Boomers are packing up their McMansions and making a lifestyle change. Moving from their houses with room for the kids and making room for their RV. In some cases, walk-in closets are being replaced with a drive-through home.
“Mailbox money.” That’s what investors often call the passive income generated by real estate assets. It could be from rental income, house flipping profits—even dividends. The thought is, buy some property and wait for the checks to start rolling in. Can that still be done, or are such scenarios a pipe dream from a pre-recession world?
Big cash flow—and then a crash
Steve Olafson of Scottsdale, Arizona is a former plumber, auto mechanic and tech manager that now works real estate deals full time. The 2008 crash is still fresh on his mind.
“In 2007, I had over 1000 apartment units,” Olafson says on the BiggerPockets.com blog. “The cash flow was very high. All of that was wiped out by the crash.”
But it gets worse. After going on a major apartment complex purchasing spree in Phoenix during ’04 and ’05, he decided to geographically diversify. Olafson began buying units in Houston, Texas. A couple of years later, not only was the economy beginning to “drop a bomb” on Arizona, but a hurricane hit Houston.
“Gross incomes on my properties dropped by more than 50%,” he says. “I was lucky to pay expenses for a while. There was nothing left to give the lenders. I fought like crazy for a couple of years and finally got the income back up to where the full payment could be made. I had to put all my reserves into the property and had nothing left to catch up the arrears that had accumulated. This is when the lenders foreclosed.”
Travelling the world on investment property profits
But Chris Morley, founder of Bien Realty in Manhattan, still sees people who are willing to take on at least a little risk in real estate.
“I have sold investment properties [in the city] to people currently living in the suburbs,” Morley tells MoneyCynic. “Their intention is to rent it out and get it paid off so when their kids leave for college they can leave the high taxes in the suburbs and live in NYC with no mortgage and less taxes.”
And then there is Dale Degagne, a financial planner from Ontario, Canada, who travels the world with his wife—on his profit from real estate investments. Currently living in Thailand, he says he bought his first rental property at age 21.
“I have mainly stuck to rentals, but I have owned multi-units, single families and student rentals. I have also done flips,” Degagne tells MoneyCynic. “Currently, there’s little money in commercial [real estate] at my price range.”
He says he “retired” at age 28 with five properties, hired a manager and hit the road. But before jumping into the real estate game, Degagne says investors should consider three keys to success:
- Pay off the mortgages. “Assuming you purchase property that is profitable from the start, not having a mortgage every month can significantly increase your profit. I know for me, [my profit] will double in 20 years when all the mortgages are paid off.”
- Hold the real estate for at least 10 years and keep good books. “In real estate you have good years and bad years, just like you will in any business and almost any retirement investment strategy. In a 10 year time frame you should see a) A trend in your real estate — prices, costs, profit b) What your worst year was, and c) From there you should be able to figure out a solid number that you can rely on. This is by far the most important point.”
- Have an exit strategy. “This involves planning how [the properties] will be taken care of when you’re still alive, but don’t want the bother of making any decisions on them. For this, my suggestion is training someone who will eventually inherit them to make the decisions. Bookkeeping and day-to-day management can always be outsourced. There’s no need to be fixing toilets in the middle of the night at 70 years old.”
No toolbox required
But to invest in real estate you don’t have to have a tool box and plumbing supplies. In fact, in some cases, you’re not allowed to manage or perform maintenance on such investments. For example, property can be purchased and placed in a self-directed IRA but financial and maintenance matters should be handled by a property manager. Performing work related to the IRA asset yourself is regarded as a ‘prohibited transaction’ by the IRS.
And for those who aren’t hands-on handy, real estate investment trusts may be a way to gain exposure to property income.
“A real estate investment trust (REIT) is a company that buys, develops, manages, and/or sells real estate such as skyscrapers, shopping malls, apartment complexes, office buildings, or housing developments,” Thomas Marino, a financial advisor in Cherry Hill, New Jersey tells MoneyCynic. “Rather than investing directly, investors in REITs put their money into a professionally managed portfolio of real estate.”
REITs make money from rental income, profit from the sale of a property, as well as other services provided to tenants, Marino says
“Because REITs are required to pay out 90% of their annual income in the form of dividends, you can expect to receive income from your REIT investment,” he adds. “A REIT may trade on the major exchanges, just like stocks, or be what is called a ‘non-traded REIT.’”
While Marino says non-traded REITS can presently pay a monthly dividend between 6%-7.5%, depending on the quality and the assets held, they are not considered as liquid as exchange-traded REITs, and can be very difficult to sell on the secondary market.
“Because non-traded REITs may involve substantial redemption fees, they are best suited for long-term investors who will not need access to their invested capital in the short term,” Marino adds. “Also, distributions are not guaranteed and can be suspended or halted altogether.”
