Retirees: How to add $340,000 to retirement savings

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Lbill
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Retirees: How to add $340,000 to retirement savings

Post by Lbill » Sat Apr 28, 2012 8:37 pm

Scott Burns reports a simple way for some retirees to add the equivalent of $340,000 to their retirement savings - become a renter:
In my new book with economist Laurence J. Kotlikoff (“The Clash of Generations,” MIT Press) we show that a retiring middle income couple can have lifetime discretionary spending— spending after income taxes, Medicare premiums and shelter— of about $15,000 a year if they stay in their home. They can increase it to $28,600 by selling their home and becoming renters. And they can boost it to $38,800 by becoming fulltime RVers. Just the difference from owning to renting, $13,600 a year is the same as adding about $340,000 to their savings.
http://assetbuilder.com/blogs/scott_bur ... sting.aspx
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Re: Retirees: How to add $340,000 to retirement savings

Post by Cut-Throat » Sat Apr 28, 2012 8:51 pm

Reverse Mortgage.......

No way I'd live in a RV....

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Re: Retirees: How to add $340,000 to retirement savings

Post by lawman3966 » Sat Apr 28, 2012 9:36 pm

I must say that I question his numbers in connection with renting vs. RV-ing. I've seen several people say that RV-ing isn't cheaper than renting at all, let alone being cheaper by $10K a year.

There a number of parts of the country where a couple could rent for about $10K a year, making a $10K in annual savings impossible.

"RV-ing" leaves open wide range of possible costs. Different classes of the population live very differently whether on wheels or on fixed foundations.

I looked into the cost of Class-C RVs some months ago, and was struck to see that new versions of these relatively small vehicles, for the brand I was looking at, ran about $70K or more. Combining depreciation of the RV with average nightly cost of RV parks would add up.

I prefer retiring overseas as a way to save money.

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Re: Retirees: How to add $340,000 to retirement savings

Post by pjstack » Sat Apr 28, 2012 9:55 pm

And what happens when you get sick? (Notice I said "when", not "if".)
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Re: Retirees: How to add $340,000 to retirement savings

Post by ilmartello » Sat Apr 28, 2012 10:00 pm

I used to like Scott Burns,then I read this thread.

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Re: Retirees: How to add $340,000 to retirement savings

Post by burgrat » Sat Apr 28, 2012 10:26 pm

How much more can I save if I live in a van, down by the river?

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Re: Retirees: How to add $340,000 to retirement savings

Post by ilmartello » Sat Apr 28, 2012 10:30 pm

burgrat wrote:How much more can I save if I live in a van, down by the river?
that's elitist, havent you heard of park benches

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Re: Retirees: How to add $340,000 to retirement savings

Post by beardsworth » Sat Apr 28, 2012 10:39 pm

ilmartello wrote:
burgrat wrote:How much more can I save if I live in a van, down by the river?
that's elitist, havent you heard of park benches
This one's taken. Find your own.

(Of course, I'm really just killing time while my RV gets fixed.)

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Re: Retirees: How to add $340,000 to retirement savings

Post by Dale_G » Sat Apr 28, 2012 11:07 pm

Well owning a home and RVing is definitely apples and oranges. But when I run the numbers on my own home, it is obvious that I would have to downgrade about 6 steps to save anything like $13,600 per year by renting.

Using round numbers (per annum): I own a $200,000 home and it cost $10,000 in taxes, insurance, maintenance and utilities to live here. I sell the home to an investor who will rent it back to me (including the utilities). So I save my present $10,000 cost and I invest the $200,000 in my 50/50 portfolio and earn a nice steady 5% = $10,000. So, I am up $20,000 right?

Oh, there is that darned rent. The only way I am going to be ahead by $13,600 is if my new landlord is willing to rent to me for $6,400. I don't know where I can find an investor quite that dumb.

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Re: Retirees: How to add $340,000 to retirement savings

Post by FireProof » Sat Apr 28, 2012 11:20 pm

dale, I think they are assuming that with a rental, you can spend down principle to 0, while with a house you need it til you die, so you will die with that 200k. Not necessarily true - as mentioned there are reverse mortgages.

