Consumer Reports "Retire in the Black"

[REWahoo]

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

 

[retire@40]

Based on retiring at age 65...

She retires at 65 but he continues to work 4 additional years

He takes a lower paying job after retiring...

With all due respect, I totally shut down when I read about retiring at 65, then continuing to work for another 4 years, working at a lower paying job, blah blah blah.

I'm impressed when someone achieves FIRE at 50 or under, but not at 65. This may be an OK article for the common folk who haven't figured out life yet and just want to do what everyone else is doing, but I enjoy reading more about retiring in the black at say.......40

 

[REWahoo]

With all due respect, I totally shut down when I read about retiring at 65, then continuing to work for another 4 years, working at a lower paying job, blah blah blah.

Agreed. I totally shut down when I read about potato peelers, too.

 

[dex]

5. Pay off credit card.
Consumption Level: $50,924

This one doesn't look correct?
Pay off a high interest credit card and consumption level goes down?

 

[Michael]

The consumption level doesn't go down when the credit card is paid off. The baseline is 50,870; so paying off the credit card increases consumption level by $54.

 

[cc]

I give up - how can a $22K job only increase your consumption by $1500?

 

[John Galt]

Disclaimer: I have read very little of this but the article
sounds a little funky to me. Also, Consumer Reports
is about my least favorite source for anything. I almost
prefer Bob Brinker; wrong a lot but more interesting.

JG

 

[bruce1]

Agreed.  I totally shut down when I read about potato peelers, too.

You obviously never got KP

 

[REWahoo]

You obviously never got KP

No, but I did get a lot of latrine duty. And I haven't "spit-shined" the chrome on a toilet since.

 

[REWahoo]

I give up - how can a $22K job only increase your consumption by $1500?

The article doesn't say how long the job was held. But you would assume it was for only a few years and the resulting annual impact over the retirement period was $1,500.

It is also pointed out that this strategy is risky because ill health can prevent working after retirement. "Half of all workers retire before age 62 anyway, many because of disabilites". And like many on this board, because of anal glaucouma disease: the inability to see their a** showing up for work anymore.

REW

 

[farmerEd]

>>3. He takes a lower paying job after retiring ($22k).

If you take a lower paying job after retiring, are you actually retired? Or just working for less money....

 

[Billy]

Hi all,
We were just offered jobs yesterday at a resort in a remote location of Ecuador. In return for working six days a week, me as a bartender, and Akaisha as a receptionist, we get lodging, food....and all of the adult beverages we can handle....PLUS.....$65.00 per month!

So I guess that means we would no longer be retired, just working for less...a lot less!....

If anyone is interested in this position, email us and we can give you the info.

Once retired, these types of opportunities come up regularly.

Billy
Website www.geocities.com/ba264

 

[REWahoo]

Hi all,
We were just offered jobs yesterday at a resort in a remote location of Ecuador. In return for working six days a week, me as a bartender, and Akaisha as a receptionist, we get lodging, food....and all of the adult beverages we can handle....PLUS.....$65.00 per month!

Hmmm.... indentured servitude and free booze. What a nightmare.

REW

 

[ACTUALLY Retired]

Once retired, these types of opportunities come up regularly.

Billy

I haven't noticed ANY sort of "opportunities" like this once I retired. The only kind of "opportunities" that come up with any reliability/recurrence are grunt labor. stocking shelves at Christmas time, and H&R Block.

Nobody from Alpine ski resorts or South Sea Island getaways that cater to Arab Shieks, and movie stars ever calls me with "opportunities"

 

[Hyperborea]

Nobody from Alpine ski resorts or South Sea Island getaways  that cater to Arab Shieks, and movie stars  ever calls me with "opportunities"

I think that's the problem.  These kind of weird/interesting job opportunities occur when you are right there.  Nobody calls you up about them.  If you're "right there" most of the time like Billy&Akaisha as near-perpetual travellers then they likely happen a lot more.  I've had some friends who did the year of travel around the world right after finishing their undergrad degree and they came back with some interesting odd job experiences too.

As for Consumer Reports it is a useful tool, in general, for informing the consumer.  An efficient market requires informed participants and it is been difficult to get the information on one side of the market.  The company probably knows that their product is crap but they aren't telling and they'd much rather that some organization isn't telling their potential suckers customers about it.

 

[Martha]

I read the Consumer Reports article too. I am wondering about the 401(k) issue. Consumer Reports stated that the theory is when you withdraw the money from the 401(k) it is treated as ordinary income thus you could end up paying both taxes on that income and on your social security. For a while we had access to some free financial software, I can't remember the program, but it also advised we stop contributing to a 401(k). I was surprised and ignored the advice.

It seems that if you are at a high tax bracket you should contribute to a 401(k) to the extent possible. But then again, there are advantages in paying tax now and then paying tax on the gain at the lower capital gains and dividend rates. Anyone give some thoughts to this issue? It is important for those planning an early retirement.

 

[sgeeeee]

I see only two problems with the conclusions from this article: 1) For many situations all of the conclusions are wrong quantitatively, and 2) For many situations all of the conclusions are wrong qualitatively.

Other than that, I don't see any problems.

 

[Michael]

It seems that if you are at a high tax bracket you should contribute to a 401(k) to the extent possible.

Most of those articles assume that you will not retire until you start collecting Social Security. If you plan to retire significantly before then, you will be withdrawing money from your 401k at a reduced tax rate for many years before Social Security becomes an issue. This can change the results. Everyone pretty much has to crunch the numbers for their individual situation.

