In personal finance, I often think in terms of “levers” to push or pull. Here are . Here are :
- Asset allocation: How are you investing your money?
- Savings rate: What percentage of your income do you save?
- Time horizon: How long are you saving for?
Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life by Laurence Kotlikoff has another good example of pulling certain levers involving a couple that comes to him with their proposed retirement plan. By tweaking these five different levers, he is able to increase their allowable monthly spending (above housing) by over $6,000 a month for the rest of their lives (a net present value of over $1.5 million):
- Delay taking Social Security. “First, they should wait to begin taking their Social Security benefits till age seventy, rather than immediately at sixty-two.”
- Use your 401(k) to fund your retirement early years instead. “Next, they should start to withdraw from their 401(k) accounts now, rather than wait till seventy.”
- Buy joint survivor single premium immediate annuities. “They also should take their 401(k) withdrawals in the form of joint survivor annuities.”
- Downsize your house/condo. “Next, they should downsize their four-bedroom house by half.”
- Move to a lower-tax state. “And finally, they should move to New Hampshire, which has no state income tax.”
The result:
This retirement makeover will make an amazing difference. In fact, it will more than double the Smith’s sustainable retirement spending! Under their original plan, the Smiths could afford to spend $5,337 per month in addition to covering their housing costs and taxes. Under the new plan, they can spend $11,819 per month in addition. That’s a ginormous increase and adds up to a $1,578,374 increase in lifetime spending measured in present value. In other words, the new plan amounts to handing the Smiths a bag filled with around $1.5 million in cash. This is money magic, pure and simple.
Now, I’m not sure I would use the term “magic”, but these are readily-available choices and the numbers come from the author’s . Living in a two-bedroom condo instead of a four-bedroom house is not the same experience, but at least you should explore it and weigh the costs and benefits. Using single premium immediate annuities to supplement Social Security is a way to guarantee income, and they are the simplest and most transparent form of annuities that are easy to comparison shop directly. I bet that significant percentage of retirees don’t even run a free, no-obligation quote.
I enjoying finding and thinking about the levers in my life. Even if not financially-optimal, it feels good to make a conscious choice and know that your actions matter. I know that I could have made more money by moving to a different state with better job opportunities, lower taxes, and/or lower cost of living. I know that I could have bought a bigger house, but also a much smaller house.
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