Retiree income is very low - should we be alarmed about this?
A recent article online argues that the median household income of a retiree is a paltry $29,000 and we should be concerned about this. And indeed, for many Americans, this may be a real concern, particularly if they are paying rent on an apartment or a mobile home lot, or if they have car payments or credit card debt. And yes, I have known folks like this, right here on our island, and they ended up broke, trying to live on Social Security alone, with no savings.
But the article made me chuckle a little bit because $29,000 is my income in retirement and is one reason why I have been able to retire early. Every January, for the last couple of years, I have taken $25,000 out of my IRA and put it into a money-market fund. Every other month or so, I transfer $5000 into my checking account. That, and the income from our condo (about $5000 a year) makes about thirty grand - in taxable income.
"But wait a minute," you say, "You live in a half-million-dollar home on a resort island, and just bought a fancy pickup truck and a new RV! How can you afford all that on thirty grand a year?" And the answer is, we don't. We spend another $10,000 in after-tax savings, which brings our spending up to $40,000 a year. Still, that isn't a lot of money for the lifestyle we lead.
The key is, of course, we are no longer paying banks interest. With no mortgage, no car payments, no credit card debt, no student loans, you don't need a lot of money to get by on a day-to-day basis. We paid all that off, over the years, and yes it was a struggle and seemed impossible at age 30. But time is an amazing thing, and if you put your mind to it, you can accomplish a lot of things over time. That is the key, of course - time. There are a lot of folks around these days who want it all, right now, without any effort on their part. Hey, pay off my student loans! Why can't I be, at age 30, as wealthy as my parents have become after they worked for 45 years? Amazing that college teaches so little these days.
But of course, others are not in the situation we are in. We have friends who have fat government pensions - pulling in more than a hundred grand a year, combined. Sounds sweet, but they often have no real savings - maybe thirty grand in the bank, if that. They have a mortgage and car payments well into their 70's and 80's. In fact, they may die insolvent, leaving nothing to their children. They have a good lifestyle - perhaps nicer than mine - but it is all premised on a steady cash-flow of income, and a mountain of debt that must be serviced.
They bought into the "debt is good" mentality, as the interest was "deductible" - so their accountant told them. So why not get a mortgage at age 70 and then deduct the interest from that fat pension check? It sort of makes sense. Heck, you can even deduct the interest on a vacation home, which might include a boat or RV - if it has a kitchen and bath. Of course, the problem with this scenario is that if you end up upside-down on these borrowed items, you may not have the cash to buy your way out, as has happened to friends of mine. It gets ugly.
But there are others who are in a far worse boat - they approach retirement age with little or no money in the bank, huge debts to service, and little or no income. That has to suck - and those are the folks that do have it bad - but often because of poor decision-making on their part. These are the same folks who bought fancy cars, boats, motorcycles, or whatever, and then flung it in your face back in the day. You quietly put money in your 401(k) while they saved nothing. Kind of hard to feel sorry for them, but then again, they probably will end up getting some sort of bailout from the government.
But speaking of the government and bailouts, one place where "Living Stingy" really adds up is in terms of taxes. The less your taxable income is, the lower your taxes are - seems like a simple thing, really. When you are working, you have no choice about taxes - you get this big paycheck (we hope) and have a big tax bill. You can take deductions, of course, and use tax credits you qualify for. But you can't deduct your way to wealth, and one mistake I see a lot of people making is assuming that chasing tax deductions will make them wealthy. If a $250,000 mortgage gives them a tax deduction, then a $500,000 mortgage is even better - right? Problem is, you have to pay that money back, and larger, more expensive homes are more expensive to maintain.
It is like leasing a car (or truck) for your business. Yes, the lease payments might be deductible (provided the vehicle is used mostly for business). But no, your business doesn't become more profitable if you lease two cars, or lease a more expensive car. It still is an expense, you just don't have to pay income tax on it - which doesn't make it free.
But a lot of people fail to see this - they don't really understand how the tax system works, only what their accountant says. A young friend of mine who was making six-figures and living in a "luxury apartment" decided to buy a condo - at the height of the real estate bubble - because "my accountant told me to do so". Apparently the accountant made an offhand comment that the $2500 a month he was spending on a de-luxe high-rise apartment would be better spent on a mortgage on a house, as the interest would be deductible. And that would be true, in most cases. Sadly, my friend, taking this advice at its most superficial level, decided to go out and buy as much condo as he could afford, thinking that the more he spent, the more he saved. Now you see why I don't give advice - people take advice the wrong way. Punchline: The market crashed and he sold the condo at a loss five years later when he had to move. He blames his accountant for "giving bad advice." You see how this works.
