Retirement Income, Plan B

July 5, 2023

Planning & Saving

Many people take great umbrage when I say retirement planning may not be as vital and pressing as screaming headlines and money gurus say. After all, no one lives forever, and many want or need to stop working as they age. Many seniors in America struggle with limited incomes and suppressed lifestyles. Social security isn’t much and may not be reliable. Doesn’t prudence demand disciplined and consistent retirement planning as simple hishtadlus? It’s borderline heretical to typical financial planners and gurus to suggest any delays to maximizing long-term compounding. But I’m not typical. And neither are most frum families.

Ideal Vs Real

Ideally, everyone would accumulate significant wealth as they work. A big asset base enables maintaining a desired standard of living even if people choose or are forced to stop working. Financial planners love illustrating how anyone can build up a multimillion-dollar portfolio by funding IRAs and 401ks consistently. With decades of compounding, even modest sums accumulate significantly.

For this reason, textbook rules of thumb advise putting away 10–15% of one’s income to build a nest egg worth 25 times projected retirement spending levels. So, if a couple hopes to live on $100,000 annually when they retire, they’re encouraged to build a $2.5 million portfolio by age 65. That way, they can withdraw 4% annually from the portfolio in perpetuity while protecting the balance for the benefit of their heirs. That 4% is a conservative number, mathematically modeled to ensure the portfolio is not whittled down due to inflation or investment volatility. This multi-decade funding plan is very nice, but only a tiny fraction of people follow it.

What’s Plan B?

Most people can save more than they do, but sticking to a 40-year retirement savings plan is extremely difficult, especially for large frum families. Tightening belts to save during peak spending years, when couples struggle to buy a home, pay tuition, and marry off children on top of other living expenses, is borderline impossible for many. Therefore, although it’s a bit controversial, it is important to highlight other approaches to saving and generating retirement income. Especially for people entering their 50s and 60s without savings, we must show them realistic Plan B approaches to planning for their financial futures.

Flexible Earnings and Savings

A key assumption underlying typical retirement planning is that household income and expenditures stay roughly steady till age 65, and then incomes turn off entirely. But that’s not etched in stone. For couples with a bunch of kids, obligatory expenses typically level off as older children become independent. Mothers whose schedules clear up a bit after all the little ones are in school may be able to earn a lot more money, which can be allocated toward savings. Also, many people can work beyond age 65, at least part-time. While not ideal, earning and saving later on can make the numbers work.

Downsizing for House Equity

One crucial expense that often falls drastically later in life is housing. Traditional retirement planning tends to ignore most Americans’ largest asset, their home equity. Retirees with paid-off mortgages can enjoy low-cost homeownership and retain their equity as a backup nest egg. If need be, they can downsize to a smaller home. Often, a healthy balance remains even after buying a new, smaller place in cash, which can be used to generate income. Plenty of 70-year-old bubbies and zeidies are glad to put the cleaning and maintenance of a sprawling house and yard behind them anyway.

Tapping Reverse Mortgage Income

Retirees who want to keep their homes but are short on cash can tap into home equity using reverse mortgages or home equity conversion mortgages (HECMs). In a very rough nutshell, HECMs are like lines of credit borrowed by seniors against their home equity. No payments are due, nor can the couple ever be thrown out of their home. Instead, principal and interest owed are built as withdrawals are made. After 120, the government sells the home to pay the outstanding balance. Any remaining proceeds go to the homeowner’s estate. Because older versions did not offer proper protection to seniors, HECMs have somewhat of a bad reputation. But the current versions can be an excellent way to utilize home equity while staying in one’s home.

The Social Security Foundation

Retirement income from Social Security gets short shrift, too. On one hand, Social Security definitely shouldn’t be counted on to cover all of a senior’s expenses. But it’s not peanuts either for most families. According to Google, the average Social Security payout for a retired couple in 2025 is $34,380 annually, $45,840 if both spouses worked. For lower- and middle-income retirees, Social Security provides a good chunk of what they need to live on a basic level. This ties into delaying retirement as benefits are increased significantly for those who can delay retirement.

Since Social Security is indexed to inflation, it’s a strong foundation for a modest retirement. Despite the current funding shortages, no politician is willing to risk the ire of the massive senior vote and allow Social Security benefits to be drastically cut. Therefore, Social Security’s likelihood of running out of money is pretty low.
If a couple in their 60s and 70s can bring in 25–50% of their needs via work, Social Security covers another 30%. In that case, they don’t need to panic over not having a multimillion-dollar retirement portfolio.

Income for Life for a Price

Income annuities, a niche life insurance product, also have a bad reputation for taking advantage of seniors. Still, if carefully selected, they may have their place in the retiree’s income toolbox. If withdrawing just 4% a year from a retirement portfolio, subject to stock market fluctuations, doesn’t supply a sufficiently stable income, an annuity can offer payouts of 6–8% of the annuity’s face value. An insurance company guarantees this income for life, but any remaining principal stays with the insurance company. Some see this as a bad trade-off, but it may be worthwhile for someone scared they’ll run out of money at the worst possible time.

Hate Plan B?

Ultimately, life is full of trade-offs. These Plan B ideas may not apply or be too unpalatable to contemplate. Maybe you don’t want or won’t be able to earn more and spend less down the road. Perhaps helping your grown children pay their kids’ tuitions and simchas is a must. Maybe staying in a large home is essential to you. Some enter their 60s and 70s with little home equity.

Or perhaps, the opposite is true, and saving through the early and middle ages and stages comes easily for you. In that case, Retirement Plan A is a fine way to go.

It’s a Question of Hishtadlus

But the real key to this conversation is to remember that this boils down to a question of the appropriate hishtadlus. Some may be able and prefer to tighten their belts for decades to pre-fund what they imagine is good hishtadlus for a comfortable retirement. However, many others will need or prefer to combine the Plan B ideas mentioned here. We research, consider, and utilize the tools and resources Hashem provides us in our hishtadlus to pay for our present and future needs. If you can’t save 15% of your present income but are otherwise hard-working, thrifty, and balanced, you’ll be OK, bezras Hashem.