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Retirement

Ridiculous Retirement System: With a Vengeance

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Various of our PF blogging friends have noted the dangerously low savings rates among middle- and working-class Americans, mostly by way of urging readers to set aside larger amounts in their 401(k) and other retirement accounts. Get Rich Slowly has suggested that a million dollars is not enough to support you in your retirement (in 20 years it’ll be worth all of $449,400 in today’s dollars) and that you should be investing between 4.2 and 5.7 percent of your income, depending on your age.

That is extremely low. I put 7% of my pay, matched by the Great Desert University for a total of 14%, into deferred savings, and I started that job with $250,000 in an IRA and another $80,000 in nondeferred brokerage accounts. I started that job 20 years ago. Today, laid off my job and essentially unemployable at age 67, I have just over half a million bucks. And that is nowhere near enough to live on through one’s dotage.

Economics professor Teresa Ghilarducci points out the fundamental problem: expecting everyone to set aside enough in self-directed, commercially operated savings funds to fund 20 or 30 years of unemployment (which is what “retirement” really is) has proven to be a massive failure. So much so that she brands it “ridiculous.” Our present 401(k)/403(b) retirement system, she observes, “simply defies human behavior. Basing a system on people’s voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs…. This do-it-yourself pension system has failed. It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”

The chickens, my friends, are flying home to roost as we speak. Most older workers cannot hold their jobs until they’re 70 (or older). The cold fact is, people over 50 have faster-growing rates of unemployment than any other group. And once you’re over about 45 in our youth-obsessed culture, you are going to have a very difficult time getting another job. If you’re 60 and older, forget it. The likelihood that you’ll land another job is almost nil, and if you do, it will be at an enormous cut in pay.

As Ghilarducci points out, “Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day.”

Over at Wealth Pilgrim, Neal Frankl explains, with crystal clarity, why you will need about 20 times your present earnings to maintain your present lifestyle. It means that if you have an income of $50,000 today, your nest egg will have to amount to $1 million to support a middle-class lifestyle through the likely end of your life. That, my friends, is with a 5% average return on investment, which you may or may not achieve. “May not” is probably the operative term for funds managed by the do-it-yourselfer.

Using Neal’s rule of thumb—which adds up to the same ratio Ghilarducci cites, 20 times your present income(!)—to have a reasonable chance of maintaining a rather ordinary lifestyle through my dotage, I would have needed $1.2 million in investments when I was laid off at the virtually unemployable age of 64. That’s more than twice what I actually do have.

Neal’s calculation is a little more forgiving, because he asks you to figure what you will need to draw down from investments, which allows you to take into account details like Social Security, the amount of your revolving debt, whether your home is paid off, and whether you live in a high- or low-cost-of-living state. Simply divide the amount you will need by 5%, the projected rate of return on investments.

In my case, I need a bare minimum of $25,000 (a figure that grows with every tax increase, every utility increase, every auto and homeowner’s insurance increase, and every jump in food and gasoline prices). In theory, then, my half-million-dollar nest egg will support me. Just barely. Assuming Social Security continues for the rest of my life, something that is decidedly not a given.

The truth is, I really need more like $30,000 to $40,000 from investments, since that $25,000 allows for a lifestyle that we might call “pinched.” If I want to go out to eat more than once a month, might like to travel a bit, wish to wear clothes that don’t come from thrift stores, then I would need $600,000 to $800,000 in savings. And those savings would need to be intelligently invested.

Understand, $40,000 plus Social Security comes nowhere near what I was earning when my job came to an end. So under the best retirement scenario, which is impossible because I have nothing like enough to establish that scenario, I’m looking at a significantly diminished lifestyle. One, we might add, that will continue to shrink over time.

As Ghilarducci points out, a retirement “system” that is going to leave 75 percent of Americans in poverty when they hit old age is ridiculous: “failure is baked into the voluntary, self-directed, commercially run retirement plans system.” She suggests mandated, guaranteed retirement accounts, to be professionally managed and to pay out in annuities, on top of Social Security.

