A reader writes that they are concerned for me as I am not making enough money. Perhaps a part-time job? I might do that, but only to keep amused - and stretch out my retirement dollars further. If I worked, my income would stay the same - as I would take out less money from my 410(k).
My local bank manager tells me that she is amazed how little some of the retirees on our island make. "How can you survive and afford a nice house on only $30,000 a year?" she asks, as she is making three times that amount. To her, this seems like defying gravity! But I wrote about this before - you need less money in retirement, or can, if you plan things right.
Another reader admits to squandering small amounts of money, but says, "Well, it's OK, because I'm still working!" as it if were possible to just make more money. But as I learned the hard way, the amount of money you make in your lifetime is a finite amount - and quite easy to calculate or at least estimate pretty accurately.
These comments illustrate the problem with the working mindset - the "Salaryman Trap" as I noted early on in this blog. You start to make good money and you think the supply will never end. What's more, you'll make more in the future! Because you'll get raise after raise and never be laid off, and someday, you'll strike it rich, somehow, through vague modalities. But someday never comes. One day you are unceremoniously dumped from your job, and you have to pick up the pieces and put together some sort of half-assed retirement plan.
It happened to my Dad, so I had a good education about these things. He was fortunate in that my Mother's parents had a modicum of money, and they could sell the family home and build something smaller and pay cash for it. He also had a small pension and Social Security. They lived a cash lifestyle, and lived pretty large on not a lot of income. And as such, they paid little income tax - the whole thing snowballs in your favor.
Let's "do the math" and figure out why this works - and whether what works in retirement works for the working person. In our first example, our Working family has a house worth a half-million dollars, in the suburbs of a major city. They have a combined income of $100,000 a year, and both commute to work. To make things simple, we'll assume they are a childless couple (a huge expense that also is not present in retirement - or shouldn't be, anyway!). In our second example, our retired couple has a house worth a similar amount, in a more distant retirement community, and has a combined income of $30,000 a year from social security and other sources.
Income: $100,000 (ordinary income)
Mortgage: $2000 a month ($400,000 @4%) or $24,000 per year - $20K interest
401(k): $15,000 per year (15% max)
Adjusted income: $65,000
Taxes, Federal & State: $13,000
Property Taxes: $5000
Remaining income: $47,000
I used a number of online calculators to generate these numbers. You can tweak them if you want to, but the end result is the same - in our earning years, the actual amount of "disposable income" is less than half your actual income. For example, you could contribute less to your 401(k), but you'd regret that later on. You could live in a cheaper house, which might be a good idea, provided it is in a nice and safe neighborhood. But the key thing is, when you earn big bucks and live in an expensive area, well, you spend big bucks, too.
But enough of that. Let's look at the retired couple's finances.
Income: $30,000 (ordinary income)
401(k): $0 (actually minus $30K, if no Social Security)
Adjusted income: $30,000
Taxes, Federal & State: $1000
Property Taxes: $700
Remaining income: $28,300
Not as big a spread as before, is it? But to some, that still is half of what you were making while working. True, but there are other things to consider.
Consider things like cars. The average American drives 15,000 miles a year - multiply that by two if you are both commuting to jobs. When we lived in the DC area, we knew married couples who would drive to work separately, even though both worked at the same "Agency" in McLean. They could cut their commuting costs in half, if they chose to. I realize now, in retrospect, how much I squandered on cars over the years. Yea, it was fun, but the cost!
Today, we have a six-year-old Hamster (KIA Soul) with a whopping 24,000 miles on it. Yea, that's right, about 5K a year. If we didn't have the camper, we'd only have one car. We never go places without the other, and we don't leave home for days at a time. "Going to market, Idella!" is a weekly thing, if that, and carefully planned out in advance - with a shopping list. Yes, when you are retired, you can plan things like that, as you have more time. Well, you have that time when working but most squander it on television (I know I did) and then say they are "too tired to cook" and send out for a $20 pizza.
So the "working" couple is buying cars (or worse yet, leasing them) at twice the rate, maybe three times, as the retired couple. And by-the-way, the retired couple has no car payments to make each month. So subtract another $1000 a month (at least) for the married couple for car payments, and you can see, the "incomes" start to level out. Factor in the lower cost of eating at home (which I have illustrated is less than one-quarter the cost of eating out) and you can start to see that while these two couples have disparate "incomes" their lifestyles are remarkably similar.
