In the seminars we’ve been conducting in San Diego and out of state, we’ve been noticing a common denominator that is becoming more and more troublesome to us. It’s the number of stories being told of parents, grandparents, or the storytellers themselves.
It often begins with, “My dad is in his 70’s, healthy, and owns his home free and clear. He has Social Security, a small annuity, plus the income from his life savings. It all adds up to around $35,000 a year or so. His retirement years aren’t anything like he planned — and he’s becoming more disillusioned each year.”
That’s sad enough on its own merit. How would you like to live your so called Golden Years pinching pennies in a 50+ year old house, and enough after tax income to survive? Now imagine what his kids must think as they begin to enter their 50’s. “Is that my future? Why bother?”
Why bother indeed. Let’s crank up the way-back machine, and see if we can’t shed some light on Dad’s thinking when he was in his 20’s and 30’s.
Let’s say he was 25 in 1957. What if…..
What if we found Dad in ’57 and gave him a choice. He could work hard, invest in real estate, make some sacrifices early in life, and end up with a pretty nice retirement. His other choice would be in the form of a guarantee. How about we guarantee him a $35,000 annual income AND a free and clear home? The median income back then was no doubt less than $10,000 a year. I’ll bet he’d have taken the guarantee. To him it would have been a no-brainer. Yet folks who today find themselves in that exact position are leading lives far different than they ever envisioned.
True Story
I was talking with a prospect the other day, who lives in another state. His parents live in an adjoining state, are retired, and in their 70’s. They enjoy very good health, and are able physically to travel. They are living the very life described above — an old free and clear home, with a little less than $35,000 a year before taxes to live on. How’s that workin’ out? Fortunately all but one of their kids’ families live in the same city. My prospect lives a six hour drive away from them. When I asked how often his parents get to see him and their grandkids he got quiet. They had to stop flying there a couple times a year because they just couldn’t afford it any longer. So the last several visits have been by car — six hours each way at 75 years old. Their most recent visit? It was postponed because they couldn’t afford the gas for the drive.
How’s that guarantee working out for you so far? It’s not funny, is it? My kids are both in their 20’s and will some day make me a grandpa. I can’t imagine the hurt of being unable to see my kids and their kids because I couldn’t afford it.
Multiply this story by a few hundred thousand times over the next decade. There are going to be a lot of folks in a very bad mood most of the time. It’s the birth of a new class. Their free and clear home will, in reality, become their prison. For people who worked hard for 30-40 years, and got exactly what they wanted for retirement, this will be a very bitter pill to swallow.
And they’ll be swallowing that pill every day for the rest of their lives — knowing it’s the result of their own plan.
Is this you?
Here we are in the spring of 2007. You’re in your late 40’s, early-mid 50’s. There’s an 80% chance the following describes your current financial position.
- You own your own home with a mortgage — it’s about 50-80% of the home’s value
- You have a 401(k) or IRA with a current balance of less than $60,000 — surely less than $200,000
- You have less than $10,000 cash available at any given time — usually less than $5,000
- You own either one rental or, much more likely, have invested in no other real estate
- Outside of your periodic and relatively small 401(k) contributions, you save very little money
Sound familiar? Let’s say as you read this you’re 51 years old. If you’re beginning to get that bad feeling in the pit of your stomach — go with it. You are in big trouble. And if you don’t begin to change your thinking and get yourself a Purposeful Plan, you’ll find yourself part of the emerging new class.
Waking up one morning with the realization your home is now your prison, isn’t my idea of the Golden Years.
Brian Brady says:
Ouch! Wait until the savers who used the 401-k discover how much of their nest-egg will be confiscated.
That ain’t a pretty post, Jeff. Then again, it’s not supposed to be.
May 25, 2007 — 9:34 am
Jeff Brown says:
Brian – I was gonna include a bit about the tax bite on 401(k) withdrawals, but felt like I was already creating somewhat of a bad day for a lot of folks.
It’s an ugly topic, especially when you just know there are so many folks rowing that boat towards the falls.
May 25, 2007 — 9:39 am
Chuchundra says:
It’s hard for me to feel a lot of sympathy for people whose unhappiness is caused by their own stubbornness.
Look, if you own a home free and clear, you own a fairly significant asset. If the home is too big and too expensive to maintain, sell it and buy or rent something smaller and cheaper. If it’s too far from your family, sell it and move. If you don’t want to sell it, rent it out and use the proceeds to pay rent on something else.
A similar thing comes up here on Long Island, where I live. The old people who own their homes outright complain that they can’t afford to pay their property taxes and the government should give them a break…that is, a much bigger break than they already get. They’re sitting on an asset worth upwards of a half million dollars or more and they cry poverty. I feel unmoved.
My mom was in a similar situation. She owned her home outright, but had a hard time making ends meet between taxes, utilities, upkeep on the house, etc., so she sold it. The investment income from that money would have easily paid for the rent on a modest apartment with money left over.
May 25, 2007 — 10:25 am
Jeff Brown says:
Chuchundra – What you say is rational, and very practical. Though most folks today and in the next decade won’t have a half million dollar equity to sell. That said, if they get say, $200K from the sale of their home, thereby generating monthly income, (though not that much) and move into an apartment, it’s not exactly their dream retirement, is it? No, not quite. It doesn’t defeat your point though, because they’re at least altering their behavior to comport more comfortably with their reality.
