The Holes In retirement myths
©Chip Simons @gettyimages
If you think your expenses will drop once you are no longer working, the author has a bridge in Brooklyn he wants to sell you!
by R. H. Schaper, DDS
When I was a kid, I remember seeing an ad showing a vibrant couple tooling along a waterway in Florida. It was on one of the back pages of many popular magazines of the time. The couple's tanned faces smiled down at a caption stating: "We retired at 55 on $250 a month!" In recent years, I've often wondered what dumpster they dined at when they were 80.
Their contemporary financial planners proclaimed you could retire comfortably with 50 percent of your annual workday income. A few radical dreamers insisted this was not enough. You needed 60 percent. Today, these planners' offspring have upped the ante to 80 percent. Even so, the 60 percent figure still is touted by a leading financial investment concern as a possible benchmark in a current national ad.
The rationale behind these figures presumes your expenses will drop once you are no longer working. Either that, or your working income was way beyond your ability to spend. As a practical matter, neither theory is true.
It is my contention that you need every bit as much monthly cash after you retire as you ever did ... and maybe even more!
Granted, some of your cash outlays will doubtless drop — at least at first — but others will increase. While my data for this statement is largely anecdotal, I think it is valid enough for you to consider.
Let's stick some holes in this myth of living on less while still maintaining your accustomed lifestyle. Unless you drastically reduce everything, it will cost just as much to maintain your home; your car(s); your membership in the golf, athletic, or tennis clubs; etc. In truth, recreational and other discretionary costs may rise immediately as you have more spare time.
Let's take some of the major basic living expenses one by one and see what happens after you retire. Probably your biggest single asset and real or hidden expense is your home. Typically, it represents around 25 percent of your net asset value and the earning potential of that money must be considered. When you retire, you have two choices. You can sell your house and move, typically into a smaller place, or stay put.
Most of the recent retirees I've talked to found out with a shock that their new, compact dream home costs nearly as much as the big, old, rambling mansion they gleefully unloaded. When they added in moving costs, brokerage fees, incidentals — such as drapes, new furniture, and landscaping — they generally had more invested than the net sales price of the old shack. They were all surprised to find an increase in taxes ate up what they figured they were saving in maintenance costs. About the only net gain was in the utility bill for heat and air conditioning. More than one confessed the creaking, paid-for homestead looked better in retrospect than it had when the sales papers were signed.
Another hidden outlay you may not be expecting is additional hired help around the house. It adds up. That chronic sore back becomes acute pain when you push a lawnmower or snowblower. Small boys who work for peanuts are a thing of the past; professionals have an hourly rate nearly equal to what you are charging your patients. If you're "the lady of the house," those worthies — loosely termed maids — will be driving a better car than yours! Guess who's paying for it?
One acquaintance of mine tried to beat the system by buying into a retirement village where everything was furnished for a flat fee. To his dismay, it only took three years for the fee to double. It will goe up another 25 percent this year. In investigating a half dozen different planned communities, I discovered that even the most loosely regulated, conservative ones have had fees double or triple in the past 10 years. I'm not telling you to stay away from these places. Many are great, with amenities worthy of extensive drool. Just remember the financial possibilities as you plan.
Another big expense item is the trusty automobile. Few of us consider the hidden depreciation cost associated with our indispensable steeds. Simply because you've retired doesn't mean your car will gather dust, and rust out in the garage. Sooner or later, it must be replaced. Out-of-town trips to see the grandchildren starring in a school play halfway across the state chew up miles faster than that commute to the office ever did! Insurance and repair charges skyrocket annually. Driving vacations tend to be more frequent and longer, too. The faithful buggy is bound to wear out in a hurry, and the sticker shock on a replacement is no fun. Underfunded retired buddies of mine are sighing and downsizing mightily.
One penny-pincher declared that he and his spouse could do with one car instead of the two they'd had for years. At least once a week, a serious argument takes place as to whose turn it is to have the keys. Even the reservation book by the phone doesn't solve the constant conflict. Last week, this couple juggled their discretionary budget downward and started shopping used car lots!
About those big vacations. Most of us retirees look forward to seeing exotic sites we were too busy to visit while we were engrossed in building golden bridges and paying for the kids' college education. Brochures pile up as we plan where we'll go next. If you're like most professionals, you currently manage to charge some part of your travel expense to the office. Sorry, you can't do that without an office! Better compute the real cost of the cruise in your retirement plans.
Food and medical costs
While you may not need the calories you did when you were 30, most of us find our stomachs have rebelled and require pampering. Invariably, this means the old grocery bill goes up. Also, we tend to get more lazy the older we get. Heading for the nearby eatery often has greater appeal than doing dishes. Even the "early bird special" costs more than eating at home.
A major item that will increase as you grow older is what you spend for medical services. You probably have been blessed with a professional discount or free treatment from everyone who has looked after you. These medical and dental professions may continue the practice now that you have retired — or they may not! If you move into a retirement area, your chance of a significant discount is remote. Professionals practicing in these garden spots soon find that giving discounts inhibit their own retirement plans. While Medicare picks up a large portion of your bill, it's not as generous as your previous insurance plan. My own costs have more than tripled in the 10 years since I laid down my drill, even though I have had no real health problems.
