Die Broke -- on Purpose: An Unconventional Retirement Plan
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.
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.
• 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.