44 thoughts on “Is Retirement on Your Radar?”

  1. Two low-wage jobs, not two minimum-wage jobs–the Sam’s Club demonstration gig is $10 an hour.

    Palome sounds like a really good guy–hard-working, positive, not a whiner, etc. I feel like with his skill set, he could probably make more money, even at his age. In fact, I wouldn’t be surprised if this article gets him a job offer or two, not to mention romantic attention from some foxy widow. This is definitely not the kind of old guy who should be staying home all day watching TV, only to emerge on triple coupon Thursdays.

    He’s not really a horrid example:

    “Palome, who said his jobs keep him active and learning new things, could survive without working. He receives $1,200 from Social Security and a $600 a month pension from his last corporate job. Still, his $1,400 in monthly wages allows him to bolster his savings and provides for some extras. He goes to the theater, pays for plane tickets to visit his children and grandsons and takes occasional vacations.”

    This, however, is:

    “At 64, when an 800 square foot manufactured home he’d seen in Plant City, a Tampa suburb, became available for $21,500, he purchased it with a credit card to amass frequent flier miles. He then sold his New Jersey home for $180,000, kept what he needed to quickly pay off his credit card debt and divided the rest among his children so they’d have down payments for their own homes.”

    Kids, don’t try this at home. I see at least five personal finance mistakes in those two sentences.

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  2. “They’re the first generation expected to fund their own retirements, even as they live longer lives. ”

    I think this is the real key, that we are now seeing the first group of people who do not benefit from defined benefit plans. They are sensitive to the outcome of the stock market ups and downs and that’s a risky business.

    I think working as long as you are healthy isn’t a bad deal for many people, since work provides benefits beyond money, including structure, social interaction, cognitive stimulation, . . . .

    But how many 77 year olds can work the number of hours he does on a regular basis? How many hours does he work? He’s an impressive guy.

    “How is the average middle-class person going to amass $1,000,000 by the time they’re 65, which is what they’ll need to get $40,000 a year in income from their retirement savings?” Ghilarducci said. ”

    And, yes, how?

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    1. Obviously it’s a big problem, but figuring the average person needs $40,000 from retirement savings alone is exaggerating the problem. The average household gets by on less than $40,000 once you take away taxes and health insurance. Retired people pay much less for both of those and get social security.

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      1. I’ve heard that complaint, too, that people are being encouraged to save too much. Usually it’s an attack against the financial planning industry, which has an interest in freaking people out about not saving enough.

        But, I think this 77 yo seems to feel that 32K a year (including both the $1400 in earnings & another $1200 in SS and $600 in private pension) is enough and a hedge against living in more constrained circumstances. I think I haven’t lived on 32K a year since college (or maybe the first year of graduate school, as a household, many many years ago, and not inflation adjusted). So I have no idea how that budget pens out or how little a retired single man (or couple) can live on. But, my real worry is that there are a few huge variables largely out of the individuals control — how the stock market does, especially around the time you need the money, how one’s health holds up, and how long one lives that all have a huge impact on the amount of savings.

        I think those risks are tough for an individual to shoulder, and that shouldering them as an individual might require people to over-save (I’ve heard this as an economic argument in China, where individual savings are replacing child-responsibility for eldert care).

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      2. Right, because when you retire, although your health expenses may be greater, here is a list of the expensive things you are no longer paying for: SS taxes; mortgage (if you do it right); day care; saving for retirement and kids’ college.

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    2. Yes, @bj: “I think working as long as you are healthy isn’t a bad deal for many people, since work provides benefits beyond money, including structure, social interaction, cognitive stimulation, . . . .”

      In fact, that’s one of the main theses of the excellent book “Die Broke” – never retire, retirement can actually send people to an early death. My DH and I do not plan to ever fully retire, and we think that’s a good thing.

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    3. Let’s not exaggerate here. At their very peak, less than half of the workforce was covered by defined benefit pensions, and not a few of those lucky folks saw their pensions disappear into bankruptcy. Moreover, they were a very thin demographic sliver–the generation before them retired on very little, and the generation before them didn’t retire, because they had no money to. It has never been the case that any generation could depend on someone else to fund them for a dozen, or a couple of dozen, years worth of retirement. Folks didn’t fail to fund their retirements because they were in a uniquely terrible situation; they failed to fund their retirements because they spent the money rather than saving it.

