In a moment of lucidity, I realized that of course if my basic survival account is padded with a five- or ten thousand-dollar cushion, what will matter in “retirement” is not month-by-month income (earnings will fluctuate wildly because teaching money will come only in spring and fall), but how much I will earn on average. That is, after the layoff, I won’t be living on bimonthly paychecks. I’ll be living on a fund of money that is restocked once a month from a variety of sources.
When income from these sources runs low, I’ll have to use some of the cushion to live on. But when income rises while community college classes are in session, the cushion should be replenished, assuming my average costs don’t overrun average income.
Thinking about this the other day, I realized to my amazement that—any way you look at it!—my income in forced retirement will be higher than my salary. Unfortunately, the changed circumstances of retirement will make that irrelevant, because costs will rise significantly. However…there it is.
When GDU is paying my full salary, the net is $3,044. The pay cut created by two furlough days a month has reduced my take-home pay to $2,836.
My financial advisor says that with a 5 percent drawdown, my savings will last 100 years. At 7% the money would last 50 years. A 5 percent drawdown plus Social Security plus teaching income should create a net of $3,288, assuming the total tax gouge is around 20 percent.
This looks wonderful, eh? Well…not so fast.
Even though my net monthly expenses will drop because I’ve paid off the second mortgage on my house and because I will cash in the whole life insurance policy as soon as this tax year ends, it still won’t be enough.
Right now I’m paying my share of the mortgage on the downtown house with a small drawdown from my largest IRA. In other words, I’m not paying the mortgage out of my salary. That cost will have to be folded in to the 5 percent survival drawdown—in fake “retirement,” I will have to help pay the mortgage out of money I would ordinarily use to live on.
Even that would be manageable…except for Medicare.
Medicare, Medicare Part D, and Medigap insurance will cost twelve times what I’m paying for health insurance now! And that will run my average costs over $3,288 a month.
Freelance income might take up the slack, but it’s so sporadic and so unreliable, I’m not including it as a source of average monthly income. As we’ve seen, the likelihood that I can keep my credit card charges down to $1,200 is slim, and so overruns of this tight little budget are probable and may be frequent. All it will take is one vet bill or one repair bill to run the thing deep into the red.
It looks like I’ll be forced to take a 6 percent drawdown, even though I don’t want to and even though I think it’s highly ill-advised.
One pool repair bill runs upwards of $115. You can’t walk into the vet’s office for less than $100. A pair of glasses costs $300. As you can see, then, at 6 percent I’ll get by…but it’ll be tight. Very, very tight.
Probably some freelance money will continue to flow in, maybe as much as two or three hundred dollars a month. whoop-de-doo!
Yesterday I dropped by the college, where the departmental chairman was hanging out with the secretary. They said not to worry about enrollments: because the college nullifies unpaid early enrollments and community college students are just as broke as the rest of us, most people wait until the week before classes start to sign up for classes. The chair was confident all three classes would make, but, he said, even if they don’t, he still has several unstaffed sections. He said he was sure I would end up, willy-nilly, with three sections.
So that will help to fill up the fund that I’ll be living on after December.
And it’s pretty clear there’ll be no problem landing three sections a semester as long as I can dodder onto a college campus. GDU has so massively shot itself in the foot—in both feet!—by jacking up tuition, adding a per-credit surcharge to the inflated tuition, and by generally mistreating students that vast numbers of students who would qualify to get into the university are going to the community colleges for their first two years.
It will be a very long time before the university recovers from its own missteps and from our right-wing legislators’ fierce, vengeful animosity toward higher education, set loose by the departure of Governor Janet Napolitano, who was able to keep the kookocracy under control to some degree. The universities in this state, especially GDU, have been permanently damaged by the crash of the Bush economy and actions of the surviving extremists in our elected offices.
It’s too bad—a disaster, really, for our state—but on a selfish, personal level…what redounds to the junior colleges’ benefit may redound to mine.
