We were reading Suze Orman on the AARP Bulletin with a 2020 action plan for retirement. She has a list of ten items. Suze (we hope we can keep up with autocorrect) is worth reading but she is only a start. She has some good ideas and a few that could use more details. Given that it is a list she leaves out what we think are the two most important issues:
- How do you want to live in retirement?
- Do the math.
We like the general idea of downsizing that shows up in several of her items. It is a great way to help make the math work. We think that waiting on Social Security is not as good an idea as she suggests but we really like Roth Accounts.
We have a fellow retiree that loves his frugal lifestyle. He cuts his own wood for his wood stove, enjoys fixing stuff, and the enjoys the outdoors. Some of his activities are free and others save money. On the other hand, we have been to Japan, Korea, Ireland, England, China, and all over the US since retirement. We pay people to fix things and cut wood. Another person we talked to was selling her home to buy a motor home to tour the US. You need to have an idea of what you want to do.
Then you need to do the math. You might need some help. We hope you know what you make now. Gross income is a tax term. It means (except for certain exclusions) all income. It isn’t useful to compare your pre-retirement gross income to your post-retirement gross income. Why? Because pre you pay Social Security Tax, contribute to your retirement, and invest for your retirement. You might pay union dues, have a big parking bill, have an expensive commute, and so on. Post you pay no Social Security tax, pay limited federal taxes on Social Security and, in Wisconsin, pay no taxes on Social Security. Disposable income is an economic term but you need to create your own version of it. Usually, you can live the same life post-retirement on considerably less gross income than was necessary pre-retirement.
Sidebar: Health care is a decidedly complicated part of it. Before you turn 65 you should apply for Medicare. At 65 the federal government will pay for a substantial portion of your health care costs. How it will all net out depends on your employment and post-employment benefits, if any. We might have been an unusual case but for us retirement sharply reduced our health care costs. End Sidebar.
In part because of health care, our version of disposable income went up when we retired. Retiring was an easy choice because first, we would have more money than if we worked and, two, that amount would support our lifestyle.
Roth vehicles simplify your life because you take the money out tax free. Another reason we are keen on Roth IRAs is that you can also use them to help your heirs. So Roth is a good idea if you are considering leaving something to somebody.
Suze wants you to wait until 70 to start collecting Social Security. Suze says in her usual combative way that:
Don’t start with me that you don’t want to leave money on the table. There’s a good chance you’ll be alive in your 90s. Even if you begin receiving Social Security at age 70, when you hit your early 80s your total payments will be more than if you started getting a lower benefit at age 62.
How good a deal depends on how long you live but Suze is misleading you, perhaps for your own good. She is not asking you the run the numbers. We are. You only break even in your early 80s. You need to live well past then to make a decent return. The real question is when can you retire and live the life you want? You need to be honest with yourself. For our frugal friend the numbers worked before 62. For us, it was almost 65 when the numbers worked. We know somebody that loves work so much that he is making less working in his 70s than he would retired. When he finally retires he will gets lots in Social Security but he won’t need it. So when you should take Social Security depends on your circumstances.
As Suze says it is likely that you will be retired for a long time. Start by investing, educating yourself, and planning early. You might need help but you need to take charge of your retirement just like your career. Retirement might be your longest part of your career.