Monday, April 3, 2017

Do You Really Need Less Money in Retirement? Yes.

Do you really need less money to live in retirement?  Yes - the Snowball effect works for you in a positive way.

One "rule of thumb" batted around by retirement planners is that in retirement, you will need only about 2/3 the income you make today, in order to live.   This number is probably on the high side.   Because of a number of factors, your cost of living drops dramatically in retirement, even as you live it up more.   Why is this?   Well, the costs of working, including ancillary costs, ratchet up your living expenses.  And because of the snowball effect, once your lifestyle gets expensive (and you do stupid things like send out for pizza and buy luxury cars) the costs compound over time.

In retirement, the reverse is true - your costs go down, which means you income can go down, which means your taxes can go down - in a reverse snowball winding itself up the hill.   One cost saving leads to another - and you can live more stress-free and have fun, rather than juggle bills all day long.

Saaaaay!  That might be a good thing to do before you retire, no?

Let's examine some costs of living and how retirement can reduce these severely.

Housing Expenses:  As I noted in an earlier posting, I was surprised these were the largest part of my budget.  But according to Fidelity and other retirement planner sites, this is not unexpected.   Housing is your largest single expense - higher than health care even.

However, it can be a lot less than it used to be when you were working.   If you resisted the temptation to continually refinance your house, you may have your mortgage paid off, which could save you $1500 to $2500 a month for a basic middle-class home these days.

What's that you say?   Mortgage interest deduction?   Well, you won't need that in retirement, as your income will be lower, and you will be in the 15% bracket (if you work it right), so the deduction will be worth less to you.   You cannot deduct your way to wealth, and having debt in retirement so you can get a deduction is idiotic.

Having your mortgage paid-for by the time you retire is the single biggest cost savings in the whole deal.   And since you can withdraw less money from your IRA to live on as a result, you don't have to pay as much in taxes, which means you can stop chasing deductions all day long.   I just did my taxes for this year - I only paid self-employment taxes (Social Security and Medicare) and basically no income taxes, State or Federal, at all.   This will not always be the case, but it illustrates how you need a lot less money in retirement and can just live, instead of chasing the IRS code.

But there are even more savings.  Downsizing to a smaller house or apartment and moving to a cheaper place to live can save even more money.  A "nice" house in the DC suburbs can cost $650,000 or more - perhaps much more.  The same house in a more rural setting could cost $150,000.   A smaller house even less.   Property taxes, utilities, and insurance can all be less - far less - that what you pay to live in an area near where you work.

Sadly, a lot of seniors fail to see this, and keep their four- or five-bedroom monstrosities in the suburbs when they retire, as they want to be near "the grands" or friends or the bridge club or whatever.   This is fine, of course, if you can afford it.   However, I have little sympathy for people who refuse to move away from high-cost areas and then posit themselves as victims.   And no, a "reverse mortgage" isn't the answer to anything, any more than rolling over a credit card is actually paying it off.  Borrowing more money is never the answer to not having enough money.  But you knew that.

There are other areas of possible savings as well.  Some States or Counties offer homestead exemptions for Seniors, or Senior tax relief, which cuts property taxes for older homeowners.  Like I said, the savings snowball.

Car Expenses:  As I noted in an earlier posting, and as validated by many other sources, it can cost $8,000 a year to own a $20,000 car, which is shocking to a lot of people, including myself.   There are fixed expenses, like insurance, depreciation, and registration, that are pretty standard regardless of how far you drive.  And then there are variable expenses like fuel, oil, tires, brakes, that vary with mileage.  The more you drive, the more expensive it is to own a car, to be sure.

But when you are retired, you may drive a lot less.  Commuting makes up 2/3 of that yearly 15,000 miles that most Americans average.   Once you have no where to drive to, other than the store or vacation, your car will last a lot longer and your annual variable expenses will drop.  But the fixed expenses drop as well, which you might not expect.

