The January issue of Consumer Reports (yes, JG, I know it's a liberal rag, but even a conservative wants to know who makes the best washing machine) has an article on the most often recommended strategies for boosting retirement income. The article describes how they teststed six of these these strategies using software called ESPlanner, developed by Laurence Kotilkoff, a professor of economics at Boston U. and Jagadeesh Gokhale, a senior fellow at the Cato Insitute.
Although interesting (the biggest positive impact to retirement income in their test came from moving to a state with a lower cost of living or delaying retirement), much more detail is needed to understand how they reached their conclusions. Of particular interest was the negative impact of increased contribution to 401(k) accounts for the hypothetical couple in the test.
The article does not describe how the software works, only that it differs from other financial planning tools by determining your "highest sustainable living standard (consumption level) for the rest of your life".
The test involved looking at the financial status of a hypothetical couple, both 55, no dependents, both working with combined incomes of $90,000, a $300,000 house with a $200,000 mortgage, $8,000 in credit card debt, $250,000 in 401(k)'s, with contributions of 5% annually. Based on retiring at age 65, if they made no changes to their current retirement savings plan, ESPlanner calculated their "consumption level" at $50,870 anually. (The article states that the consumption level amounts are expressed in today's dollars but does not make it clear that annual increases are anticipated to keep pace with inflation.)
Using this as a baseline, frequently recommend strategies to improve your retirement income were run through ESPlanner and the resulting consumption level was calculated:
Consumption Level baseline: $50,870
1. Move to a less expensive area (from New York to TX).
Consumption Level: $56,175.
2. She retires at 65 but he continues to work 4 additional years (his income was $60k of the $90k total).
Consumption Level: $54,202
3. He takes a lower paying job after retiring ($22k).
Consumption Level: $52,392
4. Pay off mortgage.
Consumption Level: $51,048
5. Pay off credit card.
Consumption Level: $50,924
6. Double their 401(k) contributions to 10%.
Consumption Level: $50,374
Amazing that the annual amount actually
decreased when the couple increased their 401(k) contribution. The reason given was that it raised the couple's tax bracket in retirement and subjected more of their SS benefits to taxation.
REW
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