More Retirement Doom

Northwestern Mutual published a report about the state of retirement and of course all the numbers are grim. You can read about at Yahoo and Bloomberg. Their survey says that Americans believe they will need $1.46 million to retire, up about 50% from 2020, while the average retirement account balance is $88,000. Bloomberg had a generational breakdown of balances and for Gen-X the average was $108,000 and for Baby Boomers it was $120,000. 

The gap between those averages and the expected need is monstrous. The "average" number in all these surveys are always flawed for not taking into account someone starting a new job, funding a new 401k which will have a low balance, yes, but the same person could easily have a larger sum from an old 401k that they rolled into an IRA. 

Let's forget about the averages though. The amount you have is what matters. Also, regarding the $1.46 million, do you think that number is close to what you need? Do you need more? Do you need less? Do you even have an opinion about how much you need? Should you even worry about how much you think you need?

I've been pushing back on the idea of have a number, a retirement number, for a very long time. The odds that some number that you get from an app, or an advisor or doing your own spreadsheet work when you're 35 or 40 staying relevant until you're 60 or 65 or 70 are very low. Additionally, let's say that at 40, you determined you needed $1,025,000 to retire at 65 and then you get to 65 and you've ended up with $880,000, then that $1.025 million number means absolutely nothing. If you have $880,000 regardless of what your goal was, then the $880,000 is the only thing that matters, that would be your reality. 

The context of these comments assumes a decent savings rate from some young age to whatever you think of as being retirement age. Coming up $145,000 short would be a bummer but not catastrophic. If someone thinks they need $1.46 million and only has $120,000, then yeah, they are in a very tough spot.

However much you end up with, again assuming a decent savings rate for many years, it will generate an income stream. A 4-5% income stream is very likely to be a safe and sustainable income stream. Maybe you were counting on 4% of $1.025,000 but if you have $880,000 then your income stream will be $35,200-$44,000. Maybe you could delay withdrawals for a year and be lucky enough for your account to go up in that year. Maybe in that year you get an 8 or 9% bump bringing you closer to the $1,025,000. Or maybe not.

If you've been reading my posts for a while you know I am big on looking at the expense side of the ledger. In the last couple of years we cut several expenses which in the context of a post retirement budget could add up. Landlines are almost completely obsolete. We were paying $65/mo, $780/yr when we turned our off a couple of years ago. Our cell phone bill is $100/mo but I see those commercials for cheapy services that are $25/mo. Last year we cut the cord with Directv in favor of streaming and cut our expense in half. We invested a good bit of money into solar and minisplits which has dramatically lowered our propane bill, we still have one but it is pretty cheap. In our circumstance, propane is much more expensive than electricity, 

Those are small things but if your fixed monthly expenses are modest, ours are, then a few hundred dollars is a decent percentage. The big things though relate to health. According to Barron's, Type 2 Diabetes will cost $109,000-$120,000 on average, out of pocket for retirees. That same article said that cardiovascular disease will cost $263,000-$315,000 out of pocket for retirees. The article didn't put cancer in that same context but I can't imaging it would be cheaper than CVD. What about kidney disease or various -itises that are expensive to manage? 

I say this all the time to anyone who will listen (more people listen than you might think), lift weights and cut carbohydrate consumption. There are volumes of research showing the benefits of both. There is literally no medical condition where low carb diets haven't been studied. I'm not saying low carb fixes everything, I am saying it has been studied in conjunction to any malady that you or someone you love might have and it is worth learning about. Explore this list I made on Twitter to learn more. I believe the combo of lifting weights and a low carb diet is miraculous. The body is very forgiving and many issues can be reversed. And the financial benefit is obvious. 

One final point back to both articles was the same quote by the Northwestern chief strategy officer about most people not realizing their withdrawals could be taxed at "20-30%." This is important, moreso if you live in a state with high income tax. It is unlikely that my federal tax bracket will be higher than 22% assuming today's brackets, certainly not 24% which goes up to $383,000 married filing joint. Arizona is a low tax state. It is easy to take a reasonable picture for your situation. If you have $1 million in your IRA and that is your only asset, you're not at much risk for falling into the 35% tax bracket for federal unless you spend it all in two years. 

I've said quite a few times that there are a lot of potential mistakes to be made involving taxes when Social Security taken, still working if you've taken SS early, the order of which account types you withdraw from even Medicare. Mistakes can be very costly. To the example above where someone comes up a little short at $880,000, a $5000 mistake related to inefficient tax management can compound the problem of not quite having enough. If you are going to do this on your own, spend the time learning this stuff so you get it right. 

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.