Don’t Die the Way Half of Americans Do

Everybody should be talking about this, but outside of academic circles, almost nobody is. “This” is a research paper done by three economics professors, one from Harvard, one from MIT, and one from Dartmouth. The research shows that 46% percent of of elderly Americans have less than $10,000 in financial assets in the year of their death. In other words, they basically ran out of money before they ran out of time. Not only is it no fun to be old and broke at the same time, it’s apparently bad for your health, too. The study found that the people with the least financial assets were generally in worse health than those who were more affluent. If you don’t want to be simultaneously old, poor, and sickly, you’ll need to take positive action to avoid being part of that 46%.

The study is called Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts. Okay, maybe that’s  why no one is talking about it; that’s not nearly as compelling a title as, say, Left Behind, Star Wars, or The Incredible Hulk. It is, after all, an academic paper, and it reads with all the page turning suspense you’d expect from a research report — meaning none at all. It won’t be made into a blockbuster movie. It won’t ever become a viral video on YouTube.  Most people will never hear of it. And that’s a shame. Because its contents are too important to overlook. Here are some of the reasons why:

1. It’s about reality, not just projections. While many studies have looked at pre-retirees and tried to ascertain how financially prepared they might be, this one looks at how well off thousands of people actually were at the end of life. Nearly half had neither significant financial assets nor housing wealth. My own anecdotal observations suggest that most people don’t foresee themselves ending up in such straits, meaning many people are probably not as well prepared for retirement reality as they think they are.

2. Not everyone who died broke started out their retirement that way. Many people have money on retirement day, but deplete their assets over fifteen or twenty years of rising living costs. For these people, retirement becomes progressively more uncomfortable as they slowly go broke. The standard of living declines, and with it the perception of quality of life. The study shows this is not a rarity or an anomaly. It’s how nearly half of us end up.

3. People with little or no financial assets usually have a hard time coping with unexpected cash outlays.That elderly couple down the street knows that the paint on their house is peeling, and the lawn is getting weedy. They just can’t afford to maintain their home like they used to.  More importantly, when uninsured medical expenses start to multiply, they start foregoing needed care. Their health suffers. Physical discomforts and worries about health problems cause stress that leads to still more health problems.

While the study has no political or social agenda, it stands as an  indictment of my profession. Both of them, actually. As a financial pro, I shake my head at my industry’s narrow focus on serving high net worth clients. So many “wealth managers”  aren’t interested in taking on clients with less than $1 million (sometimes much more) in assets to invest. Why ignore the people who could benefit most profoundly from professional counsel? It’s the middle class that most desperately needs help to avoid the mistakes that can land them in that ill-fated 46%. The well need not a physician.

I also can’t help but reflect on the fact that I live in a country where at least 52 million people attend church most every Sunday. Yet despite all that scripture has to say about wise money management, I don’t believe that the financial status of Christians as a group is appreciably different from that of everybody else.  Clearly, the motivational scripture sound bites that pass for financial teaching in some Christian circles aren’t doing the trick.

The good news is that these problems are fixable.There are sound strategies that can help you avoid the fate of the 46%. Stick around — we’ll talk about a few of them in the next post.

Who Are They Kidding with These Headlines?

I was perusing a large, respected consumer finance website when I saw one of “those” headlines. The ones that grab your attention and make you do a double take. This one was entitled “Early Retirement Without a Fortune.” The introductory paragraph went on to say that it’s “not as hard as it looks.” This grabbed my attention, because I’ve always believed early retirement was indeed a challenge for most people not blessed with large inheritances or very high income. What did these people know that I didn’t? I plowed into the reading.

The article profiled a number of people who had quit work well before their sixties. And none of them had struck it rich as investors or entrepreneurs, nor had they hit the lottery or inherited millions. How had they managed to retire in their fifties, forties, and even earlier? It’s instructive to look at two examples of the people that were profiled.

Contestant #1 is age 62, and retired at 49. He and his wife live on $50K/year, deriving $17K of that from Social Security, and the other $33K from their investment portfolio. Only the value of the investment portfolio is just $350,000, meaning they are withdrawing at a rate of more than 9% per year. At that rate, they will likely run out of money before they run out of life expectancy. It looks even worse when you add healthcare to the mix:

One of the big unaddressed issues in many retirement plans is the rising cost of healthcare as we age. A study by The Center for Retirement Research at Boston College estimates that a pair of married 65-year-olds should expect to spend $197,000 in uninsured healthcare costs over the rest of their lives. And that’s not including the costs of a potential stay in a nursing home. So this couple did retire early without a fortune…but also without much long-term financial security.

Contestant #2 “retired” at the unbelievable age of 33. He probably lived with his parents. The article doesn’t actually say that. But it did say that he managed to save 80% of his take home pay each month while he worked. How does one do that while living independently?

Then he quit working, and managed to live on just $7,000 per year, spending $1,000 on hobbies, and the rest on basic living costs. That’s just $500 per month for food, housing, clothing, transportation, utilities, medical expenses…. It sounds like the parental basement to me. Oh, and his exit from the workforce lasted just four years, after which he got a job. That’s not early retirement; it’s a sabbatical or just extended unemployment.

The best description of most people’s goal that I have ever heard is this: having enough money to retire comfortably, and to stay comfortably retired. That’s doing it right. Retiring early is a great goal, but it’s not as desirable as retiring right.