 

[John Galt]

Hey salaryguru.......nicely put. Keep writing such
insightful and tersely cogent commentary and you may get added
to my official list of ER heroes

JG

 

[sgeeeee]

Hey salaryguru.......nicely put.  Keep writing such
insightful and tersely cogent commentary and you may get added
to my official list of ER heroes

JG

Well . . . thanks for the vote of confidence, John. But others on that list may ask to be removed if my name appears alongside theirs. Besides, once I was on the list I'd probably just blow it by saying something liberal that would demand my immediate removal.

 

[PL]

I'm surprised at the level of skepticism this thread is throwing at the basic idea: that retirement income is dependent on a whole set of variables, some counterintuitive, such as higher lifetime marginal tax rates resulting from higher IRA/401 balances.

My take on the CR article was to think about interrelation of the variables, and then do a bit of research on the method. I'll go to the library to read the article. Before that, here's some 'advertising' I found about the model from a Google search:

"ESPlanner gives the most flexibility in figuring retirement income and expenses and is the most comprehensive" -- BusinessWeek

"...if you demand the deepest and most powerful planning engine, look no further." -- The Washington Post

"... its (ESPlanner's) approach to financial planning profoundly challenges well known programs ... Its formula generates the correct level of consumption for each period -- something that takes hours and hours of diddling in other programs...Through efforts such as theirs, a concept (consumption smoothing) that economists have embraced for years may finally start penetrating the world of financial planning." -- BusinessWeek

 

[PL]

Here's an explanation of the IRA/401K contribution issue, from the ESPlanner Tutorial, available on the web:

"When it comes to reducing lifetime tax payments, there are several options to consider. One thing to check is whether your family should contribute more or less to tax-deferred accounts. Although it is commonly believed that maximizing contributions to taxdeferred
accounts, including 401(k) and traditional IRA plans, lowers lifetime tax payments, this is not necessarily the case for three reasons.

First, withdrawals of principal plus interest from taxdeferred accounts can put your family into higher tax brackets.

Second, these withdrawals can trigger federal income taxation of your family's social security benefits.

And third, tax rates may be higher when your family makes its withdrawals."

Food for thought...

 

[ESRBob]

It seems that if you are at a high tax bracket you should contribute to a 401(k) to the extent possible.   But then again, there are advantages in paying tax now and then paying tax on the gain at the lower capital gains and dividend rates.   Anyone give some thoughts to this issue?  It is important for those planning an early retirement.

Not sure of all the subtleties today, for someone already in ER, but I converted the bulk of our regular IRA to a Roth some years back and so don't spend much time any more worrying about the tax consequences of IRA withdrawals.  People can argue back and forth on Roth Conversions, but it might make sense to consider 'harvesting' some of the 10% or even 15% income tax bracket (in the tax code for at least a few more years) -- basically anything up to 70k or so for a couple gets you into the 15% Fed income tax bracket, which incidentally also happens to qualify you for the 5% cap gains tax rate on other (non-IRA) capgains in your portfolio.  

In our view, 10-15% is not a high price to pay to get out from under all the future uncertainty and liability for income tax withdrawals on the ( presumably) much bigger IRA you'll be withdrawing from decades from now.  With deductions, exemptions etc and little or no earned income, the actual tax could be even lower.

If you are going to do a (full or partial) Roth Conversion, you need to do it before the end of the year, so it might be a good time to discuss this with your accountant...

ESRBob

 

[Nords]

Job offers & Roth IRAs

I haven't noticed ANY sort of "opportunities" like this once I  retired. The only kind of  "opportunities" that come up with any reliability/recurrence are grunt labor.  stocking shelves  at Christmas time, and H&R Block.

Nobody from Alpine ski resorts or South Sea Island getaways  that cater to Arab Shieks, and movie stars  ever calls me with "opportunities"

Maybe you're not hanging out in the right places, Actually. Or maybe Billy & Akaisha have such sweet & trustworthy faces...

As I approached retirement I had a couple GS-11/12 govt offers and several "civilian" offers. None of them were solicited. All were extremely flattering considering what I felt was my lack of qualification/experience, but they all had the common factor of explaining complicated concepts with simple vocabulary to complete neophytes.

Now that I'm solidly in retirement I haven't had an unsolicited offer (of any kind!) in months. I think people are able to tell that you're having too much fun to seriously consider returning to work.

But don't knock those grunt-work jobs. One of my retirement heroes was Vince Capra who, at the young age of 80, took a part-time job restocking liquor-store shelves at the Naval Postgraduate School's exchange. They didn't need the money but it got him out of the house three days a week (for which he & spouse were grateful). He'd spend the day lifting cases of beer & hard liquor while swapping WWII sea stories with a new generation of naval officers. He didn't particularly enjoy driving so he used to walk the eight-mile round trip from Pacific Grove to Monterey. He stayed hale & hearty well into his 90s.

Bob, I agree with you about Roth IRA conversions. We just completed the first increment of an eight-year conversion of our conventional IRAs. By the time it's done I'll be 52. We're comfortably inside the 10-15% bracket up until age 60 so it's a great tax move to avoid later RMDs & SS taxation. And that's even if you believe that today's tax rates will stay at their current low level...

It's compelling from the tax perspective-- but it's even more compelling after watching my father-in-law wrestle with his first RMD. And, yeah, I know it's a simple matter of looking up a couple charts and picking off the numbers, but I feel the same way about nuclear-reactor pre-critical checkoffs, crank-starting Model T Fords, and slaughtering my own chickens. I know how to do them but I'll avoid them whenever possible!

 

[John Galt]

Hello Nords!

I too had some unsolicited offers just after I ERed.
Really helped me out financially and without the old pressures
(although time was still passing). Like you, these
have dried up which is fine. If I ever did
(perish the thought) go back to some kind of work, I would be self employed. It comes
naturally to me.

JG