Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

American Retirement: Be scared, be VERY scared???

So, as on cue, we get another nervous-making rant to the effect that ô God! dear God! Americans are JUST NOT SAVING ENOUGH for their dotage. If you look at NerdWallet’s latest terrifying reprise of Americans’ average 401(k) balance, by age, you’ll be ready to shoot yourself so as to will your savings to your adult kids before you use the money all up. Yea, verily: if you have a kid between 20 and 29 who manages the average savings level, the brat has  set aside only $11,600; but the median for that bracket is a piddling $4,000. If your kids have stumbled into their 40s without undue catastrophe, they’ll have stashed all of $106,200 on average (maybe three years’ worth of living expenses, if they’re lucky), rather more than the median figure of $36,900. And if you — not your kid — have accrued the average US savings for your age bracket, at 65 you have a grandiose $198,6700, but the median among your contemporaries is an even more spectacularly inadequate $63,000.

Horrors. Clearly we’re DOOOOOMED.

Why do I doubt it?

Well, here’s why. A 401K does not one’s only retirement instrument make.

In fact, Americans have a variety of devices that help them prepare for retirement. Not the least is real estate: paying down that mortgage.

Once you’ve paid off a mortgage, your house effectively returns to you the amount you were paying monthly toward the mortgage. It gives you that much money that you don’t have to pay out to keep the roof over your head. So, let’s say (for simplicity’s sake), you pay off your mortgage on your 65th birthday; your payments were $1,000 a month. From then on, that house represents $1,000 a month of retirement savings for you: $12,000 a year that you don’t have to earn and you don’t have to take out of your IRAs or 401(k). If you live to, say, age 85, it returns 12 months x 20 x $1,000: $240,000.

So, let’s say sure, you only have $106,200 in your 401(k). But with that plus the return on your paid-off house, you have the equivalent of $346,200 to live on. Not awesome. But not bad.

Okay, now let’s bear in mind that the 401(k) is not the only savings instrument you might have. For example, some of us know about Roth IRAs. In many ways, it’s better to pay taxes upfront and then stash the balance in a Roth than it is to use a 401(k) and bet that you won’t be earning enough in your dotage to put you in the taxman’s headlights. Lemme tellya from experience: It ain’t necessarily so that you’ll be free of income tax in your poverty-stricken old age.

Uncle Sam requires you to take a percentage of your 401(k) in each year of retirement, forcing you to choke up a chunk of taxes. If you’re not earning any more than Social Security and an annual savings drawdown, that tax bite can be a hardship.

If at the age of 45 you started racking up post-tax savings in a Roth IRA at the maximum amount allowed per year, presently $6,000, in 20 years you would have $120,000. Now let’s continue to assume you pay off the mortgage on your 65th birthday, meaning it starts to “return” the equivalent of the monthly payment, about $240,000 over the next 20 years. At 65, then, you have the practical equivalent of $120,000 + $240,000: that is, $360,000. Now let’s add up the average 65-year-old’s savings: we get $120,000 (Roth IRA) + $240,000 (amount you don’t have to earn to stay in your paid-off home) + $106,200 (average agèd American’s 401(k) savings): $466,200.

Not so bad. But now you not only have the roof over your head more or less free (except for taxes and maintenance), but the house also represents a monetary asset. You can sell it, or you can borrow against it. Let’s say it’s worth $188,900, the median home value of a U.S. house: that gives you a pre-Social Security retirement net worth of $655,100. If we take as the house’s value the average third-quarter 2018 sales price ($390,200), we come up with $866,400. That’s before Social Security income.

So. Yeah: it would be good if you maxed out your 401(k). But its balance doesn’t tell the whole story.

The whole story is represented by the total of all your assets, your Social Security, and the extent to which a paid-off house reduces the amount of cash flow you need to live adequately.

Author: funny

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  1. Here’s my take on the subject. What if you don’t have a paid off house? What if you’re still paying on it at age 65? What if you are still renting at 65 and never could afford to buy? A lot of what-ifs to think about.
    My late mom was forced to sell the house and split the proceeds when stepdad divorced her. (long story) She had to go back to renting for the last 11 years of her life. She had to take early retirement in her late 50’s because her health deteriorated (factory work.) She hoped to get a less physically demanding job, but her health steadily worsened. Thank God for social security because her “pension” was a paltry $125 monthly. She had her faults but thoughtlessly spending money/not saving wasn’t one of them. She came from poverty and didn’t really invest. I don’t think her situation was/is unusual at all.
    My point is that the average American doesn’t own a home. The average American can’t afford to own a home. Too many financially ignorant people were manipulated into buying homes they couldn’t afford and that’s why so many never recovered from the Great Recession. Unfortunately, as a nation, I think we’re still drowning in financial ignorance.