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      1. Right. Not to mention that the pensions weren’t necessarily huge. Mr. Palome, for instance, has a pension of $600 a month.

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  4. You may be justified in feeling ill, but it should not be because of this guy. It sounds like he had maybe 10 flush years, and probably lived beyond his means for other years. Then he gave what little money he had accumulated (the equity in his house) away. That might have been a good strategy as an estate-planning technique (depending on when it was made, it may permit him certain benefits without having to spend that money first), but it is not one that causes me any discomfort. And, to be sure, I do not think it is bothering him either.

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  5. This guy obviously made mistakes many, even most, wouldn’t make. Being 70, he’s around my parents’ generation. My parents, in contrast, enjoy one defined benefits pension that is quite generous and inherited wealth from their Depression-era-enhanced parents, plus are enjoying the real estate gains they made by buying their first home in a solid North American market in the late 70s and making some stepping-stone moves in between.

    But my husband and I don’t have defined benefits plans (I did, but it was converted way before I amassed enough wealth in there to make it great) and since my parents are going to probably live a long time and burn through the family pot, I am guessing my retirement will — assuming my health holds up — look a lot more like the two low-paying-jobs. We’re not financial whiz kids and our cooke-cutter-diversified portfolios haven’t grown that much. Being 43 and recognizing that, we are of course working on it and saving, but our salaries have at best gone up by about 2% over the last few years (one promotion in there, and then some flat years, plus the elimination of pager pay and overtime) and a lot of our other costs have gone up a lot faster — energy costs have gone up a lot. Combine that with our kids and yeah, welcome to Walmart.

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  6. The larger arithmetic is not good. My mother was one of six, when her ma was failing the five survivors clubbed together to support a really swell nursing home. A fifth of a nursing home is not crippling, I guess. I am one of four, and have had no demands as my parents’ savings and pensions were adequate. Will our three club together to pay for Geezerville for us? I’m not holding my breath. And in our neighborhood, three is a large family, notably large. My first kid’s kindergarten teacher told me that in his class of 23 there were ten onlies and ten with one sib, and my guy was one of only three from a family of three or more.

    We’ve been through a really remarkable period in which it was expected, and financially it worked, for kids to move out of the next at 18 and live on their own, the aged had pensions which kept them from being ‘a burden on the kids’ and also lived separately. My guess is that’s going to be over, both as a usual phenomenon and as an expectation. This depends on cheap housing stock and many workers per retiree. That’s over for sure. Palome has turned down offers from his kids – this will seem exotic and mildly selfish in a few years.

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  7. It’s always on our radar. Ever since the financial planner showed the projections about ten years ago, I look at the graphs and watch how close we come (or don’t). And we have no idea how this next decade (for us, from 55-65) is going to go. Will we stop paying college tuition in 3.5 years?? So far, one in grad school seems to have the funding. So will we shift back to more ruthless savings for the final sprint? Oh, and the gap between us in terms of expectations of what age to retire – the range is from 62 – 77, or so. I know it’s a function of how much we save, but even on that we disagree about how much is enough. Buying a house this year cut deeply into this year’s savings, but I don’t want to spend the next decade just saving for retirement.

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  8. My husband and I are currently saving 24% of our income, of which some is matched by employers. In fact, we just re-evaluated our retirement planning because my husband was saving way more than I was, which we realized wasn’t fair. But now we’re living on less cash per month, and we’re having trouble reigning in our lifestyle inflation (I have a bit of an Amazon problem, plus I decided we needed a generator for when we get hit by the next hurricane, and my husband couldn’t get the frickin’ $300 one at Job Lots).

    My boss is in her late 50s, and she’s retiring next summer, the b*tch. (I say that lovingly.)

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    1. “My husband and I are currently saving 24% of our income, of which some is matched by employers. In fact, we just re-evaluated our retirement planning because my husband was saving way more than I was, which we realized wasn’t fair.”

