Yahoo syndicated an article from Fortune about the retirement woe facing many baby boomers. The headline talked about boomers hoarding wealth but the article talked about how much trouble many boomers are in. Editors, amirite?
The comments were a hoot, people just going off on the writer because of the boomers hoarding wealth quip but again, that wasn't what the article was about. There probably wasn't anything too new in there but this caught my attention.
Only about 40% of workers in their early sixties are on track to sustain their standard of living in retirement; the typical near‑retiree faces about a 24% income gap, roughly $9,000 a year.
Thinking about a number, $9000 in this case, and trying figure out how to cover it is a slight tweak to how we and many other blogs cover it.
If $9000 is some sort of common shortfall, how can it be covered? I think that too many people don't actually break out their expected expenses for when they retire. We've been quipping for years that you don't need to save for retirement after you've retired. At some point a house will be free and clear of the mortgage. The first thing I thought of for trying to find $9000 is to wonder about car payments. A $40,000-$50,000 vehicle is far from a shitbox and also not extreme luxury. The typical payment for a car in that range is about $800/mo. Drive your car longer and there's your $9000.
I don't know how many people that example helps or how often it can be that simple but ultimately, it comes down to spreadsheet work, itemizing expenses. What do fixed monthly expenses add up to now (for context) and what are they likely to be after retirement. If $6000/mo at 55 years old includes a mortgage payment and a car payment and those will be paid off, then maybe $6000 drops to $3000 or $3500 at age 65?
Now, how much are regular expenses that only get paid once or twice a year like maybe car insurance or property tax? Are these likely to change? Our list is about $13,000/yr which includes very expensive homeowners insurance due to where we live, property tax and propane (only need that every 3 years or so). I realize some of these can be paid monthly.
Unbudgetable one-off expenses is a line item we talk about frequently like new tires, a veterinarian bill or something else in the low four figures. My own belief is to earmark maybe $1000/mo but if you're sort of unlucky with this stuff (we had a very unlucky year a few years ago with a plumbing issue and car issues) then maybe earmark a little more.
How much would you like to set aside for affordable fun? If expensive trips are unlikely, what is there that you're interested and that is accessible? From Arizona, there is no shortage of hiking, national monuments, national parks, the San Diego Padres all within one day's drive.
Once all of that is dialed in, what do the known income sources add up to? How does that compare to expenses via the process we just went through above? If the income barely covers the expenses, that's not a bad outcome but there's very little margin for error. If the income is just a little short, then maybe just a little belt tightening can solve it. If the gap is big, like $9000, what can you do if the car payment example or something like it doesn't solve the issue?
Can you work some sort of part time gig or monetize a hobby? Downsizing where you live might be a little more difficult than it use to be but in Arizona, the median price for a three bedroom house in Phoenix is $475,000 (seems low) and in Scottsdale it's $875,000 versus $350,000 in Tucson. In terms of family considerations, it's only a two hour drive.
This is obviously a problem that we all need to solve for ourselves. The more effort we put into solving it, the better off we'll be.
And a quick pivot to a plan promoted by Senators Moreno (R-Ohio) and Warren (D-MA) to solve the Social Security problem by eliminating the income cap. At some income level, $184,000 in 2026, people no longer pay employment tax. Eliminating the cap has long been a regular talking point about how to address, either fully or partially, the shortfall that awaits Social Security. This seems like it would be especially painful for people making $200,000-$300,000 and living in very expensive cities.
The comments on the article are very negative of course. It is worth remembering that whatever they come up with, it can't possibly be "fair" to everyone. A couple of weeks ago I invoked a cliche about a good negotiation being one where no one feels good about it. That might be where we are headed with Social Security.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
No comments:
Post a Comment