    • It would be interesting to learn what proportion of Americans experience hard times to this extent, and at what periods in their lives. If these things happened to you when you were relatively young (under 40 or 45, for example), you might be able to recover, but if you were much older, you’d just be screwed.

      It certainly is true that many people get lured into buying houses (and cars, and many other material goods) that are more than they can afford, And, I suspect, that the “American dream” of owning a house may be an American hallucination. My father wangled an early retirement by NEVER owning a house until he could pay for it in cash. We lived either in rentals or in company housing all the time I was growing up, as they did before I was born. When he was ready to retire, he had the money in cash to buy a two-bedroom house in Arizona, where at the time real estate was a LOT cheaper than where they were living. Same was true of cars: he never bought a car on time, even though at the time American cars were engineered to last about three years and consumers were pressured to buy a new one every year or two.

      And as for divorce: community property laws had him so terrorized that, even though he would threaten to leave my mother if she didn’t stop spending “his” money on things like clothes and make-up, he did not because he knew she would end up with half of everything he had. Years later, after she died and he remarried, he did the same when he realized that the new wife was making him crazy; I remember him saying he had to stay with her “or else she’ll get all my money.”

      It also would be interesting to know how many Americans never recovered from the Great Recession, and in what respects that is so. Like your mother, I was never able to get another job: not because of health issues, but simply because no one would hire a 64-year-old woman with a Ph.D. in English, despite 15 years of journalism experience and 15 years of higher-ed teaching and administrative experience. In my case, I was extremely lucky in that 10 years earlier I had gone against my financial advisor and paid of the house — otherwise I would either have lost the house or lost even more of my savings. Nor would I have been able to stay in the middle class without Social Security.

      There are elements on the right who want to eliminate Social Security. They’re working on that by pushing back the retirement age, but the real goal is to get rid of it altogether. My son is convinced that SS will no longer be available at all when he reaches old age. This is something that must be resisted. Politicians who do not subscribe to common decency and humanity must be voted out of office and kept out of office. Multi-billionaires must be prevented from buying them into office. Once again: money is politics; politics, money.

    • By the way, on this very subject, check out this article from BBC:

      In Japan, old folks have found a way to keep the roof over their heads: go to jail!

      And as another post-script in the politics/money/politics department, it’s important to note that America’s middle class has been deeply harmed by right-to-work laws, which have crushed unions’ ability to stand up for fair wages. That certainly is the reason pay is so ridiculously low in Arizona that people who come here from other states are shocked. If you’re not in the management class here, it’s almost impossible for a single person to earn a decent living.

  2. Hypothetically, if I earn $100/month and spend $20/month on a mortgage and $60 on other expenses that means I save $20/month. Now suppose my mortgage is paid off, if I continue working, I earn $100 and spend $60 leaving $40 of savings. However, if I quit working I have $0 income and $60 of spending so I have to draw down savings $60. If I quit working while still having a mortgage the draw down of savings would be $80. Paying off a mortgage only results in increasing savings if I continue working after the mortgage is paid off. Once I stop working there are no more contributions to savings so whether or not I have a mortgage does not cause savings to increase. Now, having a mortgage or not having a mortgage does have an impact in a different way. With a mortgage I needed $80 from savings, but without it I only needed $60 from savings. This difference will allow the money in the account to last a longer amount of time.

    • Jeez. One wrong keystroke just deleted a whole fairly elaborate response to yours, Ozzy. I’ve got to start running around the city and so will have to come back to this later in the day. Interesting rumination…

  3. An interesting post…There was a very interesting documentary on this very subject on PBS Frontline Program. It highlighted what happened to Dayton Ohio…once the auto manufacturing center of the US. Now everyone there cobbles together part time jobs and full time work if it can be found at 10-$12 an hour. Worth a peek. Nice blog but don’t know if I agree with the paid for home. It really depends on where your assets are. Suppose you have a mortgage at 3.5% and have enough money to pay it off. However the money is in capable hands TIAA-CREF or T Rowe Price and some years yields gains of 30-35% but on average yields 10-11%. Does it make sense to take money yielding 10% to pay off a 3.5% mortgage? Sometimes I wished I had refinanced and invested the proceeds. A wise Banker once told me the “time to borrow money is when you don’t need it”…Just my 2 cents…