      Go, Wendy! My husband’s job puts the equivalent of 10% of his salary into retirement and then we are free to add to that. Our contributions are kind of wimpy, but it all counts. We haven’t started college savings yet (oldest would theoretically start in 7 years, middle in 10 years, youngest in about 17 years), but we are eligible for certain staff tuition benefits (which of course may or may not exist in the same form in 20 years). The house (mortgage, taxes, insurance, maintenance, etc.) is slurping up all our money for the time being, but it’s on a 20 year note and if we are able to stick with that, we’ll have it paid off by the time my husband is 60. If I had my druthers, we’d have the house paid off before our oldest starts college in 7 years, but that is probably not going to happen.

      I will probably need to go back to work right around the time our youngest starts school, in order to pay for that third (!!!) private school tuition. From there, it’s tuition payments and/or college expenses for the next 18 years.

      “But now we’re living on less cash per month, and we’re having trouble reigning in our lifestyle inflation (I have a bit of an Amazon problem, plus I decided we needed a generator for when we get hit by the next hurricane, and my husband couldn’t get the frickin’ $300 one at Job Lots).”

      If you’re putting away 24% of income, you’re doing fine. Of course, there is college to think about.

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  9. I have a small TIA-CREF account. We’ve got the rest of our money squirreled away here and there. We lost of a year of 401K savings, because Steve was on a consultancy line for the past year. We’ll probably sell the house and move to a cheaper part of the country in 20 years. He was one of the last people to qualify for a pension at his previous job. They recently offered to buy him out of the pension with a lump sum. We declined.

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  10. Aside from the fact that people don’t put a lot in their 401(k)s to begin with, the biggest problem with 401(k)s versus traditional pensions is that it’s normal for people tap that money over and over again. They use it for house downpayments, they pull it out when they change or lose jobs, they pull it out to pay debt, start a business, etc. Whenever they get into any kind of jam, they hit their retirement accounts. No matter that there are HUGE penalties and taxes, it’s still a very common practice.

    http://www.zerohedge.com/news/2013-01-15/rip-retirement-28-americans-are-raiding-their-401k-plans

    http://www.investmentnews.com/article/20091029/FREE/910299997#

    A major virtue of the traditional pension is that it cannot be so easily raided.

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  11. on the radar ? all the proximity alarms are going off and the sirens are sounding, aooga !

    my 401k is maxed out at 15% contribution, plus the old folks catch-up contribution of $5k per annum, plus company match of 5%. I’ve been doing this (except for the catch-up, only a couple of years) for fifteen years. My wife had a similar approach until the layoffs, since when 10% of her low-wage salary goes into the rolled-over 401k in Vanguard IRA funds. Prior to that we maxed out the IRA contributions every year for ten years. Prior to that, we were saving in S. Africa, where the stock market enjoyed a twenty-year return of -2%, fixed investments earned 5%, and inflation was running 5-20%.

    We’re not going to have a million nor anything like it..
    I conclude it is impossible to save for retirement. As dave.s observes, retirement as a concept did not exist until recently, and it does not seem likely to survive.

    We started college funds when the kids were born, $200/month into each fund. That would have been enough if tuition and fees had not outpaced inflation by the staggering rate they did in fact increase at. Older boy is now just a few years away from college and we will have not quite enough for 18 months of college at in-state school. It’s also impossible to save for college..

    My family in Oz whines about their high taxes, but they get:
    – healthcare
    – university for all
    – state pensions roughly equivalent to social security
    I think it’s cheap at the price.

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  12. I was trying to attach numbers to how to save. Over the last 15 years, we have one retirement account that we can easily calculate the rate of return (so it reflects the effects of the stock market). There are many 10+ year periods where the rate of return is negative or zero, including two crashes (in which the value of the account declined > 40%). Over the last 15 years, the account does reflect a net annual rate of return of 3.5% (invested 40/60 in bonds/stocks), but that value reflects the post recession increase in value — 4 years ago, there would have been a net loss.

    Doug’s illustration and Amy’s links show that people can’t save for retirement, if saving for retirement means voluntarily banking 25+% of one’s income over a long period of time (unless, say, they are required to, in the form of taxes).

    There are technical discussions of the issue, but from my point of view, the problem is that individual households (average income 55K) bottom out during economic downturns and thus cannot stay in investments for the long run. They hit periods where they can’t make contributions (or have to withdraw from accounts), and they do.

