View Full Version : NY Times article on retirement and outliving your savings
Why a million dollars doesn't buy what it used to: http://www.nytimes.com/2013/06/09/your-money/why-many-retirees-could-outlive-a-1-million-nest-egg.html?hp&_r=0
I've thought for some time now that the "conventional wisdom" of most investment advice could use some updating for the 21st century -- in particular, the concept of "safety" and "preservation of principle" when the instruments which do that with the highest degree of security are the ones most likely to steal your future in the form of diminished purchasing power. "Keep your age in bonds" may well become as antiquated advice as "Here, let me feel the bumps on your head to determine your illness."
try2bfrugal
6-9-13, 1:35pm
I just skimmed the article, but most households with a million in savings and no other income would have no reason to invest in municipal bonds. Munie bonds have low rates because of the tax advantages for wealthier households. Retirees could invest in TIPS and I bonds which are pegged to track inflation. Or even regular bonds are going to pay more than munies. Plus most households are going to have Social Security so they aren't going to have to live completely off their nest egg.
A household of two getting the average Social Security check is going to have $1,250 per month per person, or $30K a year from SS. If they need 40K a year to live, then their nest egg draw down changes to only $10K per year, or a 1% withdrawal rate from their portfolios. 30 Year TIPS are currently paying inflation plus 1% so they would never run out of money. When interest rates rise to normal levels, historically 30 year TIPS will most likely return to 2%+ over inflation.
There seems to be a hidden agenda lately in many of the investment company articles to keep people working and saving for as long as possible by taking extreme positions on finances with households making stupid investments and no Social Security, pension or part time work and acting like the current low interest rates in the U.S. will last forever and that commission and TIPS and I bonds do not exist.
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Oooops - Meant commission free on the TIPS and I bonds. The investment company reps really like to pretend these savings options do not exist because they don't make any money off them, initially or on an ongoing basis. They want to keep those fees and contributions rolling in year after year on riskier and non-inflation adjusted investments.
Of course if the federal reserve would just stop printing money to buy the majority of treasuries then interest rates would rise to a level in which people would be willing to buy the bonds and this particular problem would be solved. There would be other new problems, to be sure, especially for the too big to fail banks, but I personally question whether they would actually be worse than what we've got now.
try2bfrugal
6-9-13, 1:56pm
The average over 65 household in 2011 made under 3K a year in interest and dividends, so interest rates aren't going to have a huge impact on most households' retirements either high or low -
http://www.bls.gov/cex/2011/Standard/sage.pdf
ApatheticNoMore
6-9-13, 2:58pm
Is it another article where a million is not enough, you really need to save several million? Do those articles have any idea what the average household income in this country really is? Do they understand how impossible that is for most people? Yea but as of now we do still have Social Security, it does provide a basic income, other savings are used to supplement it.
I mean those types of articles might convince some people to throw in the towel and not save anything at all (yea great that's just what we need ...) ... but really what are those articles to most people? Surrender all hope ye who enter into accumulating a retirement portfolio?
By the by planning not to retire and work at least part of the way into old age is an ok plan, the trick is to find something where you won't hit age discrimination, and I'm not sure that will be possible for everyone.
By the way when you're so busy accumulating a retirement portfolio and funneling every last dime into Wall Street, is there going to be a world around for you to retire to by then, the way things are going? See those types of questions burn in my mind. So scaremongering, scaremongering, you should be saving 50% of your income before you even think of giving to a nature preserve, but I don't know, I think not. :)
Even saving a million seems to me like flying to the moon. I am just cashing out the $20K I have managed to save to pay for my med bills. Good thing I have a good attitude, because I will probably be poor in old age. Who actually can save a million dollars?!? No one I have ever met.
I think the conventional wisdom on returns does have to be adjusted, similar to the returns in the original YMOYL 30 year treasuries. I also think the financial services industry loves use scare tactics to get people to throw more money into their products.
My parents have some money in muni bonds right now. They are both still working and so they have provided a nice set return and tax shelter through the past years which overall have been pretty turbulent financially. The broker they bought them through said they were an "ok" investment but he advised staying more in the stock market...since they are nearing retirement I didn't think that was great advice at all. It also provides them some warm fuzzies because the building project they went to is at the local University so sometimes it is nice to think that your money is working for a greater purpose that you believe in.
