Scott Burns Columns

[yielder]

Life is less expensive for older couples

Imagine two couples. They live side by side in virtually identical houses. The Youngs have two children in their early teens. The Olds have lived there forever and are retired.

Now guess the income the Olds would need to have the same standard of living as the Youngs, expressed as a percentage of the Youngs' income:

•100 percent because it is expensive to be old.

•80 percent to 85 percent, because that's the figure used by most financial planners.

•65 percent because one margarita does the work of two when you're over 65.

•Less than 50 percent because you can sustain the same standard of living on less money when you retire.

The answer is less than 50 percent. This low figure should be a source of hope for millions of people wondering how they will ever retire.

[yielder]

Many older people are unaware that today's college graduates face a world that is seriously tougher.

• Education: Twice the 1962 cost.
• Payroll taxes: The tax stopped at the end of September & was smaller
• Income taxes: There is a ray of sunshine among the clouds. Personal exemptions have nearly kept pace with inflation
• Home prices: Mortgage rates aren't too much higher; what has changed is the price of housing – and the change has been brutal.

All in all, starting an adult life has gotten to be pricey and dicey.

[kcowan]

Life is less expensive for older couples

...The answer is less than 50 percent. This low figure should be a source of hope for millions of people wondering how they will ever retire.

The analysis looks pretty solid. What he leaves out are added expenses for health care, drugs and travel. But then there are probably savings in clothing, and work-related expenses (e.g. club memeberships). It forms the basis for a solid plan.

The other thing is that living expenses continue to drop. Mom who is 90 has stopped drinking, smoking and driving. All in the last three years. I know people in their late 70s who are happy going south for the winter rather than travelling to Europe and Asia. Been there, done that, they say.

Driving to Mexico, Texas or Florida is probably cheaper than flying to Tuscany and renting a car for a month.

[AJ]

I know people in their late 70s who are happy going south for the winter

I know people in their sixties and seventies beyond who have finally figured out that the grass isn't always greener somewhere else, that the most important journey is not to yet another dolled up bit of Americana under a tropical sun, but rather the journey inward, towards self actualization.

[Percy]

House prices have gone up indeed, but in my working life I've always noticed that a decent house costs about 4 times one's annual wages. So in terms of annual income, prices have roughly kept pace.

[Jo Anne]

I know people in their sixties and seventies beyond who have finally figured out that the grass isn't always greener somewhere else, that the most important journey is not to yet another dolled up bit of Americana under a tropical sun, but rather the journey inward, towards self actualization.

I know people in their fifties (us) who have figured out that home is a very nice place to be, summer or winter.

It's very good when you figure this out.

[Shakespeare]

It's very good when you figure this out.

Especially when you don't want to kennel your furry family members. [*]

* My two have never been kenneled: they stay with my sister when I travel if the dog doesn't come with me. [**]

** My sister's little dog has a serious case of separation anxiety and I now dog sit 8-5 5 days a week plus whenever my sister is away. I have no guilt whatsoever about making her dog sit!

[Chuck]

[*]Education: Twice the 1962 cost.

That seems like a bargin. If everything only doubled in price every 44 years I think I'd be pretty happy.

[Bylo Selhi]

[*]Education: Twice the 1962 cost.

That seems like a bargin. If everything only doubled in price every 44 years I think I'd be pretty happy.

Read the article. It's twice the cost in real (inflation-adjusted) terms.

I graduated from MIT in 1962. Tuition broke $1,000 a year in 1958-59, the year I matriculated. It rose to about $1,500 by graduation. Tuition wasn't cheap for the time, but it wasn't mind-boggling, either. With a typical starting salary of about $6,000 a year, four years of tuition cost less than a year of earnings. Today's graduates paid tuition of $32,300 for their senior year. For them, four years of tuition cost about two years of starting salary. That's twice the 1962 cost.

[jiHymas]

[*]Education: Twice the 1962 cost.

That seems like a bargin. If everything only doubled in price every 44 years I think I'd be pretty happy.

Read the article. It's twice the cost in real (inflation-adjusted) terms.

Payoffs for a degree were a lot higher in the '60's, too. Back then, you could get a good, solid, career-track job with a degree and a pulse. Ain't that way anymore.

[yielder]

[*]Education: Twice the 1962 cost.

That seems like a bargin. If everything only doubled in price every 44 years I think I'd be pretty happy.

