Wednesday, November 22, 2017

How Little You Need to Live Large

Many people think you need a huge annual income to be "wealthy" but in reality, if you own money, you don't need to earn it so much.

I was talking with a banker the other day and they remarked how surprised they were that some folks who live on retirement island get by on so little money.   These are not poor folks, but people living in  houses worth at least $400,000, driving fairly new cars, and not wanting for anything.

My banker friend was puzzled by this, as they had to struggle to pay bills, pay the mortgage, make the car payment, and put food on the table - and save for retirement at the same time.   How can someone live on a retirement island in a home that costs twice as much as theirs, on half the annual income (or less)?

And the answer is pretty simple:  The retirees don't have any debt.

Of course, not all retirees retire this way.  We have friends with fat government pensions (yes, including those "underpaid" New York State schoolteachers!) who live the debt lifestyle in retirement.  One confesses to me that they have only $30,000 in savings.  But with a six-figure combined pension, they can afford to pay a mortgage, have car payments, and whatnot.   When they want to spend, they borrow, just like working people.

But the "old school" method of retirement, which is quickly becoming the "new school" with the 401(k) generation aging out, is to have no debt and thus no need for income in retirement.

And when you get older, well, a lot of bills simply go away or shrink.   For example, most jurisdictions have tax abatement for older folks.  In New York, it was based on need in our County.  Here in Georgia, they exempt you from school tax once you hit the age of 65.   Of course, many retirees move to lower-tax jurisdictions to begin with, so their taxes are far less.

Having no mortgage means not having to cough up $1500 to $3000 a month in mortgage payments - which is an awful lot of money, in case you weren't paying attention.    Since you don't commute, you don't drive as much anymore - and your car can last a lot longer.   We've had the hamster for over two years now, and it has only 12,000 miles on it.  You save on gas, you save on maintenance, your car lasts longer - oh, and your insurance drops down to nearly nothing.

Health care costs are another aspect.   While your health may decline in old age, much of the cost is picked up by Medicare.  For the middle-aged self-employed person, it is a catch-22.  In order to earn enough to pay that huge mortgage, you make too much to qualify for an Obamacare subsidy - and you could be paying thousands per month for health care for you and your family.

What you discover, as you get older, is that the cost of living can drop down significantly.   And it is not just these big ticket items, either, but a whole host of smaller things.   As you get older, the idea of paying $200 for a pair of "designer" blue jeans seems kind of silly, when you can buy the real deal for well under a hundred.   You really aren't interested in impressing people you don't know anymore, which is why old people dress so funny and unfashionably.   We tend to dig old clothes out of the closet and wear them - which appalls the younger generation.

Similarly, being seen at the "in" club and standing in line to pay a cover charge no longer seem like important things.   On our little island, everyone goes to the happy hour at the Hampton on Wednesday, where the drinks are half-priced and the appetizers are cheap.   Yes, we tend to seek out bargains more - we have nothing else to do all day long (not really, but you do have more time to think contemplatively about your money and how you spend it).

This is not to say we don't go to other venues, but just not as often.   Meanwhile, the working people here on vacation go to the club or the Westin and spend $10 or more on a cocktail and put it on their credit card.   A lot of fun for us, once in a while, but not an affordable lifestyle in the long term.

It becomes a bit of a game - to see how much you can get away with for how little.   And it is a fun game to play.   And since you are no longer working and have few sources of income at this point in your life, it is a game you have to play.

As a result, you can live the lifestyle of someone making "six figures" in the big city, for less than $50,000 a year - often far less.   But in order to do this, you have to be astute and you can't be burdened with debt.

Good ol' Sooze Orman has been harping about this as of late.  I guess she wants more attention or is selling a new book or something.   But even a stopped clock is right twice a day.  And for our generation, who is expected to retire on "savings" and a small amount of social security, she makes a valid point.  She argues that in the last few years before you retire, it makes little sense to stuff more money into your IRA or 401(k), as the compound interest you will earn will be pretty small.   Paying off that mortgage, on the other hand, will mean you can live on a lot less cash-flow, and the savings in interest are money in the bank.

Of course, her advice to someone who has serially refinanced their house for 20 years and now owes more money on the house than it is worth (or owes hundreds of thousands of dollars with no realistic way to pay it off before retirement) is sort of useless.  The best they can hope to do if they have any equity at all, is to downsize their lifestyle and sell the white elephant and move into something a lot cheaper, preferably in a State with much lower taxes.  And no, a reverse mortgage isn't the answer - it is more like throwing gasoline on the fire.

Which is why it is important to figure out how to be debt-free by the time you retire, and figure this out early on in life.   And often this doesn't mean scrimping and saving and doing without, but rather just not refinancing your home again and again to take out cash, but rather paying down that mortgage over 30- years.  It means living within your means, which really isn't all that hard to do.

Because when you retire, you will be forced to do it anyway.   Might as well get used to it!

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