INCOME SECURITY & DIVORCE: Strange Bedfellows
Every day there is another article published beginning with the ubiquitous question: “Can I retire if I have……………?” The blank piece is filled with all kinds of trivia. Can I retire if …
- I am 55 and will have social security of $1250 a month at 62 and $700,000….
- I am 50 and will have social security of $1800 a month at 67 and $500,000….
The scenarios change every day and the “experts” typically weigh in with anodyne advice that is anything but definitive.
In their defense there is nothing about this topic that is definitive. Just ask someone who had their retirement in an S&P index fund in late 2007 and saw it fall by almost half by early 2009. The concerns become even more acute when one of the contingencies to be considered is divorce. We are all conditioned to address contingencies such as the cost of life care/memory care at the end of life. But nothing puts a crimp in a couple’s retirement plan like dividing the retirement pie in half. It is one of the most troubling questions divorce lawyers face. The client is looking at us as we show them what an equitable distribution looks like and their response is: “Will this be enough for me to live on?”
To answer that question requires serious research. You won’t get it from Suze Orman or Ed Slott. Their advice can be useful in terms of strategies. But, effective retirement planning begins with a pencil, paper, checkbook register and calculator. “What am I spending today and how can I change that once I am off the payroll?” Part of that is looking at the outside resources. What are your social security options? They change depending on when you file for benefits. Once you reach 65 you become Medicare eligible. That’s a cost savings in relation to private health insurance but you may still be paying for Part B if your historic income is high. Then there are the” gap plans” and the often elusive lure of Medicare Advantage.
But the true starting point is your largest budget item and that is housing. You may be nearing the end of a 30 year mortgage. That’s a huge savings if your housing cost will soon be reduced to real estate taxes and homeowner’s coverage. Unfortunately, many prospective retirees have clouded the picture by refinancing their primary mortgage or taking second and third mortgages which will remain due well into retirement. The residential real estate market has been quite generous in recent years, but many retirees see that while they can now sell their single family home for $700,000, a downsized condo or townhouse has now bloated into the $400-500,000 range. And those come with the inevitable “community fees and assessments” for the fellows who will now shovel your snow or clean the fountain in front of the building.
Health costs are the most challenging to budget for. But, we also see people who have sticky habits when it comes to the cars they drive and the vacations they take. In other words, it’s tough to trade down to a less expensive vehicle and a week in March to watch the Phillies or Pirates prepare for the upcoming season has become a fixture in your calendar. Not to mention the week in Sea Isle where your kids and grandkids all frolic in the surf at the house you rent in Wildwood. These are the expenses that require a hard look in a world where your income will be fixed to social security and a draw on your retirement accounts. Those sources are all you will have to get to the finish line; wherever that line may be. Curiously, if you remain healthy, there do seem to be an abundance of jobs at your local stores at $15-20/hour if you are willing to balance work with retirement.
Circling back to the beginning, let’s assume you have retirement and other income producing assets of $500-700,000. How much of that can you reasonably draw on? This has become a new battleground lately in the world of financial advice. Earlier this month Baron’s published a retirement supplement, affirming what is termed the 4% rule with qualifications. This morning Moneywise reports that Suze Orman thinks 4% is way too risky and insists that you need to spend as little as possible but not more than 3%.
Using $600,000 as a median, 4% allows a draw of $2,000 a month while 3% cuts that to $1,500. That will be supplemented by social security. The average benefit this year is reported as $1,767 per month but you can log on to see where the government wants to peg your benefit.
Now we have some real numbers ranging from $3,267 to $3,767 per month. There are going to be some taxes due on that amount although chances are you will be in a much lower tax bracket and most of your social security will not be taxed federally.
Again, playing the average, if your draws on retirement and social security payments come in at $3,500 what expenses can you afford at $115 a day. This is where the rubber meets the road. Needless to say, if the retirement account and after-tax savings (brokerage, bonds, bank assets) total $1,000,000, your retirement draw is $2,500 to $3,300 supplemented with social security. That’s why ALL the experts are encouraging people to save early and often.
The savvy reader also recognizes that most folks also have home equity and in many cases it is quite substantial. But accessing it is where the questions abound. Of course, you can sell but a substitute home is going to consume a lot of that cash and the rental market is a thin one where rents have been rising. The reverse mortgage is the new tool on the block but from the reading we have done, this is not a do-it-yourself transaction. A late tax payment or your election to rent the house could trigger a technical default that could require a sale. Here’s a useful on-line guide.
The Barron’s article by Elizabeth O’Brien observes that the 4% rule is a guide and not a fixture. In flush markets such as 2024 (S&P up 24%) the retiree has room for some indulgence. But then in a down market, you are liquidating assets in a depressed market which suggests that some expense cuts may be in order. Two challenges lawyers commonly see are subsidies for adult children who are themselves struggling. Realize that your Job 1 is getting to life’s finish line without being dependent on your kids. The second place where clients really can’t help themselves is pet expense. We have all read the stories about people eating one meal a day because the family pet needs to eat as well. But when Fido or Topcat reach their end, realize that before you shop for a replacement, the average dog or cat is costing $100 a month.
So put down your articles about whether $500,000 is enough and substitute that pencil and paper to figure out what your retirement will look like based upon your assets and your needs. And take some solace in the fact that the 10 year Treasury yield is 8x greater than it was four years ago.