But no toolbox is required, either.
This article was originally published on TheStreet.com.
It’s the opposite of working till you drop. Retire before 40. There’s no shortage of blogs stating just such an intention. The writers share their own personal mantra of how to pay off debt, save more money and begin life after work while you’re still young enough to enjoy it. Some are working toward the goal, others claim to have achieved it. Most are only a few years into their effort either way, so whether they achieve long-term success or just a huge resume gap, remains to be seen.
But Akaisha and Billy Kaderli retired at age 38 – and that was 25 years ago. To say they have achieved proof-of-concept is an understatement.
“We’ve got enough that if we can control our spending a bit, we can live anywhere we want.”
Coming to a crazy conclusion
Billy, a French chef, and his wife Akaisha bought a Santa Cruz, California restaurant in 1979. Later he became a financial advisor while she continued running the popular eatery. After six years of her serving hot dishes to customers and him cold-calling prospective clients, things were getting a little tense at home.
“It got to a point where ‘Kaish and I weren’t seeing each other anymore,” Billy tells Money Cynic. “She was running the restaurant and working nights — and in California the stock market opens at 6:30 in the morning and I was done at one o’clock. I’m at the beach, and she’s just going in to do the dinner shift.”
Being a “numbers guy,” he took stock of their assets and came to a seemingly crazy conclusion.
“All of a sudden it just clicked. I said, ‘We’ve got enough that if we can control our spending a bit, we can live anywhere we want.'”
Running the retirement numbers
She was not so sure.
“I was 36 at the time, and that wasn’t in my plan at all,” Akaisha admits. “I figured that I’d work until I was 55, and that would be ‘retire early.’ And he comes with this harebrained idea that we’re just going to chuck it all.”
It took a little convincing, to say the least.
“We were tethered to our jobs, to our bills,” she says. “And the idea that we could chuck it and live comfortably really was appealing. Once I calmed down.”
They analyzed their spending — so much of it was work related. Two cars, a house near the beach, insurance, meals out; the usual American overhead. The Kaderlis took two years to “test the waters” before making the leap in January 1991. Their nest egg? $500,000.
$500,000 to last a lifetime? Seriously? Can that work? It does when you spend just $22,000 a year in living expenses. As of the end of 2014, after 24 years – 8,760 days, Billy notes — the Kaderlis have spent an average of $22,040 annually or $60.38 per day. Basically the Kaderlis are living on the 4% withdrawal rule.
“2008 did rock our boat”
“The S&P 500 on the day we retired was 312.49,” Billy tells Money Cynic. “And if you do the math on that, up to last year, that’s about an 8.18% return, plus dividends. So with a couple percent for dividends, you’re right at the 10% level.”
Don’t you love the way he says “about” and then quotes a hundredth decimal point return? When it comes to numbers, this guy is not guessing. But after a sustained bull market, isn’t he a bit leery of a long-overdue correction?
“2008 did rock our boat,” Billy admits. “At this point, we’re a little more conservative in our investments because we’re now 62. We’ve gone through three or four of these down draws in the market. So, am I nervous? I’m always nervous.”
But Billy says it’s not just what you make, it’s what you spend.
“The key to this whole thing is: How much are you spending today on your lifestyle? If you’re spending level is $100 a day then you just have to have the assets — the net worth invested — to support that. That’s all.”
Retirement living in ‘cost beneficial countries’
However, it’s a safe bet that many Americans, at least those contemplating retirement, are living on much more than $100 a day. And will require a large enough nest egg to support their current rate of spending. The Kaderlis admit that part of their strategy is living in “cost beneficial countries” such as Mexico, El Salvador, Vietnam, and Thailand. When we spoke via Skype, they were living in Lake Atitlan, Guatemala, one of their favorite stops.
“Housing is one of the largest expenditures in any budget. So if you work on getting your housing down to an affordable amount per month, you can live just about anywhere,” Akaisha says. “It’s housing, transportation, taxes and food — but housing is your biggest [budget item].”
They don’t live by a budget, but to this day track their spending diligently. The Kaderlis spend 21% on housing, 24% on medical expenses (a spend rate that has been impacted by some recent health issues), 20% on transportation, 22% on food and entertainment, 8% on miscellaneous, and 5% on computer expenses. These are net expense amounts, after taxes.
Their housing costs have been reduced almost in half by house sitting. The couple says these stints can include spectacular beach views in well-appointed homes with maid service. Otherwise, they find monthly rates for apartments or hotels.
Low-budget living in the U.S.
Can such low budget living work in the States? The Kaderlis say you have to get creative, look for low cost-of-living areas and consider renting out a room, a floor — or owning a duplex and leasing out half of that to a tenant.
