If you really, truly can’t save, you still have hope for a decent retirement. Here, we give retirement suggestions for poor savers, non-savers and unsavers.
Stay Together. For those who are financially lost, staying with your significant other can be a winning financial strategy. Pooling your resources and helping each other through the ups and downs of life are likely to give both of you a brighter future. All relationships have imperfections, and sometimes no relationship is better than a bad relationship. But, when it comes to finances (which shouldn’t be the paramount consideration in a relationship), mutual support can have a synergistic effect on your financial security.
Get a job with a pension. This is easier said than done in a time when private sector pensions are going the way of the woolly mammoth. But many public sector and educational jobs still offer pensions. This usually means working for the government or a public university or college. Careers in the military and law enforcement also offer pensions. These jobs aren’t for everyone, but they can provide a measure of financial security.
Buy a house, pay off the mortgage, and don’t borrow against the house. People who can’t put $100 in a savings account will still manage to pay the mortgage in order to keep a roof over their heads. A house can serve as a savings vehicle, but only if you don’t borrow against the equity. The amount of money you’ll end up with is unpredictable (because who knows where housing values will go). But home values have appreciated well in the post-World War II era. So a house can be an effective piggy bank for the savings challenged.
Work as long as possible. Working as long as possible builds up your Social Security benefits. If you keep working until 70, you could end up with monthly benefits in the range of 50% or more than if you started taking Social Security at 62. Working those last few years between age 62 and 70 could leverage up your Social Security benefits more than just about any comparable time period in your working life. If you have a pension, working longer could also boost your pension benefits.
Some people really, truly can’t save. We aren’t just talking about serial consumers, reckless investors, or other pathological wasters of money. A health crisis, a divorce, an ill parent or child, and you could be left with little or nothing. Or Hurricane Katrina might swing by your house and leave you with a pile of kindling. Some people don’t earn a high income, and need to spend all of their income for current living expenses. Still others with uneven incomes have trouble budgeting from month to month.
If this were Puritan New England, you’d get a lot of fire and brimstone about the immorality of being a spendthrift, the evilness of material desires, and the very long time that eternity is. Then you’d be tossed into debtor’s prison and have a “B” (for broke) sewn on your clothes.
But this is the 21st Century. Burning people at the stake has fallen out of fashion, and contributes to global warming as well. Instead, we offer hope for the financially lost.
An important strategy for the financially lost is to stay with your significant other. This conjures up visions from the 1960’s of a bedraggled housewife in a worn bathrobe, her hair in curlers, economically trapped in a loveless marriage while the man of the house, wearing only a sleeveless undershirt and boxer shorts, sits slumped in a sagging armchair bought years ago on installment payments and buries his unshaven face in can after can of cheap beer, staring at the flickering screen of a black and white TV, filling the house with smoke from his nickel cigars and calling every now and then for a refill of his pretzel bowl. That’s not what we’re talking about. And we're not suggesting that you roam the Internet or cruise bars looking for someone with a good retirement package. What we mean is that when two people join together or stay together because they want to be together, they benefit financially as well as many other ways.
There’s an old saying that two can live as cheaply as one. That isn’t literally true, but its updated meaning is important to understand. Most likely, you and your significant other will work for much of your adulthoods. As the two of you progress through life, you will probably encounter job loss, illness, and other difficulties. You help each other to recover from these problems. You pool your financial resources and put an economic umbrella over both your heads. When one of you is laid off or falls ill, the other supports the household until the first has recovered. You’re each like an insurance policy for the other, providing aid and comfort in times of need. The two of you are much stronger together than individually, and that enhances your combined ability to save and invest.
Being together in retirement has a similar synergism. Couples can add up their combined Social Security payments, pensions and retirement accounts, and together be significantly better off than each would be alone. For example, assume that you each work a substantial number of years before retiring and collect $15,000 a year from Social Security. We’ll further assume that neither of you gets a pension, but that each has $250,000 in retirement accounts and other savings. Using the 4% per year rule for withdrawals (see our discussion of making retirement money last for more details), you can each take out $10,000 the first year of retirement, with the amount adjusted for inflation each year thereafter. That gives you $25,000 a year each. If you lived alone, $25,000 is enough for you to be okay, but not much more than okay. If, however, the two of you are together, your combined income of $50,000 is enough to make both of you solidly middle class.
A relationship shouldn’t be about money, and isn’t likely to last if it's only about money. But you have many reasons to make your relationship work, and increased financial security is one of them.
Get a job that provides a pension.
Pensions still exist. Government jobs usually come with pensions. Jobs in education, particularly in public schools and universities, usually come with pensions. Career military personnel can receive a pension after 20 or more years of service. Jobs in law enforcement usually offer pensions. There are debates about whether or not people in these jobs are overpaid or underpaid, but they almost always have a chance to qualify for a pension. Many of these jobs also offer tax deferred retirement accounts similar to 401(k)’s; and retiree health insurance benefits, which can be quite valuable as you get older. A pension won’t buy you luxuries; you need savings for that. But it can keep the igloo warm on a very cold night.
