According to a recent survey done by AARP, 28% of people approaching retirement age think they’re more likely to learn that Bigfoot is real than their being able to retire comfortably.
The survey polled 1,161 people ages 40 to 59 with incomes between $40,000 and $99,000. Of them, only 47% said that retirement was one of their top three priorities. Yikes.
Retirement? Ruh-roh
While I don’t know about Bigfoot, I’m definitely in trouble when it comes to retirement. I didn’t make it a priority in my 30s the way I should have (and I was broke in my 20s).
Not only did I not have a SEP-IRA until last year, I wasn’t even maxing out my Roth IRA. Instead, I let other savings concerns take precedence: Tim’s teeth, new windows for the house, paying extra on the mortgage, etc. And I only just moved my Roth from a low-earning bank fund to one of Vanguard’s more targeted (and therefore more strategic) retirement fund.
As a consequence, I’m 40 years old and have roughly $40,000 saved in my two IRAs. Bad Abby, no retirement!
But seriously, I’m in the same boat as a lot of the respondents. I’m very skeptical about being able to have a comfortable retire. In fact, when I started this post,I wasn’t sure I’d be able to retire at all, let alone comfortably. (Though unlike 37% of the respondents I don’t think there’s any chance that disco could make a comeback, regardless of my retirement status.)
Can I retire at all?
The numbers say yes, but they assume more steady returns than I do.
After all, the numbers said yes to lots of people getting ready to retire around 2008, and those folks got a nasty surprise. Not to mention that the numbers assume full Social Security benefits and don’t always take inflation into account. And this of course is based on my job staying steady and my always being able to put at least $9,000 a year toward retirement.
But okay, let’s say I am able to retire. Whether it’s comfortable or not is the second part of the equation.
What’s your comfort zone?
It’s unclear here what the parameters are for a “comfortable retirement.” I suppose that’s because it must vary from person to person, but it’d have been nice if the study had at least thrown in a broad sketch.
Failing that, I guess I have to define it for myself.
“Comfortable” to me means being able to spend without worrying too much (except inasmuch as I’ll always worry about money). Ideally, it would also mean traveling at least a couple of times a year (without having to use travel rewards credit cards, though I probably would anyway). It also means being able to cover all those fun surprises that life throws your way. So I think I’d consider $50,000 a year “comfortable.”
Fewer expenses in our golden years
Or am I — and the respondents — looking at “comfortable” through the wrong lens? My brain (and probably theirs) is stuck in the present, which has factors like mortgages and higher taxes. Could this be increasing the amount we think we need in retirement?
The most obvious obsolete expense will be retirement savings. A lot of people are throwing thousands of dollars at their retirement accounts each year. So retiring will nix a huge item in the monthly budget.
Another decrease will be taxes. Even people who aren’t self-employed will see a drop in taxes (unless they have the exact same income in retirement). But those of us who are self-employed? Our tax rates are going to plummet.
Right now taxes eat up $2,147 a month of my gross income. (They’re one of the main reasons I can only kinda sorta live on half my income.) Once I’m no longer working, I can get rid of $730 a month in FICA taxes alone, and my income taxes will go down too. So let’s say that’s a minimum of $1,200 a month saved — probably more.
Of course, most people aren’t self-employed so the tax drop won’t be that precipitous, but most will save something. And of course the tax-savings disparity is made up for with mortgages.
I have a relatively low mortgage, so I’m only throwing $700 to $900 a month at the thing. Since property taxes and, therefore, insurance, will keep going up over time, I’ll probably only be saving $300 to $400 a month by the time I’m retired. Which — don’t get me wrong — is nothing to sniff at. But the average mortgage payment in 2015 was just under $1,500 — plus whatever additional principal they’re paying down — so the average mortgage holder is going to see a huge drop in expenses.
Or will they?
It turns out that a lot of expenses may actually follow people into retirement.
The number of retirees with a mortgage is going up. In 2011 (sorry, the most recent year I could find), 30% of homeowners over 65 still had mortgages. At 75 and older, 21.2% were still making house payments. That’s mind-boggling! And not the only problem.
About one-third of older Americans carry non-mortgage debt — about $4,800 in credit card debt alone for people 50 and up. The average total non-mortgage debt was just under $12,500.
So maybe current expenses actually are a good metric for how much money you’ll need in retirement.
But not me
Luckily, my retirement expenses will look different from my current ones.
Specifically, I think I can pay off the house by the time I’m 50, barring any drastic changes to my finances. And for now I have no non-mortgage debt. (Eventually, I’ll need a new car, but hopefully by then I’ll have saved enough to pay for most or all of it with my car fund.)
