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Making Up For Lost Time

Mitchell is like many people. He’s a good father who works hard, but money never stretches far enough. Approaching age 62, he is trying to assess retirement but has not run the math.

We started with Social Security. Mitchell’s full retirement benefit would be about $2,500 per month. However, if he took it at age 62 he would only get 70% or $1,750 each month.

Making matters worse, Mitchell is in very good health and his family has a long life span.

Assuming he lives 25 years in retirement, with 3% inflation, he’ll receive $780,000 during retirement.

If he waits until age 66 to begin Social Security his benefit is $2,500 per month. Again, assuming he lives to age 87, and 3% inflation, he will collect $876,000.

However, if Mitchell is really serious about saving we encouraged him to keep working and delay Social Security until age 70. Not only would this give him his regular salary, but it puts less emphasis on his investment portfolio. Just as importantly, his Social Security benefit increases 8% for each year past age 66.

This brings his monthly benefit to $3,400. Assuming the same life span, he would receive benefits of $903,000. Mitchell quickly realized this offered an additional $123,000 in retirement. Furthermore, it back loaded the benefit when he needed it most. He also realized that given his families long life span he might live well into his 90’s. As such, the increased benefit would really help.

So often clients want to be very precise about Social Security. If you tell us when you will die, it is easy to be precise.

However, if you don’t know when you’ll die it is better to be “approximately right” as opposed to “precisely wrong.” You want a margin of safety.

This is important since life spans continue to expand. For every 4 or 5 years we live, the average life span increases 1 year. As such, over the next 20 years the average life span could easily increase by 4 or 5 years.

Given this, if age 87 is reasonable today—you might re-run your figures and determine how much you need to make it to age 92.

From our perspective, it is better to die with too much money, than to live with no money. Additionally, the longer you work, the better your ability to overcome something unexpected.

If Mitchell works longer he can also fund an IRA or 401(k) plan. Even if he doesn’t have a 401(k) plan available he can contribute $6,500 per year to an IRA. If it earns 7% per year Mitchell can accumulate an extra $67,000 compared to retirement at age 62.

Next we looked at Mitchell’s house. While raising his family he enjoyed a 3,000 square foot house. Now the kids are grown.

We suggested a 2,000 square foot home with no yard to take care of.

Downsizing would save $300 per month just in property taxes. Not only does the smaller house cost less to purchase but insurance, maintenance and utilities should all provide savings too.

Over a 25 year retirement, the property tax alone would save $134,000.

We also pointed out the pool. Mitchell admitted that with the kids gone, it rarely got use but still required maintenance. Downsizing the pool, and associated maintenance, would save $44,000 during a 25 year retirement.

Then there were the vehicles. Mitchell drove a Ford F250 and his wife, Sharon, drove a Suburban. Based upon their history, we assumed 15,000 miles per year at 15 miles per gallon for each vehicle with gas costing $2.50 per gallon.

If they downsized to something like a Camry, Accord or Elantra they could get 30 miles per gallon.

This would save an additional $1,250 per vehicle per year. Mitchell knew the more efficient vehicles also cost less to purchase.

Downsizing the vehicles would save $88,000 during retirement.

As Mitchell pondered the advice he thought about whether he owned his possessions or if they owned him. Although they hated change, the couple recognized the opportunity to save, and cut costs, by more than $450,000 was too good to pass up.

Dave Sather is a Victoria CERTIFIED FINANCIAL PLANNER™ and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

Originally published January 6, 2015, Victoria Advocate