It’s a little late for those of us who have already been involuntarily retired or who are still working but don’t have a chance of setting aside 30% or more of gross income. But for the younger generations: something needs to be done, and soon. The coming “retirement crisis” is going to affect everyone. As I’ve pointed out myself, when Baby Boomers sink into poverty, their adult sons and daughters will be called upon to support them.

What we have here is a retirement system that’s ridiculous not only for the vast number of workers who are edging toward old age, but for everyone else, too.

 

There but for the Grace of God…

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Here’s a hair-raising story of not just one but several formerly middle-class Americans who today are living out of their cars. The issue has become so dire in California that a nonprofit in Santa Barbara has arranged with various owners of large parking lots to provide “safe” space for people to car-camp. Meanwhile, so much as a whiff of the word “homeless” makes it even more difficult—indeed, pretty much impossible—for these once decently earning workers and small-business owners to get jobs.

Looking at photos of Janis Adkins trying to make a home in the back of a Toyota Sienna—which happens to be the make and model of the Dog Chariot, though hers is newer than mine—I thought, holy Christ! How lucky am I not to be walking in her shoes! Like Adkins, I’ve never been able to get another real job; not for any lack of trying, either. But at least I’m still in my home.

So…what happened that kept a roof over my head while she was being put out on the street?

Well, I think it’s a combination of a few decisions made, long ago, that happened to be right (even though they were questionable at the time), raw luck, and social safety nets that kicked in just in the nick of time.

The Decisions

The big decision, maybe the only smart one I’ve made since I left my husband, was to pay off my house.

One day while I was tooling up the freeway, a little revelation dawned: once the alimony ran out, the mortgage on my home would consume over half my net income, which was, shall we say, not very generous to begin with. I was just getting by on a combination of the alimony and net pay for a full-time, non-tenure-track teaching position at the Great Desert University. In fact, most months I ran a little in the red. With the alimony gone, my salary would not cover the mortgage payments and put food on the table. I needed to pay off the $80,000 mortgage as fast as I could: clear it off the books before I had to rely on salary alone to live.

A small inheritance from my father, another from a remote aunt, plus some other money I then had in short-term corporate bonds would close that debt. My financial adviser had a freaking kitten when I told him I intended to cash out those investments and pay them toward the house. “You’re over-invested in real estate,” said he (my 403(b) owned an REIT), “and it wouldn’t be a good idea to pay off the mortgage.”

Right.

So I went right ahead and did it.

Eight or ten years later, I sold that house and used the cash to buy a comparable house in a quieter, better-kept part of the neighborhood, with a pool, a larger lot, and lots of upgrades. Selling price of the old house was more than twice what I paid for it.

If I hadn’t had that cash to buy this house, I’d be up to my nose in debt today, since it also cost more than twice what I paid for the first shack. And if I’d owed money to a bank at the time GDU canned me and all my staff, I probably couldn’t have paid it. Almost certainly, by now I would have lost my home, and I, too, could be living in a minivan under some parking-lot’s trees.

Other lucky/wise decisions:

• Bought a Toyota. Today, when I can’t afford to buy a newer car, it’s 12 years old, has 112,000 miles on it, and still runs like a top.
• Got in the habit of living frugally. Not being able to go out to eat, to take a trip, to afford cable or a cell phone, to see a movie or go to a concert: none of those is much of a hardship, because I didn’t do those things in the first place.
• Didn’t get another big dog. Few things will empty your bank account faster than the cost of owning large dogs. Especially German shepherds…
• Banked at a credit union, which did not then and still does not inflict nicks and gouges for the privilege of letting them invest my money.
• Refinanced the house my son and I were co-purchasing through the credit union, which made a loan modification as soon as we told them I was out of work.

Raw Luck

The expensive dogs were gone by the time I lost my job. Not that I wanted to lose them. But today I couldn’t even begin to pay the vet and drug bills for the German shepherd. I’d have had to find another home for her, had she still been living when GDU canned me.

The university laid me off on the last day that people were eligible for the 50% COBRA discount.

My health was good, my teeth were good, and I already had all the pairs of glasses and contact lenses I needed.

My car, all the appliances in the house, and the air conditioner were running well.

A hailstorm wrecked the roof and the ancient air-conditioner, causing the homeowner’s insurance carrier to replace both of those very expensive items, each of which will probably last as long as I’m likely to stay in the house.