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Re: Retirees: How to add $340,000 to retirement savings

Post by Toons » Sat Apr 28, 2012 11:24 pm

burgrat wrote:How much more can I save if I live in a van, down by the river?
LOL,,,excellent :happy
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Re: Retirees: How to add $340,000 to retirement savings

Post by GregLee » Sun Apr 29, 2012 1:02 am

I have some difficulty believing that you can save anything by going from owning to renting. I went from renting to owning 18 years ago just because I was having trouble handling the expense of renting. Saving money was the whole point of buying, and it worked, too.
Greg, retired 8/10.

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Re: Retirees: How to add $340,000 to retirement savings

Post by Sheepdog » Sun Apr 29, 2012 1:18 am

We'll move in with one of my kids. They lived with us for 22 years.....then we can live with them for 22 years. Let's see...I'm 78, that'll just about do it.
That will save me a bunch.. :moneybag
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The looming crisis. . .

Post by Taylor Larimore » Sun Apr 29, 2012 7:33 am

Bogleheads:

Startling figures:
According to the latest Retirement Confidence Survey done by EBRI, the Employee Benefit Research Institute, only 22 percent of all workers 55 or older had total savings and investments of $250,000 or more. Another 18 percent had total savings between $100,000 and $249,000. At the other end of the scale, 40 percent had total savings under $25,000.
My generation enjoyed mandatory (to the employee) pension plans guaranteeing a comfortable lifetime income in retirement. These retirement plans are rapidly disappearing. Now each of us must voluntarily save enough to retire comfortably.

Studies show that it takes approximately $1 million dollars at age 65 to provide $40,000 of lifetime income.

Many future retirees face unhappy poverty if they do not now save aggressively and invest successfully.

Best wishes.
Taylor
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Re: Retirees: How to add $340,000 to retirement savings

Post by dkturner » Sun Apr 29, 2012 7:34 am

I'm wondering if this Scott Burns article is a teaser to get people to buy his new book? I suspect that anybody who reads the article will wonder "how do they do that?" Buy the book and you can find out.

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Re: Retirees: How to add $340,000 to retirement savings

Post by Cut-Throat » Sun Apr 29, 2012 7:47 am

burgrat wrote:How much more can I save if I live in a van, down by the river?

Truly Brilliant!...... :mrgreen:

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Re: Retirees: How to add $340,000 to retirement savings

Post by nisiprius » Sun Apr 29, 2012 9:21 am

The flat claim that "the difference from owning to renting [is] $13,600/year" is mysteriously precise and doesn't pass the laugh test for my personal situation. I don't need to run any fancy computer simulations.

When we bought our house, the out-of-pocket total for mortgage payments plus real estate taxes plus maintenance was already less per month than we'd been paying for an apartment. And that was a 9% mortgage. And I'm not including either the effect of the tax break or the growth in home equity.

Recently, for various reasons, we were assessing the situation and now that the mortgage is long since paid off, taxes and maintenance are in the ballpark of half what similar homes rent for. Local apartments tend to be nicer, fancier, much smaller than our (small) house, and rents are even higher.

I agree with Burns' main point. The investment industry is misleading both on the degree and the predictability of the effect of investment decisions. All the ads a couple of years ago suggesting that "XYZ's retirement specialists can put your retirement back on track," for example. It's what you want to hear, just as you'd like to believe that "A smarter allocation can improve your nest egg by 50%. That's a lot easier than increasing your savings by 50%." Likely as not what they mean is "you can put your retirement back on track by working longer."

But the effect of life decisions is just as unpredictable as the stock market. I am extremely skeptical of the snake oil peddled by Burns and Kotlikoff in their earlier book, which seemed to be that you can hugely improve your wealth and happiness by making ridiculously elaborate, insanely precise computer calculations of the future effects of your life financial decisions. I'm willing to accept that by far the biggest financial mistake I made was grad school (nine years of it). On the other hand, it was a wonderful time and I met my wife there. Maybe a better way to look at is was that I took nine years of early retirement before starting work.