The two keys, of course, are debt and consumption, or spending. People argue that debt is good, as you can "write off" the interest on your taxes. And indeed, mortgage interest can lower your tax bill. But on the other hand, not having to pay two grand a month in mortgage payments is a big plus. That's like having an additional $24,000 a year of income, right there, guaranteed. Sure, you could invest in the stock market (your 401(k)) and make more, but it isn't guaranteed. And when you are retired, you want guaranteed things, not speculative investments.
THIS IS NOT TO SAY that a working couple should live like a retiree. It isn't possible, in most cases. If you are still working, you can't pay cash for a house - you don't have the cash, if you are like most people. So you borrow. And you don't have cash to pay for a car. So you borrow. Some debt is inevitable when you are starting out in life. The key is, of course, not to take on excessive or frivolous debts. And the real key is to have a plan to be debt-free by retirement, if you plan on living off your 401(k).
If you "have to make" $100,000 a year in retirement (in today's dollars) to service debts, you will pay a lot in taxes and interest, if you are still in debt when retired. This means burning through that 401(k) money at a rapid clip and paying a huge chunk of it to banks and the IRS. Not only that, the whole point of an IRA or 401(k) is to pay taxes at a lower rate when you retire, as your income will be lower and you will be in a lower tax bracket. Paying taxes at the same rate or higher defeats the whole purpose of the 401(k).
Again, I have friends who have government pensions that combined, are over $100,000 a year. To them, our lifestyle is mystifying. They have a mortgage and car loans (and a boat loan, and probably credit card debt) as they have this huge income in retirement to service this debt - and pay the onerous taxes. They have little or no savings. But they live in a house nearly identical to mine, and drive the same kind of car. Same shit, different income philosophy - the cash-flow mentality versus the owning money mentality.
Of course, if they were debt-free by the time they reached retirement, they would be far wealthier than I am, as although they would have the tax problem, they wouldn't have debts to service. But they chose to spend it all while working - and why not, when Uncle Sugar (or the local school board) basically offers to pay you for life.
I digress - but not by much - because something else came to my attention which sort of illustrates the problem. I call them the "Three Amigos" - three golfing buddies that are retired. They have started this "breakfast club" thing, where they go out to breakfast one day a week - just the guys, no wives. Two of the Amigos have pensions in retirement - and debts. One is debt-free and living on savings, of which he can choose not to take out much money from, and thus limit his tax bill.
Things were fine for a while. The local golf course had a breakfast buffet which, at $12.95 was kind of pricey (for food I could make at home for $4) but didn't break the bank. But then one of the Amigos wanted to go to the Swank Hotel which opened up here on the island, where breakfast was $29.95 with beverages and tip. That's a shitload of money for scrambled eggs, in case you didn't notice. The Amigo who is living off of savings is less than enthused.
To me, it makes no sense, and Mark and I both despise going out for breakfast. Getting up, showering, getting dressed and then driving a few miles before you even eat just feels wrong. Paying exorbitant prices for the cheapest meal of the day makes even less sense. It is like the other couple I wrote about, who drove 20 miles (round-trip) to have breakfast. Economically, it is nonsense. Maybe I can see, once in a great while, going to a fancy brunch. But driving 20 miles to go to the Ihop? I can make better pancakes with real maple syrup at home.
But the contrasts go beyond that. The pension Amigo thinks it is scandalous and immoral that someone over 65 in our County doesn't have to pay school tax. It is scandalous because the exemption applies only to people making under $40,000 a year. As I noted before, my neighbor behind us was paying under $300 a year in property taxes when she died. The new owners - who are not resident owners - pay over $3000. Whether it is scandalous or not depends on whether you make $40,000 a year or less. On the other hand, it is pretty scandalous to me what some government employees pull in, in terms of retirement pensions - often 75% of their last years' income! The old model of a modest pension and being debt-free, as you can see, changed, at least for government employees.
But the rest of us - the bulk of the population in the USA - doesn't have such generous pensions. We have to live on our savings, which can be easily wiped out by inflation. And indeed, inflation in the price of restaurant meals is one reason our Amigo is no longer enthused about being part of the Breakfast Club. It is one reason Mark and I don't eat out as often as we used to. Going to a restaurant that is little more than a refueling station and having mediocre food - and paying top dollar - makes less and less sense to us. Why send out for a $20 pizza when you can make one at home for a few bucks? It is not a matter of food snobbery, it is a matter of simple economics.