As for when they retire, I think the tax savings will diminish since most retirees make a fraction of their former paycheck and are likely in a much lower tax bracket. Wasn't that the the entire theory behind the 401k? You'd be a "net winner" by deferring taxes now to when you were in retirement. So, I wouldn't think that municipal bonds would be the best option for most retirees since they pay less than other types of bonds when the tax savings are not factored in.
Even saving a million seems to me like flying to the moon. I am just cashing out the $20K I have managed to save to pay for my med bills. Good thing I have a good attitude, because I will probably be poor in old age. Who actually can save a million dollars?!? No one I have ever met.
You know them, it's just not obvious. The Millionaire Next Door lays out what they look like.
There seems to be a hidden agenda lately in many of the investment company articles to keep people working and saving for as long as possible by taking extreme positions on finances with households making stupid investments and no Social Security, pension or part time work and acting like the current low interest rates in the U.S. will last forever and that commission and TIPS and I bonds do not exist.
THIS! Not to mention the ad nauseum iteration of the ridiculous idea that everyone needs to plan to have 80% of current INCOME to live off of after retirement. Until we changed the kids school situation, we were saving roughly 40-50% of current income. So can someone explain to me why we would suddenly double our expenses in retirement? This ridiculous advice assumes everyone is spending more or less what they earn, with maybe a little bit going toward retirement. It would be VERY VERY easy to tell people to calculate retirement needs based on current SPENDING, not EARNING. That might also actually help people get a clue about where their money is going and start living more sensibly. But instead this 80% figure is bandied about like the gospel, and the sheeple just trot happily along in the 'oh woe is me I'll never be able to retire" flock.
That being said, I was a bit shocked yesterday as DH was flipping channels that he stopped on a financial advice giver on Fox News (of all places) basically saying that the best way for a young couple to get ahead was to live off of one salary and save the other. It wasn't Elizabeth Warren -- maybe her daughter? Didn't see the name. Anyway, that was a breath of fresh air.
Llamo, I think it is because most of the people I know don't have a clue what they are spending.
You know them, it's just not obvious. The Millionaire Next Door lays out what they look like.
They wear JC Penney suits and drink Budweiser, IIRC
I don't read those articles. I'm with redfox. After my recession/MIL house/DH business fiascos, the idea of retirement is like dreaming of taking a trip to Oz. But beyond that, I truly believe that retirement as a concept is due for a makeover. There are so many different and unique ways to view your working life, why just have one definition? Create your own reality and forget about all the doomsayers.
lhamo, The daughter wrote the book "The Two-Income Trap" with Elizabeth Warren. I learned that from Zoebird, actually. :) So it very well could have been her.
flowerseverywhere
6-9-13, 8:28pm
They wear JC Penney suits and drink Budweiser, IIRC. Not really. They drink water from the tap
THIS! Not to mention the ad nauseum iteration of the ridiculous idea that everyone needs to plan to have 80% of current INCOME to live off of after retirement. Until we changed the kids school situation, we were saving roughly 40-50% of current income. So can someone explain to me why we would suddenly double our expenses in retirement? This ridiculous advice assumes everyone is spending more or less what they earn, with maybe a little bit going toward retirement. It would be VERY VERY easy to tell people to calculate retirement needs based on current SPENDING, not EARNING. That might also actually help people get a clue about where their money is going and start living more sensibly. But instead this 80% figure is bandied about like the gospel, and the sheeple just trot happily along in the 'oh woe is me I'll never be able to retire" flock.
My take on the article is that they made some critical assumptions that we as a group do not. We know it is possible to live well on less money. Many of us are at FI or well on the road to it. I know that DW and I are doing just fine on half of our previous income. So, yeah, I agree that it's not necessary to prepare for 80% of your income at retirement.
However, I don't think that's a universal idea. The personal savings rate in April of this year (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm) was just 2.5%. It's true that some expenses likely will go away in retirement, but some may rise, too, like health insurance costs or oil. This 2.5% savings rate rate indicates to me that people are pretty much spending what they make now, so maybe having 80% of their income is not a bad idea -- for them.
