Sunday, August 23

Week 216 - Short on Retirement Savings? It’s Time to “Right-size” Your Life.

Situation: Many of us (most?) will not make our “Retirement Savings Number” by the time we qualify for full Social Security benefits. What’s a Retirement Savings Number? That is the dollar amount of retirement benefits needed to replace 75% of your pre-retirement wages and salary. Will you make your number? If not, aspects of your life will probably need to be replaced by less costly versions. Why not start working on “right-sizing” your life now and delay full retirement a little longer?

Mission: Outline the areas where lifestyle adjustments can be made without feeling the full effects that job loss entails. Forty years of working a job makes it more than a livelihood; it becomes a “personhood.” Chances are you will miss at least some aspects of the job and the respect it gave you in the eyes of others. Now is the time to focus on finding ways to limit costs but still invest in yourself enough to afford retirement. 

Execution: Let’s start with your home. Frequently, we have more living space than needed. Let’s assume you’re comfortable and the mortgage is almost paid off. How can you turn it into income? Reverse mortgages carry hidden costs that limit their attractiveness. Instead, think about converting part of your house into an attractive apartment for rent. Better yet, sell the house and take out a low-cost annuity through TIAA-CREF or Vanguard. Rent only enough living space to meet your retirement needs. 

Next is your car. Think about leasing because it is then possible to have a new car every 3 years and benefit from greater dealer incentives than can be had by purchasing a car. Remember that by leasing a scaled-down version of the vehicle you’ve been driving you’ll save money needed for paying bills that increase in retirement (like medical bills). Japan specializes in producing trouble-free but high-quality cars; Honda Civics and Toyota Corollas get excellent gas mileage and come without “sticker-shock.” 

This leads into the importance of drawing up a monthly budget. Start by eliminating all debts; use whatever means necessary. This effort will gradually decrease the amount of interest you pay, leaving more money to spend. Food, utilities, rent, and your car lease are the big expenditures; dedicate specific parts of your income to paying those bills. Next comes clothes and entertainment, including travel and recreation. For most retirees, clothes and travel become items they save for, so dedicate part of your income to a savings account. If enough money doesn’t reach that account, then buying new clothes and taking trips will have to be curtailed. This budget limits you to spending “cash on hand.” Your credit cards will show a zero balance at the end of each month, no matter what.  

It has been shown through many medical and wellness studies that your weight will have a very big impact on the quality of your life. As we near retirement age, 2/3rds of us are overweight. That translates into both inconvenience and expense during your sunset years. Now is the time to learn how to eat less and smarter. Learn to love having more nuts and veggies, make a habit of “meatless Mondays”, and give up pastries and desserts. Exercise is important for cardiac health but it also makes you hungrier. You won’t lose weight unless you have the discipline to stick with a 2000 Calories/day diet. 

“Where's the money [discussion], Lebowski?” You want to find a way to make your Retirement Number, and hope we’ll provide a clear path to resolving that problem. It starts indirectly with lifestyle adjustments that lower expenses and increase income. After that, move directly into plugging any holes in your finances. Three options are available, starting with a delayed retirement. The Social Security Administration will increase your lifetime monthly benefit 8% for each year that you put off retirement. If you retire at age 70 instead of age 62, you’ll go from having your full retirement benefit cut by 25% (retirement at age 62) to having it increased by 32% (retirement at age 70). 

It’s now becoming reasonable to make stocks a larger part of your overall retirement savings, to balance the amount of money most of us currently have in bonds. Social Security is a system for paying out interest on US Treasury Bonds. If your full benefit is going to be $1500/mo, and 30-yr Treasuries are paying 3% interest, you have a non-transferable account at the US Treasury worth $600,000. That means the rest of your retirement accounts (defined-benefit pension, IRA, 401k, 403b, plus taxable stocks and bonds) likely need to be 75% in stocks (see this week’s Table for a 12-asset example which carries an expense ratio of only 0.51%). Even then, you’re unlikely to reach the recommended 50/50 balance between stocks and bonds. Does having that much in stocks make you nervous, given recent history? Well, 100 years of history gives a better perspective: Stocks, with dividends reinvested, have grown at 10.1%/yr vs. 5.0%/yr for 10-yr Treasury Notes with interest reinvested. Inflation averaged 3.2%/yr. A 50/50 balance between stocks and bonds would have grown 4.0%/yr after inflation (allowing 0.2%/yr for transaction costs). 

Your third option is to prepare to hold a part-time job after you retire. That may require you to get more college education or pay for training and credentialing. (Licensed Practical Nurses and long-haul truck drivers, for example, are in short supply.) But find a way to do that without borrowing money. Why do you need to have no debts when you transition to part-time employment, and have to remain debt-free thereafter? Because you’ll be living on a fixed income (except for any dividend-growing stocks you might own and any salary increase you might get from your part-time job). That means your Return on Assets (ROA) is essentially zero (negative after considering inflation). Debts predictably grow larger when ROA is less than the interest rate of those debts.

Bottom Line: Making money is about cutting costs and investing in yourself. For example, pay off your debts and invest in your health. If you can't afford to retire then delay retirement, live on a budget, right-size your life, and accept the necessity for part-time employment after you retire. You'll also need to keep investing in stocks for the rest of your life, learning along the way to safely make money with money. That means taking advantage of the magic of compound interest by reinvesting dividends and interest. It also means low-cost investing, online, making automatic monthly additions to dividend-growing stocks from your checking account and backstopping those with 10-yr Treasury Notes at zero cost. You can start today by gradually rebalancing your personal retirement accounts (IRA, 401k, 403b) to reflect the fact that Social Security and Defined Benefit Pensions are bond equivalent holdings in your name. You’ll want those tax-deferred accounts to be 75% invested in stock mutual funds (as well as your taxable accounts) to achieve the 50/50 stock/bond balance that most advisors recommend you maintain throughout retirement. 

Risk Rating: 4

Full Disclosure: I dollar-average into 10-yr Treasury Notes and all 9 of the stocks listed in the Table. 

Note: Metrics in the Table are current for the Sunday of publication; red highlights denote underperformance relative to our key benchmark, the Vanguard Balanced Index Fund (VBINX).

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1 comment:

  1. Thanks for sharing your opinion with us. I am totally agree with your point that a car lease is the big expenditures. Thanks again for sharing the idea's to resize our life in a right way.


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