Worthwhile From the Web: Thoughts on Retirement with Dignity 2.0

The tiny, initial clue ... by allowing us to imagine what we do not know, stimulates a desire for knowledge.
- Marcel Proust

Knowing is not enough; we must apply. Willing is not enough; we must do.
- Johann Wolfgang von Goethe

Welcome to Worthwhile from the Web.  Ok, the name is corny, but I wanted you to be able to easily distinguish independent articles that deserve your time from my own articles (that also deserve your attention).

Tonight's article is from The Big Picture Blog and likely requires more than 1% of your time.  Written by a bond manager, it provides an in-depth look at what an 80th percentile, middle-age baby boomer likely faces regarding future retirement.  Entitled Thoughts on Retirement with Dignity 2.0, the author reviews these baby boomers backgrounds, prospects for retirement, options in achieving retirement, and implications on the economy.  Here's a preview:

The 80th percentile 57 year old household income is little changed from 2 years ago (or 4 years ago, for that matter) and stands at $150,000. They have, on average, a $200,000 mortgage on a home valued in the low $300 thousands. (The value was $370,000 in 2007). If they have a 401K or IRA, the balance is approximately $100,000. Other assets and liabilities are very difficult to generalize and quantify. The quantity and frequency of debt beyond a first mortgage is significant and so is non-retirement plan financial assets, but they appear to generally offset each other. It is safe to say that; if you Google Earthed the $315,000 neighborhood in Columbus, Ohio and pulled out the 57 year old household, you might find that their home equity loans, education loans and auto loans offset their financial assets excluding home and retirement accounts. If that were the case, they are $100,000 in the hole with eight years to go to retirement.
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Since 1999, the S&P 500 Index is flat, but there have been two 50% decline phases and numerous leadership changes. In general, the public has been put through a meat grinder in the stock market for the last 12 years.
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Based on a conventional approach, these 57 year olds need to accumulate about $3 million in retirement savings in the next 8 years in order keep everyone happy. That figure is based on the calculation that they need to replace $150,000 per year in employment income when they quit working and they will receive about $30,000 in Social Security, leaving a $120,000 funding gap. It takes $3 million to fill the gap at a 4% distribution rate.
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I came up with 3 primary actions that can be taken in order for these 57 year olds to retire comfortably, if taken together. All of them will have a potentially negative impact on the economy.
1. Postpone retirement to age 70 or older
2. Cut the household budget and save the difference
3. Liquidate debt by downsizing
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They need to take the $115,000 in spending down to, say, $75,000. Talk about choking the horse. But it certainly can be done. That will facilitate $40,000 in annual savings, but what is really cool is that, after adapting to the pain of austerity and establishing a less expensive lifestyle, the savings goal drops to $1,080,000! 

Whether you are baby boomer or just starting out, I strongly encourage you to read the complete article Thoughts on Retirement with Dignity 2.0.

Disclaimer: Please remember that I’m just a guy sharing information on a blog, and this is NOT official investment advice. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please consult your investment adviser before making any investment decisions. During your conversation with said investment adviser, ask why they believe in their recommendation. If you are not convinced by their explanation, any action that you take or forego is also your responsibility. Just in case you missed that, you are responsible for your investments.

With that said, don’t let your investments keep you up at night. If they do keep you awake, you may be taking more risks than you are comfortable with. Talk to a professional about reallocating to less risky investments so that you can sleep. During your conversation with said professional, ask why they believe that their recommendation is less risky. If you are not convinced by their explanation, don’t invest. Remember:

1. It’s your nest egg.
2. Opportunities are easier to make up than losses.