Haves & Have Nots — Golfer or Caddie? — Who’s Who In Retirement?

Posted @ 3:48 pm - Filed under Real Estate Investing, Purposeful Planning, Retirement Income

The value of the home I’m using isn’t relevant to the principles involved. I’m using San Diego prices. If you live in a state in which the home prices haven’t yet crossed the ridiculous line, nothing will change. We’re talking concepts, rules, and principles here. They apply at all levels – just like gravity will always cause us to fall down, and not up.

Here’s one of those posers. There’s a guy you know, who lives in a nearby neighborhood that’s a level or so higher priced than yours. His house is worth $800,000 and he owes $350,000 or so. He makes around $150-200,000 a year at his job — plus a bonus most years. He’s 46 years old, and has $250,000 in his 401(k). He drives a pretty cool Beemer, while his wife gets by with her four year old Lexus SUV. They take the best vacations. She’s been home for the kids, who are almost gone now, ready for college.

A definite Have. True enough. But they’re well on their way, though no yet irreversibly to being classic Have Nots in retirement.

How can that be? The answer is scary it’s so easy.

Even if he ends up with three times what he now sports in his 401(k) it won’t yield the retirement income he always thought. In fact, his after tax income will probably dip below $50,000 a year.

Whoa big guy, you say. What’s wrong with that? Another easy question. Here’s the easy answer.

That’s $50-grand in today’s money. What do you think 20 years will do to the buying power of the dollar? Answer that by asking yourself what that amount of annual after tax income bought for a retired couple in 1987. You’re nodding your head now, cuz yer gettin’ it, aren’t you?

The consequence might literally mean the difference between being the retiree enjoying his thrice weekly rounds of golf — or being that guy’s caddie.

Many of the Haves of today are destined to be the Have Nots of their retirement generation. Starting now, and for the next 20 years or so, this separation of the population is gonna widen. And many of today’s Haves will be stuck in the Have Not side of the ledger — permanently.

They will have done this to themselves by expecting results from a retirement plan that really has little horsepower. They’re happily socking away thousands of dollars a year in various company plans. So far, so good I guess. But do what a brand new (about to be) client did last week.

Ask your buddies at work just what they’re gonna do when they’ve created a semi-impressive retirement income — pre-tax. They’ve been very disciplined as they pay down their home’s mortgage balance. They also got through their kids’ college years — thousands poorer, but it’s worth it. They’ve just about accomplished their goals: A debt free home — a great retirement income — and a carefree life full of travel, grandkids, and lazy weekends.

Here’s the itsy-bitsy problem. With your kids gone, and no interest deductions, your fine income is gonna be taxed to death. Think of today’s income tax rates. With all the Boomers retiring in the next 20-25 years, do you think they’re gonna go up, or down? This isn’t even a close call. There is now roughly three, count ‘em, 3 workers for every Social Security recipient. The trend isn’t in Boomers’ favor, as it’s now predicted that in 15-30 years it’ll be down to, you guessed it, only two workers. That’s two full time employees paying for the Social Security income of one person.

And there you’ll be with your $40-50,000 — for the rest of your lives. Think about this Have’s life today. Remember, he was making $150-200,000 a year, with a cool car for both he and his wife. They had some toys for the weekend, maybe even a boat. His big treat in retirement could end up as a visit to the neighborhood cafe, reading the paper, with the bitter memory of saving chump change in income taxes every year — instead of becoming serious about his retirement.

After tax is the key phrase when planning for retirement income. Everything else is very cool looking shiny chrome — which, as you’re well aware, doesn’t make the car go any faster.

This leaves you with a couple ways to go.

You can stick with the tax deferred savings plan, which leaves you with little or no tax deductions, and a relatively static and 100% taxable retirement income. It also leaves you at the mercy of government regulations, which will require many taxpayers to take more out than is prudent, resulting in the possible premature gutting of their savings.

OR

You can construct a well thought out Purposeful Plan, which takes into account income taxes, inflation, (buying power) tax shelter, and multiple baskets of retirement income. Also, a Plan that understands creating the potential for an increasing monthly income in retirement is a good thing.

Fast forward to 65 years old. The Have’s family in our example will be paying the $800-1,000 a month taxes on their free and clear home. That doesn’t include the insurance, maintenance, utilities — you know the list. Health insurance, the cost of owning a car, or two. Before they’ve had a bite to eat, or a glass of wine to enjoy, they find their money for the year is half gone. Yet, this former Have, now finds out the ugly truth — they’re Have Nots for the rest of their lives.

And as inflation plus taxes take their never-ending pieces of the pie, it begins to go downhill, a year at a time. Before they know it, they can’t even afford to drive the 1,000 miles and back to visit family. (read: grandkids)

The first lesson here — the Haves aren’t necessarily gonna be Haves in retirement. Most of them are hard working folk who are living their lives, keeping their nose clean, and being stellar citizens. They’re saving for retirement though, without understanding the physics of investing.

The second lesson, is the one is usually bringing the surprised looks. I get folks to look at this one, by asking an easy question.

Would you purposefully avoid nickels and dimes in taxes each year while working, so in retirement you would have the privilege of paying $5 and $10 dollar bills in annual taxes?

The third lesson is even simpler. Retirement income will be based upon how large your net worth is when you reach retirement. Why would you grow your invested capital at 5-20% a year, when you could easily be benefiting from capital growth of 20-50% yearly?

Income is simply the yield on an amount of capital. The more capital — the bigger the income. Do you want to retire on 6-10% on $750,000 or $2-5Mil? Duh

Let that sink in, then ask yourself what path you’re on now?

Here’s the recipe for a less than abundant retirement.

Start with a basic misunderstanding of investing in general. Then, avoid paying chump change income taxes for 40 years, so you can pay more income taxes in the first 1-3 years of retirement then you avoided the previous 40. In other words, focus on saving pennies today for the privilege of paying dollars in retirement. Finally, end up with a net worth 2-10 times less than what you could’ve prudently acquired.

And that’s the formula millions of people are using to successfully turn themselves from Haves to Have Nots. And once you’re a Have Not in retirement — you’re a Have Not forever.

And that translates into transforming your retirement into a life sentence.

Does that sound harsh — an exaggeration? Remember this — once you’ve retired, your income is pretty much your income, for life. Unless of course, the idea of going back to work for extra income appeals to you.

Yeah, I didn’t thinks so.

This entry was posted on Sunday, August 26th, 2007 at 3:48 pm and is filed under Real Estate Investing, Purposeful Planning, Retirement Income. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.