Friday, February 02, 2007

Retirement Planning - A Staged Approach

Recently Jonathan Clements, a Wall Street Journal columnist, proposed a staged approach to retirement spending in How to Survive Retirement -- Even if You're Short on Savings. Usually, I agree with the simple logical solutions to personal finance issues that Mr. Clements presents. However, this time, an analysis with numbers shows that the solution may not be feasible to address the issue of being short on savings.

However, the staged approach does seem to provide an effective way to use one's home as savings for retirement.

Low Savings Example

Mr. Clements writes that a solution to low savings is to live retirement in two phases. In the first phase of 65 to 85, one should spend 3-4% of one's retirement savings. 15% should be set aside and invested in stocks and TIPS. In the second phase of over 85, one would spend the investments for the 15% invested and money from the sale or reverse mortgage of one's house. Conceptually this sounds like a good idea.

However, when one puts in the numbers, the staged solution doesn't appear to work. Using his example of a 55-64 year old average savings of $90,000, 4% or $3,600 per year does not provide sufficient income on which to live. The person would still be primarily depending on Social Security and their pension.

A Good Approach to Use One's House for Retirement Savings

While it doesn't solve the issue of low savings, a staged retirement approach does offer an opportunity for one to use the equity of one's home as retirement income. In the past, I have not been a fan of using my home as retirement savings. The concept of staged retirement has caused me to change my mind.

Take the example of 35 year old Em S. Grad in the Vanguard Retirement Calculator post. To cover 30 years for retirement after 65, Em needed $6,708,059 in retirement savings. If we apply the staged retirement model, Em would need $4,534,151 in retirement savings to cover the first stage through 85, or 20 years. To cover from the second stage of 85 to 95, Em should have a house (or other sellable assets) valued at $2,164,908 (the difference between $6,708,059 and $4,534,151) when he retires at 65. Em can then sell the house and other assets at 85 to fund the second stage of his retirement.

What I like about the staged model is that I can enjoy a significant portion of my "retirement savings" before I retire. In this case, it is in the form of my house and other assets. Thus, I will not have forgone enjoyment of all my wealth while saving for retirement.

Thank you, Mr. Clements, for another great idea.

For more on Reaping the Rewards , check back every Friday for a new segment.

Photo Credit: morgueFile.com, Emily Roesly

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

4 comments:

Blogger for peace said...

FYI - You can access those Wall Street Journal articles for free with a netpass from: http://news.congoo.com

My daily free tip!

Super Saver said...

Blogger for Peace,

Thanks for the tip on getting free access to subscription only on-line articles.

Chad said...

"Recently Jonathan Clements, a Wall Street Journal columnist, proposed a staged approach to retirement spending in How to Survive Retirement -- Even if You're Short on Savings. Usually, I agree with the simple logical solutions to personal finance issues that Mr. Clements presents. However, this time, an analysis with numbers shows that the solution may not be feasible to address the issue of"

That is all I get from your feed now. It is annoying since basically it means your feed is broken.

Super Saver said...

Chad,

Thanks for your comment. Apologies for the partial feed. I changed to a partial feed on 1/27/07 since another blog was copying the full feed content from My Wealth Builder. The situation has been solved so I can change back to a full feed for the benefit of my readers.