Well, that's all very well and fine, you say, but who wants to spend retirement sitting at home and making pancakes and watching television all day long? And people have told me this, thinking I am leading some sort of drab existence, "eating raman noodles" as one put it. Yet, we spend every summer - and several weeks during the year - exploring the United States in our (nearly) new RV and pickup truck. Can the salaryman spend four months on the road, every year? I think not. And it need not be that expensive, too. We went on an Alaska cruise (after spending nearly two months in Alaska in the RV) and by booking after labor day, were upgraded from the cheapest room to a veranda suite. And the weather was fabulous.
It is not that we are not doing anything, just that we are making different choices. And the world recognizes this, which is why restaurants offer "early bird specials" and "senior coffee" not because poor old seniors are broke and can't afford to pay more, only that they prefer not to, and if you want to attract that business, you have to offer deals. It is simple economics - you sell products to people at the highest price they are willing to pay. And the working person is willing to pay more as they are "too busy" to shop on price and think (erroneously) that they can always make more money.
I wonder if my fat pension Amigo thinks the free donuts at Dunkin' Donuts are immoral as well? If so, I am going straight to hell. Just kidding, as we tend to make coffee at home, as paying $2.95 for a cup of Joe just sticks in our craw. But that free donut - well, that has tempted us into the shop on one occasion. Maybe just a year in purgatory.
I am not saying I am better than other people - this is based in my experience as a working person. Back in the day I took perverse pride at never looking at prices in the grocery store - or comparing grocery stores. Shop at Walmart? Heck no - all they will have there are dented cans of peas, like the Dollar Tree. Well, I overcame my prejudices and the Walmart "Ghetto Gourmet" is our go-to place, as is "The Tree" - the latter particularly for things like mouthwash and soaps (but not detergents).
Of course, some political types decry Walmart for being politically incorrect, while shopping at Publix instead - not realizing the Publix heiress paid for the January 6th insurrection. Yea, fuck Publix - some of the stores in Florida are nice, but you pay through the nose, in terms of prices. $12 a pound for sliced deli? Get real. You spend $10 there, you put a buck in that crazy lady's pocket. So politically, it is a wash - any company making lots of money tends to vote Republican. Gee, I wonder why? But I digress.
The point is, you can live a rich life on a lot less - which was the theme of this blog and indeed the topic of my first posting, over a decade ago. Since then, I have had a chance to put theories into action - and realize a lot of what I thought early on was wrong, or at least needed tweaking. If you are facing retirement and your projected income isn't what you thought it would be, relax. Provided you are debt-free, you can still live a good life - hell, people on Welfare do!
Can any of this be useful to the working person? Or are we all doomed, during our working lives, to squander cash on ill-conceived things such as credit card debt? I think there is a nugget there if people are willing to listen to it. Live like a retiree. Have a plan to get out of debt, and stay there, eventually. Stop paying interest to banks - as much as you can. Stop squandering money on "convenience" items. Not only will you regret that $20 you blew on delivery pizza, you will struggle the rest of your life to remove that 1" from your waistline. Yes, bad spending habits and poor health go hand in hand. That is one reason why America has the world's fattest poor.
It is funny, but as part of the Ambetter Peachtree (Obamacare) health plan, they offer these little "rewards" if you complete little tasks, such as watching a video or downloading a brochure. Many of them are on topics like good eating, exercise, seeing your doctor, and whatnot. But a surprising number are about personal economics and spending habits. It seems that being stressed-out about money all the time isn't good for your health. Funny thing that - once I retired, my two stress-related illnesses, diverticulitis and gout, mysteriously retreated from my life. 50-something growing pains may be stress-related, it seems. And money is a number one source of stress - and the number one cause of divorce (which is ironic, because if you were stressed-out about money before your divorce, guess what?).
So no, you can't live like a retiree when you are working. But someday, and likely at a time and place not of your choosing, you may be forced to retire. So it might not be a bad idea to plan for this, and think about money and where it is taking you. Having nice things is indeed fun. But I can say from experience that having financial security is far nicer than all the fancy cars and toys in the world.