Retiring Broke and Knowing What to Do About It

The majority of people still working today will retire without a traditional (defined benefit) pension plan. Some of them will have substantial balances in 401(k), 403(b), or other personal savings, but most of them will not. Most people will have the promise of Social Security, home equity (which may well recover a lot of its value over the rest of this decade), and fairly modest retirement savings.

But a lot of them will be, effectively, broke. Their personal assets are not going to last the 25 years or more that most of them will live beyond their retirement date. So they either use those assets as a fairly meager supplement to Social Security, or in traditional Baby Boomer fashion, they continue to spend until they truly are broke, and then they have to live off Social Security by itself.

Even if you are entitled to pension benefits that are better than average, this helps solve the problem only if you have been eligible for these plans for a long stretch of your career. Employees who retire with modest years of service in their current jobs may still leave with little to take with them.

Fortunately, virtually everyone who has been employed is entitled to Social Security – or if not, they are covered by some other plan (only those who have spent most of their lives unemployed or being paid “under the table” have nothing at all in retirement). So few people are literally, totally, broke in retirement.
Still, living on Social Security alone, or Social Security plus only a small supplement from savings, is a big step down from the middle class or upper middle class lives that most employed people currently enjoy. Social Security was always intended to provide a safety net, not a comfortable lifestyle. So, for practical purposes, many people who retire are going to feel broke, and for practical purposes, will be. If anything, they will be more in need of support than those who are well off. They may need less advice, because they have fewer financial options, and therefore fewer decisions to make. But they need education and hand-holding, so that they can make appropriate choices, and so that they can navigate the emotional stresses that the necessary lifestyle changes are likely to create.

There are three areas where such retiring employees in this group can benefit from help:
• Understanding what their financial situation actually is.
• Understanding what lifestyle choices will help them get by financially, while preserving as much of their old life as possible.
• Learning about techniques and resources to help them stretch their money as far as they can.

Understanding their financial situation means more than a balance sheet of their assets and debts, and a budget showing their expected retirement income and expenses. It also means a realistic projection of their finances through the whole length of their retirement – and not just a “best case scenario,” but also their possible exposure to financial and health risks, not to mention the possibility of living long lives that make it even harder to stretch their resources for the duration.

People living beyond their means often don’t need very deep analysis to see that they are soon going to be in real trouble. Understanding lifestyle choices that might help them out the mess is partly a matter of simply knowing what the options are, and partly a matter of working through the financial and the personal implications of making such choices. Software can help with the financial aspects, but the effects on self and family are highly personal. This is where hand-holding can be of lasting benefit.

The options retiring employees with inadequate financial resources need to consider are:
• Working longer – either not retiring or “retiring” from their current job and finding a new one. Or, if they are married, perhaps it’s the spouse that is better suited to postponing retirement or going back to work. Unfortunately, it isn’t always easy to find a job (especially right now), and if the retiring employee or the spouse has health issues, continued work might not even be possible.
• Reducing expenses – this might just mean cutting the “fat” out of the budget, but it might mean a lot more than that. Since housing is most people’s largest expense, finding a cheaper place to live (smaller, less fancy, and/or in a less costly neighborhood) is often the first place to start.
• Finding shared living arrangements – we expect it to become quite commonplace for retired Baby Boomers to share housing and living expenses, which not only can save money for everyone involved, but can also provide companionship and, if needed, some measure of care-giving.

Learning the techniques of frugal living is also important. Most of us waste a great deal of our income:
• On things we don’t need,
• On things that are better than we need, and/or
• On things we could have gotten much less expensively or even for free.

There is a whole subculture of bargain shopping, swapping, barter, and freebies that most of us don’t bother with, but that could save us a bundle. And there are “senior discounts” on everything from movie tickets to real estate taxes – if you ask for them.

Of course, it’s hard to “step down” from a more affluent to a less affluent lifestyle. The transition can be painful. But once you do it, and you accustom yourself to the new reality, you can live just as fulfilling a life. It will be fulfilling in different ways, but it is actually true that best things in life are free, and that it’s our own attitudes and our relationships with others that mainly determine our happiness in life. Study after study shows that apart from the very poor and the very wealthy (both of which groups are less happy than average), our happiness does not correlate with our finances. And once we have taken that step back, and are finally living within our means, our stress levels fall, and we might even be more content than we were before.

So during this Thanksgiving season, maybe we can help those less fortunate through this transition, or at least prepare them for it. We may very well help them find the retirement rainbow on the other side of that chimerical pot of gold.

Material for this blog was taken, with permission, from Chuck Yanikoski, President, RetirementWorks, Inc.