Retirement - The new Solution - MOVING

You’ve heard that baby boomers, as well as Generations X and Y, are behind on their retirement savings, right? These demographics are regularly bludgeoned in the media and by the financial industry’s marketing machine for their negligence in saving for the future.

While some in the media are well-intentioned in their criticism, I can’t help but recognize the bias within the financial industry when it admonishes savers to save more — in their proprietary savings vehicles, of course. Because of this bias, the emphasis has always been on new and different ways to invest. And while I certainly do believe your investment strategy plays a very important role in the retirement planning process, it’s decidedly less important than two behavioral moves that can dramatically improve your retirement readiness.

The first retirement silver bullet may be the most powerful: MOVE, to an area with a lower cost of living.

A moving truck operated by Piedmont Moving Systems, an agent for Mayflower Transit based in San Jose, California. (Photo credit: Wikipedia)

The huge impact this maneuver can have on an investor’s retirement prospects becomes especially apparent when comparing the areas with the highest cost of living to the areas with the lowest. According to Sperling’s Best Places, an online resource that estimates the cost of living in areas across the country, the median home price in Chevy Chase Village, an idyllic Washington D.C. suburb located in Maryland, is $1.5 million. The cost of living there is 252% higher than the U.S. average. By comparison, the median home price in Great Recession-battered Detroit is $35,700. The cost of living there is a full 26.7% lower than the U.S. average.

But if that example appears all too convenient and unrealistic, consider this contrast: Washington D.C. suburb Alexandria, Va., boasts a median home price of $444,200 and a cost of living 55.5% higher than the U.S. average. Meanwhile, Knoxville, Tenn., the vibrant and colorful home of the University of Tennessee, has a median home price of $109,200 and a cost of living 19.3% lower than the national average.

Let’s picture a prospective couple in Alexandria trying to figure out their plan for retirement:

In Alexandria

• Their home is now worth $500,000.
• They have a $200,000 mortgage (from college costs and home improvements).
• They need $100,000 in annual income to cover expenses:
  • Mortgage principal and interest payment ($200,000 loan at 5 percent for 15 years) = $19,000 per year
  • Other income needs, less mortgage = $81,000 per year
• They took a pension lump-sum offer, invested in a 401(k) and have total retirement assets of $800,000.
• Social Security plus a 4 percent withdrawal from their retirement accounts = $50,000, or 50 percent of their estimated need.

In Knoxville

• They could purchase a comparable home for $200,000, mortgage free.
• They could add the $100,000 in net proceeds from the sale of their home in Alexandria to their retirement nest egg, now $900,000.
• According to the cost of living ratio, a $41,120 annual income in Knoxville would feel like their $81,000 income in Alexandria.
• Social Security plus a 4 percent withdrawal from their retirement accounts = $54,000, or 119 percent of their estimated need.

This is the set of choices our prospective couple is facing presented in chart form:

If you find yourself in a retirement planning pickle, I’m not suggesting you read this and immediately put a “for sale” sign in your yard. Cost of living should not be confused with quality of living. If your geography and proximity to friends and family is where you derive the most joy from life, I’m not suggesting that you have a financial duty to uproot. But, if you’ve reached a retirement plan dead-end and find yourself without options and a yearning for a refreshing change of pace, there is no question that transplanting your financial life to a lower cost of living area can transform a bleak retirement into one that is quite comfortable.

Current Outlook for Boomer Retirees

Have Boomers set aside enough funds for retirement?  Researchers are suggesting their savings are not sufficient.  Relying on Social Security is not a good idea because of its impending insolvency.  The overall outlook for aging baby boomers appears grim.

Millions of Americans are still facing a dismal outlook when it comes to their own ability to retire.

Statistics to support current retirement conditions:

1.  The expected retirement age is now up to 67 from a previous 63

2.  According to AARP 40% of baby boomers consider working until they die

3.  The Employment Benefit Research Institute notes 46% of Americans have less than $10,000

     saved for retirement.

4.  Lifehappens.org reports a dismal 87% of adults feel they will not have a comfortable

    retirement.

5.  CNBS recorded 36% of Americans state they don't contribute anything to their 

     savings by an average of $117,000

6.  Ameriprise surveyed 50 - 70 year olds about their cash savings and found that

    90% had experienced a significant economic life event that negatively impacted

    their retirement savings by an average of $117,000.

7.  The Great recession created low interest rates which impaired the growth

    of retirement assets

8.  The market has declined by 55% and home equity 33% while 23% reported having

     to support grown children or grandchildren

Why has American retirement dreams been depleted?

Most respondents to the surveys point to increasing cost of living expenses preventing them from saving.  Included in the saving problem is rising healthcare and long-term care expenses.

In addition to the rising expenses it the fact that the dollar doesn't go as far as it once did because of practices by the Federal Reserve.

Putting money in the bank is probably the largest retirement mistake.  Inflation destroys 50% if you let it stay there for 22 years.  Your money has to work for you, not the bank.

The traditional forms of investment like CDs, bonds and money markets pay less than 85% less than they did just six years ago.

Tax increases implemented by the Obama Administration further complicates matters.

The United States retirement system has earned a "C" rating from the consulting firm Mercer, as compared to the "A" grade Denmark received and the Netherlands' retirement system's B+ rating.  The study further shows that other countries are willing to make unpleasant steps by workers and employers to fund a stable system.

The United States Social Security trust fund is expected to become insolvent in 2033.

As Social Security dwindles, retirees will need to look at other resources like home equity to fund their retirement.

For the first time in history less money will be available and alternative sources of income will need to be established.

Despite a drop in home values since the recession 21% of Americans expect to rely on the equity built up in their homes as a source of income.

Attempting to retire without social security requires a lot of planning, saving and investing.  It's important to plan well to create a successful retirement plan.

How to use Home Equity for retirement