John Doe is 53 years old. He works at a warehouse and earns $40,000 per year before taxes. He has a 401(k) program at work, but he hasn’t contributed to it like he should and the program has no matching funds. The last time John checked his statement there was less than $4,000 in the plan. He knows he should save more, but he finds it difficult to do on his salary. John is divorced and pays child support for his son from the failed marriage. Between his apartment rent, car payment and the $12,000 he owes in credit card debt, he can hardly afford to set aside money for retirement.
John is, of course, fictional. But his situation reflects that of many Americans who feel as if their retirement future is uncertain. Unless John lands a job with a higher paying salary, or comes up with some cash from an inheritance or wins the power ball lottery, he will likely limp along until retirement and then collect his Social Security. Like millions of other Americans, John’s main source of income will be his Social Security check when he retires.
Of course, it all depends on your highest 35 earnings years as to how much your personal Social Security check will be, but according to the U.S. Social Security Administration, the average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012. So, if John is going to get by in retirement, he has to do a couple of things that may be distasteful to him. One is to continue working as long as possible – perhaps years after the normal retirement age. Another is to establish and abide by a tight budget. John could also consider working a second part-time job to boost his income. That would enable him to actively save money for retirement and passively save money by increasing the amount he pays into the system. Improving your earnings record can increase the amount of your monthly Social Security check.
This nail is already in the plank, but I will hammer it once more just for emphasis – John will find it to his advantage to wait until he is age 70 to begin taking his Social Security so he can get the maximum obtainable from the system.
Mr. Doe should also go to the website discussed in Chapter One, https://secure.ssa.gov/RIL/SiView.do , and create an account so he can get an estimate of how much his Social Security payments will be when he retires. First, check your annual statement to make sure your earnings record is accurate. Mistakes are rare because the earnings kept on file at Social Security were reported by employers when they submitted your Social Security taxes. But mistakes can happen, especially for self-employed individuals, whose earnings records are taken from tax returns.
Even if you start receiving Social Security and continue to work, your earnings record will be updated. He should also realize that, because of the double-edged sword of compound interest, every dollar he puts on a credit card (unless he pays his balance in full each month) is five dollars he will not have in retirement. Let’s say that he wants to buy a new car. He must realize that he can either have a new car, the payments for which will last six years and require him to pay at least one-third of the purchase price in interest, or he can save the value of that new car for his future. But he certainly cannot do both.
Budget for Retirement
One way to enhance your retirement is by starting as soon as possible to live within your means. Scratch that. Live a notch or two below your means. Take the money you save by doing so and apply it to your future. Learning to separate needs from wants may be a factor here. Living below your means but within your needs is simple. It may not always be easy, but it is simple. If your car is a 6-year-old Ford and it gets you where you want to go, then keep it. Put another 100,000 miles on it. Don’t buy a new BMW just because your credit score will allow you to do it, or just because the loan officer at the dealership says he can get you a seven-year loan. If you can afford to buy a 3,000-square-foot home, buy a 2,000-square-foot home. Sure, you would like to blow $5,000 on that resort vacation you’ve been dreaming of. You don’t have to chuck it…just postpone it until you are paying for it with extra money, not money you should be saving for retirement.
I know some people who have started what they call “retirement gardens” to reduce food costs. You would be amazed at how much money you can save with tomatoes at a dollar each. With the new digital age, many are looking into ways to cut out duplicative phone and television services. Do you really need all the entertainment you treat yourself to? When there are free concerts in the park and movies at the one-dollar box at the grocery store?
Can you see yourself saving $10 a day? Let me put it another way. Do you waste $10 a day on things you don’t really need? I thought so. Did you know that if you took that $10 and saved it in a piggy bank, at the end of 20 years you would have $73,000? However, what if you could get a measly 6% interest? Your monthly deposit of $300 for 20 years with an interest rate of 6.00% compounded annually would, after 20 years, yield $136,993.73. There are all manner of strategies to which you could put that money to work during retirement to make it last the rest of your life.
Controlling the cost of housing may be a challenge, but many Americans are paying far too much of their monthly income for rent or mortgage payments. You might have also heard that you should spend no more than 30% of your annual income on rent or mortgage payments. It may buy you a few extra square feet of living space, and perhaps a bit more prestige, but it leaves your flank unprotected if you are unable to save for retirement. Spending 30% of your yearly income on rent is widely believed to be an affordable amount, leaving enough money for all your other expenses. Some pay much more than that and, hence, are unable to save for retirement.
When the housing bubble burst in 2007 and property values plummeted, many homeowners learned a bitter lesson. Spending a greater portion of one’s income than is traditionally prudent with the idea that home values will always go up can backfire. Rent and mortgage debt is one of your largest expenses. When you’re working on a manageable budget to accommodate a more comfortable retirement, it is definitely a major category to consider possible adjustments. There are some unexpected advantages to downsizing. In addition to the obvious – lower rent – property taxes and maintenance expenses will also be lowered.
Americans who are homeowners have an ace in the hole when it comes to retirement – maybe. If you own a home and you have equity in that home, then it is an asset you can fall back on if necessary. Is it a liquid asset? Hardly. But it can be turned into cash in a variety of ways.
In some cases where the homeowner is retired and at least age 62, with no mortgage, or only a small amount left on a mortgage balance, he or she may be eligible for a reverse mortgage. In general, I am not a proponent of reverse mortgages unless all other options have been pursued. Because reverse mortgages are equity loans, they typically come with higher fees than traditional mortgages. But this type of loan generally does not require repayment as long as you continue to live in that home for the rest of your life, keep up the house, and pay the property taxes. However, if you later wish to move, you must repay the lender the principal value of the loan, plus interest and fees. And only the equity remaining in the home after the loan is completely repaid will be passed on to your heirs.