Retirement Income, Plan B

July 5, 2023

Planning & Saving

Zechariah and Golda Reiss were panicking about their lack of retirement savings. The cost of raising and marrying off seven kids had made it impossible to stash away money in retirement accounts over the years. But they were approaching age 60, and what used to be a distant future was now looming large. An article Golda read stated that a proper retirement savings account was loaded with millions of dollars to ensure that it would be sufficient until 120 and recommended saving 15% of one’s income for 40 years. Well, that plan was water under the bridge.

What’s plan B?

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 and when people choose or are forced to stop working. Financial planners love illustrating how anyone can build up a multimillion-dollar portfolio by funding IRAs 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 with a goal of building 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 probably save more than they do, but sticking to a 40-year retirement savings plan is extraordinarily difficult for most families. Tightening belts significantly during peak spending years, when couples struggle to buy a home, pay tuition, and marry off children on top of myriad other living expenses, is extremely difficult. Therefore, although it’s a bit controversial, I think it is important to highlight other approaches to saving and generating retirement income. Especially for people entering their 50s and 60s without savings, we need to show them realistic approaches to planning for the future.

Flexible Earning 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 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.

The Social Security Foundation

Another retirement income factor, Social Security, gets short shrift too. On the 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 2023 is $32,400 annually. For lower-and middle-income retirees, Social Security provides a good chunk of what they need to live on a basic level. And since Social Security is indexed to inflation, it’s a strong foundation for a modest retirement.

Despite the fearmongering of academics and journalists, Social Security’s likelihood of running out of money is almost zero in the foreseeable future. Suppose the Reisses can bring in 25–50% of their needs via work, and Social Security covers another 30%. In that case, they don’t need to panic over not having a multimillion-dollar retirement portfolio.

Downsizing for House Equity

Traditional retirement planning also 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

For retirees who want to keep their home but are short of cash, there is a growing opportunity to 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 build as withdrawals are made. After 120, the government sells the home to pay the outstanding balance. Any remaining proceeds go to the homeowners’ estate. Although HECMs have somewhat of a bad reputation since the earliest versions did not offer proper protection to the seniors, the current versions can be an excellent way to utilize home equity while staying in one’s home.

Income for Life for a Price

Annuities also have a bad reputation for taking advantage of seniors, but if carefully selected, they may have their place in the retiree’s income tool box. If withdrawing just 4% a year from a retirement portfolio, subject to stock market fluctuations, doesn’t cut an 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.

Hishtadlus Trade-offs

Ultimately, life is full of trade-offs. Some may be able to tighten their belts for decades to fund retirement, but many others will need to choose some combination of the ideas mentioned here. It’s on us to research and utilize the tools He provides us in our hishtadlus toward saving and paying for our eis ziknah.