I also didn't get from the article a persistent push on the million-dollar figure, either. They used it as a nice round figure, one that's been often quoted, but it was clear to me that many people won't have a million at retirement and that won't stop them from retiring when they have to. They'll just have to do things differently, like cut expenses quite a lot, or take on some sort of income-producing job to make up some. I think the article also pushed strongly the idea that Social Security is -- for better or worse -- a thicker leg on the "retirement stool" than was originally envisioned.
As I read articles on how withdrawing 3% a year from principal is the new 4% to avoid outliving one's funds, I thought this was a good take on the situation.
Llamo, I think it is because most of the people I know don't have a clue what they are spending.
Yeah, and that is step one that should be addressed in people's planning, rather than worrying about whether or not they are going to have a million dollars. The latter question is irrelevant if you don't know the answer to the first.
What is the Dickens quote? Something like:
Annual income one pound one shilling. Annual spending one pound. Result: happiness
Annual income one pound one shilling. Annual spending one pound two shillings. Result: misery.
It ain't rocket science.
Note that I am not slamming people who have had trouble saving or had to decimate nest eggs due to illness, long term unemployment, chronic underemployment, etc. Just the people who run around NYC spending 150k mindlessly when they don't have to and then whine about the fact that they'll never be able to retire. And yes, I know housing is expensive in NYC. Move to Queens. We did. And did quite nicely for ourselves. Groceries are cheaper/better, too.
You know them, it's just not obvious. The Millionaire Next Door lays out what they look like.
So I have heard, and in my immediate neighborhood, with all the immigrants, it may be so. Absolutely no one in my immediate circle except the neurologist & spouse with inherited wealth have anywhere close to more than what they need month to month (we all talk about this with each other). We are all lucky to still have our homes.
My DH & I wouldn't have had the option of a home without my parents giving us the down payment. I am simply trusting in my husband, my community, and the basic goodness of my species, as well as my ability & willingness to work anywhere to get me through.
Even saving a million seems to me like flying to the moon. I am just cashing out the $20K I have managed to save to pay for my med bills. Good thing I have a good attitude, because I will probably be poor in old age. Who actually can save a million dollars?!? No one I have ever met.
Really? A million is really not that much anymore. I would expect many of the people I know have at least that much. I also know many that don't.
catherine
6-10-13, 10:41am
So, given the doomsday scenario set out here, would you a) be more motivated to stay at a job you really didn't like much just so you could sock away $2 million or b) find a job you enjoy doing for less money, extend your working life and lower your expectations for what you think you'll need?
The assumption for this $2 million is that you withdraw only 3-4%, leaving the principle intact and then you wind up passing that HUGE chunk of money to your kids or a charity or both. I guess that's OK, but it feels like hoarding to me. Why not just try to calculate a slow divestment of principle and interest so you kind of net out closer to 0 at the end? The Die Broke philosophy.
rosarugosa
6-10-13, 10:53am
I don't expect us to have anywhere near a million when we retire, but in retrospect, and without spending a lot of time with my calculator, I think it's safe to say that we could have retired with a million if we had a different mindset about saving/spending when younger, even on our solidly middle-class income. Oddly enough, all those years of "investing" in boutiques and fine restaurants did nothing to enhance our financial situation. :)
On the other hand, both of our moms have reasonably comfortable retirements with a very small fraction of that amount. They have all the necessities covered, and many luxuries as well.
iris lily
6-10-13, 10:54am
So, given the doomsday scenario set out here, would you a) be more motivated to stay at a job you really didn't like much just so you could sock away $2 million or b) find a job you enjoy doing for less money, extend your working life and lower your expectations for what you think you'll need?
The assumption for this $2 million is that you withdraw only 3-4%, leaving the principle intact and then you wind up passing that HUGE chunk of money to your kids or a charity or both. I guess that's OK, but it feels like hoarding to me. Why not just try to calculate a slow divestment of principle and interest so you kind of net out closer to 0 at the end? The Die Broke philosophy.
Why can't I work at a job I like and still have $2 million? Like dmc, I agree that $1 million isn't that much, I'm shooting for multi.
I also believe in the Die Broke philosophy (especially since we do not have children) but am ever cautious about overspending no matter how much is in the bank. Right now the market is up and I feel rich, but talk to me a year from now. The swings of the market are extreme.
