I hope I have convinced you by now that many, many people will be going into retirement without the financial resources they will need to be able to live in a way that closely approximates how they did before retirement. In fact, in some cases, their standard of living could be significantly lower.
Now whether that’s a bad thing or not all depends on your specific situation. If you are pretty healthy and able to dramatically reduce your living expenses in retirement by paying off debt, downsizing, limiting travel, entertainment and eating out, along with reductions in other areas, you will make your limited resources go much further. Some part-time work will also help a lot. The problem, of course, is that some of these may be things that you would rather not do or may not be able to do.
Some very important reminders.
If you think you are going to be in that situation, I hope I have also convinced you that you do not need to be fearful or in despair. To reinforce that idea, I want to remind you of four very important points:
- God calls us to plan and save and prepare, but He does not say that we are going to be on our own if we don’t. As I discussed in the first article, God has promised to care for us. You can count on that. But does that mean that we sit back passively and do nothing and expect God to take care of us? No, as that would be presumptuous. We have to find a balance between trusting in God’s sovereignty and providential care for us and our own responsibility to do all we can to take care of ourselves.
- Although many of us may never be “rich” during this life, at least in a material sense, we will be rich beyond our wildest dreams in the life to come. This is the gift that God has promised us – our inheritance in Him. We will have indescribable riches beyond measure in eternity, all because of God’s loving-kindness and mercy toward those whom He loves and who love Him. And most importantly, we will have HIM – the Father, Son, and Holy Spirit – forever!
- Most people will intentionally and dramatically reduce their spending in retirement if they know they have to in order to make their money last. In the last post, I pointed out the savings “targets” that you could shoot for in order to be able to replace 80% of your pre-retirement income. But is it possible for an individual or couple to live on less? Certainly. Could it be very challenging or difficult? Absolutely, but that doesn’t mean it’s impossible. Most of the time, people will do what they have to do to get by, even if it is very difficult.
- Those who have saved relatively little still have options, depending on their individual situation. There are ways to make the money you have saved last longer or at least to try to make it last as long as you live. This, in addition to the expense reductions discussed above, along with some part time work if you can manage it, may be just enough for you to be able to handle your expenses in retirement.
Let’s go back to our example couple, Mike and Debbie. As you may recall from the last article, in a “best case” scenario, they will have enough savings and income to cover their income “gap” in retirement. However, the “best case” underlying assumptions were very optimistic. In a “less than best case” scenario, they have a net shortfall of $29.4K based on a $39.6K income gap and projected income of $10.2K.
Can Mike and Debbie retire early?
One of Mike’s and Debbie’s goals is to retire early (before age 65) if possible. They would like to transition to some kind of full time ministry or mission work (not necessarily for pay). In the “less than best case” scenario, they will have difficulty meeting their income targets if they retire at their full retirement age of 67. Therefore, early retirement in that scenario could be very difficult to achieve.
If we assume the best case scenario, their prospects are somewhat improved. Let’s say that their target retirement age is 63 and 62 for Mike and Debbie, respectively. In our “best case” scenario, their total savings, income from savings, and Social Security benefits will all be reduced. First, Social Security for both Mike and Debbie will be reduced to $45K per year. Their total savings will be reduced to $289K, with annual income from savings of $11.5K, which, when combined with Social Security, would provide a total annual income of $56.5K.
Would that permit Mike and Debbie to retire early? It all depends. If their expenses are in the $80K range at that time, then they can only replace 70% of their pre-retirement income. That may or may not be enough for them to retire early, but it doesn’t appear to be out of the question. As always, it seems to come down to a simple proposition: increase savings and/or decrease spending. Doing one or the other will help; doing both will help a lot.
Before we move on, we need to see if Mike and Debbie have another potential source of income that we haven’t discussed – their home equity. Home equity will be a very important part of most people’s retirement plan. That’s because home equity, rather than income-producing investments, represents the single largest contributor to net worth. According to the U.S. Census Bureau’s data, the typical American’s net worth at age 65 is $194K. However, removing the benefit from home equity lowers that figure down to just $44K.
You may recall that Mike and Debbie originally purchased their home for $189K and took out a 30 year fixed rate mortgage. It increased in value to $220K before the 2008 “crash,” decreased to $162K, but has since recovered to $185K, which is close to what they originally paid for it (but still well below the peak of $220K prior to 2008). They have 8 years remaining and an outstanding balance of $62K.
So, when Mike reaches age 63, their house will almost be paid for. By that time, the house could be valued at $200K or more. Having a paid-for house is always a good idea heading into retirement!
Mike and Debbie could, if absolutely necessary, tap their home equity for additional income. There are basically two ways to do that:
- Downsize. Mike and Debbie could downsize to a smaller house (or perhaps a very low cost rental). For example, if they can sell the house for $200K and buy a small condo for $120K, they could invest the difference of $80K and generate $3K in additional income a year. If they rent a small apartment, they could invest the entire sum of $200K, which could generate an additional $8K per year. However, unless their apartment rent is substantially less than $600 per month, or less than what ongoing taxes, maintenance and insurance would be on their house, there isn’t much benefit in doing that.
- Take out a reverse mortgage. They could take out a reverse mortgage, which could provide them with annual income in the $5k to $10K range. This would make early retirement much more feasible. But reverse mortgages come at a price: high fees, high interest rates, and loss of home equity that could have been used later in retirement as a cash reserve.
Downsizing from a large house with a high mortgage payment, especially if it eliminates the monthly payment, can be a very good idea. That’s because it can significantly reduce living expenses and may free up some equity to generate income, depending on the cost of the replacement house. Downsizing from a smaller, lower cost house that is paid for may be less beneficial unless the taxes, maintenance, and insurance are disproportionately high.
My personal preference would be to go into retirement with a paid-for house and then to tap the equity later on only if it’s an absolute necessity. If ongoing “carrying costs” for a paid-for house are too high, consider moving into a lower maintenance/insurance/tax cost situation.
The additional income ($3K annually) that Mike and Debbie may be able to generate by downsizing will not significantly address their shortfall in a “less than best case” scenario. So their ability to retire early, as with most of us, really depends on what kind of assumptions they make about spending, saving, and investing and how confident they are with them. Mike and Debbie could conceivably retire early, but it would present some challenges and risks.
Is it starting to sound like this really isn’t a very exact science? Well, it isn’t. You can only make educated guesses based on limited information since none of us know what the future will hold. This is one of the biggest challenges of retirement stewardship, especially trying to come up with a projection of what you will need to save for retirement. So what are we to do?
The answer for retirement stewardship planning is no different than any other area of life. First, we have to understand and assess the realities of our situation, whatever they are. Second, we have to recognize that we are finite creatures who have virtually no control over the macro-economic forces that can have such a huge impact on our finances now and in the future. Third, we have to understand that we worship and serve a God who controls all things, including the dynamics of global macro-economics (and all other things that are outside our control).
Finally, we have to do all we can, in accordance with the biblical wisdom we have been given – whether that be through specific scriptures or subject matter experts we can trust – to take whatever steps we can to plan for the future and position ourselves as best we can, and then trust the rest to God. This can be described very well by the definition of retirement stewardship from my free eBook, 15 Principles of Retirement Stewardship:
Retirement stewardship is managing all that God has generously given you – your time, talents, and treasure – by saving diligently, investing wisely, giving generously, and living abundantly; for your joy, the good of others, and God’s honor and glory, as you plan for, and/or live in, retirement.
I discuss some more of the specific practical things you can do if you are behind in retirement stewardship in the next and final article in this series.
Read the next article: Behind in Saving for Retirement? (Part 6).