Health insurance is also a major consideration. In the beginning, they bought a high deductible, catastrophic coverage plan. Now, when they visit the U.S., they take out a traveler’s policy. Day-to-day, living outside of the States, the Kaderlis are exempt from the Obamacare health insurance mandate.
“We’re self-insured,” Akaisha says. “We pay out-of-pocket for all of our medical expenses.” The couple also relies on their own version of medical tourism, visiting favorable foreign locales for healthcare.
And they don’t own a car. They used to own a vehicle, but now use local mass transit, walk, bike, share rides with friends, or hire a driver. It’s a debt-free lifestyle built on frugality – and freedom.
“The financial industry is not doing their job,” Billy says. “Debt is the killer. You’re a wage slave when you have debt. And if you can eliminate that, it frees up a whole lot of options.”
Check out the Kaderli’s website: RetireEarlyLifestyle.com
This article was originally published on TheStreet.com.
Saving for retirement is hard enough, especially if your nest egg is fed by a single income source. Developing multiple income streams can help deliver a life-after-work cash flow that lasts. In its annual analysis, the nonprofit Tax Foundation considered all of the sources of personal income as reported to the IRS in tax filings for the year 2013.
Perhaps there are at least a couple of income streams that you can add to your retirement savings strategy.
The core income
Of the total $9.2 trillion income reported on over 147 million individual tax returns in 2013, 70% of American income was derived from employment.
“For most tax filers in the U.S., the largest number on the 1040 comes on line 7, the very first line pertaining to income,” Alan Cole, economist for the Tax Foundation says in the report. “It is on this line that taxpayers mark wages, salaries, tips, and other compensation for their work. The amounts reported on the 1040 reflect most, but not all, labor compensation. Firms also pay for employee health benefits and make contributions to Social Security.”
So that’s our W-2 income – and it’s what we rely on most to float our everyday expenses as well as feed our future retirement revenue. Now to consider the other income sources we might tap.
Buying a future income stream
You can purchase a future income stream by diverting some of your income to a pension – in the off-chance that your employer offers you one – or by purchasing an annuity. Pensions and annuities accounted for $639 billion in income for taxpayers in 2013 and were the second-largest income source for Americans.
Annuities have been given a pretty bad rap in recent years, mostly because financial advisors make so much money off of them, leading to aggressive and sometimes unscrupulous sales tactics. But buying a low-cost annuity from a respected and highly-rated provider can provide an additional source of guaranteed retirement income.
Income from S corporations and partnerships can be based on business revenue or from investments. Energy investments – such as oil and gas, wind, solar and other alternative energy plays — often use limited partnerships to gain investors. This is another area where potential buy-ins should be carefully considered and thoroughly vetted.
Of course, partnerships and S-corps can also be used for investments such as equipment and real estate rentals, land and timber, royalty-driven concerns, farms and ranches or timeshares – just to name a few.
Partnerships can provide a valuable income stream with little or no involvement on your part. Of course, finding the right business or investment is the key.
Ah, the precious profit known as a capital gain. How sweet it is: Buy something and sell it for more than the purchase price. Simple, right? If only it was so easy. But capital gains accounted for $483 billion in taxpayer income in 2013.
A capital gain can be profit derived from the sale of a stock, house, property – anything. It’s not usually a recurring income stream, but a one-time sale. As stock investors know, it’s a matter of timing and discipline: Buy low and sell high is harder than it sounds.
Having a little business on the side has become a thing. Whether it’s freelancing a talent, skill or service, or working some kind of ecommerce angle, it’s easier than ever to start – and yeah, fail at – generating a side income.
It might be something you do after work or on weekends: consulting, repairing, creating or selling. Nearly all (95%) of U.S. businesses are “pass-through” entities, meaning they aren’t structured as corporations but as firms where the income passes through to the individual owner. The majority are simply sole-proprietorships – one-man bands.
So, it doesn’t take much to test an idea to see if it flies. While small business failure rates are high, if you’ve got a full-time job and start a little venture on the side, your risk is low.
Take Craig Newmark for example. He threw together a little website in his spare time when he moved to San Francisco for a new job. He started by listing local events — and then job openings — and his side hustle hobby really took off: it’s called Craigslist.
Who knows where Social Security is headed 10, or 15 years down the road? Only 41% of 18 to 29-year-olds and 29% of 30 to 49-year-olds Americans have confidence that the system will be around for them in the future, according to an AARP survey last year.
In the meantime, Social Security benefits accounted for $243 billion dollars of reported income in 2013, according to the Tax Foundation report, the sixth-highest income source. It’s a critical revenue stream for many of today’s retirees. For the rest of us? Maybe little more than a trickle. The latest estimate, released by the program’s trustees last July, estimates that after 2034 Social Security will only be able to pay about 75% of scheduled benefits.