P.S. A high school classmate of mine--technically a classmate but I didn't know her--is literally living in a van--OK, a motorhome, but not a fancy one, literally by a river. She supports herself by a combination of Social Security and "workamping," getting her spot in the motorhome park for free in exchange for doing part-time odd-jobs in the park. It's a stunning location in the Southwest with spectacular scenery and she is always posting pictures on Facebook of the river and the hills she's hiked up, etc. I think she's reached a good place in her life and she seems to be having a nice "retirement," so don't knock it.
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Re: Retirees: How to add $340,000 to retirement savings

Post by dodonnell » Sun Apr 29, 2012 10:02 am

Unfortunately, the cost of renting vs. owning is a moving target. Moving quite fast toward Renting becoming more expensive than owning.

Cost of Owning vs. Renting:
  • 2006 180%
    2007 170%
    2008 150%
    2009 120%
    2010 115%
    2011 110%
    2012 105%
So, which number, or what year, did the author base his analysis on ? ... and will that analysis be relevant in 2013 and beyond ?

Nice, analysis on the RV option ... don't get me started on gas prices. Which have ranged from $1.61 to $4.12 per gallon over the last 4 years.

Advice like this is analogous to stated that people in Maine should save money by selling all their winter clothing and snow equipment because it is 90 degrees outside today.

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Re: Retirees: How to add $340,000 to retirement savings

Post by rec7 » Sun Apr 29, 2012 10:27 am

[quote="Lbill"]Scott Burns reports a simple way for some retirees to add the equivalent of $340,000 to their retirement savings - become a renter:
[quote]In my new book with economist Laurence J. Kotlikoff (“The Clash of Generations,” MIT Press) we show that a retiring middle income couple can have lifetime discretionary spending— spending after income taxes, Medicare premiums and shelter— of about $15,000 a year if they stay in their home. They can increase it to $28,600 by selling their home and becoming renters. And they can boost it to $38,800 by becoming fulltime RVers. Just the difference from owning to renting, $13,600 a year is the same as adding about $340,000 to their savings.[/quote]
http://assetbuilder.com/blogs/scott_bur ... sting.aspx[/quote]

For some reason I do not understand this statement. Can someone explain this to me? My home taxes and insurance are about 3k a year.
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Re: Retirees: How to add $340,000 to retirement savings

Post by rustymutt » Sun Apr 29, 2012 10:53 am

Cut-Throat wrote:Reverse Mortgage.......

No way I'd live in a RV....
2nd that
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Re: Retirees: How to add $340,000 to retirement savings

Post by rustymutt » Sun Apr 29, 2012 10:54 am

Toons wrote:
burgrat wrote:How much more can I save if I live in a van, down by the river?
LOL,,,excellent :happy
LOL, would depend on if that Van is in working condition, or just a metal box.
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Re: Retirees: How to add $340,000 to retirement savings

Post by NoRoboGuy » Sun Apr 29, 2012 12:01 pm

rustymutt wrote:
Toons wrote:
burgrat wrote:How much more can I save if I live in a van, down by the river?
LOL,,,excellent :happy
LOL, would depend on if that Van is in working condition, or just a metal box.
...or whether your neighbor is Matt Foley, motivational speaker. :shock:
There is no free lunch.

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Re: Retirees: How to add $340,000 to retirement savings

Post by nisiprius » Sun Apr 29, 2012 1:14 pm

No way I'd live in an RV.
It might depend on the RV.

I mentioned my high school classmate who is a "workamper" living in an old used motorhome on the river.

