In Smart Money's 5 Biggest Retirement Myth articles, the author names these myths and I have followed each category with some notes of my own.
1. $1 Million Will be Enough
The article mentions that future retirees don't correctly estimate what they will need in retirement which is likely directly related to the following myth #2, that people spend less when they are older. When coupled with falling investment income and market fluctuation, that seemingly huge amount of money doesn't seem so big anymore. Furthermore, inflation on the basics makes it difficult to keep up. A paid off home still requires lights, gas, and water. Eating costs can easily double, especially if a special diet must be adhered to.
2. You'll Spend Less When You Are Older
If there is any myth that needs to go, this one is it. The article mentions exotic travel versus funding a grandchild's College Savings plan, both optional expenses, as well as rocketing entertainment and travel expenses.
Leaving aside the optional expenses, medical expenses are seriously underestimated in the planning stages. Life insurance may no longer be necessary, but the costs are replaced (exponentially) by long term care insurance. I'm continually struck by how much medical costs run even where health is relatively ok.
Many believe they will be able to stay in their (paid for) home, but find it is necessary to re-locate to a residence such as a condo or co-op. Fees and taxes alone can rival a mortgage in some places. People who have never spent a penny on cleaning services may now find that necessary. Ditto for lawn services or other personal services.
3. Older People Need More Bonds
4. You're Money Lasts Longer if You Move
In this section, the author talks about comparing all taxes (state income vs. sales tax vs. property tax). Additionally, not every retiree moves from an expensive area to an inexpensive one. The opposite might be more pragmatic ad that is something to consider. Quality of life factored in, some choose to follow their children to more expensive areas, or return to the expensive area because that is home.
Knowing a little bit about what nursing assistance can cost, having family close by and available to help could well be a more frugal choice over trading in more expensive digs for less expensive ones.
5. Uncle Sam Has Your Back
Medicare doesn't cover it all, necessitating supplemental insurance. Medicaid for nursing home care only sets in once you are properly impoverished. A spouse can retain some assets in addition to a home, but those assets need to cover housing, food, taxes, transportation, medical, etc. Long term care might alleviate some of the expense of nursing home care should that become necessary, but anyone have an idea of what nursing care runs even after insurance? And then there are still the expenses of the household.
More thoughts to follow I'm sure.
19 comments:
I so wish every woman I know wold read this. So many have been duped into believing that Hashem will bail everyone out. SO they willingly accept to live paycheck to paycheck and parent bail outs. But they are having twice as many kids and not earning very much. And no one wants to go back to school for real job skills.
I cringe about what frum America will be like 30 year from now.
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Two very important facts to keep in mind:
1. A bed at a good nursing home in the New York area is about $15,000 A MONTH. Yes, a month.
2. Medicare does not pay for custodial care, all those non-medical needs that frail elderly often have such as assistance getting in and out of bed, help getting the right medication, and housekeeping services.
Some other myths/problems are that so many of the retirement planning tools and calculators that have been around for the past severl years that many of us have relied upon use some very false assumptions, including rates of return on investments and built in assumptions that one's earnings will keep increasing until retirement. It turns out for many, earnings peak in ones 40's (sometimes earlier) and may even go down in your 50's and 60's, that of course, is if you are lucky enough not to lose your job when you are over 50 and it becomes extremely difficult to get a new job.
A paid off home still requires lights, gas, and water.
And two even bigger items, property taxes and insurance!
3. Older People Need More Bonds
Bad because bonds haven't even come close to meeting inflation recently, much less beating it to provide some growing income.
If you want to enjoy the benefits of retirement, then you must live long enough to retire.
To help achieve that goal, please read this:
Top Five Foods that Kill People:
{1} sodas, colas, sweet carbonated beverages
{2} potato chips and French fries
{3} candy bars
{4} sausages and wieners
{5} fatty meats, especially fried
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Mark - what would you do instead of bonds? Would you have retirees and near retirees gamble most of their funds in the stock market? Isn't it better to start saving young and live very frugally so that you can park your funds in safe places as you get older. I'm not saying that all of your money should be in bonds, treasuries and money markets, but a good chunk should be if you have a low risk tolerance.
retirement shmirement. Let's just keep living in expensive areas, assuming that people in their 20's should have new cars, two minivans and new furniture, spending on weddings and 200 people for a bar/bas mitzvah and pay whatever it takes to keep our kids in expensive day schools.
I actually pulled 2/3rds of my retirement money out of equities (it's sitting slowly losing value in a Money Market fund) while I wait to see if the Congress is really going to tank the world economy next month.
Assuming you retire right around the time your mortgage is paid off and you finish paying for your last kids College tuition / wedding, then yes your needs right after retirement can decline. Leter, they climb due to health care expenses; unless you are 'lucky enough' to die quickly.
Nursing home at $180k a year? Well, if living in the 5T allows me to sell my paid-off home for $1million, that is not so bad....