Some stocks, mutual funds and exchange-traded funds pay out dividend income to shareholders. Finding such investments that offer some growth potential in addition to paying a dividend is practically portfolio nirvana. But dividends offer sweet, sweat-free paydays.
Retirement account distributions
This is down the list but a high priority for just about all savers: retirement income from our tax-advantaged accounts. Retirement account distribution strategies are often debated but never once-and-for-all decided. But you’ve got to build a balance first.
“America’s system of retirement accounts, while fragmented in several different programs, is taxed in a neutral way that removes the bias against saving,” Cole’s Tax Foundation report says. “Furthermore, it actually works fairly well at providing people income in their retirement. Notably, the income from retirement accounts is now a little bit larger than the investment income earned outside of that system.”
Retirees pulled $214 billion from their retirement accounts in 2013. You’ll want to make sure you have one to pull from too when the time comes.
Ah yes, that blast from the past: interest. Remember that? It’s been a while since any of us have actually seen interest paid on savings, and that’s why it’s at the bottom of the list. The $101 billion in interest income claimed by 2013 filers works out to about $690 per taxpayer. With the average savings account paying only about 0.06% interest in 2013, you’ve got to wonder: Where the heck did this interest income come from? Well, there is corporate and municipal bond interest to consider, too.
These days, typical savings accounts are paying a little bit more – around 1% — and interest payments may start getting closer to relevance as the Fed hikes the ball up the long and winding yield curve.
All the rest
Alimony, gambling proceeds, state income tax refunds, unemployment compensation and other sources of income are little more than ripples in the giant pool of American income sources. And a bit harder to initiate on your own.
But with a goal of creating as many income streams as possible, every little bit helps.
Good news, retirement savers: The market’s crashing. Finally. Last week, the Dow dropped more than 1,000 points. It did so again this morning, before recovering most of the loss by midday. The financial reporters were chasing their tails faster than ever. “The market is down! What does it mean?!” And then, hours later: “The market is recovering! What does it mean?!”
What working Americans saving for retirement really need is a market crash that lasts.
A little behind saving for retirement? You need a grizzly bear market
If you’ve been diligently saving for retirement, say in your 401(k) or IRA, you’ve been buying into a rising market for the past six and half years. And that’s fine, but you could really use a good, solid break in the market. A deep sustained bear market.
That’s when your retirement savings gets turbocharged. You’ll be buying the market at a discount for the first time in years. With each paycheck-deducted contribution into your retirement savings, you’ll be snapping up shares at a faster than ever pace. You deserve more bang for your buck. With a really horrible stock market, you’ll finally be getting caught up a bit with your life-after-work nest egg.
Come on bear market, stay ugly
The thing is, the market just hasn’t committed to being really bad yet. But maybe this is finally our time. We just need it to go down and stay there for a while. Bear markets only last for an average of 14 months – while bull markets stretch on and on; for an average of more than three years (43 months), according to Putnam research.
Imagine if we could buy into a discounted market for a year or two – and then hang onto a raging bull run into retirement!
Don’t just get our hopes up
Maybe I’m just being overly optimistic – hoping for a really big, sustained drop in the markets. But if you walk on the sunny side of the street like I do, you might want to crank up those salary deferrals into you 401(k), max out your IRA contributions and put some of that cash to work in your taxable brokerage account.
And then hope for the worst.
Asking a financial advisor about Social Security claiming strategies — or healthcare costs during retirement — and you’re likely to see a furrowed brow, followed by some snappy verbal tap dancing. And yet both matters are of primary concern for those planning for life after work.
Ron Mastrogiovanni Sr., president and CEO of HealthView services in Danvers, Massachusetts, says he “grew up” in the financial services industry and knows why advisors have traditionally dodged such questions.
“No one ever trained us on Social Security and healthcare, years ago,” Mastrogiovanni tells the Money Cynic. “Today, that’s beginning to change pretty radically.”
A 2014 survey by Practical Perspectives and GDC Research found that just 36% of financial advisors advised clients on specific Social Security claiming strategies, while a meager 13% offered recommendations on how to manage health care costs in retirement.
And yet, advisors often use Social Security as a marketing device to lure prospective clients to seminars, workshops and free consultations. Jared Weiss with the Corporation for Social Security Claiming Strategies (CSSCS) says it’s “frightening” how many financial advisors talk about Social Security while the percentage who really know anything about it “is very low.” He says pitches such as “The Seven Simple Secrets of Social Security” are common.
“I’m here to tell you that with 2,728 filing rules and what some would say [are] several hundred filing options, there’s a lot more than “Seven Simple Secrets,” Weiss tells the Money Cynic. “It’s much more complex when you start talking about spousal benefits, federal and state worker benefits, Medicare, disability, adult dependent children — there’s a whole array of complexities.”
