There’s an urban legend that makes the rounds from time to time that goes something like this:
During the early years of the space race, NASA and its counterparts in the Soviet Union had a problem. The ballpoint pens they were using wouldn’t write in zero gravity. NASA put a team of researchers on it and spent more than $1 million trying to develop a reliable pen for the astronauts.
What did the Soviets do to solve the same problem?
Answer: They used a pencil.
While apocryphal, that story illustrates a very real point: Most problems have more than one solution.
Unfortunately, when it comes to retirement, most people are trying to solve the “problem” with a single solution: saving. The uncomfortable truth is that this is not working for a large portion of the population. According to the Economic Benefit Research Institute (EBRI), 66 percent of workers and 64 percent of retirees have less than $50,000 in total savings.
At that rate, many people will not save anywhere near enough to fund the type of retirement they want. It’s unfortunate, but it’s math. You can’t make 1 plus 1 equal 3 (or $3 million).
So rather than write another well-intentioned article about how you can skip your daily latte and accumulate a bazillion dollars (assuming 30 percent compound returns, no down years and a Cubs World Series win), I thought I’d instead offer a few alternative ideas that you can use to either provide income during retirement or reduce the amount of income you need.
Retire debt free. If you subscribe to the 4 percent rule, for every $1,000 in income you need each year, you’ll need about $25,000 in assets. If your house payment is $1,000 per month, you’ll need a $300,000 nest egg just to generate the payment. Retire debt free and the need for that income (and the corresponding asset) goes out the window. Debt and income needs go hand in hand. The more debt you have, the more income you will need.
Let your paycheck be your portfolio. Using the arithmetic above, a $20,000 income is the functional equivalent of a $500,000 portfolio. If you don’t have the portfolio, another way to generate that same amount of income would be to trade some of your time or expertise for it by working longer, working part time or starting a small business. Done correctly, this solution can generate the income you need while leaving plenty of time to pursue your other interests.
Maximize your hidden balance sheet. During your working years, you put 6.2 percent of every dollar you earn (up to certain limits) into Social Security. Your employer adds another 6.2 percent. If that were your 401(k), would you do everything possible to maximize the distributions from that asset? Of course you would. And yet, most people claim Social Security benefits at 62, which (similar to buying a pair of leather pants) is almost universally a bad idea. There are a number of claiming strategies you can use to maximize your benefits. Most people don’t use them and end up missing out on $100,000 or more of income. Go to www.intentionalretirement.com/social-security to use a tool that will give you the three best strategies to use for you and your spouse.
Move to a place where your dollar will go further. If you’re ready to retire, but your nest egg isn’t, one option is to delay retirement and give your portfolio a chance to grow. Another option would be to move to a location where your dollar will go further. It’s much cheaper to live in New Mexico than New Jersey. And why limit yourself to the U.S.? You can live in Panama for a fraction of what it would cost you in Pennsylvania.
Draw money in a tax-efficient way. If you’re like most people, some of your accounts are taxable and some are tax-deferred or even tax-free. Which should you draw from first in retirement? Choose wisely, because your choice could add years to the life of your nest egg. (Hint: You should usually take the taxable first.)
Take a medical vacation. Do you have health problems? Open-heart surgery (to take one example) will set you back about $100,000 in the U.S. Buy a plane ticket to Narayana Hrudayalaya Health Center in southern India, however, and you can get that same surgery for around $2,000. It has the world’s largest cardiac hospital, where doctors perform more open-heart surgeries than any other hospital in the world. Consequently, they have pioneered several new techniques and boast a 98 percent survival rate. Of course, quality of care is a primary concern, so visit www.JointCommissionInternational.org to learn about internationally accredited and certified health care organizations in countries that you are considering.
Travel cheaper. If you love to travel but don’t love paying for it, “travel hacking” might be for you. That is where you use creative ways to rack up rewards with airline and hotel loyalty programs. I’ve used travel hacking to accumulate about 350,000 frequent-flier miles (enough for a dozen or so domestic tickets). Visit www.travelhacking.org to learn more.
Those are just a few of the unconventional strategies you can use to help your retirement dollars go further. Some might work for you. Others might not. The important thing to remember is that your nest egg is only one arrow in your quiver. Keep an open mind and you’ll likely find more than one way to solve your retirement income problem.
Joe Hearn is an Omaha financial planner. He can be reached at 402-331-8600 or by email at email@example.com.