I also I know a couple who are retired early (in their late fifties) and have sold their house and become full-time RV-ers. They are in quite a different income category from me. (They also own BRK stock, go to the meetings, and come back from them talking about what "Warren" said). Their motorhome is larger than the mobile home my wife and I lived in back in our grad school days. It has two bathrooms. It has "slide-outs." They press a button and a big old chunk of the side pushes out and creates a living room. I think there's a second one. It also has a huge motorized awning to create a sort of porch. The driver and passenger sit in huge swiveling easy chairs in front of something that looks like a Dreamliner cockpit. It has enough, uh, storage to be independent of, uh, external facilities for several days. However, they're constrained in terms of places to park it and complain about the difficulty of finding motorhome accommodations that are up to their standards. (No, they don't use Wal*Mart parking lots).

I believe the size is on the order of 9x40, something like 400 square feet when unfolded. That's as large as many perfectly livable apartments.

I wouldn't like it myself, and I don't know how it works out financially, but I can certainly see the appeal.

(I believe the plan is that they will do this for ten years or so and then buy a house somewhere).
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Re: Retirees: How to add $340,000 to retirement savings

Post by wilson08 » Sun Apr 29, 2012 1:32 pm

Aside from the RV idea and on renting in general
one thing about renting never changes:
You are always at the mercy of the landlord, it
is housing that belongs to someone else.

There may be a time in my life where I would want to
rent or need to rent but not always. Never having any
equity, tax advantage, and a home that I could say was
mine that I could remodel and decorate as I wanted
without asking permission is just not a life long route
I would take.

Wilson

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Re: Retirees: How to add $340,000 to retirement savings

Post by reggiesimpson » Sun Apr 29, 2012 4:22 pm

Sell everything and stop paying for anything. Go on a "permanent cruise". Runs $33,000 annually (includes health care) with Royal Caribbean.

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Re: Retirees: How to add $340,000 to retirement savings

Post by tfb » Sun Apr 29, 2012 4:23 pm

rec7 wrote:
Lbill wrote:Scott Burns reports a simple way for some retirees to add the equivalent of $340,000 to their retirement savings - become a renter:
In my new book with economist Laurence J. Kotlikoff (“The Clash of Generations,” MIT Press) we show that a retiring middle income couple can have lifetime discretionary spending— spending after income taxes, Medicare premiums and shelter— of about $15,000 a year if they stay in their home. They can increase it to $28,600 by selling their home and becoming renters. And they can boost it to $38,800 by becoming fulltime RVers. Just the difference from owning to renting, $13,600 a year is the same as adding about $340,000 to their savings.
http://assetbuilder.com/blogs/scott_bur ... sting.aspx
For some reason I do not understand this statement. Can someone explain this to me? My home taxes and insurance are about 3k a year.
The idea is that you unlock the value of your home and spend it down.
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Re: Retirees: How to add $340,000 to retirement savings

Post by Lbill » Sun Apr 29, 2012 5:09 pm

Since retirees aren't making a dime on their savings these days, Scott has been promoting ideas for retirees to effectively "add" to their portfolio net worth by looking for ways to find money, such as trading cars The Jumbo CD in your garage, reverse mortgages Reverse mortgages - their time has come, and now liberating the dead money tied up in a home and renting instead.
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Re: Retirees: How to add $340,000 to retirement savings

Post by rustymutt » Sun Apr 29, 2012 5:16 pm

reggiesimpson wrote:Sell everything and stop paying for anything. Go on a "permanent cruise". Runs $33,000 annually (includes health care) with Royal Caribbean.

Seems as if lately you'd need the health insurance on their boats.
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Re: Retirees: How to add $340,000 to retirement savings

Post by reggiesimpson » Sun Apr 29, 2012 5:48 pm

rustymutt wrote:
reggiesimpson wrote:Sell everything and stop paying for anything. Go on a "permanent cruise". Runs $33,000 annually (includes health care) with Royal Caribbean.

Seems as if lately you'd need the health insurance on their boats.
Great article in recent WSJ? regarding this subject. I am looking in to it myself!

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Re: Retirees: How to add $340,000 to retirement savings

Post by reggiesimpson » Sun Apr 29, 2012 5:57 pm

reggiesimpson wrote:
rustymutt wrote:
reggiesimpson wrote:Sell everything and stop paying for anything. Go on a "permanent cruise". Runs $33,000 annually (includes health care) with Royal Caribbean.