    Let’s make that budget for the household income of 55K (or whatever number we think we should use as a representative value), one that includes paying current costs for housing, healthcare, food, and retirement and college and taxes.

    (We save a lot but we cannot by any stretch be seen as being representative of any kind of median or average).

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  13. For many of the postwar generation (and some of the Depression generation), the primary form of savings was:

    1. Buy a house before you are 35, with a 30 year mortgage, in the nicest suburb you can afford.
    2. Do NOT do any cash out refinancings.
    3. Do NOT take out any home equity loans.
    4. Do NOT “trade up,” unless you can do so without increasing your mortgage payment (i.e., with more equity).
    5. Do NOT worry if the home value declines at some point; you have a 30
    year holding period.

    At age 65, you will have a fully-paid for house, which you don’t need any more as an empty nester, and you can sell it and move to an apartment. This method still works.

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    1. 5. Do NOT worry if the home value declines at some point; you have a 30 year holding period.

      There are plenty of houses around here that have dropped in price for longer than 30 years. Many of them are worth less than nothing, in the sense that the city has to pull down the house to get somebody to take the land for free. There’s even more of that in Detroit.

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      2. I’m in a city house in a neighborhood that has held its value for something close to 100 years (though prices didn’t increase as fast as inflation for much of that period). The suburbs that surround me, though not all of them, are the ones that have had the houses drop in value.

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      3. I’ve personally done very well so far through owning a home and I certainly don’t want people to avoid it out of some kind of free-floating fear. In fact, I’ve encouraged several people to buy here if they are unlikely to want or need to leave the area. Rentals on houses or anything large enough for a family cost something like 30% more than what it would take to pay the mortgage even if you could mortgage 100% of the purchase price. And the quality is mostly lower. But the idea that it is suitable in general for a primary form of savings strikes me as risky.

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    2. I think it’s a good start, but it’s not nearly enough. Outside NYC, it’s very unlikely that you’ll buy an apartment or condo to live in (although I know developers really wanted Baby Boomers to do that). That’s why the airwaves abound with reverse mortgage ads–all those elderly people with paid-off homes (or almost paid-off homes), no intention of leaving them, and no cash.

      http://www.ispot.tv/ad/7Iit/one-reverse-mortgage-retirement-featuring-henry-winkler

      http://www.ispot.tv/ad/7kkJ/american-advisors-group-reverse-mortgage-dvd

      http://www.ispot.tv/ad/7IHi/reverse-mortgage-loans-featuring-robert-wagner

      Imagine you’re a little old lady with a paid-off house and just Social Security. You can eat, clothe yourself, and run a Littleoldladymobile on Social Security, but that’s it. For something large like a roof or car replacement, you need actual cash savings.

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  14. “This method still works.”

    I don’t have any significant consequence that it does, having seen neither the value of our house nor our retirement assets appreciate significantly over the last 15 years. What saves us is that we have saved a significant portion of a fairly good income. So to me, that seems the only way to really save for retirement — to earn a lot of money.

    It didn’t work for my parents, either, who were born during the war years — they did buy a house they could afford in their 30’s, in a nice neighborhood, but it only appreciated by about 100% over the following 30 years, resulting in a very small nest egg. They lived frugally and within their means and never traded up or cashed out. They saved some money, but not a million dollars.

    But they have a comfortable retirement because of a defined benefit pension plan (but because of that same defined benefit, and because they were state employees, are not eligible for social security).

    The one historical fact I do buy into is that it is not reasonable to expect to retire at 65 and live for another 30 years without working (that is to spend 1/3 of one’s life unemployed). The retirement age of 65 was based on far fewer post-retirement years (and, usually, fewer childhood years before work started).

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    1. If you put down 20%, and the house doubles in value over 30 years, while you pay off the mortgage, you now have 10 times your original investment, which represents an 8% after-tax return over 30 years. A very spiffy ROI.

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      1. If houses didn’t cost a ton of money to maintain and if property taxes and transfer taxes didn’t exist, you’d be right.

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      2. MH,

        Right.