CSSCS, founded in Plainville, Massachusetts by Cheryl Robertson, a former labor and employment attorney and insurance agent, trains advisors, CPAs and attorneys in Social Security claiming strategies.
“Consumers — investors — are basically demanding that advisors provide them with this information,” Mastrogiovanni adds. HealthView provides advisors with applications and education regarding healthcare planning, Medicare, long-term care and Social Security. “Take Social Security for instance. You optimize Social Security; you’re talking about a difference of hundreds of thousands of dollars in potential income. You’re talking a lot of dollars.”
Weiss says financial planners are finally beginning to integrate Social Security and retirement healthcare expenses into their projections. He estimates that such reports can cost clients anywhere from $100 to $700.
Excluding health care costs from retirement income planning can be an equally expensive error, Mastrogiovanni says. Many advisors recommend a replacement income formula, such as aiming for an income stream equal to 75-80% of your pre-retirement salary. Mastrogiovanni says such a strategy may cover a portion of healthcare costs in retirement but is likely to fall well short.
While healthcare costs vary by age, gender, health, income and state of residence, a recent white paper issued by HealthView projected average lifetime retirement health care premium costs for a 65-year-old healthy couple retiring this year would total $266,589. That sum considers coverage by Medicare Parts B, D, and a supplemental insurance policy.
If total health care costs were factored in — including dental, vision, co-pays, and all out-of-pocket expenses — the couple’s costs would increase to $394,954, the report said. For a 55-year-old couple retiring in 10 years, total lifetime healthcare costs were estimated to be $463,849. HealthView projects that for a couple retiring this year, total healthcare costs would consume about two-thirds of their lifetime Social Security benefits.
However, finding an advisor that not only talks a good game but is proficient in Social Security strategies or retirement healthcare costs is not an easy task. Weiss says his firm offers a “Certified in Social Security Claiming Strategies” (CSSCS) designation to help consumers identify practitioners.
The National Social Security Association, another for-profit firm offering similar education services, also sponsors a Social Security focused designation, the National Social Security Advisor (NSSA).
Both credentials are recognized by FINRA, the self-regulatory agency of the U.S. securities industry though that does not constitute an endorsement by the regulator. Other designations may also integrate Social Security claiming strategies into their curriculum but aren’t specifically certifying Social Security expertise.
Asking your advisor straight out if they have the resources and knowledge to offer advice on healthcare costs in retirement and Social Security is the most direct route to finding competent guidance, both consultants say.
If the advisor answers no, Mastrogiovanni says that’s when a consumer has some tough decisions to make regarding that advisor’s future role in their retirement planning.
Originally published on TheStreet
I had a buddy retire years ago, with a big fat 401(k) and all. For a while he played a lot of golf. I mean a whole lot of golf. Traveled, caught up on a bunch of home improvements – and finally went back to work.
Why? “Bored,” he said. But he didn’t go back to work at his old job; he wanted to do something “fun.” Now he wakes up every day way before dawn to do a morning radio show.
My brother retired, too. Took a 100% salary from a lifetime state pension loaded with benefits. Could have done anything he wanted. He did. He started his own business. Now with a sprawling high-tech manufacturing firm, he’s working harder than ever — and loving it.
That’s the thing with retirement these days. The “get rich by 40 and retire” strategy has evolved into a retire, and then do-what-you’ve-always-wanted-to-do mentality.
Is retirement a reality?
However, if you don’t have a fully-loaded 401(k) or an income-for-life pension, never retiring can be a reality rather than an option. According to Fidelity, only one-third of working Americans are on-track to cover 95% or more of their total expenses in retirement. Just 12% will be able to cover essential costs — but not discretionary expenses like travel and entertainment.
That leaves over half (55%) with a fair or even poor probability of being able to completely cover essential living expenses in retirement, including housing, health care and food.
Surprisingly, the generation with the worst prospects for retirement is the youngest. Gen Y adults under 35 are currently falling significantly short in meeting retirement savings goals, even though many of the Fidelity survey respondents said they were looking forward to retiring early.
Fully 40% of those surveyed are saving less than 6% of their salaries today, far less than the often recommended 10-15%.
Why wealthy workers don’t retire
But what if you scrimped and saved and invested and had a pile of money to retire on – would you still work? In a survey by Spectrem Research, more than half (51%) of wealthy investors with incomes over $750,000 said they were still working. And of those working wealthy, nearly half (46%) said they would never retire – or would wait until after age 70 to call it quits.
Proponents of a “never retire” lifestyle say that remaining in the workforce keeps you vital, engaged – and healthier. And there seems to be research to support that theory.