Seems as if lately you'd need the health insurance on their boats.
Great article in recent WSJ? regarding this subject. I am looking in to it myself!
My understanding is that basic care is covered on the boat. Further..........take a look at Bumrungrad Hospital (and it qualifications) in Thailand. Just in case?

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Re: Retirees: How to add $340,000 to retirement savings

Post by Beagler » Sun Apr 29, 2012 6:10 pm

Those without wanderlust will just park somewhere? For free?
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Re: Retirees: How to add $340,000 to retirement savings

Post by Rodc » Sun Apr 29, 2012 6:43 pm

Better, have two or three couples sell their houses and form a commune in a modest rental house.

Own one or two cars for the group.

Not sure it is for me, but you get greatly reduced cost, company and someone to share chores with. :)
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Re: Retirees: How to add $340,000 to retirement savings

Post by burgrat » Sun Apr 29, 2012 10:16 pm

louis c wrote:
rustymutt wrote:
Toons wrote:
burgrat wrote:How much more can I save if I live in a van, down by the river?
LOL,,,excellent :happy
LOL, would depend on if that Van is in working condition, or just a metal box.
...or whether your neighbor is Matt Foley, motivational speaker. :shock:
That's who I was channeling!

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Re: Retirees: How to add $340,000 to retirement savings

Post by Erwin » Sun Apr 29, 2012 10:35 pm

Life is not only about money. The pleasure of owning your home is what attracts most people to do it. To me this suggestion should only be exercised if you absolutely need the money to put food on the table.
Erwin

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Re: Retirees: How to add $340,000 to retirement savings

Post by MossySF » Mon Apr 30, 2012 1:28 am

mpt follower wrote:Life is not only about money. The pleasure of owning your home is what attracts most people to do it. To me this suggestion should only be exercised if you absolutely need the money to put food on the table.
Which is what most Americans will be facing during retirement.

Bogleheads -- with the average 40% savings rate according to various polls -- already have made the decisions of lifestyle vs money.

The overall point of the article is correct though. Life decisions have a far larger impact than deciding whether to hold 30% International or 50% International. Even deciding on 1% ER funds versus 0.25% ER funds is nothing but noise compared to the big events of life -- marriage, divorce, kids, college, career, location, house. The specific point of house versus RV is just an example where you can calculate out specific costs for a book/article.

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Re: Retirees: How to add $340,000 to retirement savings

Post by 555 » Mon Apr 30, 2012 2:40 am

MossySF wrote:`...The overall point of the article is correct though. Life decisions have a far larger impact than deciding whether to hold 30% International or 50% International. Even deciding on 1% ER funds versus 0.25% ER funds is nothing but noise compared to the big events of life -- marriage, divorce, kids, college, career, location, house. The specific point of house versus RV is just an example where you can calculate out specific costs for a book/article.'
Noooo! The higher expense ratio makes a major impact. And it's not noise, it's signal, albeit a very negative one.

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Re: Retirees: How to add $340,000 to retirement savings

Post by nisiprius » Mon Apr 30, 2012 5:51 am

[Added] :oops: The correct figure is $5,000 a year, $412 a month. Thank you to the people who caught it. Not grocery-coupon territory. Still much less important that life decisions like going to grad school (negative impact), or like passing up the variable-rate mortgage in 1976 in favor of a fixed-rate mortgage (positive impact--and, I would note, contrary to much advice at the time).

As previously posted:

No, it's just noise. If you have, let's say, a $500,000 portfolio, reasonable for midlife, the diffference between a 1.20% expense ratio and an 0.20% expense ratio is $500/year, or less than $50/month. How carefully you sort your grocery coupons could be a bigger difference than that.

By comparison, during the nine years I was in grad school (1960s dollars) my wife and I were living off something like $3,000 to $4,000 a year, while the first job I got paid about $15,000. So the impact of that life decision was on the order of $100,000, while the impact of a low ER, $500/year over, I dunno, 30 years, is about $15,000.