Not really. Burns comes to his 2x the cost: "With a typical starting salary of about $6,000 a year, four years of tuition cost less than a year of earnings. Today's graduates paid tuition of $32,300 for their senior year. For them, four years of tuition cost about two years of starting salary. That's twice the 1962 cost." The actual tuition went from $1500 to $32,300!

When I started university in 1968, I had a sweetheart summer job at Alcan and earned a unionized wage of +$120/week. I could earn enough over the summer to pay for all costs of the school year because tuition was $698 all in, ie, no additional student fees and books were $100-200. I shared an apartment with another guy for $75/month. Food cost me another $25-35/week. And the most important part, a draught beer cost 25 cents at Toe Blake's or the Mansfield Tavern.

Today, with tuition at +$4,000, student fees at +$1,100, books at +$1000, housing at $400/month. At the minimum wage of $7.45/hr that most service jobs pay, kids today can't even cover 1/2 the cost. And the killer: a beer in a bar costs +$4.00. From that perspective, the cost of a year at university has gone up 16x.

[yielder]

Not to take anything way from NormR and SteveS who already know what Burns is saying, this is why it's not as simple as plugging numbers into a calculator.

If there were a Hero Award in financial planning, William P. Bengen would be a shoo-in for the nomination. The Southern California certified financial planner does more than financial planning for his clients. He also does original research that is more important to you and me than the vast majority of the investment research from Wall Street.

How can this be?

Simple. While Wall Street concentrates on accumulating money through investment returns, Mr. Bengen is one of the leaders in distribution research, the arcane study of portfolio survival when we are taking money from our nest egg rather than adding new savings.

His research, published 12 years ago in the Journal of Financial Planning, warned about the dangers of taking much more than 4 percent a year from a retirement portfolio.

His more recent research, published five years ago in the same journal, told us we could safely withdraw 5 percent a year by establishing a "floor and ceiling" rule for distributions in bull and bear markets.

Now, in the August issue of the Journal of Financial Planning, Mr. Bengen advances the subject again, outlining a conceptual "layer cake" for retirement income planning. With it, a series of decisions may increase (or decrease) your initial withdrawal rate.

Although most will remain in the 4 percent to 5 percent range, a retiree who's willing to assume significant risk might have a starting withdrawal rate of a whopping 7.6 percent, he says.

We're talking, in other words, of nearly doubling retiree spending.

More champagne, anyone?

Since you can get 5 percent yields on long-term bonds, some readers may wonder, why should anyone even worry about this?

Answer: We need to worry because a 5 percent constant yield is a commitment to declining purchasing power. A couple in their 60s can expect that one of them will live about 25 years. If inflation averages 3 percent, a $500,000 nest egg invested in 5 percent Treasuries will see its original $25,000 of annual purchasing power reduced to $18,600 in 10 years and only $11,940 in 25 years.

To have risk-free retirement purchasing power of $25,000 a year for the remainder of your life, you would need to invest your nest egg in Treasury Inflation Protected Securities, currently earning about 2.3 percent over the rate of inflation. That, in turn, would require a nest egg of $1,087,000.

That's a lot more than the $625,000 to $500,000 you'd need for a portfolio that allowed a 4 percent to 5 percent withdrawal rate with limited risk. And it's way more than the $328,000 you would need for a 7.6 percent withdrawal rate.

Mr. Bengen's layer cake is based on seven decisions about your retirement. Here is a nutshell description of the five most important ones:

Your "withdrawal" scheme: This is how you plan to withdraw money. These plans range from a "lifestyle" scheme that assumes you want to sustain a given spending level for the rest of your life, to a "life phase" scheme that recognizes that future needs may be smaller than current needs, to an "annuitylike" scheme that simply delivers an income that is never adjusted for inflation.

Your asset allocation: How your portfolio is invested will have an impact on your long-term returns.

Your time horizon: If you come from a long-lived family, you might want to consider a 35-year horizon. A person who already has a number of ailments, however, might feel safe planning on a 20-year horizon.

Your success rate: Each portfolio and withdrawal scheme has a success rate that depends on your time horizon. If you insist on 100 percent success, you'll need to withdraw at a lower rate than if you would be willing to accept a 90 percent success rate.

Your desire to leave a legacy: Your desire to leave a certain amount to children or charities will also have an impact on your possible withdrawal rate.

How often the portfolio is rebalanced and whether you assume above average or below average investment performance also will have an impact on your withdrawal rate.

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