Gabriel H. Sahlgren conducted a study while serving as a research fellow at the Institute of Economic Affairs in London. He concluded that “being retired decreases physical, mental and self-assessed health. The adverse effects increase as the number of years spent in retirement increases.”
Sahlgren’s research came to these additional conclusions:
- Retirement increases the probability of suffering from clinical depression by about 40%
- Retirement decreases the likelihood of being in “very good” or “excellent” self-assessed health by about 40%
- Retirement increases the probability of having at least one diagnosed physical condition by about 60%
- Retirement increases the probability of taking a drug for such a condition by about 60%
Financial benefits of postponing retirement
Other than the possible health benefits of never retiring – or at least postponing it as long as possible, there is a one more reason to wait until age 70 to retire. Doing so will boost your Social Security income by more than 30%.
But whether the decision to “never retire” is because of a desire to remain financially solvent, physically fit or mentally sharp, perhaps quality of life is not defined by whether we are “working” or “retired.”
In a 2011 study fielded by the Harvard School of Public Health, over 700 retirees were asked if life after work was better, about the same or worse than life five years prior to retiring. Responses were fairly well divided between “better” (29%) and “worse” (25%).
Nearly half (44%) said it was “about the same.”
Originally published on Investor Place
You ever notice the runners crossing the finish line after a marathon? Hands on their hips, red-faced and gasping for air. Or, hunched over with their hands on their knees, kind of wobbling a bit.
That’s how a lot of 50+ workers are feeling these days when it comes to the race to retirement. Except, you haven’t crossed the finish line – you can see it, but aren’t quite sure you’ll make it, right? It’s OK. Take a few deep breaths and pace yourself. If you’re a bit behind in your retirement savings and feel like you’re getting lapped, we’re going to show you some shortcuts to get you back on track.
Transition to your retirement budget now
Consider transitioning your living expenses to retirement mode now. You know you’ll have to live on less when you quit working so it’s a good idea to start now while you can still choose your budget battles.
Think you might want to live on the lake in retirement? Consider downsizing the big family house that you’ve been rattling around in and find that lakeside cabin fixer-upper. If the commute is still manageable for your current job, you could sell your big house, buy the retirement hideaway and invest the remaining equity from the sale.
Reducing debt is a good idea, too. That 18% APR credit card interest you’re paying is dragging down your financial resources. Dedicate yourself to paying off the credit cards, and then put them in a drawer and let them gather dust for a while. Don’t close the accounts, because that could ding your credit score. Once those balances are erased, you can plow that extra cash into your retirement savings.
Still driving two vehicles? Maybe you can get by with just one. Sell the extra vehicle and all the money you’ll save on payments, insurance, gas and maintenance can go to your nest egg. Premium cable television, the landline you never use, membership dues you pay for services long forgotten: every bit adds up.
If you want to get serious about saving for retirement and living a worry-free life-after-work, reduce your living expenses by half. Yes, half.
Kick-in the catch-up contributions
If you’re 50 or over you can make up for a bit of lost time with catch-up contributions to your tax-deferred retirement accounts.
That means you can put in your regular maximum deferral contribution to your retirement plan (like a 401(k), Traditional or Roth IRA, SIMPLE, SEP or 403(b) plan) and then kick-in an additional amount, which varies by account. The IRS has all of the details available online — or talk it over with a trusted advisor.
Start a new investment account
If you’ve really committed to a super-charged retirement savings plan, you’ll find that you can quickly reach the limit of what can be set aside in your tax-deferred accounts, such as your 401(k) or IRA. Now you need to dedicate funds to a taxable investment account. If you haven’t already started an emergency savings account, this new brokerage account can serve double duty for a while. That means you’ll first stash cash, or cash-equivalent investments, into the account amounting to six months income. Once that life-raft is inflated you can invest the rest in a suitable mixture of equity and fixed-income investments.
Now, set-up an automatic draft from your current wages to feed this shiny new account. Have each month’s deposit dedicated to buy-in equally into your mix of investments.
Generate a side income
Finally, you may want to investigate starting a small business or income-producing endeavor on the side. Moonlighting can be fun, and it might be something you’ll grow now to continue during retirement, as an income supplement to your retirement assets.
Follow your passions. Love arts and crafts? Start an Etsy account and sell your wares online. Or combine your hobby with a bit of travel and sell your goods at local arts fairs and trade shows. Online sales can be extremely lucrative, especially if dedicated to niche products. Rather than compete with Wal-Mart and Best Buy, consider selling products of local and regional interest, or items related to a favorite past time that you are totally enamored with.
Virtually any hobby can be monetized: photography, writing, sewing – even fishing! Plow any profits you generate into your investment and retirement accounts.
Moonlighting can also mean finding a second job. Again, finding something that you may want to continue doing during retirement is best.