No, I don't want to try to estimate whether or how much grad school increased my income (the impact in my case was probably more like "solid foundation for a steady, good-earning job," not demonstrable ROI. Point is, the general financial magnitude of the life decision was close to ten time as important. (And before you say "compounding," the $100,000 I didn't earn would have compounded, too, and for longer than the retirement savings because it was earlier in life.)
Last edited by nisiprius on Mon Apr 30, 2012 1:01 pm, edited 2 times in total.
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Re: Retirees: How to add $340,000 to retirement savings

Post by RedJones » Mon Apr 30, 2012 8:13 am

rustymutt wrote:
Cut-Throat wrote:Reverse Mortgage.......

No way I'd live in a RV....
2nd that
Burns's approach is much more cost-effective than a reverse mortgage, where the miracle of compound interest is working against you. My parents took out a reverse mortgage thinking it didn't matter if the bank got the house in the end because they would die in it. That was naive. What happened is that the driving skills of my healthy father declined enough so that he cause two auto accidents. At that point we prevailed on him to give up driving and relocate close to my brother. By that point the $12k that he was drawing from his RM was costing him $25k in interest per year. I imagine having to leave the house earlier than death happens to a lot of RM'ed seniors at which point the high cost of the RM becomes apparent. Much better to sell out per Burns before that day comes, although maybe not to an RV.

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Re: Retirees: How to add $340,000 to retirement savings

Post by FabLab » Mon Apr 30, 2012 8:24 am

nisiprius wrote:No, it's just noise. If you have, let's say, a $500,000 portfolio, reasonable for midlife, the diffference between a 1.20% expense ratio and an 0.20% expense ratio is $500/year, or less than $50/month. How carefully you sort your grocery coupons could be a bigger difference than that.
You must collect a lot more coupons than I do.
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Re: Retirees: How to add $340,000 to retirement savings

Post by tfb » Mon Apr 30, 2012 8:35 am

nisiprius wrote:No, it's just noise. If you have, let's say, a $500,000 portfolio, reasonable for midlife, the diffference between a 1.20% expense ratio and an 0.20% expense ratio is $500/year, or less than $50/month. How carefully you sort your grocery coupons could be a bigger difference than that.
Isn't it $5,000/year, or more than $400/month?
Harry Sit, taking a break from the forums.

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Re: The looming crisis. . .

Post by Grt2bOutdoors » Mon Apr 30, 2012 8:48 am

Taylor Larimore wrote:Bogleheads:

Startling figures:
According to the latest Retirement Confidence Survey done by EBRI, the Employee Benefit Research Institute, only 22 percent of all workers 55 or older had total savings and investments of $250,000 or more. Another 18 percent had total savings between $100,000 and $249,000. At the other end of the scale, 40 percent had total savings under $25,000.
My generation enjoyed mandatory (to the employee) pension plans guaranteeing a comfortable lifetime income in retirement. These retirement plans are rapidly disappearing. Now each of us must voluntarily save enough to retire comfortably.

Studies show that it takes approximately $1 million dollars at age 65 to provide $40,000 of lifetime income.

Many future retirees face unhappy poverty if they do not now save aggressively and invest successfully.

Best wishes.
Taylor

They need less in assets after accounting for social security. Let's say they receive $10,000 in annual social security, they'd likely need about $500 - $700K in retirement assets. No easy feat, especially for the many retirees who own zero real assets or have little in the way of financial assets.
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Re: Retirees: How to add $340,000 to retirement savings