But getting back to deductions, one of the nicest ones I took was the depreciation deduction by purchasing investment real estate back when it was cheap (after the bubble of 1989). Of course, the key was to buy low, sell high. When I sold out, a lot of the people buying were thinking - like my condo friend - that they would "make out" on the deal, what with the tax deductions, not realizing that unless you have an underlying profit, it is all going to go South in a hurry. But I digress.
I no longer have to chase deductions - they are pretty worthless to me. My income is so low that my taxes are basically zilch - a few hundred a year for State and Federal income taxes. If I had a mortgage to pay, credit card debt, car payments, and whatnot, I would have to take out more money from my IRA every year, which would mean my IRA would be drained dry in no time, but moreover, I would have to take out even more to pay taxes, as while there are little taxes on $30,000 a year income (married couple) if I went to $50,000 or $70,000, the tax bill would be substantial. The snowball effect kicks in, yet again.
So if you can approach retirement with some after-tax income (perhaps in a Roth IRA) you can use that money to pay for "big ticket" items like cars and whatnot, and not have to borrow money and pay interest - and worse yet, tap that 401(k)/IRA and pay income taxes. And it makes a difference, too. If you structure your retirement so that you need $100,000 a year to live, then a million dollars in your IRA will last you only about ten years or so - and you will pay a boatload of income taxes on it. On the other hand, if you have no debt, then that same amount of money could last 30 years or more - in fact, if the market is doing well, it could conceivably last forever, if you have a minimum 3% rate of return on your money, which isn't too hard to do, even these days.
But it doesn't end there. A lot of government programs and subsidies are based on annual taxable income and not overall wealth. Again, our screwed-up society equates wealth with income and vice-versa. The media calls someone making a million dollars a year (like Kamala Harris and her husband) "millionaires" when in fact, they might be broke.
The point is, the lower your income, not only do you save on taxes, you save on a lot of other things.
Say, for example, I had a mortgage of $400,000 on my house (as my Fidelity advisor suggested). That would mean I would have to cough up $2000 a month or so, every month, which means I would have to take another $24,000 out of my IRA every year. This would kick me into a higher tax bracket, and also mean that my IRA would not last nearly as long. Not having to pay this every month amounts to a phantom $24,000 in income, but also has tax benefits and other benefits as well.
If my income was now nearly $60,000 a year (in order to pay that mortgage) I would only receive half as much subsidy on my Obamacare plan - a cost of $10,000 a year or more, about half that mortgage payment. Mortgage interest deduction or not, it ends up costing me more in the long run.
I am not sure this means we would qualify for food stamps (nor would we want to) but it illustrates yet another savings aspect of not paying interest.
Apparently, I am not the only retiree to live this way. I recall talking to our local bank manager and she said she was amazed how little income some retirees on the island make - as their houses and cars are paid-for. When you put only 5,000 miles a year on a car, well, you don't need to be leasing or buying new cars every few years. The savings add up. She was flummoxed by the math, as she was earning "good money" as a bank manager, and had a series of debts to service that pretty much ate up that "good money" every month. In other words, she was caught up on the hamster wheel that so many of feel trapped on, during our working lives.
I only wish, in retrospect, that during that working life, I learned to live on less and borrow less. I was able to start my own law practice and live a fairly comfortable life. But the stress of debt - unnecessary debt - was always there, and I feel foolish now, for taking on some of those debts, particularly the credit card variety.
The amount of money you earn in life is a finite number - and not hard to calculate. You will likely be forced into retirement earlier than you anticipate - by fate or circumstance. The amount you "need" to retire with will be whatever it is you end up with when you crash-land there. You can't wait until age 50 to start saving. And the only way to save is to make savings in your lifestyle.
The good news is, you don't need a lot of money to live, in retirement, if you can pay off debts before you get there. On the other hand, if you hit retirement age with an onerous mortgage to pay, unless you have a fat pension to pay it with, you are screwed. For us folks in the 401(k) generation, that simply is not an option, however.
Of course, why wait until retirement? If you can live on less, you can save more, and end up wealthier, which in turn means you can do what you want to do in life - retire early, for example, see the world, do what you want. Also, the less you live on, the more opportunities you have in life. Debt-slaves are never able to start a business or take advantage of lucrative opportunities in life - which is why they remain debt-slaves. Fortunately for us, most people choose to be debt-slaves, which means a better life for the remainder of us - those who choose to follow the trail of bread crumbs.