Retirement Un-Readiness - A Failure Of Imagination: Financial Advisors' Daily Digest

by: SA For FAs
Summary

Roger Nusbaum shows that retirement planning math is simple arithmetic that anyone can do; the question is are you prepared to reflect on the lifestyle choices you’re making.

Ian Bezek: Stock market bears underestimate the impact of the corporate tax cut on soaring earnings.

John M. Mason: M&A activity is running at record levels, and the surge is expected to continue.

And the award for most practical retirement advice goes to… Roger Nusbaum.

His latest article on Seeking Alpha, “Retirement Math Can Be Simple,” cites a new survey, according to which a large proportion of non-retired Americans aged 50 and up believe they cannot afford retirement. (The parameters of the NHP survey are varied, but it would seem that 73% of this cohort expect to have to delay retirement for one reason or another.)

If you’re among those who can’t afford a retirement, then know that a bit of planning can afford you one. It all comes down to the simplest of arithmetic and some elemental lifestyle decisions, which Roger usefully illustrates using his own personal income and expenses:

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.”

He goes into more detail in the article, but you get the idea. You too can do this. Anybody can get an immediate estimate of the benefits due them by setting up a My Social Security online account. Once again, Roger explains the next step quite simply:

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 pay out 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.”

Being short $1,200 a month is not an unusual scenario in today’s times, and it’s useful to see that it would take something like $360,000 to cover such a shortfall over a conventional retirement time frame. Someone in his 50s may well have the wherewithal to raise that amount of money in a period of, say, 10 years by saving $3,000 a month or less than that if one could generate a rate of return higher than 0%.

Someone who can’t – or who won’t make the requisite lifestyle changes to save that amount – has other options, as Roger’s article makes clear. A person who owns a home in an expensive place like California can likely do quite well in a place like Arizona. Obviously, a whole bunch of family concerns and lifestyle preferences come into play here. Maybe an aging or ill parent needs you close by. But still – someone living in the Westside of L.A. can still move to the Valley, right? For the zillion things you’d never do – for some that might be moving to Arizona, for others that’d be moving to the Valley – there’s at least one or two things you would do that would take a ton of financial pressure off of you.

The first commenter on Roger’s story, vinyl1, makes the following interesting point:

As a retiree, I know my position. I've got my income, my spending, and my tax situation captured down to the last dollar….The problem isn't us, it's the many non-financial people out there, who don't know what their income is or how much they spend.”

My experience tells me that the “non-financial people out there” will not start using spreadsheets based on an article, no matter how meritorious. These are often “right brain,” creative types who don’t like ledgers, but relish the big picture interconnectedness of life. Great! If that’s you, then here’s your chance to philosophize over what kind of path would lead you to increase your savings by, say, $3,000 a month – or what kind of less costly future lifestyle would be acceptable, even pleasant.

It’s probably a good idea to integrate lifestyle changes as soon as possible. But regardless, what Roger’s article demonstrates is that the math, which is all simple arithmetic, is no barrier to making a plan. It’s rather a reluctance to face reality. Even if you failed math back in high school, don’t succumb to a failure of imagination now.

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