How Baby Boomers Can Salvage Retirement

Has the stock market’s meltdown wrecked the Baby Boomers’ retirement dreams? Not necessarily, provided one is prepared to spend less now and retire at 70 rather than 65. That’s the gist of the plan that my friend Doug Behnfield, has laid out below. Doug, whose back-of-the-napkin thoughts on the economy were featured here last summer, is a top-producing stock broker who has always lived well within his means. Here’s his tough-love advice:

I am going to use as a template for the Baby Boomer, someone my age (55) and in the 80th percentile of household income, which I assume to be about $150,000. Due to the real estate mania and the favoring of real estate “investment” over traditional savings, combined with home equity extraction for consumption, I am guessing that mortgage debt ($200,000) exceeds retirement savings ($100,000) leaving this household upside down by $100,000. They spend all their after-tax income ($115,000) leaving a 0% savings rate because, although they put $15,000 or $20,000 into the 401K, they also borrow for



a car, a tuition or a kitchen remodel every year. If they were to replace their employment income with retirement income, they would need to save over $2 million, because, at a 4.5% distribution rate, they need over $90,000 pre-tax per year to supplement Social Security. Since they can’t save $100,000 to $150,000 per year for the next 10 years to retire at age 65 with dignity, I am proposing an alternative solution composed of three basic parts:

2) Cut your annual budget and increase your savings by $40,000 per year. This means do without the new car or kitchen and also cut $20,000 from lifestyle expenses. This has one very important and overlooked benefit beyond the actual increased savings. It also resets the lifestyle to a new level of frugality that leads directly to a reduction in the retirement income goal. Instead of needing $150,000 in pre-tax retirement income or $115,000 after-tax to replace pre-retirement income, you only need $75M. That means you only have to get from upside down $100,000 to right-side up $1 million in 15 years. That equates to $55,000 income on savings plus Social Security. Saving $40,000 per year for 15 years doesn’t get there, even with high single digit returns, so one more step is required:

3) Liquidate your debt! Let’s assume that the $200,000 mortgage plus consumer debt is primarily a function of believing in a very aggressive, linear assumption of real estate appreciation. You believed it so strongly that you gave very little thought to issues such as cost of carry, liquidity and tastefulness. Now you own a 4-bedroom, 4-bath 4000 sq. ft. house with a 3 car garage on 3/4 acre and nobody shows up. And you don’t garden. You paid $550,000 and now it is worth $425,000. Or at least that’s what the realtor thought, if there were any buyers. Now it all seems so wrong. All that maintenance, taxes, interest…and for a depreciating asset. Best to dump it, move into a nice, tasteful (and frugal) two-bedroom townhouse and get back to the serious business of retirement income building. Come to think of it, why even buy the two-bedroom. Now that you’ve opened your eyes to what a “ball and chain” this stuff is, it makes more sense to rent.

***
(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)