        The main benefit of buying a house is the ability to more or less freeze your housing expenses (except for taxes, of course, but the renter isn’t safe from that, either, as their rent will reflect their landlord’s taxes). Plus, Social Security is OK to live on for somebody with a paid-off house and even quite moderate savings–if that is the life you are willing to live.

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    2. “having seen neither the value of our house nor our retirement assets appreciate significantly over the last 15 years.. the only way to really save for retirement (is) to earn a lot of money.”
      matches my experience.. we didn’t earn enough money, luckily we have children who may let us live in their basements. Either that, or I’m doing it Viking-style, will launch my canoe above the Grand Canyon and paddle until I go down..

      My parents managed about fifteen years of retirement because of a defined-benefit government pension that was indexed to inflation, and Dad kept working at any contract or consulting work he could get. Even at that, the real inflation outpaced the official inflation rate by enough that they were flat broke by the end, with no assets left.

      The problem with working past 65 is that most people can’t, either physically or because of ageism that excludes them from the kind of job that can still be done at 65 and after. That guy who can manage 8 hour days on his feet at 77 is an outlier in many ways.

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      1. “The problem with working past 65 is that most people can’t, either physically or because of ageism that excludes them from the kind of job that can still be done at 65 and after.”

        That’s a very good reason to consider start going entrepreneurial if facing job loss in your 50s. If you’re your boss, you’re not going to fire you for being old.

        My parents will be able to work as long as they are physically able, because they own their own businesses.

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  15. Yes, but that’s different from using it as a savings account that you will draw on for expenses.

    And you have to take the interest rate into account somewhere, don’t you?

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    1. “Yes, but that’s different from using it as a savings account that you will draw on for expenses.”

      That’s the phrasing I’ve been thinking about–that both home equity and retirement accounts have been treated as savings accounts by people who have no substantial savings. Why is that?

      1. Home equity and pure savings gets treated as unsexy by a lot of people in the personal finance world. Couldn’t you be investing that money–with me, for instance?

      2. Employer matches for 401(k) contributions. Unfortunately, they entice people both to readily put money in and just as readily take it out again.

      3. The government really pushes both home ownership and retirement accounts through tax benefits. There are no tax benefits for having a flush savings account. It is its own reward.

      I have no idea what an appropriate solution to this situation is. Maybe just Dave Ramsey’s Baby Steps (which are meant to be worked in order):

      1. $1,000 emergency fund

      2. Pay off non-mortgage debt, smallest to largest.

      3. Save 3-6 months expenses (and then save downpayment for house if needed)

      4. Start investing for retirement.

      5. Start saving for kids’ college.

      6. Pay off house early

      7. Build wealth and give.

      We’re stalled somewhere between 4 and 5, but it’s not a terrible place to be.

      Note how very late in the 7 baby steps investing for retirement comes.

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      1. 3. The government really pushes both home ownership and retirement accounts through tax benefits. There are no tax benefits for having a flush savings account. It is its own reward.

        There aren’t really any tax benefits for paying down your mortgage or buying a house for cash. And, while it isn’t a tax benefit, FDIC insurance on savings isn’t nothing.

        I’ve had lots of old people complaining about their CD rates but I’m a bit less than totally sympathetic because complaining about returns of .5% to people with Index funds returning -25% isn’t really effective. Of course, the stock market got better before the interest rates ticked up.

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      2. In my personal experience, we can do 4 (retirement) or 5 (college), but not both, at least not well, not at the same time. We’ve favored retirement at the expense of college for now, but that might have to change.

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      3. “There aren’t really any tax benefits for paying down your mortgage or buying a house for cash.”

        Yes, and I’d argue that that is a problem. There are so many people out there who think it’s somehow sophisticated to keep a big mortgage because some guy who wants to sell them mutual funds says so.

        “And, while it isn’t a tax benefit, FDIC insurance on savings isn’t nothing.”

        Quite right. I actually am friendly to FDIC insurance on savings, as it encourages savings, without also encouraging reckless speculation.

        “I’ve had lots of old people complaining about their CD rates but I’m a bit less than totally sympathetic because complaining about returns of .5% to people with Index funds returning -25% isn’t really effective. Of course, the stock market got better before the interest rates ticked up.”

