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Tags: retirement | cheap | costs | income | investments

Retirement Ain't Cheap: Crunch the Numbers to Thrive and Survive

retirement savings written on paper scrap atop bed of cash dollar bills

Charles Sizemore By Friday, 26 October 2018 08:20 AM Current | Bio | Archive

Your monthly expenses fall once you retire. Or at least they’re supposed to.

But what if they don’t?

Standard financial planning assumes that your expenses in retirement will be 70% to 80% of your expenses during your final working years.

But a recent study by MoneyComb and Duke University suggests that the real number can be a lot higher. As in 130%.

That number might sound ridiculously high at first, but think about it. You might have massive expenses in retirement that you didn’t have in your working years, such as paying for your adult children’s weddings.

Plus, without work taking up 8 to 10 hours of your day, you have a lot more time to sit around the house and impulsively buy things on Amazon.

But before we get into any of that, consider where the old 70% to 80% rule of thumb came from.

In a simpler time, you might have bought a house at 30 and lived in it long enough to pay off a 30-year mortgage. So, you entered retirement without one of your biggest expenses – the house payment.

Today’s retiring baby boomers are far more likely to have moved multiple times for jobs and possibly divorced once or twice. They’ve taken out new mortgages at each stop along the way, resetting the 30-year clock, and enter retirement with those debts left to pay.

That’s a very big difference from previous generations.

Otherwise, where else are big drops in spending going to come from? Your electric bill doesn’t magically drop once your paycheck stops. And you might spend a decent bit more on travel and leisure since you have the free time.

And let’s face it. Unlike their parents’ generation, which learned frugality during the Great Depression, the Boomers were never the most fiscally disciplined. Does that magically change in retirement?

I would take all retirement estimates with a large grain of salt.

As my friend Harry Dent has explained for years, retirement is not the spending breakpoint. Americans hit their peak spending years long before that, between 46 and 54 on average, depending on their income level.

Spending declines after that, but it does so gradually. And it doesn’t suddenly drop 20% to 30% at retirement (or soar by 30%).

As you do your retirement planning, I recommend you take an honest look at your finances.

Unless something is fundamentally changing, such as your mortgage getting paid off, your post-retirement expenses are going to look a lot like your pre-retirement expenses.

And you also might have large expenses you didn’t before, like your daughter’s wedding. Try to set that money aside and out of your regular investment or spending account. Consider that money already spent and not part of your retirement nest egg.

The Social Security Administration estimates that your Social Security benefits will only replace about 40% of your paycheck. That means the remaining 60% has to come from your investments.

That could be $50,000, $100,000, or even a lot higher depending on your lifestyle.

Let’s take a look at the numbers. The following table breaks down how much you’d have to invest in assorted income securities in order to generate $10,000.

I list traditional forms, along with my Peak Income service.

At today’s current average savings account rate, you’d need a ridiculous $11 million to generate just $10,000.

If you needed an extra $50,000 to top off your Social Security income, you’d need a nest egg of $55 million.

If you have that kind of money, there’s really no point in you reading this. You clearly don’t need my services.

The further you get down the scale, the numbers get a lot more reasonable.

You’d need $751,800 in the average five-year CD in order to generate $10,000 in retirement income, but “only” $325,733 or $304,878 in 10-year Treasury notes or a utilities index fund. That’s still a lot of money. You’d need a million dollars in savings to generate just $30,000.

This is why I write Peak Income. My current model portfolio sports a dividend yield of 6.77%, more than double what you’d get in utilities stocks.

You’d need $147,710 invested for every $10,000 in income. That’s a lot more doable than $304,878… or $11 million.

Bond yields are rising, but they’re still far too low to meet the retirement needs of most investors. And this is where Peak Income comes in handy.

I look for income stocks that are a little off the beaten path. Some sport monster yields over 10%, while others sport more modest yields of around 4%.

But all pay substantially more than what you’re going to get in traditional income investments.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Standard financial planning assumes that your expenses in retirement will be 70% to 80% of your expenses during your final working years.
retirement, cheap, costs, income, investments
Friday, 26 October 2018 08:20 AM
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