Let's get the obvious part out of the way - your insurance will drop a lot.  I pay less every six months for insurance than most people pay per month.   For two $25,000 cars, with collision and comp, it runs about $419 for six months.  This is because I am old, have a clean driver's license, drive a lot less, drive a lot less in heavy traffic and big cities, and don't have to commute.   And note that type of car really makes little difference at my age.  The M Roadster cost as much to insure as the mild Hamster.

But it goes beyond that.  Since you drive less, your car will last longer, which is of no value to anyone but yourself.   If you are putting 5,000 - 10,000 miles a year on your car, it could last 20 years or more.  When I was a kid, there was a lady in our town who drove a 1957 Ford Fairlane.   That might sound like a really old car to you, but in 1977, it was just a 20-year-old car.   However, we all thought it was impossibly old, because back then, most cars were junked after 8 years, some after 5.   A 20-year old car was unheard of, which is why the motor vehicle department would issue "antique" or "vintage" tags after 20 years.

Today, it is a joke.  A 1997 Taurus is hardly an "antique", "vintage", or "classic" car but just an old used car these days.   This is how the automotive industry has changed - for the better.

So you keep your car longer - how does that save money?  In depreciation.  That $8000 per year cost includes the depreciation of a $20,000 car, dropping in value by half every five years.   As an oldster, you can keep the car for 10 or 15 years, if you are careful, and the depreciation cost drops to nothing after a while.

Of course, the other huge savings is going to one car.  Cars cost money, in depreciation, driven or not.  If you are short on cash and have two cars, ask yourself why.  You'd be surprised how many people claim they "need" two cars, but could easily commute together without too much hassle.   When I lived in the DC area, I knew many married couples who drove separate cars to work even thought they worked for the same company (and in this case, it was the company).  Not only was this wasteful, they forfeited the ability to use the car pool lanes, which would have shaved a lot of time off their commutes.

In retirement, the "need" for two cars is even less.   Here on the island, some couples make do with one car and a golf cart - or a bicycle.   Seldom does one need to leave the island without the other, and it isn't hard to get around the island even by walking.

And by the way, moving to a location where you can walk to the grocery, bank, etc., isn't a bad option, either.   It may be you need no car at all.   And eventually, as you age, you won't be able to drive anyway.  We can only hope self-driving cars are ready by then!

Meals and Groceries:  This may seem like an area where there are no savings, but you would be surprised.   When we lived in the big city, it seemed we were "busy all the time" and too tired to cook or make lunch for ourselves, so we ordered take out, at at fast-food places, had pizza delivered, or went to expensive restaurants.   Worse yet, we never shopped on price, as we were convinced we were "making so much money" we could afford to spend as much as we wanted to.

Oh, the 30's - the age of naiveté!

Aging sobers you up considerably, and the recession of 2008 was a Godsend in some respects, as it forced us to re-think our spending.  I remember we went to Wal-Mart to see what the prices were like, for the first time in our lives (other than for car batteries and stuff).   We were surprised to see that a whole host of stuff you buy at the "gourmet" store was on sale at Wal-Mart for a whole lot less.  The world's largest purveyor of organic produce - who knew?

Yet I know a lot of people who still turn up their noses at saving money, sneering that they never shop anywhere other than Whole Foods or Wegmans, or if they must, Publix.  All are fine stores, to be sure.  All are radically overpriced, particularly Whole Foods.  Oddly enough, the same people don't patronize Trader Joe's very often.

As I have illustrated before, it costs about 1/4 as much to make food at home as it does to eat out.  So if you "grab a McMuffin and Coffee" on the way to work, you are spending about $4 to $5 for something that can cost less than a buck to make.  That $10 lunch is $2.50 at home.   And that $25 steak dinner at a restaurant is maybe $7 tops, made on your own barbecue.   And better food, too.

Now, of course, you will still want to eat out, but as a retiree, you get more picky about where and when to eat.   Eating at a restaurant is not just refueling your body, but a special event.   So you tend to gravitate away from the eat-n-go kind of places, and also have less patience for shitty service and bad food.   Here on the island, some restaurants get away with this, as vacationers staying in a motel room have no other choice but to eat out.  As one (former) restaurateur told me, "They're just tourists, they're not coming back anyway, so I don't care if the food sucks and the service is slow!"

