Grab your calculator. I’ll wait…
OK. Let me start by noting that today’s missive comes to you by way of the United Kingdom. I am not there, mind you. I am at home in an exceptionally rainy Prague, where I just finished reading a story in a British publication warning that soon-to-be retirees might be in for a hellacious retirement bookended by “financial catastrophe” and poverty.
The problem is this: People “are being given a wrong idea of what money they are likely to require in old age.”
Compounding the problem is that pension-plan companies are providing financial projections that “could be widely optimistic, meaning millions could be facing a poorer retirement than they expect.”
Granted, this is from the U.K.—It’s not U.S.-based research and there are some differences. But the theme crosses nationalities.
We have lived through a most unique period financially over the last 30 years or so in the States. We’ve seen historically anomalistic gains on Wall Street and in the bond market, and we’ve experienced exceptionally low rates of inflation.
And given human nature, we want to believe that’s just normal and that it will continue.
Alas, we’re battling something called “reversion to the mean.” Think of that this way: What goes up, must come down.
It always happens.
Which means we can expect painfully subpar stock-market returns through the end of this decade. We can expect bond funds to underperform. We can expect sharply higher inflation (as I wrote about in the May issue of the Global Intelligence Letter). And we should probably expect that the Federal Reserve won’t be able to adequately address the weakening financial environment because Uncle Sam has way too much debt, so lifting interest rates would severely crimp his ability to function.
The nut of all this is that investment returns are likely to be generally tepid for those us sprinting toward retirement. Yet our costs are probably going to be higher because of inflation.
This is where you grab your calculator…
As I was cogitating on that U.K. story, I got thinking about what my income and expenses might roughly look like in retirement. Will I really be able to afford my life then? We all just sort of assume retirement is kinda gonna look like today, but that’s not necessarily the case, as that British story pointed out.
Folks are projecting investment gains that are probably unrealistic, and they’re projecting costs that underestimate reality, especially when it comes to healthcare.
So, I did a little back-of-the-envelope (on Excel) addition and subtraction.
Social Security tells me that I will collect about $3,200 in monthly benefits at full-retirement age—67 for me (you can check your own data at the Social Security website). And I know I have my retirement savings accounts to draw on. Those are worth about $750,000 at the moment, combined. Though I still have a dozen years before I hit 67, I conservatively assume my rate of return from now until then will be 0%. I do so because I would rather be pleasantly surprised than soundly disappointed in the lifestyle I can afford.
At a 4% withdrawal rate, that $750,000 will supply me with $30,000 a year, or $2,500 a month. Moreover, at that withdrawal rate, $750,000 will last 25 years (again, assuming 0% growth). And I’m OK with that because as we age, our spending needs reduce, meaning I won’t likely need to withdraw as much.
Granted, I am not factoring inflation into my expenses. Then again, as I’ve noted a couple times, I’m not factoring growth into my assets or my Social Security benefits (which will actually be higher than $3,200 when I hit 67). Moreover, I’ve not included dividends and interest payments in my monthly income. The way I see it, growth in Social Security, and minimal growth in my assets (along with dividend and interest payments) will essentially balance out inflation.
My real goal here is simply to gauge my expected costs in Year 1 of retirement against my expected income in Year 1, based on today’s dollars.
If I know I’m right-side up—if my fixed costs are substantially below my conservative income estimates—then I feel confident that my lifestyle tomorrow will pretty much look like the lifestyle I have today. And that gives me some comfort.
Based on the numbers, my retirement income is likely to be about $5,700 a month in today’s dollars. And my expenses are going to about $4,200. That includes rent, health insurance, food (at home and eating out), whole-life insurance policies, mobile phone, and utilities. I’ve also included taxes at a rate that is too high, again to be conservative. That’s a cost many people forget to plan for.
All in, then, I should have something close to $1,500 per month that I can allocate to whatever I like—likely travel, in my case.
Of course, my costs are based on my expenses in Prague, which actually gets to a compelling second point in this column: Where you live in retirement makes a huge difference.
If I moved back to the U.S., I’d want to live somewhere like Knoxville, Tennessee, or Asheville, North Carolina…or somewhere in Vermont or New Hampshire or Maine. Mountains and lakes agree with me. But I looked at the housing costs. And I know U.S. healthcare expenses are beyond the pale. Plus, I’d need a car, which implies insurance, gas, and maintenance.
My $5,700 monthly income would not cover my costs. And if it did, it would be because I had to compromise on lifestyle, and not travel as freely as I want.
But here in Europe…100% of my (excellent) healthcare is covered and I pay about $125 a month. No co-pay, no deductibles. And I don’t need the expenses of a car. I get can anywhere I want to go in Prague on metros and trams within a few minutes, and at an annual cost of just $170.
So, pull out your calculator (or, better yet, open Excel) and plug in some numbers. See if your income can cover your expenses…or whether you might want to consider a cheaper, more freeing lifestyle as a retiree overseas.