The Social Safety Nets

No way could I have afforded health insurance if I’d had to pay the full freight of COBRA. Thanks to the 50% discount, which I grabbed just under the wire, COBRA cost me less than Medicare does. We might note, however, that Medicare costs approximately eight times what I was paying for an EPO that gave me access to the best doctors and medical facilities in the Valley. Still. I’d have been uninsurable if I’d had to pay the full cost of COBRA.

Mercifully, I was already eligible for Social Security. Although I was forced to take it at a much-reduced rate—I’d intended to wait until I was 70, another six years, to collect Social Security—it paid several times the amount of Unemployment Insurance, without the hassles. The $2,400/semester the adjunct teaching pays would have rendered me ineligible for UI, anyway.

And, thank God, I became eligible for Medicare on the first day of the month after COBRA ended. Paying eight times what health insurance should cost for less coverage and fewer willing providers is less than perfectly desirable, but at least I’ve got some coverage!

Overall, it was a confluence of decent financial management, one or two reasonably intelligent decisions, frugal living, crucial government antipoverty programs, and incredible luck that kept me from spending my old age in a minivan. Even though things can be difficult at times, at least I have my home and my health. So far. My mother was right: I am blessed.

 

A$k Lady Karma, and ye shall re¢eive

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For hevvinsake! You’ll recall how I was whining about my penurious income, part of which is a piddling $1,080 Social Security benefit? Well, Lady Karma must have read that blog post.

In this afternoon’s mail, along comes a missal from the Social Security Administration. I cringe when I see yet another summons from the Feds: it usually means another frustrating ride on the bureaucratic merry-go-round. But not always…

Periodically we reexamine our records to see if there are any additional benefits due. As a result of this examination, your monthly benefit amount has been increased to give credit for months of entitlement before you reached full retirement age, 66, for which monthly benefits were not payable. You also have been given credit for additional earnings which were not included in your previous computation.

To coin a term, huh??

You will receive a payment on or about May 9, 2012 for $1317.50. This payment includes both your new regular monthly benefit and benefits due from May 2011, the date of the earliest increase described above, through April 2012.

Seriously? You mean I could buy a pair of shoes? Dang!

After that, you will receive your monthly payment of $1,115.20.

Hot damn! They’re giving me a $35/month raise!

Hey. Every little bit counts. It’s better than a $35 cut. Thirty-five bucks will buy a meal out. It will pay the increase in the Cox bill for about a year. It will cover the increase in the amount I’ll have to self-escrow to cover the newly bloated homeowner’s insurance premium. Too, too excellent.

Money Worries: I’ve gotta stay away from the computer

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Probably I’m better off if I don’t know. Sitting in front of the computer mulling over the money worries is not helping my mental health.

Any way you look at it, there’s no way my savings will support me for the rest of my life, unless I die tomorrow. Nor is there any way my lifestyle is going to get any better. I am so damn sick of pinching pennies…my whole life has become pinched. And especially I’m sick of working like an animal for sub-minimum wages. Our current client hasn’t paid us; I sent him a bill payable net ten days and haven’t heard a word. Ten days, however, won’t be over until next Friday. Meanwhile I didn’t finish the work I was supposed to have done for him because the perfectly excruciating piece of ersatz lit-crit I was editing expanded to fill all space—I’ll make a grandiose $360 for 30 hours of work on that thing, and the real truth is, it  probably took more than 30 hours to drag through. Between that, the nonpaying client’s work, and the Holy Week frenzy of singing, I haven’t been able to break loose enough time to work on the real estate course.

I feel pretty discouraged about the real estate scheme, because I kinda doubt that I’ll make any more at that than I do at my various other schemes, largely because I’m not much of a people person.

Consequently, a view of my financial future goes beyond “pretty” discouraging to “radically discouraging.”

Yesterday I asked myself if I might take a small drawdown from savings to give myself enough extra money that I could pay the bills and have just a little bit extra to spend on things like clothing, shoes, an occasional concert or visit to a museum, or maybe just not having to feel strapped after the car has to be fixed. Math not being a stronger point with me than people skills are, I had to think this through each step of the way.

