    by » Goodbye 4% Retirement Spending Rule: Popular Rule of Thumb Eclipsed by New Theories Topretirements — November 20, 2012

  5. [...] For further reference: Money 101 (CNN Money) Do Retirees Need Financial Advisors (US News) Choosing the Safest Investment Path (Jane Bryant Quinn) 7 Fantasies That Could Wreck Your Retirement (Topretirements) Can You Afford to Retire: And What to Do If You Don’t Like the Answer [...]

    by » Does Your Financial IQ Put Your Retirement at Risk? Topretirements — July 30, 2013

RSS feed for comments on this post. TrackBack URL

Leave a comment

Salary Data