This is a guest article by Flexo from Consumerism Commentary. Flexo has embarked on a ten-day, ten-venue tour.
Recently, our fearless host of Debt Free Adventure began investing for retirement. Even while still on the path of paying off debt, I think it’s a great idea to start planning for a time when he will be living without the income received as a reward for the time and effort spent working.
Here is one reason not to delay investing for retirement: the government, at least here in The United States, will most likely not be able to take care of you. To prove this, I opened my latest Social Security statement. According to the Social Security Administration’s tables, at the full retirement age of 67, I would qualify for payments of about $2,500 per month.
This is based on the assumption I would be earning the same salary I earned in 2009 each year until I reached full retirement age, and paying into Social Security on the taxable portion of that income each year. Today, a monthly income of $2,500 sounds like an excellent benefit, but retirement is 33 years from now. Even assuming a conservative 3% rate of inflation, that $2,500 looks more like $915 does today. That’s not going to go far and with reduced benefits likely, I may not even see half of that.
Besides taking responsibility for our financial future by investing in 401(k)s, Roth IRAs, and all the other choices available, it’s time to rethink what retirement is. The generation of workers following those in retirement now or retiring soon will be the first who needs to significantly adjust its expectations and challenge its assumptions.
Why retire at all?
The main reason to stop earning money in exchange for time and effort is because increasing age makes it difficult. Yes, spending more time with family and checking off “bucket list” items are good reasons too, but in general, we tire of work. Some of us might be lucky to earn our money doing something we are truly passionate about but most simply want to stop working because it’s difficult keeping it up while maintaining a healthy lifestyle.
Consider “semi-retirement.” Leave your job with appropriate fanfare but find a way to continue earning income doing something you are passionate about.
If you do retire, reduce expenses
Without making any changes, life in all aspects gets more expensive every year. Even if you assume you moderately increase your income every year for the next several decades and maximize your savings and investing, there is a chance that comfortable living will always be out of reach. Financial advisers promise returns of 8-12% in the stock market but aggressive predictions, inflation, and taxes make a real return of 4% seem more realistic.
I’m a strong believer of finding ways to increase income significantly rather than incrementally, but when this can’t be done the choice is to reduce the other side of the equation: expenses. No one likes to hear it, but the image of retirement pushed by the media, including 24 hours of free time, living in an expensive location, and enjoying a stress-free existence is just not likely. Most people will need to consider making a number of sacrifices.
Downsize your living arrangement. Not every family is exactly the same, but it is safe to generalize that needs change over time. By the time you retire, you may have paid off your house. Your kids may be adults no longer in need of your financial support. You may be able to use proceeds from selling one house to buy a smaller house, perhaps in full without a mortgage, and have a sizable portion of cash remaining. Downsizing is one way to take advantage of an increase in real estate prices. If you don’t downsize, buying and selling at roughly the same time — being on both sides of the transaction — results in canceling your advantage.
Relocate to somewhere extreme. The dollars you’ve earned, saved, and invested will go farther when you move somewhere where the cost of living is low. I’m not suggesting retiring to Kansas or Oklahoma, though I am sure those are fine states full of beauty and enjoyment. I am suggesting looking into options outside of the United States.
Central and South America are the most obvious choices because they are still relatively close to the United States but, for now, often benefit from a significantly lower cost of living. There are places you can buy land and a large house for the equivalent of $150,000, and be within the culture of a city or an ocean.
This relocation comes with risks. You should do as much research as possible, including visiting the location ahead of time, understanding the local bureaucracy, and investing in the local currency. Liz Pulliam Weston explains how relocating outside the United States could allow you to retire like royalty while describing more of the risks.
Stay active and healthy. Aging is not always a friendly process, and health care costs can increase significantly due to increased needs and higher prices. While there are many unpreventable medical conditions that present themselves with age, some costs can be controlled by living a healthy lifestyle.
Other than the above, saving money in retirement is much like saving money at any other time in your life. Prioritize your expenses, move a few steps towards a frugal approach to life, and make the most of what you have. The retirement of the future would be unrecognizable to those in retirement today. It would be impossible to guarantee a stress-free multi-decade vacation, so the best approach is to start considering your options and your needs as soon as possible.
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