In a recent column in the San Diego Union Tribune, a financial planner was enlisted to offer a reader a financial make-over. The goal was to retire at 55, after a divorce, after a recent home purchase, and after racking up a five figure debt with credit cards.
The planner suggested:
"Use emergency savings to pay off debt.
"Decrease monthly retirement contributions from $500 to $300; use the extra $200 to rebuild emergency fund.
"To retire at 55, work part time for 10 years (with a minimum salary of $20,000) and consider selling home and buying a smaller property outright to eliminate a mortgage during retirement.
"Establish a budget to manage current spending habits.
"Revise W-4 form with employer to account for mortgage and property tax deductions; doing so will increase income by $400.
"Take on more risk and diversify asset allocations to maximize returns for the next few years before retirement.
"Look into the purchase of a $1 million umbrella policy as well as disability insurance.
"Have a coordinated will and trust drawn up along with applicable medical directives and powers of attorney."
And because the article allowed for comments, I added the following: "Sounds like her planner needs to suggest the harsh realities. Let's start with her inability to come up with or budget for those property taxes. With a current liability (mortgage payment, which seems to me was adjusted at some point) and a $5,000 a year property tax bill (something that is guaranteed never to decline), Ms. Ventura will not even come close to enough to live on with her pension. If she were to retire right now, with the assets she has, she would have about $300 a week for all of her other incidentals.
"Her planner," I wrote, "wants her to decrease her retirement contribution by 30%, add more insurance, not really retire (work part-time for earning least $20,000 a year - doing what?) and rearrange her asset allocation to get 10.68% a year return (even without the use of index funds, no short term or intermediate bond investment coupled with large-cap and international exposure could hope to get those kinds of returns which so far over the last ten-years hasn't and projecting even optimistically out over the next ten years will).
"And after all of that, he wants her to sell her home.
Why not just keep working until she is 65, put away the credit cards (while continuing to pay them down - which if she took her current personal savings to do would allow her to redirect that $450 to rebuilding that account - which would still have, according to the numbers listed above, well over $13,000 in checking and savings) and budget in another $300 towards the mortgage payments bringing the overall life of the loan down to around fifteen years. This will leave her living tight - like the rest of us - but will also increase the chance that she will have her home when she retires (meaning when she stops working) and might be able to pay for the taxes on the property.
I see no mention of health insurance in Mr. Phelps plan short of a disability policy or an employer sponsored long-term care arrangement. That 403(b) and 457 plan will begin to cover that but if a recent estimate by Fidelity suggests, her savings for insurance in a post-work life will fall short by $850,000.
True, Ms. Ventura is doing better than most but she is going to need to rethink those post-divorce goals. And this is true for many of us.
When we calculate how much we will need, we tend to gloss over numerous factors in an attempt to tailor our dreams to fit. Her financial make-over would have cost her $1,200 and she would not really be any closer to the truth about her future than had she just faced the facts.
One: Divorce changes the whole retirement picture. Ms. Ventura is no exception, she will have to recover much more financially than had she remained married.
Two: The cost of retirement is rising every day, just like everything else. Plan on a 15% increase in those costs, year-over-year. Can she handle that and still retire at 55? Not likely.
Three: There are no guarantees. That employer sponsored pension may falter. Those investments may weaken. That house may be worth less as the taxes on it rise.
The best base calculation she can make: Can she live on half of what she is making now? Because that, for an increasing number of us, is the reality of retirement.