Post by Grt2bOutdoors » Mon Apr 30, 2012 8:55 am

nisiprius wrote:No, it's just noise. If you have, let's say, a $500,000 portfolio, reasonable for midlife, the diffference between a 1.20% expense ratio and an 0.20% expense ratio is $500/year, or less than $50/month. How carefully you sort your grocery coupons could be a bigger difference than that.
Reasonable for midlife? Ha! In what world? If the average income is $54K gross in this country, how is it possible to amass $500K in gross assets by midlife. It may be possible if you are fortunate to be earning above the median at an early age and have consistency in that employment allowing you to accumulate meaninful assets that have the ability to compound or land a gig with a very generous employer. I can speak for my fellow peers (early 40) that those who have that level of assets or greater number fewer than 10% of that age group. Not only would it take higher earnings, consistency and a bit of luck, but many in that age group are in the most expensive part of their lives with home ownership costs, child rearing costs and saving for retirement, not too mention some of them are also part of the "sandwich" generation.
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Re: Retirees: How to add $340,000 to retirement savings

Post by Random Musings » Mon Apr 30, 2012 9:40 am

Looking at RV's, I'd stick with something that wouldn't make the transition too difficult, like the Newell P2000i RV.

Found My RV

Being Bogleheadish, certified pre-owned, of course. Excuse me, I have to go to run the numbers to see if I'll get $340K more........

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Retirees: How to add $340,000 to retirement savings

Post by Lbill » Mon Apr 30, 2012 10:05 am

I think it's a good idea to own a home for retirement. After all, it's a well-known fact that real estate never loses value. :oops:
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Re: Retirees: How to add $340,000 to retirement savings

Post by 555 » Mon Apr 30, 2012 10:25 am

nisiprius, you are off by a factor of TEN! It would cost you $5000/year, not $500/year! Over 40 years that's $200,000! It's HUGE! Over 40 years an extra 1%/year expense ratio devours about 1/3 of your portfolio (not 2/5 due to the wonders of compounding) or you can take 1% of your varying portfolio sizes over the years.

So it's not insignificant. There's another reason it's not noise that I alluded to. `Noise' in investing should refer to a bunch of random positive and negative effects that, when added, mostly cancel. But costs consistently have an effect in one direction. That's signal, not noise.
nisiprius wrote:No, it's just noise. If you have, let's say, a $500,000 portfolio, reasonable for midlife, the diffference between a 1.20% expense ratio and an 0.20% expense ratio is $500/year, or less than $50/month. How carefully you sort your grocery coupons could be a bigger difference than that.

By comparison, during the nine years I was in grad school (1960s dollars) my wife and I were living off something like $3,000 to $4,000 a year, while the first job I got paid about $15,000. So the impact of that life decision was on the order of $100,000, while the impact of a low ER, $500/year over, I dunno, 30 years, is about $15,000.

No, I don't want to try to estimate whether or how much grad school increased my income (the impact in my case was probably more like "solid foundation for a steady, good-earning job," not demonstrable ROI. Point is, the general financial magnitude of the life decision was close to ten time as important. (And before you say "compounding," the $100,000 I didn't earn would have compounded, too, and for longer than the retirement savings because it was earlier in life.)

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Re: Retirees: How to add $340,000 to retirement savings

Post by Jeanz » Mon Apr 30, 2012 10:33 am

In my state and county, people over 62 with low incomes get a break on property taxes. I think there may be help available to pay for utilities as well. That might explain the number of older widows who hang on to their houses; if you looked at all sources of income, it might make sense economically. That assumes, of course, that there's no mortgage or home equity loan that needs to be paid.

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Re: Retirees: How to add $340,000 to retirement savings

Post by lawman3966 » Mon Apr 30, 2012 10:39 am

555 wrote:It would cost you $5000/year, not $500/year! Over 40 years that's $200,000! It's HUGE! Over 40 years an extra 1%/year expense ratio devours about 1/3 of your portfolio (not 2/5 due to the wonders of compounding) or you can take 1% of your varying portfolio sizes over the years.
I suspect that the real-life costs of fees are about twice that stated above. I think that the 1.2% figure is used because the it's the average ER of actively managed funds. However, non-Bogleheads who use actively managed funds commonly use financial advisors who add at least another 1% the total cost. If memory serves, a 2% fee applied annually to a person who saves up from 0 to some final nest egg value over 40 years will lose about 40% to fees over his/her investment life.