First, Social Security covers less than half my expenses, which include a $734 payment toward the downtown albatross house. Teaching income is peanuts, and because it’s extremely irregular (I’m actually paid only 8 months out of 12, and for long stretches no two checks are the same), I put that into a money market account and then transfer a set amount to my checking account to cover expenses. Right now, the amount is $2,050 a month. It just covers expenses; in the summer, now that utility bills have gone up, it actually does not cover expenses (my winter bills are now almost as high as summer’s sky-high bills were two years ago). Nor does it cover expenses in a month like this one, when I get hit with a $450+ car repair bill. One out-of-routine expense will put me in the red, and “routine” does not include a meal in a restaurant, a hair styling, a trip to the botanical garden or a museum, a concert that I have to pay for, a day trip to a tourist attraction.

So the first question is, while I’m teaching seven sections a year, how much beyond teaching income do I need to pay my bills? Right now I’m pulling $930 a month from a long-term emergency savings fund (every month is an emergency when you’re permanently unemployed), which resides in the credit union making zip. Sooner or later, I’m going to be forced to buy a new car, at which point I will need that money to pay for it—seeing it drop by almost a thousand bucks a month makes me cringe.

Another way to look at this: presently I’m running in the red.

Retirement savings average about an 8 percent return, so a modest drawdown (up to about 4%) should not reduce principal over the long term. Can I draw down from retirement savings without having to eat into principal?

Another $500 a month would cover the rising bills (my homeowner’s just went up another $55) and give me enough extra to enjoy life in a modest way. It wouldn’t cover expenses during the summer or during the month-long winter break, when I have no income other than Social Security, but it would be better than nothing. What percent of my savings would I have to draw down to engineer a net $500/month increase?

Okayyyy…. Let’s think about that.

A gross drawdown of $20,592 a year is 3.69% of savings. That’s almost four percent (the amount money advisers suggest to make savings last for most of your remaining years—and based on family lifespans, I expect to live into my mid-90s). Almost four percent while I’m teaching the maximum allowable number of classes!

Holy God! Does that or does that not mean I will end up in freaking poverty when I can no longer dodder into a classroom? Speak to me, ô Oracle of Excel!

Right now I need $3,040 a month to cover everything (that amount can only go up, but let’s avert our eyes from that inconvenient truth).

Got that? A near-four percent drawdown will not allow me to cover my bills if I’m not teaching! That $530 shortfall x 12 months comes to $6,360 a year, the equivalent of 2.65 sections of freshman comp. What it means is that I will always be short of what I need to live on unless I teach forever, until I die.

Uh huh. Can you imagine a 95-year-old Ph.D. in English getting hired to teach roomsful of fractious 19-year-olds?

How much will I need to cover my bills if and when I can’t teach anymore?

Lovely. I will need over 5% of savings to live like an ascetic. And I hate living like this.

Having seen what happened to an acquaintance when she ran out of money at the end of her lifetime, however, I can assure you that I do not want to draw down more than 4% of retirement savings! Better you should shoot yourself than go through what that woman did—and she had friends running interference with the horror show for her. If you were all alone, like, say, me…you truly would be better off dead than old.

Most Americans would be better off dead than old, IMHO. That’s the nature of our society.

Oh well. Moving on.

So, suppose I cut the proposed pay increase from $500 a month to $250 a month? Then how much would I have to draw down?

Okay. I could increase the monthly budget by about $250 if I continue to teach 3 +3 +1 and draw a little over 3% from savings. That’s more reasonable. But…what happens when I can’t teach anymore????

Wow! To get by with just $250 added to my present “income” from savings after I can no longer teach, I will have to draw down almost 6 percent from my savings.

That’s assuming a 20% tax rate, which is about what I’m paying right now. I ran the figures at 15%; that made almost no difference in the amount I would have to draw down to survive. It’s sure unlikely taxes will ever go down. And you can be sure expenses will never go down. Matter of fact, that 6 percent drawdown does not account for inflation.