There are downsides to all of these jobs. Government employees work in highly bureaucratized environments, where accountability is as common as flying pigs, credit is more often stolen than given, and blame, like sewage, flows downhill. In a government office, 30% of the employees do 70% of the work, and the other 70% of the employees, on a good day when they’re hallucinating about personal productivity, halfheartedly “do” some of the remaining 30%. A lot of your colleagues will obsess over quality of life issues, which actually means that they’d rather take the taxpayers’ money than earn it. Pay raises, bonuses, and promotions may have little or nothing to do with accomplishments or merit, and everything to do with managerial peevishness and unvarnished arbitrariness, tempered only by office politics and rank favoritism. If you’re in the 30%, you’ll probably be left up the creek without a paddle. And you’ll have to put with decades of this horseradish (well, not exactly) to get a pension.
Educators have to deal with children of all ages. If you teach in a primary school system, many students and parents will want you to run an above-average classroom, where everyone gets an “A.” You'll face pressure to get your students to earn high test scores, while all other learning becomes secondary.
If you teach in a college, you struggle to become tenured. You’ll have to do research and publish to survive. Teaching of students shifts into the background. With all this, you could quickly turn from being an idealist into a cynic. Then you’ll have to endure decades of cynicism to get your pension.
Military and law enforcement personnel perform yeoman’s duty for the rest of us. But there are many things you have to think about before going into either of these fields. You have to be disciplined, motivated and cut out for highly structured and high-pressured environments. And you have to be willing to take serious personal risks.
Only certain personality types can stay in government, educational, military and law enforcement jobs long enough to get a pension, and you shouldn’t take one of these jobs just for the pension. But if you think you’re can do one of these jobs, and your retirement portfolio has a value that hovers around zero on good days, give it a try. You won’t get rich, but you may get some financial security.
There are still a number of private employers that provide pensions. But private sector employers have become increasingly reluctant to take on the expense and risks of traditional pensions. And they are offloading retiree health insurance benefits faster than rich folks left New Orleans when Katrina approached. So if you want a degree of certainty as to what pension you’ll get after 20, 30 or even more years of service, look to government, educational, military and law enforcement jobs. There is the possibility that the government could change the rules of the game some time during your career. But governments are less likely than private employers to force existing employees to change pension plans. New employees may have to accept a different plan, but existing employees will probably retain what they have. The federal government did just that in the early 1980’s. It changed pension plans, but allowed everyone hired before the change to stay in the old plan. Some private companies have been changing traditional defined benefit pension plans into so-called “cash balance” plans that have reduced the pensions of long time existing employees, to their considerable chagrin and disappointment. If you want a reliable pension, stick to government, educational, military and law enforcement jobs.
You can buy a house and pay down the mortgage.
People who can’t save a nickel a week can often meet the monthly mortgage payment. Maybe the prospect of sleeping in the car provides motivation. Whatever the reason, if you can’t save, then buy a house, pay off the mortgage and avoid borrowing against the house. You will build equity over time. If you have no financial assets when you retire, at least you’ll have the house. Given the overall trend of housing values, you may end up with a decent pile of dinero. You’ll probably have to sell the house when you retire to get a pool of cash for living expenses. But that’s better than no pool of cash.
To make this strategy work, you have to resist the temptation to spend your home equity before retirement. In an era where many people seem to do cash out refinancings more often than they celebrate the 4th of July, this advice may fall on deaf ears. However, as we’ve pointed out before in our discussion of real estate, no matter how much home equity you have, it will be finite amount. If you spend your home equity during your working years, you won’t have any available for retirement. If you do take out home equity loans, or refinance your mortgage to borrow more cash, pay off the debt as soon as you can while you are working to minimize the interest charges you pay. The more you pay in interest, the less money you’ll have for retirement savings. Then avoid further borrowing against the house.
The strategy of buying and fully paying for a home is more likely to work in the faster growing parts of the country. In the Northeast and the West Coast, where economic growth has generally been brisk, homes have increased substantially in value over the decades. In the slower growing parts of the Midwest, South and Plains states, real estate values have barely kept pace with inflation. People who live between the Alleghenies and the Sierra Nevadas should try to do more than just own a home at the end of their lives. Learn to save or get a job with a pension.
Okay, this isn’t what you wanted to hear because it doesn’t exactly involve retiring soon. You wanted have your cake and eat it, too. Well, you will, when money grows on trees. Until then, keep in mind the benefits of working longer. If you work up to age 70, you’ll probably end up with Social Security benefits 50% or more than what you could get at age 62. (Look at your annual statement from Social Security for more details.) Boosting your benefits will also boost your spouse's survivor's benefits, if you're the first to go. If you have a pension, working longer may boost your pension benefits. We discussed boosting your benefits in an earlier section. Working longer also lets you, however late in life, to start saving. Even a modest balance in a passbook savings account or an IRA is better than nothing. Prove that an old dog can learn a new trick, and start saving.
If you absolutely cannot save or follow any of the strategies we’ve discussed here, then we have one final hint: cat food supposedly has higher nutritional content than dog food. But beware of what happens if you take the cat’s food.
Next, we discuss a few thoughts on estate planning.