Committing to your retirement lifestyle – prior to retirement – can help you define what you want the rest, and the best, of your life to be.
Saving for retirement can be an abstract exercise – until you put real numbers into a real plan. Let’s construct a strategy for a $100,000 retirement income starting at age 65 until age 90. You may live longer or retire sooner, but for the purposes of simply starting somewhere in the planning process we’ll begin with that.
All of the intricacies of such retirement scenarios should consider inflation, market variances, withdrawal rates and all the rest — details best left to financial planners using advanced calculations. Some advisors use what is called a “Monte Carlo” simulation. Others love a good spreadsheet. We’re working with what is little more than a cocktail napkin, but the numbers will give you an idea of the work that needs to be done.
If you’re 20
We’ll assume that to begin you’ve already taken care of the major roadblocks that keep some Millennials from starting the race to retirement: credit card and student loan debt and a three- to six-month emergency fund. You will want to put your retirement savings in a tax-advantaged investment account, such as an IRA, 401(k), or SIMPLE. How to invest your savings is a topic for another time. What we want is a number. The big number required to fuel our life-after-work for some 25 years. Steve Vernon is a consulting research scholar for the financial security division of the Stanford Center on Longevity. His book, Money for Life, discusses the pros and cons of various ways to generate retirement income. NerdWallet asked him what size of a nest egg would it take to generate a $100,000 annual retirement income.
“My very general rule of thumb is to have savings equal to 25 times your desired amount of annual retirement income when you retire,” he says. “So if you need $100,000 per year in retirement income, you’ll need $2.5 million in savings. If the $100,000 income is in addition to Social Security or includes Social Security — that makes a difference.”
We’ll exclude Social Security in our plan, so the $2.5 million will be our initial bogey.
Zeroing-in on the big number
To nail down the assets required for our six-figure retirement income, let’s consider another rule of thumb. Blackrock, the investment management company, released its “Corrections During Critical Pre-Retirement Phase” (CoRI) calculator in mid-2013. It calculates the level of savings an investor needs to generate a desired income throughout retirement.
Using the same parameters given Steve Vernon, the CoRI calculator gives a similar, if slightly lower, result: $2 million. Starting at age 20, that would require savings of about $9,500 per year based on a projected annual return of 6%. That’s a doable number if you have a 401(k) at work; in fact well below the $17,500 maximum deferral allowed in 2014.
But it is about $800 every month. That’s a big number to someone in their 20s.
If you’re 40
If you are in your peak earnings years, it may take every bit of that 401(k) deferral limit to get you on track for the six-figure retirement. Using the same savings rate of $9,500 per year – starting at age 20 — you would already have some $350,000 in your retirement kitty. If not, it’s time to play catch-up, deploying every investment tool in your arsenal: annual rebalancing, tax-efficient mutual funds or exchange-traded funds, and profit/loss tax harvesting. After age 50, you can also use the “catch-up” provisions to boost your retirement savings to your IRA or 401(k).
If you’re 60
It’s the race to the finish line and you should be seeing a big balance on your investment statement. Somewhere in the neighborhood of $1.5 million. To reach the goal of a $2 million, or better, nest egg capable of generating 100 grand in retirement income each year, you may be selling off some assets to pad your account balance. Reducing expenses now during the five-year countdown to retirement can also help you cushion your after-work budget. Now is a good time to factor-in your Social Security and Medicare benefits, too. You may even decide to continue working for a few more years, or generate a part-time income to make up for the gap.
The $2 to $2.5 million retirement savings target required to generate a six-figure income can seem impossible to achieve – until you have a plan in place, and a firm commitment to succeed.
The American Retirement Crisis won’t bring back pension plans, but the “war for talent” just might. An overwhelming majority (85%) of Americans are worried about their opportunity to retire. Virtually the same number (82%) believe that workers with pensions are more likely to enjoy a secure retirement, and 84% say that all Americans should have access to a pension, according to the National Institute on Retirement Security (NIRS).
It seems what we have in place now is not working – so, is it time to bring back old-fashioned pensions?
The NIRS study says Americans are twice as likely to choose an employer with a pension plan as one with a 401(k). Millennials aged 18 to 34 are most dissatisfied with the current system – and the most likely to affect change. If younger workers begin seeking out employers with enhanced retirement benefits, the do-it-for-me defined-benefit pension plan could once again replace the do-it-yourself defined-contribution 401(k) plan. But don’t expect employers to take the initiative on their own.
Pension plans will return only if the job market demands it
“Corporate America has found that pensions are no longer necessary to attract employees,” says Jim Heafner, a financial advisor in Charlotte, N.C. “It’s as if they all got together and agreed collectively to terminate pensions for new hires so they could all save a bunch of money.”