We’ve seen the vagaries of the economy: what goes up must come down. I lost $200,000 in the crash of the Bush economy. It’s pretty well come back over the past four years—only because ever since I was laid off I’ve struggled to avoid drawing  money from investments. But all it will take is one more (inevitable) market drop, and the amount I’ll need to take out of savings will be one hell of a lot more than 5.7 percent.

I’m screwed. Unless I die soon, screwed.

Budget: Busted, Disgusted, and Can’t Be Trusted

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Ugh! My desk is groaning under the piles of paper that have flowed in over the past three weeks. Did most of the bookkeeping to update this month’s budget, and now, thanks to a $205 pool repair bill and the $180 for the (discounted!) air conditioning contract, I’ve got all of $140 to live on between now and the 20th.

Emergency savings, set aside to cover the constantly recurring pool bills and similar little urgencies, are down to $1,300. That account normally hovers around $2,000. So I’d like to avoid having to draw more money out of that during this budget cycle…especially since, on the 21st (first day of the March/April cycle) the car has to go in for an oil change and to figure out why it’s tweeting out of its left front wheel. That’ll be another $200 to $400, you can bet.

Power, electric, water, food, taxes, and gasoline bills are all up—yesterday a little over half a tank of gas set me back $40—but my income certainly isn’t. Social Security rose a few dollars last January, but that was it. Adjunct pay never increases.

Luckily, this week is spring break, so I won’t have to drive around very much. Enough food is stashed in the fridge and freezer to last a week or ten days (I think…). Thursday I’m driving out to Sun City to meet SDXB and drive up to meet our friend La Maya at her weekend place in Yarnell. We’ll take his car, since I’m afraid mine won’t make it up the 2,500-foot climb. I wouldn’t take it into the desert at all these days, much less up Yarnell Hill. We’ll fly up to the old mining town, schmooze with La Maya for a few hours, and then fly back down the hill to his house, where we’ll meet his friends for a dinner of pasties, which he’s been planning for some time.

And that will be my only excursion for spring break. Or for anything: it’s been months and months and months since I’ve gotten out of this place.

Dang, but I’m tired of pinching pennies! I want this job so bad, so I can have just a few more years of a normal life. So many things I can’t afford are piling up: a new(er) car, paint jobs inside and outside the house, orthodonture on the twisted teeth…just to be able to get one of those things done would help. And I’m tired of being cooped up in this house. A walk around the park a vacation does not make.

But have to be realistic about my financial future: the likelihood of the school hiring me—an old lady already on Social Security—into a handsomely paid full-time faculty position is nil.

The accountant is about done with my taxes. I’ll only get about $1,800 back, from which I’ll have to pay her bill. Usually I get around $4,000, and I was counting on that to help refill the Survival Savings account. February’s RASL payment brought it back up to where it was eight or ten months ago, but that was the last of the three annual payments the state owed me for unused sick leave. So without that and with income taxes increased by $2,200, Survival Savings will last about eight months, at which time that little fund will be drained to zero. Then I’ll have to start drawing down retirement savings to make ends meet. Social Security covers less than half my base monthly expenses—significantly less than half, with all those increased bills.

Though net worth looks pretty good, certainly compared with that of most Americans, there’s really only $546,000 to support me through my dotage. And that’s likely to be quite a while: women in my family have lived into their mid-90s—and they were Christian Scientists. They did 100% without medical care. Imagine how long someone with those genes could live into the 21st century, with passing medical care, a lifetime of good nutrition, and no really grinding work. Assuming, though, that I only live to 95, starting a drawdown now is likely to run me out of money before I die. And a 4% drawdown is about $500 a month short of the amount I need to stay in my home and cover my present pared-down expenses.

The real estate class starts next week. That’s gonna make for five weeks of Tuesdays and Thursdays from Hell, but at least it will get over quickly. Relatively. I sure don’t look forward to having to sit in a classroom taking coursework. I spend enough time in classrooms, thank you. And to have to race home from class on T-Th, bolt down dinner, and race back out there to listen to someone drone on into the night does not appeal. However…one does what one has to do. Unfortunately, the other semester of this regimen isn’t offered during the summer, at least not in the junior colleges. You can take all three courses required for a license at a propriety school, to the tune of hundreds of dollars. But since my tuition waiver gets me into each class for $15 apiece, that seems counterproductive.

