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How to Make Retirement Savings Last When Life Gets in the Way

What to consider when you're approaching retirement and haven't met savings goals.

“Good Savers” have managed to accumulate a couple million dollars before retiring. Not considered rich by Wall Street standards, Good Savers nonetheless have done well for themselves and believe they have enough to fund their retirement. In earlier columns, I discussed why Good Savers need to be good allocators, eight financial do’s and don’ts for Good Savers, and whether Good Savers need insurance.

But what about those savers who have had a more difficult path? “Frustrated Savers” had their intentions thwarted by life events, such as unexpected medical bills, job layoffs, boomerang kids, bankruptcy, or lawsuits. It's not always easy to accomplish savings goals, yet time doesn't slow down. In this column, I’ll discuss what Frustrated Savers who are approaching retirement age can do to make their savings last.

Financial Profile of a Frustrated Saver

Frustrated Savers have worked hard their whole life but have fallen short of their savings goal. They have most of their savings in 401(k) accounts, own a home with a substantial mortgage, have car loans, and accumulated credit card debt. Although grown, their kids still periodically need financial help.

A typical Frustrated Saver couple approaching 65 might have the following net-worth statement:

Assets:
Checking Account: $3,000
Savings Account: $7,000
401(k): $400,000
Personal Residence: $600,000
Truck: $15,000
Sedan: $25,000
Total: $1,050,000

Liabilities:
Home Mortgage: $250,000
Home Equity Line: $150,000
Sedan Loan: $20,000
Credit Cards: $30,000
Total: $450,000

Net Worth:
$600,000

Further, our couple has the following expenses:

  • Sedan payments of $500 per month (1.9% interest rate)
  • Credit card minimum payments of $600 per month (18% interest rate)
  • Mortgage payments of $1,500 per month (4% interest rate)
  • Equity line payments of $600 per month (4.8% interest rate)
  • Annual travel expenses estimated at $10,000
  • Annual gifts to kids estimated at $20,000
  • Annual charitable contributions estimated at $3,600
  • Additional monthly spending of $4,000 (not including mortgages, car payment, credit card payments, travel, gifts, and charitable contributions)

They also have:

  • Life insurance of $500,000 per person
  • Updated estate documents
  • Social Security benefits estimated at $2,500 per month each at age 66

Add it all up, and our Frustrated Saver couple spends $10,000 every month. Social Security would take care of half that amount, so our couple would need $5,000 in additional funding to cover all their expenses. Their 401(k) has a value of $400,000, which means they would need to initially withdraw 15% of its value to cover a year’s expenses, without considering taxes. Obviously, this high withdrawal rate would not be sustainable; the portfolio would be depleted relatively quickly.

Thinking About Retiring

When the retirement numbers like these don't work, savers have three options:

  • Delay retirement
  • Decrease expenses
  • Increase income

Delay Retirement

It's an oversimplification to tell people that if they can't afford to retire, they need to continue to work. They might be 64, laid off, and not able to find work; they might be physically unable to work; or they simply just might be burnt out. Yet, if continuing to work is an option, the benefits are huge. More time working means:

  • More contributions to 401(k)
  • Fewer years of retirement to fund
  • More time for investment growth

In the case of our Frustrated Saver couple, delaying retirement by two years could mean:

  • Social Security benefits increase by $400 per month each (by delaying start date)
  • 401(k) contributions of $26,000 per person per year can be made (assuming they contribute the IRS maximum amount)

If we assume an annual investment return of 7%, the 401(k) balance could increase by contributions and growth to $573,000. Now, the monthly amount needed in excess of Social Security is $4,200. This equates to an 8.8% initial withdrawal rate. It's still not sustainably safe, but we can see the huge difference delaying retirement can make. (Delaying retirement by three years results in a 401(k) balance of $669,000 and Social Security benefits of $3,100 each. The monthly amount needed in excess of Social Security becomes $3,800, or 6.8% of the investment balance.)

Decrease Expenses

Decreasing expenses can be extremely helpful as well. It is not up to me as a financial advisor to dictate my clients' priorities. Having said that, it might worthwhile pointing out that helping kids at the risk of not having enough money for retirement is not a good answer for either generation. It might also not be a huge concession to reduce travel expenses. Looking at fixed expenses can also reveal savings opportunities.

For example, it might be possible to refinance the mortgage and home equity line at a lower interest rate. And assuming that our couple can avoid incurring additional credit card debt, the refinance could incorporate that as well. Payments on a $430,000 30-year mortgage at 2.8% are $1,800 per month. This reduces monthly cash flow needs by $900.

Canceling unnecessary insurance (like disability insurance) or dropping down to one car might also help balance the budget.

If our Frustrated Saver couple can reduce expenses by $12,000 annually and successfully refinance, then their monthly expenses will be $1,800 less.

Increase Income

It is possible to increase income while being retired from "regular" work. I have seen many clients happily earn extra money after retirement with a "lifestyle career." These have included positions such as teacher or substitute teacher, golf course starter, writer, life coach, consultant, expert witness, photographer, and artist. If you start your own business activity, however, be sure to do so with a profit motive. Trying to deduct expenses for an unprofitable hobby will run afoul of the IRS' hobby loss rules.

There are other creative ways to generate income. You could rent out a room in your house. You could also rent your house out periodically as a vacation rental. Earning rent on up to 14 days a year is not taxable. Now might be a good time to sell your coin collection or cash in those old savings bonds.

Combining Strategies

By combining strategies, our Frustrated Saver couple can achieve success. If our couple delays retirement by two years, decreases expenses by $12,000 per year, refinances debt, and makes $500 per month by selling artwork or renting a room, their retirement scenario becomes:

  • $573,000 balance in 401(k)
  • $2,900 each per month in Social Security
  • $7,200 in monthly expenses

So, net monthly cash flow needed from investments will now be $900 ($7,200 expenses minus $500 income minus $5,800 Social Security). This equates to 1.9% of our couple's 401(k) balance. Even though this doesn't include taxes, the combined strategy leaves an adequate cushion.

In my next column, we’ll cover 10 financial do’s and don’ts for our Frustrated Saver couple.

Sheryl Rowling, CPA, is head of rebalancing solutions for Morningstar and founder of Rowling & Associates, an investment advisory firm. She is a part-time columnist and consultant on advisor-focused products for Morningstar, and she continues to actively work in the advisory business. Morningstar acquired her Total Rebalance Expert software platform in 2015. The opinions expressed in her work are her own and do not necessarily reflect the views of Morningstar or of Rowling & Associates LLC.