Die Broke -- on Purpose: An Unconventional Retirement Plan

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This will probably come as a shocker to most people: Three economists from leading universities have found that "a substantial fraction of persons die with virtually no financial assets -- 46.1% with less than $10,000 -- and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support."

Got that? The findings, in a paper published by the National Bureau of Economic Research show that a huge portion of America is relying almost completely on Social Security, and that they die with hardly any money to their name.

Awful ... or Awesome?

Dying broke probably sounds just awful. But it doesn't have to be.

In fact, it should almost be a goal to which we all aspire. For many of us, a perfect financial life would be one in which we amassed exactly the amount of money we'd need in life, and in which we ran out of money the day we died.

After all, what's the sense of dying with lots of money in the bank? You can't take it with you.

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The reality of those who do die broke isn't as neat and clean, though. The professors' data reflects millions of Americans not living perfect financial lives, but instead struggling to get by in retirement. They don't end up running out of assets on their last day, but long before it.

For a clearer picture of the situation, know that the average monthly Social Security benefit (as of early this year) is $1,230. That's $14,760 per year. Can you imagine yourself living on that – or, let's even up it a little, on, say, $20,000 or $25,000 per year?

Even if you can imagine it, would you want to live that way? Probably not.

Problems with the perfect plan

As nice as it might be to run out of money on the day you die, there are a few problems with that plan.

  • You don't know exactly how long you're going to live, so you don't know if you need to have ample funds for 10 years or 50 years.
  • You also don't know exactly how much money you'll need for the rest of your life. Sure, you can estimate it based on your expenses and assumptions, but a single medical emergency can eat up a big chunk of your nest egg, as can various other surprises.
  • You might actually want to leave a big pile of dollars behind, for your loved ones.

Given all that, the bottom line is that you probably need to accumulate a lot of money for your retirement -- just in case you have high expenses and just in case you live a long time.

Many experts suggest that when it comes time to live off your nest egg, you should plan to withdraw about 4% of it in the first year, and then adjust for inflation annually. Thus, if you're looking for income of $40,000 per year, you'll need a million dollars. (Remember that everyone's needs are different -- you might want more income than that, but you might also be expecting some Social Security income and perhaps even some pension money to make up some of that income.)

Make the 'Die Broke' Plan Work for You

If you're reading this wishing you'd started saving for retirement aggressively many years ago, don't freak out. All is not lost, no matter how imperfect your current financial situation may seem.

There are still a bunch of ways that you can make your retirement much more comfortable. Here are some of the main ones:

• Save more aggressively. The old rule of thumb to sock away 10% of your income is too low for many people. Aim for 15%, or even 20% or more, if you can. And remember that due to the ability of money to grow over time, the dollars you sock away today will likely contribute much more to your retirement than dollars you sock away next year or in five years. So don't put it off.

Die Broke -- on Purpose: An Unconventional Retirement Plan

By Selena Maranjian, The Motley Fool

There's a persistent assumption going around about what happens after one retires: Pundits, financial planners and even retirees often claim that your spending shrinks after you leave the 9-to-5 world.

Sure, your house may be paid off by then, and you may be able to ditch the expenses of commuting and buying clothes for work. That's not the full picture, though.

In good and not-so-good ways, many people end up spending more than they expect during their golden years.

For lots of folks, retirement means finally getting around to doing things you've been putting off for years. And those things cost money.

You may finally do some traveling in Europe, for example, or explore the U.S. in an RV. Want to get serious about your love for curling? Joining a league costs some money. Looking forward to overhauling the garden or taking up woodworking? That'll cost you, too. Even just traveling to visit and spend time with the grandkids can add up -- in travel costs, dinners to treat the family, and gifts and ice creams for the young ones.

Of course, you don't have to bear these costs. You can let the children and grandchildren come to you and can spend more time in public libraries than on golf courses. But the early years of retirement, in particular, are when folks tend to have significant energy and lots of plans.

Unfortunately, many expenses in retirement are not so discretionary.

Health care, for example, can take a huge bite out of your nest egg. Fidelity Investments recently estimated that a 65-year-old couple retiring today can expect to pay, on average, about $230,000 on health care. That's just an average, so you might spend far less -- but you could also spend much more.

Medicare probably won't provide sufficient coverage, so you might need to buy supplemental insurance, which isn't usually cheap.

Meanwhile, though a lower income level will probably mean your income taxes will decrease, you'll still be on the hook for property taxes. And those will probably keep growing over time. If your annual property tax is $3,000 and it grows at 3% each year, it will hit $5,400 in 20 years.

Your home insurance costs will rise, too, along with your car insurance premiums, the cost of heating and cooling your home, groceries, and most other items.

And finally, whereas you might expect retirement to be a time when you're no longer raising children and supporting those dependents, you might still find yourself occasionally -- or routinely -- helping your loved ones out financially.

Still, the news isn't all bad. While you might spend more than you expected to once you retire, you probably won't keep it up. As we move into and then out of our 70s, people tend to slow down and be less active. Less travel, less eating out, and fewer hobbies can mean lower spending.

Throughout most of our retirement, we'll enjoy discounts on various expenses, too, such as movie tickets, meals, and even property taxes.

What to do

Don't let your retirement plan end up designed by assumptions you never questioned. Take some time to map out what your expenses may be in retirement, and to make sure you're saving, investing, and accumulating enough to support them.

If it looks like you're not quite where you should be, you have options. You can ramp up your saving and invest your money more effectively. (Yes, you can become a millionaire on a minimum-wage salary.) You might work a few more years before retiring, too, which can do wonders for your nest egg by boosting your Social Security benefits.

Another possibility is working part-time through part of your retirement, which can add income and possibly some useful benefits as well. It also keeps many retirees happier, giving them a social setting to belong to. Downsizing to a smaller home or moving to a less costly town or region can also make a difference.

Spend some time planning now, and you'll thank yourself later.

Learn more:


AOL DailyFinance Retirement News


The Motley Fool Retirement Nook


The Social Security Administration Retirement Planner

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Invest more effectively. Keeping everything in a bank account isn't investing -- with interest rates below the average rate of inflation, you're actually losing buying power every year. Bonds are appropriate for those in or near retirement, but ideally in combination with stocks, which usually build wealth much faster. Within the stock world, you needn't take chances on obscure potential high-fliers, either. Over long periods, healthy, growing dividends can build great wealth. And if all goes well, the dividend payouts will rise over time, as will the stock prices, too.

• Retire a year or three later than you've been planning to, if possible. The benefits are many: For each extra year you work, you'll keep workplace benefits such as health-care coverage, and won't have to pay for them. You'll also delay tapping your nest egg for money to live off. And ideally, you'll be able to contribute to the nest egg for a few more years, as well. Meanwhile, for every year that you delay starting to receive Social Security benefits, they'll go up about 8%. Delay three years, and you'll collect roughly 24% more. That's a big difference!

• Cut costs. Another way to make your retirement fund last longer is to use less of it each year. You might move into a smaller house, for example, or to a region with a lower cost of living. You and your partner might make do with one car in retirement, instead of two, saving money on insurance and upkeep. And if you've been supporting some grown and able children or grandchildren, you might rein in that spending, too.

Some or all of these moves can have a powerful effect on your financial condition now and in retirement. You don't have to be among the 46% who die with more worries than dollars.



Selena Maranjian is a longtime contributor to The Motley Fool. You can follow her on Twitter here.

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