On the other hand, the longer I have to string out these courses, the longer it’ll take to give myself a shot at some other job.

Not that there’s much promise in those precincts. My mother had a real estate license. She sold exactly zero houses and earned exactly zero dollars. In the course of this career, she sandblasted the paint off the Mercury, driving through windstorms between Long Beach and the Salton Sea. God only knows how much she spent on gasoline to get back and forth between those two armpits. And she spent untold numbers of hours sitting in open houses, bored stiff.

So. I don’t have much hope for this endeavor. But…nothing ventured (etc)…

Garden spot at Salton Sea

Image: Abandoned, salt-encrusted structures on the East shore of the Salton Sea. GregManninLB. Wikipedia Project. Public Domain.

Net Worth in the Time of Cholera…

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Over at My Journey to Millions, my favorite conservative Evan is doing his monthly net worth review. He’s performing well. This month he reports that over the past year net worth has increased a startling 95.30 percent. Yesssss! Great work, Evan!

The amazing progress Evan has made since he started blogging says a great deal about stating a goal and then making (and following!) a plan to make the goal happen. In theory, it can work for any of us. As we know, Evan’s goal is to become a multimillionaire. It must be said that he has the tools: he’s well educated, he’s still reasonably young but has been around long enough to build the experience needed to earn well, he’s energetic and focused, and he’s willing to work hard.  You can frame all the goals you want, but unless you’re prepared to make them happen, they’ll avail you naught.

IMHO the key factor is the willingness to work hard toward the goal, followed by focus, energy, and growing experience. To that we might add flexibility. While we’re still told that people with bachelor’s degrees outearn those with AAs and high-school diplomas and people with graduate degrees outearn everyone else, I think we all know quiet millionaires who own landscaping and carpet-cleaning services, college grads with $30,000/year jobs, and people with graduate degrees who qualify for food stamps.

Well, naturally, having seen what Evan’s been up to, I couldn’t let my own figures just sit there. Over the past couple of years, frankly, I’ve been too depressed about the sagging real estate values and the likely permanent unemployment to even think about net worth. However, things may be looking up a bit. In January, as I mentioned a while back, my investments earned 16 grand, causing me to wonder why I bother to teach at all. The crash of the Bush economy devastated my savings: when times were good (October 2007), total investments (not counting credit union accounts) came to just over $743,000. My paid-off house was worth about $250,000 in 2007. By December of 2009, when I lost my job shortly after reaching an age to make me eligible for Social Security (and ineligible for hiring even under the best of economic conditions), the combined value of my investments had dropped to $483,000, a $260,000 loss; Zillow claimed my house was worth $180,000, and the house I was co-purchasing with my son had a negative equity of about $60,000.

So how do things look now?

Better. Since the crash, investments have risen $63,000, with no further deposits from me (because on Social Security and adjunct pay, one has nothing to invest). A neighboring house similar to mine sold in two days for $205,000, suggesting it was somewhat underpriced; since my house is the same model and upgraded to about the same extent, I figure mine would sell for about $210,000 or possibly $215,000. The downtown house is still upside-down, but probably to a lesser degree; I think we’re about $20,000 or $30,000 underwater now.

In April 2011, the last time I could bring myself to add up net worth, it looked like this:

By the end of last month, the picture had changed slightly:

So what we have here is an “up but down” sort of picture. Despite a significant drop in investment values since the last time I could bear to look, and despite continuing depreciation of the 12-year-old vehicle, total net worth has risen by about 22 grand.

However, that figure is based on the Never-Never-Land valuation of the two pieces of real estate. We really have no idea what either house is worth, and besides: you can’t eat real estate. When it comes down to the money that matters—the funds I will have to draw down to live on when I can no longer dodder into a classroom—I’m merrily sinking beneath the bounding main. Since April, I’ve lost another $21,000 of the money I’ll need to cover expenses in my dotage. That’s despite the fact that I haven’t withdrawn a penny from those investments since I was laid off my job.

I am, in a word, screwed.

And that is why I need a real job. Now. Old age or no old age. Either that or I need Death to come a-callin’ in a timely manner.

Infographic: The Great Recession in the United States. Timetoast.