Fortunately, he is a former restaurateur.

As you get older, you do eat less as well.  We find we split an entree rather than order two.   We simply don't like the huge portions with "two sides" when one portion is more than enough.   And of course, many oldsters find the "early bird special" and whatnot to be a real cost-saver.   As a retiree, you have more time to plan your outings, as well as plan your meals, and this results in real savings across the board.

Taxes:  As I noted above, the snowball effect is really at work here.  For pensioners or people living off dividends, maybe your income is not something you can control.  You get a check and you have to pay taxes on it.  For the 401(k) generation, your income is what you decide to withdraw from your savings until you hit age 70 or so and are forced to withdraw a minimum amount.

So you can decide to make less money if you want to, and how much taxes you pay is, in effect, how much you decide to pay.  401(k) income is taxed as ordinary income - but you don't have to pay "FICA" or the self-employment taxes (13-18%!) that wage earners do.  So your tax bill will be an awful lot less than it was when you were working.

This knocks you into a lower tax bracket - 15% if you play it right - and you need to withdraw even less to get by.  Again, other things like senior tax relief for property taxes, or even state taxes, can mean even more savings, once you get older.

Other:  There are a whole host of other savings you can take when you are older, and as a retiree, you have a lot of time on your hands to take these.   Plus, if you live with other retirees, you hear about all of these things and can act on them.

Senior discounts for restaurants, stores, even movie theaters, are now available to you.   Free or low-cost passes for State and National Parks are a real money-saver if you are traveling a lot, particularly by RV.  The list goes on and on.   Even though many seniors are some of the richest people in our country, we feel obligated to offer them discounts on everything, assuming they are all poor, which often they are not.

* * *

Those are the savings.  On the other hand, there are some areas where your expenses may go up.  But again, it depends on a lot of factors.  For example, medical expenses can skyrocket in the years leading up to retirement, but once you are on medicare, drop dramatically.  This can depend on your overall health, of course, and whether you decide to become a medical junky or not.

Travel costs can rise, only because you decide to travel more.  This is a good thing, right?   But costs of travel can actually drop for seniors, even as they travel more.

When we are younger and working, we hope to take two weeks off and fly somewhere on vacation.  The costs are not as critical when you are working hard and making big bucks.  Your time is worth more than money (or so you think) so you book a "luxury vacation" for two for a week in the  Caribbean.

As an oldster, you might have more time to plan, and take advantage of package tours and extended stays and elder hostels.   As a "working stiff" you can't afford to take a month off and rent a a car and cottage in the UK and explore.   But in terms of cost per day, it is far less than staying in a hotel and eating in restaurants and taking taxis everywhere.

Package tours are aimed at the elderly, and we laugh sometimes at the bus tours that come to our island.  However as you get much older, they are a good way to get out of the house and not have to worry about making reservations and arrangements.  My Brother-in-law and his wife just returned from on in Italy, and they loved it - they are not the kind of folks who want to spend two months making reservations and planning a trip.   So why not?   At least they went.

Elder Hostels and Elder Hostel tours are remarkably cheap and my Father used to go on these.  Things are pretty organized, and the costs are very reasonable.  Plane fare is probably the worst part of it.

Retirement can be what you make of it.  And some folks thrive in retirement, taking on (or continuing) hobbies or traveling or just relaxing.   If you have the money to do the things you want to do, it can be great.   If you feel stressed for cash all the time, it can suck.

But often, this is a matter of choice, not circumstance.  My observation, having lived and studied among these great apes we call "retirees" for over 12 years now, is that many of them make themselves miserable by chasing status, spending more than they should, keeping high-dollar lifestyles, or obsessing about silly things.  And still others, of course, retired with not enough money not because they were poor, but because they chose to live large during their working years and assumed that retirement would work itself out later somehow.

There are huge savings in being retired. But don't take that as an excuse to under-fund your retirement!   You may want to do more than stay home and watch television.