This means that my expenses will go way down in retirement. All in all, I’m looking at about $27,000 less in expenses/retirement savings each year. So that definitely lowers the amount I need to stay comfortable… I think.
A big question mark
The problem is that the divorce is still too recent to know how much I need to live on as a single person. I’m still figuring out how much I spend on food, entertainment, etc. And of course there’s the issue of accounting for all the wrinkles life throws your way.
My health care costs will likely go up as I get older. The house will need a new roof, not to mention all the other things that just generally go wrong with it — especially since it’ll be almost 90 years old by the time I’m 70. Frankly, I shudder to think about what fun surprises it has in store.
And of course, inflation is a thing.
So I’m going to stick with my assessment of “comfortable” being $50,000 a year. And hope it turns out that I can live happily on drastically less.
Bigfoot will have to wait (probably)
If I succeed in putting away $9,000 a year, the AARP calculator says that I could maintain $50,000 a year pretty easily. So on the surface, I can say that comfortable retirement is more likely to appear than a sasquatch.
But.
That number assumes full Social Security benefits. From everything I’ve seen, my generation is being told to expect about 75% of whatever we’re being quoted. Also, I doubt that the calculator accounts for inflation. And it probably can’t adjust for a shift to a more conservative asset allocation as I near retirement, which will likely result in a lower rate of return.
That said, I also think I can live on less than $50,000 a year and still enjoy myself. (I just might have to travel hack if I’m interested in multiple vacations per year.) So I’m more confident now than when I started this post that it’s possible for me to have an at least nominally comfortable retirement.
But just in case I’ll be trying to sock away more than $9,000 a year.
What would “comfortable retirement” look like to you? Do you think it (or retirement at all) is possible for you?
I will retire or become semi-retired (work part-time) next year if my employer agrees to it. I’m 61 and we’ve been saving pretty regularly. Our graduate student son should be done with school and off our dole around the same time.
My husband is younger, semi-retired, and won’t collect SS until 2022. His job might possibly end July 2020 so we may hit a low-income stretch . He’ll be old enough to take funds from his 401K so it won’t be too bad for too long.
I think in our case around $60,000 per year would give us a comfortable retirement.
We might need less since we’re frugal but I would want room in the budget for travel.
Glad I’m not the only one aiming a little higher inre: retirement income. It sounds like you have things well on track, even if there’s a potential two-year dicey period for you. At least you’re planning for it!
Just met with (and contracted) a financial adviser yesterday to go over this exact issue. I have an inheritance IRA he’ll be handling in a “growth & income” plan that includes mutual funds, large cap stocks and various bonds. I’ve also opened a money market account with a big chunk of our savings that the RMDs of the inheritance IRA will be rolled into each year until my husband retires, as well as whatever else we can throw into it. My husband works for the county and will have a pension. Then there’s also social security, which–in spite of doom & gloom predictions to the contrary–is likely to stick around. Nevertheless, according to my retirement analysis yesterday, we’re looking at a 37.2% projected shortfall.
I currently live in CA. One of the highest cost of living states in the nation with some of the highest taxes. We plan to move out of state when my husband retires. To a lower cost of living area. Preferably to a no-income-tax state. Where we hope to buy a modest home/condo/mobile home in a senior park with no or low mortgage. So… the projected income needs the adviser calculated, based on where we live now and assuming a similar lifestyle, is probably overestimated. By a bunch.
WHERE you retire has a huge impact on being “comfortable”. You also need to define what “comfortable” looks like for you. Some folks want to travel. To go out to eat often. To socialize. To enjoy hobbies. Others don’t have wanderlust, aren’t social butterflies, etc. They might view “comfortable” as being able to spend time with grandchildren. And it’s important to see retirement not as a single stage, but in several stages. Life is different from your 60s to 70s or 80s and beyond.
All excellent points. I’ll be retiring in Arizona as far as I can tell, which has a rising COL but still is pretty low compared to most areas of the country. And the main COL increase right now is rent, which wouldn’t be a factor.
I think it’s smart to move to a cheaper area when you’re ready to retire. It’s a good way to stretch funds and also a change of scenery never hurts!
Oops… forgot to mention… the lifespan used to calculate our retirement shortfall was 90 years for each of us. Not to sound morbid, but my husband and I are both diabetic. It runs in our families. I’ve had ulcerative colitis most of my life, had breast cancer in 1999, and a litany of other problems. My husband’s father died last October at 81. His mother has a rare (and genetic) type of kidney cancer that has metastasized; she’s 77. So, the likelihood either of us will live to 90 is (genetically and medically) slim.
