No tears for millionaires

June 14, 2013 

Forgive me for not shedding crocodile tears over couples with $1 million in assets who may have to draw down their retirement portfolios by 3 percent per year, rather than 4, the withdrawal rate financial advisers usually suggest.

With his recent article, “For Retirees, a Million-Dollar Illusion,” New York Times business editor and blogger Jeff Sommer joins the chorus of doomsayers who think Americans haven’t saved enough for retirement but are rushing, lemming like, toward financial ruin.

Sommer makes the case that investors shouldn’t put all their eggs in bonds, but how big a problem is that? How many millionaires are unaware of the virtues of a diversified portfolio? I know I can’t open my mail without being solicited by one or more financial gurus who want to steer the Plumbs away from the pitfalls of timid investments.

And for those affluent retirees smart enough to keep a big chunk of their portfolio in stocks, the recent market rally has restored much of their wealth. They may not be on Easy Street yet, but they’re a heck of a lot better off than the average stiff.

On average, American households have accumulated less than $11,000 in savings – exclusive of their home. Most observers agree that such statistics are worrisome. For retirees without a pension (including most Americans), that leaves a thin comfort margin. A monthly Social Security check alone is unlikely to keep them out of poverty.

In analyzing the challenges facing more affluent retirees, however, it’s important to look at more than net worth. Building the biggest possible nest egg is not the only – nor even the primary reason – people should save.

In a recent paper published by the National Bureau of Economics, co-author Jeffrey Brown, a University of Illinois professor, argues that obsession with wealth-building has blinded Americans to the virtues of one type of investment vehicle: life annuities. He makes the case that people should invest in order to support their spending and consumption habits and not just to build capital – the goal most often pushed by financial advisers.

In other words, Brown suggests, you can’t take it with you, so why not let your money help while you can still enjoy it?

Like any investment, annuities have drawbacks, but the professor’s point is well-taken: In retirement people should seek ways to balance income with their spending habits.

A common shortcoming of articles about the looming retirement crisis is that they ignore paths people actually follow. The more money a household has amassed, the rosier its retirement outlook, but even people of limited means are not without options.

Take reverse mortgages. The older the homeowner at the time a reverse mortgage is taken out, the higher the monthly income generated. Heirs may be unhappy when they learn Granny’s estate wasn’t what they expected, but for a family that paid off their note years earlier, a reverse mortgage may be a way to stay out of the poorhouse.

Experts predict that single women will face a dismal retirement. According to the Census Bureau, 40 percent of elderly women are widowed, which puts them at financial risk. On the other hand, widowhood may open a door. Many widows/widowers sell the family home, bank the proceeds and rent a home or move in with children.

Other options for retirees, single or married, include retirement communities, assisted-living facilities and house-sharing.

Nor does reaching the Social Security retirement age (66 for people born between 1943-54) mean that every older American is going to spend his or her last days in a rocking chair. Many people have no intention of leaving the workplace, even if it means going part time or starting a new career. Studies indicate that continuing to work both boosts retirement income and contributes to retirees’ physical and mental wellbeing.

Historically, most American households have never amassed seven-figure portfolios, and yet somehow they managed a comfortable retirement – even before Medicare or Social Security.

And if some rich folks have to sell one of their vacation houses or drive a two-year-old Lexus in order to scrape by, they can just suck it up.

Email former Herald Editor Terry Plumb at terry.plumb@gmail.com

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