A colleague invests using a big-name Wall St firm, and pays fees totalling about 2% on AUM per year. His fees would be considerably higher but for the fact that he has over $ 1 million invested with them (an asset base far larger than that of most investors). With only $500,000 invested at that firm or others like it, I suspect that the investor would pay 2.5%-3% AUM annually. If there's a moral to the story, it's that innumeracy is expensive.

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Re: The looming crisis. . .

Post by S&L1940 » Mon Apr 30, 2012 10:48 am

Taylor Larimore wrote:Bogleheads:

Studies show that it takes approximately $1 million dollars at age 65 to provide $40,000 of lifetime income.

Many future retirees face unhappy poverty if they do not now save aggressively and invest successfully.

Best wishes.
Taylor


73 and a good couple $ hundred K short of the $1 mill. yet, SS, Medicare, a home with mortgage almost paid off and a lifestyle that is pretty neat but not costly; I think we can make it. unless we live past 95. then, it will be our kids problem :mrgreen:

it is those coming up in their 40's and 50's that are going to miss the support that SS and Medicare gives us. those under 40, I believe that they are not even counting on SS or Medicare being as robust as it is now!
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Re: Retirees: How to add $340,000 to retirement savings

Post by YDNAL » Mon Apr 30, 2012 11:23 am

Lbill wrote:Scott Burns reports a simple way for some retirees to add the equivalent of $340,000 to their retirement savings - become a renter:
In my new book with economist Laurence J. Kotlikoff (“The Clash of Generations,” MIT Press) we show that a retiring middle income couple can have lifetime discretionary spending— spending after income taxes, Medicare premiums and shelter— of about $15,000 a year if they stay in their home. They can increase it to $28,600 by selling their home and becoming renters. And they can boost it to $38,800 by becoming fulltime RVers. Just the difference from owning to renting, $13,600 a year is the same as adding about $340,000 to their savings.
Lbill wrote:I think it's a good idea to own a home for retirement. After all, it's a well-known fact that real estate never loses value. :oops:
Bill, your OP is about supposed "savings" by renting vs. owning and not gain/loss in the market value of owning your home.

Not having read responses, I don't know if anyone challenged the numbers.

1. Is Mr. Burns considering opportunity cost of capital (and put a number to it)?... note that I haven't read the book mentioned in the quote above.

2. We must match apples/apples in determining what is "rent" when you own a non-leveraged house. For us:
  • • Property taxes. After Homestead exemption ($50K), we pay 2% of assessed (not market), which has been locked at purchase price and can only increase max 3% annually by State law.
    • Property insurance. State-backed (most insurance companies bailed) and runs 1% - 1.5% of market value.
    • Upkeep, maintenance/repairs. Depends on condition, but I will make Scott Burns happy and give him 2%.
3. A $500K house would cost $26.5K annually to own. Being generous here. This house commands $24-$30K annually in Market rent. Lets say $24K to also be generous here.

4. It is ridiculous to generalize that a "retired middle income couple" saves $13,600 annually by renting (apples/apples), and Scott Burns may have smoked something in the RV. :)
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Re: The looming crisis. . .

Post by Grt2bOutdoors » Mon Apr 30, 2012 11:27 am

1530jesup wrote:
Taylor Larimore wrote:Bogleheads:

Studies show that it takes approximately $1 million dollars at age 65 to provide $40,000 of lifetime income.

Many future retirees face unhappy poverty if they do not now save aggressively and invest successfully.

Best wishes.
Taylor


it is those coming up in their 40's and 50's that are going to miss the support that SS and Medicare gives us. those under 40, I believe that they are not even counting on SS or Medicare being as robust as it is now!
Are you a fear-mongerer as well? They've been talking about SS and Medicare going bust for decades, there are plenty of assets there and plenty of people are still kicking in their mandatory contributions.
If you feel that SS isn't going to be around, may I suggest you sell all your financial assets now? To say SS and Medicare will not exist is to make the same claim that employment will be non-existent. Do you really believe that for a second? If so, you should move out of the country because things will be alot harder on everyone.
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