Are You Stressing Too Much?
Or Not Enough?
How much do you really, really, really need for retirement? Based upon decades of experience in elder law and talking to hundreds of people (and looking at their finances) my opinion: Not as much as other experts might say.
I want to know what you think. You may comment at the end of this article.
Yesterday I saw a piece on CNBC in which a somewhat incredulous young reporter was interviewing a seasoned financial advisor who claimed “$2.5 million is a good start.” I posted it on the Mason Law, PC Facebook page if you want to look at it. In fact, the article and video link to a number of other interesting pieces. I spent about 30 minutes looking around on the site.
We all have seen retirement calculators on the web. When I Googled “Retirement Calculator” I got 31,400,000 results (in 0.23 seconds, no less). Most of them are hosted by financial institutions, and most of them grossly inflate the real needs of retirees (or so I believe).
Why do I think that? Based upon my experience and the vast majority of my clients, a million dollars is at the high end. In fact, a typical client will have a residence (paid for), maybe a small tract of land (inherited) and a few hundred thousand in the bank. No debt. Social Security of perhaps $1,600.
While they may be living “carefully” they certainly aren’t living in grinding poverty. Other than the normal concerns of age, many of them, I daresay, are happy.
I suspect that the inflated needs are based on a number of assumptions. First, that the “target” audience of the retirement calculator or ad may be relatively high earners in the first place.
Second, that the target will maintain the same life style after retirement (which isn’t necessarily so)
Third, that the level of expenses, including debt, will remain the same pre and post retirement. Most folks tend to pay off debt as retirement approaches (including having the residence close to, or completely, paid off).
Fourth, that the retirement calculators often build in $250,000 or $500,000 for health care expenses. Between Medicare Parts A, B and D (or alternatively an Advantage Plan under Part C) and a Medicare Supplement most medical expenses are covered. With a bit of planning long term care expenses can be largely addressed through either insurance or (hehehehe) a trip to see me (or a combination of both).
The Warren Buffet Secret Wealth Building Formula
Of course, if you had a bit more extravagant retirement in mind, here is the Warren Buffet secret trick to retiring as a millionaire in just one year: Save $84,000 a month for the next 12 months.
On the Other Hand . . .
I am not recommending ignoring the problem, as many seem to be doing. You have to start planning. You MUST avoid what I have sadly seen in my conference room. The couple is in their 80’s, have a home worth $120,000 with a mortgage and a home equity line totaling $100,000. Credit card indebtedness of $30,000. Total income of $2,300 a month. Total expenses (including debt service) of $2,500.
In many cases, however, I cannot help but think that many people are subjecting themselves to excess stress by trying to meet recommended (but unrealistic) guidelines and expectations found on the internet and other media.
Think about it . . . but perhaps you can dial back the stress level a bit.
I really want to know what you think. Your comments are welcome.
Bob,
Financial planners struggle with this question. We try to get our clients to where there’s only a minimal chance they would ever run out of money to age 100. (If genetic engineering starts extending life expectancies beyond that, we’re toast.) Planning for that mortality age will also mean substantial assets will remain if mortality happens at 85 or 90 – assets that could have been enjoyed with an enhanced lifestyle.
That lifestyle is very individualized. My aunt (who was referred to you) fit the description of the person with limited assets but very happy. On the other hand, some clients travel extensively after retirement and their living expenses actually go up. Having a thoughtful, individualized plan based on your spending patterns, not some formula, is essential to peace of mind.
Perhaps a client said it best – “I don’t care if my assets last until mortality, just until dementia!”
Bob, thanks for asking a great question.
Hah! “I don’t care if my assets last until mortality, just until dementia!” Love it.
You nailed it, Giles . . . in the end it cannot be a “one size fits all” approach.
I am a licensed insurance agent. I work with the elder market selling the Medicare Supplement Plans, Medicare Advantage Plans, etc. I have observed that the retirees with 250K to 500K, with their home paid for, seem to be the most comfortable in retirement. Most are living off their Social Security and dipping into their savings for big things like taxes and insurance premiums. Those that are renting or paying a mortgage seem to be doing less well. The one area that I get the most calls about is prescription drugs. Unless a person qualifies for extra help because of low income, the cost of the medications is one of the biggest monthly expenses. My tax advisor is on Medicare. She gets a monthly shot for rheumatoid arthritis at a cost of $2600.00 a pop. At that rate the annual cost is $31,000. She does have a prescription drug plan, so that means her cost is reduced to around 5K, but that is still high if you are trying to live on a fixed income. I have another customer whose monthly drug cost is $18,200. In her case, she is wearing a pump, so that the drug is paid by Medicare and her supplement, but she struggles to pay the supplement premium. Folks really do need your services to help them, but most procrastinate because of the cost.
Drug costs are a big “if” . . . and that is something so hard to plan for. Insurance is about the only answer out there (short of a ton of cash).
I am keenly aware of the tendency to procrastinate and put off “going to see Bob.” I’m also aware that I am not helping for free. On the other hand, I try to explain that in the long run NOT using me or one of my colleagues can, in the long run, be much MORE expensive.
I told some folks last night, “NO Plan IS a Plan . . . maybe a bad Plan . . . but it IS a Plan.”
Great reply, Mary.
In your example above, could they benefit from having a conference with you or is it too late and that would be one more expense?
It is seldom ever too late. Waiting too long may narrow the options, but usually there some options. If it really is too late (which does occasionally come up) at least they will know for sure after a brief consult.