        You would have heard me whining about it, too, because we had our house downpayment fund in 0.9% money markets while waiting to buy our house this May. When we started the process, the money market was giving 2.75% or some such. So sad.

        By the way, I’ve been wanting to mention that if you read Jane Austen carefully, it looks like her characters were expecting only 5% return on investment. So an heiress with 10,000 pounds would have a yearly income of 500 pounds, if I’m remembering correctly. I’m not sure if they had much in the way of inflation, though. If they had very low inflation it would take a lot of sting out of only getting 5%.

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      4. Mostly Lurking said:

        “In my personal experience, we can do 4 (retirement) or 5 (college), but not both, at least not well, not at the same time. We’ve favored retirement at the expense of college for now, but that might have to change.”

        I think a lot of the benefit of the list is that it helps you to prioritize what you should be doing right now, when there’s only so much money (and there’s always only so much money). A lot of advice says to do A, B, C, D, E, F, G, H, I and J all at once and I think people just get lost.

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      5. You should think of it like paying Civ. First you get your army strong enough to only defend, then you build productive capacity, then science, and only at the end do you build a big enough army to smash the other countries.

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  16. We’ve been spectacularly lucky in our house, which has risen nicely in price while providing housing services. Our town has become stylish, mingling swingles on Craigslist ask for it in housing wanted ads. Not something you can count on! We should be okay – ask me after I make my last dormitory payment, in about ten years – and we do work we can keep doing, even as arthritis and bad knees make their appearances. Nothing but luck has us separated from similarly thrifty people who bought a house in a nice neighborhood in Detroit 25 years ago.

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  17. Every serious person over 40 has retirement on their radar, unless they are in very bad financial shape (and even then it’s on their long term, after we pay off credit cards or build up an emergency fund radar). What is most worrisome is the non-serious people, of whom there are multitudes. I know several people who are in good shape themselves, but know that a sibling or parent is absolutely not. One of them has a mother who has worked long past her planned retirement age to support her two other children (one flaky, one saddled with a spouse with serious problems). The future is pretty grim even if you yourself are doing okay.

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    1. I’ve seen a number of Baby Boomers pull it together late in life (and in time, I think). From my personal file:

      1. For years, Relative A and her husband earned high, lived high, and harvested equity regularly from their rental houses (Why couldn’t they live on $200-250K a year? I have no idea). After their divorce and her kids’ leaving the nest, Relative A suddenly smartened up, started paying off the rental houses and has been working 4-6 different gigs and saving like a fiend. I hope she lives long enough to enjoy it.

      2. Relatives B and C are also Boomers and small business people. All the business credit offers they got in the 90s went to their heads (free money!) and things went very sour after the dotcom bubble. They ran up debt attempting to meet their payroll, not realizing how bad or how long the recession was going to be. There were some very bad years, but they eventually emerged on the other side more careful about credit and big Dave Ramsey fans (even the wife, who had been VERY into retail therapy). At this point, they are almost too careful.

      3. Most recently, Relatives D and E have suddenly gotten religion. They are high earners (also in the quarter million dollar range), and had for a long time been a) deciding what they wanted and getting it and then b) figuring out how to afford it. They could always just work longer and harder to get whatever they wanted. Not too long ago, they had a mid-six figure line of credit and were talking about leasing (!) a hybrid (!). Quite recently, things have started to change–I have no idea why. Suddenly, their financial decisions are predicated on the idea that their resources are finite, which had never previously been the case. They even offered a kid more downpayment money, on the condition that the kid not reduce his own contribution to the downpayment! This was a huge breakthrough.

      I’m noting that all of my examples are a) strong earners and b) are self-employed or semi self-employed and c) have the option of working more and earning more. That all helps.

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      1. My theory is that, for the middle to upper middle class, the empty nester years (ages 50 to 65 or so), which have recently been years of cruises and evenings out, will become the savings years, when couples at the peak of their earning power strive to put together enough to carry them through retirement.

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  18. I’m just happy that they nixed mandatory retirement in my job at 65 a few years back because that freaked me out. Now that I know that I can work past 65, I’m good. I’m also insured enough that if I die before then, my family gets a nest egg to cover any shortfall.

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