I don’t understand the 5%-7% draw down. Everything I’ve read advocates a 4% draw down. Could you explain your advisor’s reasoning? I would much appreciate it!
@ frugalscholar: Reasoning, Part I, is that I can’t live on much less than 5 percent, as long as I’m helping to pay the mortgage on the downtown house. Even if we wanted to sell the house, which we don’t, we would have to bring about $35,000 to the table to do a short sale. Neither of us can afford that just now. At the same time, it’s clear I haven’t a chance of getting a full-time job: I am an elderly woman with arcane skills that simply do not compute at places like WalMart. No one is going to hire even a normal person (to say nothing of an eccentric, marginal academic) who looks like she’ll stay around two years at the outside and who can be expected to have health problems that will drive up the cost of the group health insurance policy. Those two issues are the practical reasons employers avoid hiring someone on the cusp of retirement; the emotional reason is out-and-out dislike of the elderly, a type of bigotry that pervades American culture.
Reasoning, Part 2: The several funds I own — a large IRA with Fidelity, the 403b with Fidelity, the 403b with TIAA-CREF, and a half-dozen Vanguard funds — contain a surprising amount of cash. Just the one Dick and John manage, which holds about half my total savings, regularly generates significantly more than the $800 drawdown to cover the house: last month we drew down $800 but the fund made $7,825 AFTER the drawdown.
Obviously, during the recent downturn, that fund lost money, which was alarming. However, when the market is behaving normally — that is, not frolicking with irrational exuberance — the fund makes more than it loses. My total investment portfolio gained $15,000 last month. It appears that the total amount of savings, actively managed and conservatively invested, will on average earn enough that, at 5%, it will take longer to draw down the entire amount than I’m likely to live.
My original goal was to accrue enough that I could live solely on investment income plus Social Security, so that the entire principal could go to my son. Before the crash, that was the case. But obviously, it’s not going to happen now, what with my being forced to “retire” in the middle of a major recession. But something certainly will be left for him. Plus my house, which is paid for, is worth a nice little chunk of change.
I’ve heard that most advisors recommend a 4% to 6% drawdown, which would put the proposed 5% figure in the realm of reason. Seven percent is more than I want to do — and I don’t think it will be necessary.
As for the downtown house: once it’s sold or rented, I can live nicely on a 4% drawdown, or continue with 5% and quit working at the junior colleges. I am quite certain that within the next few years the value of that area will go through the roof, just as it has in other residential districts along the lightrail route. All of the centrally located districts in town have held their value or increased (houses comparable to mine are selling for about $48,000 more than I paid five years ago). The reason we’re upside down with the jointly owned house is that a number of speculators bought into the area with the same idea, only they thought they could flip the places. They bought too late and were caught in the real estate crash, leading to several nearby foreclosures. We have plenty of resources to hold onto the house–we’re not about to go belly-up. Even though I recognize the risk, I think it’s a risk well worth taking. We are going to make a profit on that place, and in the meantime, my son is not living in a dangerous firetrap.
Wow–thanks for the explanation.
I’m not really clear when you talk about Medicare etc coverage. Is that assuming you take it now or only when you actually retire?
If it’s the latter, you should really crunch the numbers. It may actually save you money in the long run to take it now and pay extra. (You might also be able to talk to HR about getting out of the U’s health benefits? Probably not, but still..)
As I recall, Medicare costs increase exponentially per month that you don’t take them. So if they’re going to be so much, why not do the math and figure out what the costs would be (now and over time) if you took the damned things now?
Yes, it’s silly to pay for everything (though, really, you can just get Medicare and not use it; there’s no penalty, as I recall, for not signing up for Plan D and such right away) but it’d be sillier to not pay $100 or so more a month now all to pay over $300 a month later. My guess is, you may actually save money this way.
Let me know what you find with those numbers.
Ooops. just found out I was wrong about the Plan D thing. But I know that some of the Plan D programs are very, very low. I believe one is actually $0. But there are several that are $30 or less a month.
This is a great topic for another post… And since I’m casting about for a subject for today’s rant…onward!