ApatheticNoMore
6-10-13, 11:31am
So, given the doomsday scenario set out here, would you a) be more motivated to stay at a job you really didn't like much just so you could sock away $2 million or b) find a job you enjoy doing for less money, extend your working life and lower your expectations for what you think you'll need?
Considering I've never been able to find a job I didn't completely loathe (fast food as a youngster was still more fun than anything I've done since ..), I'd like two million thanks. Of course that's not happening either. Most people will have neither work they like NOR two million of course! Of course if I had any idea how to even go about getting a job I like (most useless career books are useless) .... then maybe I'd choose that. But honestly accumulating two million might be a less impossible task really!! If one was skilled at investing etc. ... at least I have a vague idea how that could happen. Getting a job one likes is a complete mystery to me.
I never understand the million figures, are they are million per person or per couple? Because the latter doesn't seem that difficult if all goes well, only I'm single, so it would only be 1/2 million, so I'd be a complete and utter failure yada yada.
The assumption for this $2 million is that you withdraw only 3-4%, leaving the principle intact and then you wind up passing that HUGE chunk of money to your kids or a charity or both. I guess that's OK, but it feels like hoarding to me. Why not just try to calculate a slow divestment of principle and interest so you kind of net out closer to 0 at the end? The Die Broke philosophy
better at least have long term care insurance then.
On the other hand, both of our moms have reasonably comfortable retirements with a very small fraction of that amount. They have all the necessities covered, and many luxuries as well
honestly I've never had any real clue about finances there as it seems basically impossible information to get at. So it's an open mystery that weights ocassionally at the back of mind, what if there's not enough money for end of life stuff? But I do think earlier generations experiences of retirement are pretty near totally irrelevant to me. They had pensions. I don't. I think we should preserve the SS system, but realistically I will likely never net what they did out of Social Security, can't even collect till late 60s as is.
I thought it was a pretty decent article compared to other doomsday retirement articles I've seen recently. It brought out at least three good points. One, that the old rule of a four percent safe withdrawal from the nest egg is out the window. The new rule is more like two or three percent. Two, that you probably are not going to keep up with inflation without taking some risk. Which probably includes some fine balance between stocks and bonds. And third , that there is a good chance interest rates are going to rise soon which makes some bond investments pretty risky right now.
Most of the doomsday articles I see are not making any assumptions about how simple a person is living. Like in the early example he describes a couple who is 65 and eligible for S.S. plus withdrawing four percent of a million dollars. Heck, that income is almost more than I was making when I was working, paying off a home loan and maxing out my 401k! All or most of the doomsday articles I see are more about savings and less about learning how to live a lifestyle where less is more.
They wear JC Penney suits and drink Budweiser, IIRC
Ha ha. Or more likely shop at thrift stores and buy off brand beers at the dollar store :-)
While I'm not in the Millionaire Next Door club, far from it, I have found in these past 14 years of retirement (14 - yikes! And I'm only 55 now!) I need little to live on to be happy and fulfilled. How much you need to retire on is more dependant on your lifestyle than the need for a certain set amount of Monet THEY tell you that you must save. I plan to use up much, if not all, of my principal over my lifetime rather than live solely on the interest of savings.
Even saving a million seems to me like flying to the moon. I am just cashing out the $20K I have managed to save to pay for my med bills. Good thing I have a good attitude, because I will probably be poor in old age. Who actually can save a million dollars?!? No one I have ever met.
I'm unlikely to even EARN a million in my lifetime. A lot of jobs pay $20k or less. 45 years times $20k is $900,000. Some of that would have to be spent to , you know, live. I started working when $8,800 a year wasn't a bad salary. I had years when I was caring for stepkids or my health crapped out. I think my average earning has been under $10k a year when you count the zero years.
So, given the doomsday scenario set out here, would you a) be more motivated to stay at a job you really didn't like much just so you could sock away $2 million or b) find a job you enjoy doing for less money, extend your working life and lower your expectations for what you think you'll need?
The assumption for this $2 million is that you withdraw only 3-4%, leaving the principle intact and then you wind up passing that HUGE chunk of money to your kids or a charity or both. I guess that's OK, but it feels like hoarding to me. Why not just try to calculate a slow divestment of principle and interest so you kind of net out closer to 0 at the end? The Die Broke philosophy.
