The New York Times, June 8, 2013, published an article by Jeff Sommer called, “For Retirees, A Million-Dollar Illusion.” You can find the article at NY Times.
Jeff Sommer begins:
A MILLION dollars isn’t what it used to be.
In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.
Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1million is relatively big. It may seem like a lot to live on.
But in many ways, it’s not. . . .”We’re facing a crisis right now, and it’s going to get worse,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Most people haven’t saved nearly enough, not even people who have put away $1million.”
We Grandmas know what has happened to the stock market, to real estate, to savings. We know that low interest rates are going to affect the income from retirement funds. So, of course, the scare tactic comes next:
For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year – a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die. . . .
And with rising life expectancies, many people will have a lot of time: the average 65-year-old woman today can be expected to live to 86, a man to 84. One out of 10 people who are 65 today will live past 95, according to projections from the Social Security Administration.
Okay, now I get it. The intent of the article is to get us to invest as a lot of words are spent comparing investments in stocks and bonds. It seems we are to believe that even those with $1 million are in trouble so it does not bode well for anyone with less:
$20,000 – the cash flow from a $1 million portfolio at 2 percent – won’t take you very far in the United States today. And if you’re not close to being a millionaire – if you’re starting,
say, with $10,000 in financial assets – you’ve got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today, according to calculations by Edward N. Wolff, an economics professor at New York University. (He bases this estimate on 2010 Federal Reserve data, which he has updated for Sunday Business according to changes in relevant market indexes.)
A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent. Yet even such families may have difficulty maintaining their standard of living in retirement.
“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”. . . .
Consider again the 65-year-old couple who are starting to draw down $1 million in savings this year: if they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions.
It seems that Social Security is $1 million itself? Paying close attention to Social Security benefits is likely to be meaningful for retirees at nearly all income levels, Professor Wolff said. “Even at the millionaire level, for most people, Social Security is going to be very important.”
The maximum Social Security benefit for a retiree at 66 this year is $31,000 – about the equivalent of drawing down 3 percent a year on a portfolio of $1million. . . . Still, even $61,000 or $71,000 a year – the combined Social Security and cash flow from the $1 million portfolio – isn’t likely to be enough for most people who have grown accustomed to living on $150,000 or more a year. And $150,000 is the median income of a typical household in the top 10 percent, roughly the ranking of a family with $1 million in net assets, Professor Wolff says.
Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income – often considered an acceptable target level.
And, he says, if Social Security is important for the relatively affluent, it’s all the more so for those with less income and wealth, especially with the decline of traditional pensions. “Social Security needs to be strengthened, not cut,” he says.
What happens if Social Security benefits are cut? Is it all gloom and doom for us Boomer grandparents? Jeff Sommer quotes the experts:
Professor Munnell said that in addition to relying on Social Security, which she called “absolutely crucial, even for people with $1 million,” other options include saving more, spending less, working longer and tapping home equity for living expenses. “There aren’t that many levers we can use,” she said. “We have to consider them all.”
Still, the expectation of working longer seems to be the trend. An annual survey for the Employee Benefit Research Institute found that in 1991, only 11 percent of workers expected to retire after age 65, while this year, 36 percent said they would retire after 65 – and 7 percent said they didn’t plan to retire at all.
Working longer improves your financial prospects, and one reason is morbid: you won’t have as long to live on your savings. Working longer helps in a happier way, too. Professor Munnell notes that by delaying retirement, monthly Social Security benefits rise substantially. For example, if you delay claiming benefits past what the government calls your “full” retirement age – 66, for people retiring this year – your monthly benefits increase by 8 percent a year until you reach 70.
This is Grandma’s view on the “Million Dollar Illusion.” It seems that all of the gloom and doomers are not Boomers themselves. It seems they are talking to the last generation and not us Boomer Grandmas. We are “Forever Young.” Being active longer and working longer does not depress us. The thought of old fashioned retirement depresses us!
We are looking to continue our productive years well beyond age 65 in some capacity of work or finding a new life’s work or a new challenge beyond age 65. And we have the advice of our elders to guide us further.
My mother-in-law says Grandpa and I are “young old.” She says we should go and do and travel and be active now. She says she is “old old.” “Old old” starts in the early 80’s according to her. My wise mother-in-law says you do not need so much money when you are “old old.” She said she cannot walk far and likes the comforts of home, and of course, the comforts and stimulation of the casino. That is the vice that consumes her disposable income. Travel, except to see great grandchildren, is a thing of memories. “Travel now,” she says.
So, this Grandma says we Boomers need not worry as much as the gloom and doomers want us to. We are going to take advantage of all life offers, including working longer, because of who we are in this Boomer generation. After all, we are probably the last generation to have the benefit of social security. That seems to make us all have $1 million we might not have known we had.
This article about the $1 million dollar illusion has given me a greater sense of security, not less security. Forever young, forever optimists and forever in denial that old age will come upon us as we Boomer Grandmas live in the present with
Joy,
Mema
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