Going All In To Solve A Retirement Shortfall (Part 2)

Following up on Friday's post, today will reiterate a few concepts we've been looking at for many years. 

Yahoo warned of potential problems retirees may face if their plan is to rely solely on Social Security. What I think they mean is retirees for whom Social Security is their only resource. That may or may not turn out to be a problem depending on the dollars involved, lifestyle choices and of course whether the threats of a 20-25% haircut come to pass. 

Anyone who seeks out financial content from an obscure blog like this one is far more likely to know their expected SS payout, what it would be if they take it early and what it would be if they hold out until 70. Knowing this is crucial. Then effectively tracking today's spending and knowing how spending will (or won't?) change at retirement. Hopefully a mortgage is paid off, hopefully there are no car payments to make and health insurance at 65, if retired, should go down quite a bit on Medicare, especially if income goes way down. Once someone is retired, saving for retirement is one less expense too.

Look at your fixed monthly expenses, what's left? Food, various utilities (a lot of things lumped in here), other insurances, what else? After mortgage, cars and health insurance, the other big one I can think of is prescriptions, depending on someone's details. We talk all the time here about behaviors that can greatly increase the odds of not needing prescriptions to manage chronic maladies. Cutting carbs and lifting weights can have miraculous results and costs little to nothing, far less than the cost of taking a half a dozen prescriptions for the rest of your life. 

I separate out and track annual expenses in a different column of our spreadsheet. BTW, I mean that literally, it is all on a spreadsheet. These items for us include things like propane delivery (we could pay monthly), property tax and so on. That might just be mental accounting, maybe for someone else it makes sense to pay those monthly, the point is to not forget about these. 

That's all stuff that has to be paid one way or another. If you can swing some sort of emergency fund to cover things like new tires and veterinary bills, all the better. 

I just used the word spreadsheet. That's what all of this is, spreadsheet work. What are your expenses? What income sources do you have like SS, investment account or anything else? Are you likely to be ahead or are you clearly behind? What about reasonable discretionary spending? Can that be covered or is the hole painfully deeper? Note that none of this involves some percentage of your income. Do the bottom up work, it won't take long, to figure out some real numbers.

The sooner people have visibility on this, the better the chance of solving or preventing their problem. Someone who is 50, who stands to collect $3000 from SS, expecting to spend $5500/mo all in when they retire but who only has $200,000 has some work to do. If this person is targeting a "normal" retirement age, they have time to fix it, but they'll have a better chance if they start right now instead of trying to figure it out six months before they want to retire. 

The $200,000 as it sits now should certainly grow. If it doubled to $400,000 in 15 years, ok, assuming a 4% withdrawal rate, it would generate $16,000/yr which when added to $36,000 from SS leaves an annual shortfall of $14,000. That implies needing to accumulate an additional $350,000 on top of the $200k that we are assuming grows to $400k. Simple math is that this person needs to save $23,000/yr to come up with that additional $350,000. That's not a real number of course as you'd expect new contributions to also grow. But simple math tells you that adding $5000/yr likely won't cut it. $5000 per for 15 years is $75,000. That contribution is very unlikely to grow to $350k. Even $10,000 year for 15 years probably won't grow to $350,000.

To my way of thinking, the answer here is to monetize something. Maybe monetize your time by working, hopefully closer to your terms with the hours you want. Maybe monetize a hobby by selling something you make. Maybe monetize a skill by consulting or coaching (yeah, maybe this is a job too but working for yourself). 

To help with this there are things like Fiverr and Upwork to find freelance work. Do you have a skill that would lend itself to freelancing? If not, could you cultivate one? If you're not sure, start in on this now. Our 50 year old from the example above has plenty of time to work on that sort of opportunity. 

In my example Friday with incident management team (IMT) work, the pay is very lucrative but there are tradeoffs. The days are very long so most parts of your life would be put on hold, things like family time, exercise and hobbies. A lot of the jobs involve being by a computer much of the day which is good for me of course. Someone who works on a lot of incidents could easily be out four months a year and probably make more than they made from their day jobs. I personally do not want to be away from home anywhere near that long. 

But in terms of hard work for a finite period each year, what would you be willing to do? Where we talk about return stacking in portfolio construction, think of this as work stacking. Would you work your butt off at something for two months per year to cover six months of your expenses? Circumstantially, that may not be a first choice but the dollars and cents would be compelling. Things in my life would have to take a seriously unexpected detour for me to want to be away from home for two months working on fires. I'd do it if my hand was forced somehow or unless something crazy was happening around Prescott, I'd want to help in my backyard but then I'd get to sleep at home. 

A last resort as far as working is whatever it is you do not want to do. For some people that might be sitting at a desk all day, for others that might be standing in a retail store all day. Ultimately, we all gotta do what we gotta do. Time invested on the front end is our best chance to avoid the "last resort" choice. 

I write about the IMT stuff so much because I think over the period of many years, I've personally covered the whole arc of being somewhat interested to starting to learn to becoming very interested to apparently creating the optionality with a brief training assignment last summer. Optionality is hugely important to me, if something does go wrong in my financial life, I do not want my hand forced into a job of last resort. 

Take this as a repeated call to get to work preventing/solving your own problem. To maybe look around a corner or two at what could wrong and mitigate the adversity that might go with Plan A failing. 

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.