I would choose option "c". Make some likable but drastic changes to my lifestyle, drasticly reduce both my "needs" and my spending, chance my housing situation so I can be mortgage free sooner rather than later, look into alternative ways to live that are different and more frugal but very enjoyable than the traditional house-with-a-thirty-year-mortgage. I would work hard to reduce my expenses and become debt free so that I don't need one or two million in order to retire.
If I had to choose between staying in a job that I didn't like to sock away $2m vs doing a job that I enjoyed for less money, longer, -- well, I've chosen the work for joy.
And, the nice thing is that because it's not a "job" -- I have the opportunity to earn a lot more than $2m over time. :)
I think this also goes hand-in-hand with what Spartana says -- because in order to do this, you do need to get ahold of your finances. By living simply (and small/minimally), we are able to do a lot more and live on a lot less day to day, and any extra goes to savings, etc. It works great.
Right now, we're in the process of developing a virtual studio (online classes) that my clients, friends and family in the US, around NZ, AUS and the greater world (there are a few out there!) can attend classes with me in a way that is accessible, easy, and efficient (ie, I open up my available hours and people sign up for private lessons, live streaming classes, etc). And, i can record and host several hours of videos besides. So, it extends my reach without really extending expenses, work, or travel of a second location.
Though I still plan on other locations, too. :)
I'd like to have 2MM to retire, but I don't know if that will be possible given the market doing dismally in the last few years- and I don't expect it to be better any time soon. If it were entirely up to me, we'd likely be retired by now (on much less than that) but hubby is worried about the effects of inflation and the future cost of healthcare under Obamacare (given that its likely to at least double or triple based on what I've seen projected so far). So its likely another 3-15 years (depending on whether we still enjoy our jobs and can do them). We aren't big on things, and have proven to ourselves we can live on fairly small amounts through extended bouts of unemployment. I also did some self employment and realized that really wasn't my thing. So when I retire, its likely play and volunteering and not another career.
ApatheticNoMore
6-16-13, 5:00pm
If I had to choose between staying in a job that I didn't like to sock away $2m vs doing a job that I enjoyed for less money then .... I'd really like to have those choices!
Even saving a million seems to me like flying to the moon. I am just cashing out the $20K I have managed to save to pay for my med bills. Good thing I have a good attitude, because I will probably be poor in old age. Who actually can save a million dollars?!? No one I have ever met.
I believe moderator "Loose Chickens" once wrote that she and her husband had lived an itinerant lifestyle in an RV for decades, been frugal, and had a financial net worth north of $1,000,000. They never had a high income.
I started saving for retirement in 1990 and living frugally. Now, at age 62, I have about $647,000 in retirement savings and Zillow estimates that the home I bought in 1977 for $40,000 is worth a bit more than $500,000. This puts me into the "Millionaire Next Door" category of the book by Doctors Stanley and Danko of the same name.
For a good look at the typical millionaire in the USA and their spending habits, read "The Millionaire Next Door (1996) and "Stop Spending Like You're Rich and Start Living Like a Real Millionaire" (2009). The latter book is by Dr. Thomas J. Stanley.
The original title for "The Millionaire Next Door" was going to be "The Blue Collar Millionaire", but an editor suggested the title that was used as being more accurate.
My income back in August of 1989 was $28,831 per annum and it topped out at $97,082 per annum. While the latter figure is somewhat above the median household income in the USA, it is nowhere close to the level of household income considered necessary to become "rich".
Best,
Rodger
By the way when you're so busy accumulating a retirement portfolio and funneling every last dime into Wall Street, is there going to be a world around for you to retire to by then, the way things are going? See those types of questions burn in my mind. So scaremongering, scaremongering, you should be saving 50% of your income before you even think of giving to a nature preserve, but I don't know, I think not. :)
So true!
I'm also always struck by the 80% figure. If you're saving for retirement, plus emergency fund, plus your next vehicle, plus paying a mortgage, that likely is at least, or more than 20% of your income. That doesn't count commuting costs, clothing, food at or for work/food you could have obtained more cheaply if you had the time, other time-saving conveniences, etc. OTOH, there is the health care monster without a job. So, I dunno. We paid off our house and have been saving >10% and closer to 20% just in retirement, since our 20s. I think we'll have at least $1million by the time we retire but the vagaries of luck may change that.
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