My contemporaries who are forced to make weekly visits to the local drugstore swear a significant part of their retirement checks go to keeping them healthy. The older they are, the bigger the bite. In spite of expansive promises from politicians, don't bet you'll be able to sock this part of your retirement income away anyime soon. Long experience has shown that no matter how much your bill is federally subsidized, you'll still have to pick up an increasing dollar amount.
One of my friends, a real miser type, decided to cover all the medical bases with insurance policies. He bought a fistful — 14, to be exact! That was fine until he belatedly found the fine print allowed the various companies to raise the rates as he grew older. He's had to drop several to celebrate his 80th birthday. Otherwise, he wouldn't have been able to afford the candles on his cake.
There's one other nasty factor you need to consider when you figure your retirement goals. That factor is inflation. We all tend to shrug off the two or three percent inflation rate economists have extolled over the past few years. We ignore the few pennies it adds to the grocery bill or the gas pump total. It's small change most of the time. If the tab at the local cinema is up 50 cents, we pay the increase without thinking about it. The theaters have to make a living, too, don't they?
But when it happens every year, year after year, it adds up. For example, if the inflation rate is 3 percent and you retire at age 60, everything you buy is going to double by the time your eulogy is read — more if you plan on outlasting the mortality tables. A recent investment newsletter from Edward D. Jones asserted that when a 3 percent inflation rate was considered, you'd need a little over 80 percent more in 20 years to maintain your present purchasing power.
Planning for the future
So, what is the answer? There are several. The first is obvious: you must have a retirement goal that provides at least 100 percent of your current income, adjusted for the future inflation that will occur before you pack up your mouth mirror. Several assumptions need to be made with this figure. The first is that you are currently and regularly putting back something for your old age. This implies you are behaving responsibly and living well within your means. I make this point only because I've seen too many of my younger colleagues mistakenly think their practices will grow forever and automatically cover their everlasting spendthrift ways — even after retirement.
The second is that you will continue to save after you retire. After all, you and/or your spouse are realistically looking at nearly a quarter of a century of being unemployed. If you're going to beat the future inflation factor, you need to continue to add to your nest egg after you retire, at least for the first few years. Otherwise, you eventually will be scrambling your nest egg for supper.
Professional planners sometimes propose an alternative. Here's how this works. The idea is to figure out how long you or your spouse will stick around, and then amortize the amount you will extract from your capital each year. If you use this method, I suggest you make arrangements to live near a freeway. That way, you can conveniently wander out in traffic on the appointed date of reckoning.
Of course, you can start being very nice to your children. Encourage them to invest in living space for you in their home when you can no longer work. You won't like it, but it is one way to stretch your budget — maybe. I have several friends who had the reverse happen! Untimely divorce-court appearances left the next generation dependent on the old folks for assistance. Some even brought their own offspring along to help carry their bags in. Forget what emotional turmoil can ensue in such a scenario and concentrate on the economic dislocation it brings. It's not pretty. Better add a few thousand or so to your figures — just in case!
Seriously, you need to assess what your real long- term needs will be when you leave the work force. To do so, take your current income and add another 10 percent for items you may have missed or that you are currently charging off to the office. Go through every checkbook and credit card bill in the house. It's amazing what you might have forgotten. Next, decide how many productive years you have before you retire. The final figure you need is an inflation factor. This can be tricky. No one has a crystal ball.
When I did my own calculations years ago, I looked back 20 years and averaged the annual inflation rate. My figure was 5 percent. It turned out that I was overly conservative. The turbulent 1980s may have been an anomaly, but who knows? History can repeat! Your opinion may dictate more or less than that. It's all dependent on unknown factors. You can always make adjustments if conditions warrant it down the line. I had to do it.
Plan on being vigilant in responding to basic economic changes as you go along. Since inflation compounds itself, it took a fair amount of adding machine tape to come up with my own requirements. It also took a little time, but it was well worth it. I found I was going to need something like twice as much capital as I had originally thought I would need to be comfortable in my sunset years.
Chances are when you see the amount you must set aside each year, retirement will seem impossible. Take heart! One thing is working in your favor: the money you have invested will grow all by itself. Recently, someone figured out that if you, at the age of 17, put $1,000 into an IRA, you'd be a millionaire when retirement time came, even if you never saved another dime.
Remember the Rule of 72
Whether or not this is true, it does underscore the value of the rule of 72. This says that when you divide the rate of return into 72, the resulting figure is the number of years it will take for your money to double. The only wild card is the presumption that there will be no tax bite on the earnings.
Obviously, sheltering your money from the IRS is wise. How you do this is up to you. Whether you invest on your own or employ a planning expert also is up to you. How conservative or aggressive you are in your investment strategy depends on your temperament and the time you have to work with. The important thing is to put enough back.
Why am I sitting here in comfortable retirement stressing this, when I could be out on the links? Simple. Twenty years from now, I don't want to be annoyed by you blocking my wheelchair in the nursing home, pleading with me to loan you money!