"Mark - what would you do instead of bonds? Would you have retirees and near retirees gamble most of their funds in the stock market? Isn't it better to start saving young and live very frugally so that you can park your funds in safe places as you get older. I'm not saying that all of your money should be in bonds, treasuries and money markets, but a good chunk should be if you have a low risk tolerance"
Keep in mind time-frame here. The numbers recommended in most retirement guides (books, etc), are that people should be planning to live to 95. About 11% of those who make it to 65 currently make it to 95, and the number is (slowly) growing. About 50% of those who make it to 65 will make it to 84. Obviously, if you have relatives who are living into their 100s, you'll want to plan for longer.
This means while some of the money you have when you retire (at, let's say, 65) needs to be available for while you're 66, 67, 68, etc, some of it needs to last 25-30 years, meeting and/or beating inflation. It's not to say that folks should be all stocks, but an allocation of between 40-60 and 60-40 is probably pretty reasonable, with more conservative allocations requiring more money at retirement. It's also a good argument for delaying Social Security until later (as the amount you get, per year, is higher at 70.5 than at full retirement age).
One alternative is always to buy a SPIA (Single Premium Immediate Annuity). You pay a single chunk of money, and receive a set amount per month in return. Insurance companies can give you more back than you can safely take out, because they don't have longevity risk (i.e. while you need to have your money outlast you, it's ok for them if your money outlasts you, because other people won't outlast their money).
Nursing home at $180k a year? Well, if living in the 5T allows me to sell my paid-off home for $1million, that is not so bad...
1 mil should last 5.5 years for nursing home expense. You still need to pay for supplemental insurance and what if your spouse needs a place to live?. . . remember that part of 1 mil you sell your home for is partially taxable, and that puts one in the 35% tax bracket for federal. Add another 8% marginal rate. . . oh, and add the AMT for federal because I'm fairly certain you will need to pay AMT. Now that 1 mil isn't quite 1 mil.
If this is the plan. . . RUN, don't walk to the nearest reputable tax lawyer and estate planner because I don't believe selling a 5 Towns home is a good choice at all.
I would be careful in the other direction as well. Many of these retirement calculators, rules of thumb and so on are developed published and operated by financial services firms who have make their living selling investments. They tend to overestimate the amount of money you need to live in retirement, often counting luxuries, like world travel, as necessary expenses. There is simply no substitute for learning enough financial math to do the calculations yourself.
If I could live in a neighborhood I could afford and rely on good public transportation that would go a long way for our family. Plus we have a not-too-staggering student loan that will linger on for many years because we can't pay it down and save money at the same time. Retirement scares the daylights out of me considering how hard it is to live in the here and now.
Thanks SL for mentioning "the other spouse." Those figures for nursing home care are for one person--what if both spouses will need that nursing home care? Double the costs and your money flies out the window. Have one spouse in a nursing facility and one staying in his/her home--not double the costs but still requiring way more money.
Re the longevity issue, one reason why official retirement age for social security keeps going up, and why people have to plan on having more money for when they retire than the amounts commonly recommended. It's one thing when people lived only to their early 70s on average; it's quite another when the mid 80s is now considered as "normal."
The way I see it is very simple, most frum Yidden don't save for retirement because of Yeshiva tuition. My wife & I (after much debate) put our kids in public school because we didn't want to be the next "old people charity case." The day of reckoning is coming and many of you will be working until death. Face it now before it's too late.
Frum Yidden don't save for retirement for the same reason most people don't save for retirement, trouble sacrificing today for benefits in the future. There is TONS of academic research on it, and it has NOTHING to do with being Frum.
The non-Frum are underfunding retirement as well. There is a disaster coming down the pike when the unprepared baby boomers demand massive increases in social security because they failed to save despite being the benefits of decades of American plenty.
The difference is, the "Frum Yidden" justify their 45,000 minivans and 18,000/year private schools instead of financially prudent measures because they are Frum.
Yeshiva is an excuse, otherwise it would be silver candlesticks, Pesach vacations, and whatever other nonsense people have decided is socially acceptable overspending.
$5000 wigs anyone?
Also, not only is Long Term Care Insurance (especially if the option to get inflation-adjusted insurance is open to you) much cheaper the earlier you buy it, it is entirely possible that later in life you will have a medical condition that means you are unable to get it at all.
I'm not *happy* to write the check (it's a non-trivial amount of money), but it is nice knowing that we have the insurance.
One comment on LTCI that I heard from a colleague (in her 60s) at work:
"We just purchased, at great expense, long term care insurance. It was annoying for us, but we could afford it, and it's insurance against us running out of money. But it's also insurance for our kids, so that they won't bankrupt themselves paying for our care."
Anon 9:48 - Mark - what would you do instead of bonds? Would you have retirees and near retirees gamble most of their funds in the stock market?
I'm not an expert, but I think a good option for at least some portion of ones savings would be stocks of solid companies located in places with growing economies. Obviously remaining diversified within that sector for increased safety.
Isn't it better to start saving young and live very frugally so that you can park your funds in safe places as you get older.
Not just "better", but critical too. If you don't start saving at a young age, you will find it more and more difficult to catch up as you get older.
I'm not saying that all of your money should be in bonds, treasuries and money markets, but a good chunk should be if you have a low risk tolerance.
Risk comes in many different guises. One kind of risk is loss of principal, another kind is slow depletion of principal value due to inflation or currency depreciation. You need to be aware of both kinds of risk and you need to at least attempt to mitigate both of them.
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