The past several years have re-arranged how we think about retirement. The shift in the “dream” has been the subject of more than one news report on the state of where Boomers are and where their younger cohorts how to be one day. Yet, retirement is and always will be the same: a time when fixed income rules the budget.
In the pre-recession era, fixed income was not considered to be fixed. Rising stock markets, inflated home prices and the feeling that money would grow continuously no matter where it was put gave rise to a thinking that retirement would be better than the one our parents may have had. Few people surveyed the pre-Recession retiree about exactly what this world was like.
Retirement means relying on what you put away during your work life to support a time when you didn’t want to work – at least in the career you had been in. Some older Americans had pensions, which were built with an exchange of human capital (in the early years) and retirement capital (as they retired). The trade-off was lack of portability with that money, meaning that if you had a pension, you were likely to stay in the same job for twenty, possibly thirty years. The 401(k) changed that when it was introduced. Some of the older retirees were forced into making the shift as their pensions were dissolved or otherwise frozen.
And when they retired, this older group, many of whom didn’t feel as though working beyond age 65 was an option, felt the harsh realities of what living on a fixed income would be. They put up a good front in many instances. But this group, unlike many who want to retire in a post-Recession world, retired with far less financial baggage than their present day cohorts.
More soon-to-be-retired people are carrying far more debt than in years past. Much of it was tied up in the mortgages on their homes. It was common thinking just five years ago that calculating your home (more specifically the paper gains in equity) into your retirement assets was part of the plan. Many refinanced their homes in the years leading up to 2008 with the thinking that they could simply sell, bank the equity and live off of those profits.
This thinking had several flaws that became evident in that post-2008 world. One, you needed a place to live, and Two, the place where you are living, even if it was mortgage free, still costs money (in the form of inflation costs for upkeep, rising property taxes and insurance). They ignored the simple fact the homes are not investments. Unlike real investments, such as stocks or bonds, your home is illiquid: you could sell it at a whim.
So when the discussion about folks who want to retire but can’t, it is largely because of this flaw in their plan. Many Boomers are carrying mortgages into retirement and in far too many instances, there is additional debt as well. And you are being pulled in several directions when it comes to a solution to this single issue.
Paying down a mortgage can be a form of reverse savings. Even with mortgages rates at an all-time low, refinancing is not an option for many people. They find themselves “stuck” in higher rate mortgages. There is however, a way out. Pre-paying your mortgage, essentially making higher payments – directed at the principle – is one of the best forms of late-year retirement planning. The process is simple enough: divide you mortgage payments into twelve (i.e. $1200 a month mortgage divided by 12=$100). Then increase your mortgage payment each month by three times that amount. That $1200 a month mortgage payment would jump to $1500 a month. The upside of such a maneuver: your 30-year mortgage will be paid in full in fifteen years
Increasing contribution to your retirement plan is always a prudent method of increasing retirement wealth. And working longer adds even more of the much needed savings to these accounts. Yet far too many of us who lament about the state of their retirement are not making a significant contribution to their plans. If have mentioned this before and I will do so again: a five percent (5%) contribution has almost no impact on your take-home pay. it may get the matching contribution, but it is still not enough.
An increase of 1% a month over the course of the year will give you a chance to re-adjust your monthly budget with each additional jump in contribution. It will also give you the most realistic portrayal of what a fixed income, impacted by inflation, is like. Except you will still be earning money, hopefully getting regular raises and perhaps bonuses (which should go directly into your plan) and embracing the budget you may have never constructed.
You may be close to retirement (which means you are at the peak of your earning career) or you may be just starting out on the journey. Either way, embracing the concept of a fixed income, aka budget, sooner rather than later will shift the thinking away from disappointment that you might not retire to the belief that you have trained yourself well for the days of no (or much less) work.
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