A Bigger Problem Than Not Having Enough Saved For Retirement?

The Wall Street Journal ran an article titled Here's What It's Like To Retire On Almost Nothing But Social Security. My first reaction to the four profiled people might seem a little odd but these people are doing what they have to in order to get by because there is no alternative. In the early days of the blog when my wife and I were new full timers in Walker, I saw a lot of people making it work because they had to which was a productive thing to learn about and that is what these people are doing. Yes they all have challenges, actually one of the four seems to be creating her own challenges, but they are doing what they can in terms of being fairly positive and trying to help themselves. 

The most striking thing in the article was a quote by a guy who is now 70 and who started having health problems at 63. He said "he was unprepared for sudden retirement, financially or otherwise." Think about that. Being unprepared in his context doesn't have to just be about retirement account balances. Retiring can be a real psychological challenge and if it does come out of left field which we know is common, the wrong scenario could be devastating. 

In terms of the finances, this person never expected to stop working so he didn't have much in the way of retirement savings. What about the 55 year old, 55 seems to be a magic number in this context, who is pretty close to where they should be to retire at 65 but who is then has their hand forced into retirement? At 55, with a decent retirement balance and ten years until desired retirement, the right sequence of returns could give this person a lot of compounding benefit. 

To give you an idea of the potential importance those last ten years from 55 to 65 I plugged some numbers into a compounding calculator at Nerd Wallet. Saving $5000 per year compounding at 5.65%, which is a 100 basis point haircut versus the long term CAGR of the Vanguard Balanced Index Fund (VBAIX), grows to $280,000 after 25 years which might correspond to being 55 years old. After 35 years though which might correspond to being 65 years old, everything else being equal, the account balance would be $550,000. Both numbers might seem a little low but relying on $280,000 starting at age 55 is going to be very difficult. The soonest they can get Social Security is 62 unless they can swing a disability payout. If they are going to be somewhere near a 4% withdrawal rate, lets go 5%, that's $14000/yr or $1166/mo. That certainly is enough to be one income stream but I think this example would need other income streams to avoid really struggling. 

This contrasts with retiring on their own terms at 65 taking in $20-$25k in portfolio income plus closer to a full Social Security payout. I chose low numbers all the way around with this exercise so that it wasn't in terms of wealthy or not. I want to think in terms here of what someone with a more modest income might have been able to as $5000 in annual savings isn't an insanely high number. 

Now zoom out to your specifics if you're still working. How difficult would it be to make it work starting tomorrow if you had to? This is a serious risk for people in their early to mid-50's. As you start to get closer to 59 1/2 maybe there is less risk, a shorter window before being able to access IRA type money without penalty. Then, making it to 62 and the ability to take Social Security early which lowers the risk a little more. The point that risk of a really bad outcome goes down some with hitting these milestones. I'm not advocating taking Social Security early. I think there are plenty of valid arguments for taking it early and waiting but it is crucial to understand how the numbers work and what the tradeoff is for taking it early. 

There are a lot of anecdotes about people having to retire earlier than they had planned and part of the above discussion assumes they can't get work again. Another possibility to being forced out is finding another job but not being able to replace their income, maybe going from $100,000 to $50,000. For someone who has lived below their means that doesn't have to be a horrible outcome. Even someone who did not live below their means, but maybe at 55 they now have paid off their house. With that expense out of the picture, maybe a serious drop in income is less problematic?

Living below your means or just getting to the point of being mortgage free gives optionality. We talk all the time about ways to supplement income in retirement from monetized hobbies, figuring out how to generate an income stream from a volunteer endeavor, one of the ladies in the WSJ article house sits, I've talked before about our dog sitter who recently gave that up at 79 after about 15 years from her "retirement," I wrote countless posts years ago about my neighbor with a backhoe (how many hours at $65 per hour in 2008 dollars would you need to supplement your income) and the list is endless.

Being forced into retirement (or out of your primary career) sooner that expected happens a lot and can be very problematic. It may be out of your control but what is in your control is how much effort you put in to being resilient against that sort of outcome. For me, living below our means has been an easy way to improve resilience and it has worked out well for me to build a path to monetizing a volunteer endeavor. For someone else maybe they are handy or crafty or any one of a 100 ideas that would work for them to cobble together a couple of income streams they can do on their own terms. 

It is up to each of us to prevent or solve our own problem.  

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.