How much better to have actually planned a magnificently abundant retirement in the first place.
I like your can-do attitude in times of crisis. Sometimes making lemonade from lemons is the best we can do.
Thanks for joining in – please come back.
May 25, 2007 — 10:34 am
Eric says:
Help a young man out here – what tax bite do you speak of? Early withdrawal? I was under the impression that so long as a 401k built up to a certain age (65?) that it was relatively tax free?
Rain on my parade, I’m wearing my parka 🙂
May 25, 2007 — 11:38 am
Chuchundra says:
If you have a standard, pre-tax 401K or IRA, you pay tax on your distributions. It’s considered regular income. You didn’t pay tax on the money you put in or on the capital gains that money made over the years, so you pay when you take it out. The idea being that you’ll be in a lower tax bracket when you’re retired, so the tax bite will be smaller.
May 25, 2007 — 11:55 am
Kelly Kilpatrick says:
Very thought-provoking. Any thoughts about how to get this point across clearly to a 20-year-old?
May 25, 2007 — 12:13 pm
Brian Brady says:
“The idea being that you’ll be in a lower tax bracket when you’re retired, so the tax bite will be smaller”
an urban myth, Chuchundra. I won’t steal the BawldGuy’s thunder because he explains the problem better than most.
May 25, 2007 — 1:52 pm
Jeff Brown says:
Eric – Brian has it right. Calling that approach an urban myth is being kind. It’s a bad joke being played on folks who won’t understand the punch line until it’s too late.
The short answer is this: Stop putting money in your 401(k).
This is much too important a subject with such a great question Eric, to answer here. I’m going to publish a separate post as an answer.
What Chuchundra wrote is the essence of what the vast majority of taxpayers actually believe. And it’s wrong – painfully wrong.
I promise to post my answer in the next 24-48 hours Eric. Thanks for asking such a great question.
May 25, 2007 — 2:06 pm
Jeff Brown says:
Kelly – See my response to Eric.
I’ll be using my daughter (23 in July) as an example, so you’ll be able to identify with the concept easily.
Thanks – come again.
Brian – Fastball, belt-high, down the middle. Yer the man!
May 25, 2007 — 2:10 pm
Thomas Johnson says:
Picture this: In Texas, there is no state income tax, so as a result we have Lone Star sized property taxes. In the Houston area, nice suburban MPC, plan on 3%-4% of the house value. Here’s our retiree punch line. There is an appraisal cap on appreciation of 10% per year. Our market typically appreciates 3%-6% per year, as we have almost zero supply constraints: no zoning, lots of land(lots of lots?). Punch line: the tax appraisals magically increase at 9-9.9% per year. Our fixed income grand dad will be compounding his property tax at almost 10%/year. Rule of 72: doubles every 7 years. Retire at 65 with a 200,000 home and at age 75 property taxes are $12000. At age 85: $24000 which exceeds his Social Security by about 80%. Make up the spare bedroom.
May 25, 2007 — 5:01 pm
Jeff Brown says:
Thomas – And I thought 401(k)’s were a scam. Seems Texas has learned how to make ‘no state income taxes’ pay even better. 9.9% a year indeed.
Thanks for the hoot!
May 25, 2007 — 5:08 pm
Chris says:
What about like a Roth IRA or a form of IRA? A lot of my friends are starting to get jobs and jump on the 401k bandwagon. I don’t think I would get one even if it was offered.
People need to start minding their finances. Insted of buying those 60in TV’s maybe saving a bit…
May 27, 2007 — 9:45 am
Jeff Brown says:
Chris – Thanks for teeing it up. 🙂
Roth IRA’s are, relatively speaking, much better than their IRA/401(k) counterparts. But that’s like giving a 10 year old the choice between spinach and Brussells sprouts. 🙂
Besides potentially messing with your estate at death; having all sorts of rules with multiple exceptions tax wise; and severely limiting your ability to contribute, they’re fine.
My alternative, which will be published Tuesday, (sorry Eric, I forgot it was a three day weekend) will demonstrate why staying away from so called qualified plans is an easy decision.
Here’s a teaser. What if the income produced at retirement was absolutely tax free for life? What if when you died, it wasn’t even considered part of your estate? What if…….
Can’t give the whole store away, can I?
May 27, 2007 — 10:12 am
Eric says:
No problems Jeff – but keep us posted, I’m eager to hear about it.
If you were looking to put a couple hundred a month aside for a 401k or company offered retirement plan, can you address in the article what you would prefer to see it spent on? Tossed in a liquid savings account (which still overs 4-5%) until there’s enough for a small investment?
In that position and eager to see what your position is for the young 20 something starting up and trying to get an early foot in the retirement door 🙂
May 27, 2007 — 12:48 pm
Jeff Brown says:
Eric – Will do.
You are the living profile of who my son (partner) is trying to reach. He’s 26 and finding most of his friends, with a few exceptions, aren’t really doing much to make their future worth living.
May 27, 2007 — 12:57 pm