But because pension plans are “incredibly” expensive, according to Heafner, employers will only revive them if the job market demands it.
“In a time when pensions are not necessary to entice good employees, I see no logic for pensions to return to corporate America. The only reason that Corporate America will ever turn back to pensions is if the competitive landscape requires it. In the future, when the economy moves at a faster pace and competition for talent heats up, it is possible that we will see the rebirth of pension plans, once again making them commonplace. Given the state of our economy and the fiscal challenges facing America, that may be some years off,” Heafner says.
The “good old days” of pensions are gone
But Jeffery D. Cortright, a financial advisor in Jenison, Mich. believes the days of corporate pensions are over – never to return.
“You need look no further than state and local government pension fund issues to understand the ‘good old days’ are gone for pooled pension programs,” says Cortright. “Longevity for beneficiaries, litigation over mismanagement, investment fraud and beneficiary financial fraud are just a few reasons there will not be a resurgence in the pension programs of yesteryears.”
It all boils down to the employee’s personal responsibility, he adds.
“As is often said, ‘no one will look after your money as closely as you do,’” Cortright says. “If we rely on an employer to manage the funds for all employees, we run the risk of one bad decision impacting an entire workplace. If the employee has the responsibility, a bad decision impacts just one worker. To build the proper foundation for this responsibility, however, we need to make financial education a larger priority through schools, employers and retirement saving programs.”
Pension plans are not a “wealth building” tool
And at least one advisor is not sorry to see the departure of private pensions. While such plans have provided retirement income for employees in the past, pensions are not really “wealth building” tools for workers, according to Ilene Davis, an investment advisor in Cocoa Beach, Fla.
“It may represent a future source of income, but if someone needed a lump sum to fix a roof or buy a car, they could get it from a 401(k) plan but not a pension, and other than to a spouse, none of the benefits typically will be passed on to other beneficiaries,” Davis says. “Plus the continuation of that pension is dependent on the solvency of the company and/or the Pension Benefit Guaranty Corporation, which ultimately is likely to depend on the kindness of Congress to use tax dollars to keep it honoring promises.”
Rising interest rates could see pension plans “roar back”
But still, there are those who hold out hope for a return to the days of corporate-sponsored retirement incomes. Oliver G. McGee III is a former U.S. Deputy Assistant Secretary of Transportation for Technology Policy in the Clinton administration and a professor of mechanical engineering at Howard University. He believes pensions are set for a comeback.
“When interests rates turn around again, so will defined benefit pensions start to roar back,” McGee told The Money Pivot. “And just as welfare policies have roared back, so will pension policies roar back again, too. Businesses are already anticipating such returns of conventional welfare and pension policies. Why? Because it’s good business strategy to anticipate such regulatory and liquidity risks. This is especially the case in businesses addressing regulatory risks by encouraging the need for job creation to reduce welfare rolls. And this is especially the case in businesses watching their liquidity risks by enhancing internal labor markets of businesses through better recruitment and retention policies.”
McGee thinks rising interest rates will spur rising interest in pension plans.
“Soon businesses will begin to re-open frozen defined benefit pension plans, as interest rates change, that will in turn benefit such plans. As businesses run the numbers, they will begin to see that any expansion of a 401(k) may possibly be more expensive than offering a defined benefit plan, especially when businesses take into account the drain of cash reserves associated with employee turnover, which defined benefit plans generally reduce.”
Pension plans = accountability
Todd Uzzell is an insurance agent in Mesa, Ariz., and thinks there are at least a couple more good reasons to resurrect pension plans.
“The less power we allow our government to have, the less control that they have over us,” Uzzell says. “When we changed to the ‘401k system’, accountability went out the window.”
Uzzell says pension plans have a chain of accountability that is lost with 401(k) plans.
“With pensions, there were some tacit and written guarantees barring a company from going belly up. These guarantees required a certain level of accountability. The fund managers all wanted to manage the pensions thus making them accountable to the pension boards; pension boards were accountable to their workers, and the workers saw the value in staying with a company for an extended period of time. If the pension fund didn’t perform, then the manager stood to lose the account, and the pension board was held responsible by the employees. This is a system that promotes performance,” he says.
“Under the ‘401k system’ it is backwards, the employees — who generally know very little about the financial market — choose their own funds and manage their own retirement future,” Uzzell continues. “If they choose poorly and do not have an adequate retirement nest egg, they have no one to blame but themselves. In general, I am in favor of personal responsibility, but the current system doesn’t require the ‘banks’ to perform for their constituents. If they have a good year, great! And if they have a bad year they still will control the same 401(k) money that they controlled the previous year. No accountability. The 401k idea was brought about by the banks and shrouded in the guise of letting the people (who have no idea how the markets work) control their destiny. Pension plans equal accountability.”