Maybe a little morbid but mainly just practical. Still, sometimes people beat the odds, so it’s good to plan for the best case lifespan in this situation.
Indeed. My grandmother had a host of illnesses and operations and for decades was never completely well. Yet she made it to a month shy of 90. And my Aunt Dot, who was raised poor with nutrition to match, was quite, quite sick and on oxygen for years, but made it just past 90.
Me, I’m holding to my promise of 150 years. But I agree: Hope for the best, plan for the worst and don’t be surprised by anything in between.
Donna Freedman recently posted…Adventures in the clearance section.
Yep, I’m holding you to that whole 150 years thing, so you’d best keep an eye on your health, missy!
I’m too stressed out and distracted to really think about it right now. I’m reasonably certain I’m going to inherit, I just don’t know how much, so that’s a factor, too. (No, I won’t ask.)
As for you, unless you develop another serious, chronic health problem, I think you’re going to be okay, at the very least. The way you handle money is scary good. I’ve got a lot of confidence in you.
Aw, thanks catseye. And no, I wouldn’t ask about inheritance either. I hope you get a little less stressed out and distracted soon, not just because of retirement but just in general. Try to take a deep breath once in a while I guess.
“When can we afford to retire and how well?” is a question that’s been nagging me for ages, and I honestly just do not know. There are way too many variables, at least half are unknown or I can’t plug in a reasonable guess yet, so it feels a little bit like a fool’s errand for me to set down numbers when the ranges go all over the place.
It feels more urgent to know or nail down when we have uncertain health too, I have no clue what kind of health care resources we’ll have access to ten, twenty and thirty years from now, not what we’ll need.
We’re doing the best we can to save and invest without losing sight of today, and we may even consider retiring to a different state according to PiC which was a bit of a surprise to me but if he’s game, I suppose I can be too! You know what a big fan of change I am. 😅
Revanche @ A Gai Shan Life recently posted…Just a little (link) love: hedgie on a trip edition
Oh yes, you and change are best buds! I know you love it where you are, but a different climate could help some symptoms of your health issues. I guess this is all the more reason to travel now and see how you do in different climates. There’s always a spare bed here for guests. #justsayin
Retirement is one of the scary questions when it comes to personal finance in my mind. First off, I’m pretty terrified I’m going to be forced to retire early due to health reasons. I think a lot of people with unpredictable chronic conditions probably face this but the generalized anxiety doesn’t really help. Second, I do worry about leaving the husband and kiddo in the lurch. I handle this in several ways. First, I am very careful to max out our retirement accounts and play it safe with them. I’d rather be conservative in my earnings than face a nasty surprise. I also tucked an inherited IRA firmly away and plan to do the same with other accounts that my mother refuses to spend (I get my propensity to be stubborn from somewhere). These accounts are only one side of my plan, however. The other side is insurance.
I am fortunate to work for a company that offers retirement income insurance. I jumped at the chance to buy a policy and will continue to maintain it, even if I leave the company. Why? It’s a promise of monthly income that isn’t tied to the stock market. I know that I can rely on this income to stay stable and I don’t have to worry about the health of the account. In addition, I maintain long term care policies for both myself and my husband. While it would be lovely to imagine staying in our home until the final moments… this isn’t a reasonable reality for a large chunk of the population. It is reasonable to expect that we will likely need assistance down the road; we may even need residential treatment. Health insurance does not cover nursing homes. Neither does most government health care. So, long term care policies make sense. My policy was bought when I was barely out of high school, so it came before all my health problems. My husband’s is less comprehensive but we take what we can get.
Our retirement plan is to work as long as is reasonable and then move to a state with a lower cost of living and no income tax. This will stretch our payouts from the retirement accounts and insurance (to be absolutely safe, we planned for a retirement that doesn’t include Social Security; it will be a great help if it remains solvent but I didn’t want to take any chances). Since commuting to work and other activities won’t be a factor, and we’re not going to have as many people living in the home, we’ll be able to downsize and live further away from the hustle and bustle; something that means we’ll likely spend less money on the new home than we did on this place. One factor we’re going to look at? Assisted living facilities near where we want to live. Neither of us wants to stay at home as long as possible if it means sacrificing the wellbeing of those around us. So, we’d rather strike a balance of what is financially feasible and healthy for our loved ones. Having the facility be nearby and a place we can easily visit is peace of mind for the other partner, which should make the choice easier when the time comes.
All very well thought out. I think it’s great that you’ve taken so many precautions and planned so well. I really do need to look into long-term care insurance if I’m not already too old to get a reasonable rate.