A retirement plan for the working 99 percent

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(MoneyWatch) Following a question from a reader, my last post addressed how a typical retiree can make ends meet. This new post looks at the situation for a working couple who are both age 60 and who have about $200,000 in retirement savings, along with some home equity.

As with the current retiree, the financial solutions are limited for this couple. Their most important decisions will be when to start taking Social Security benefits, how long to work, how to deploy their retirement savings, and how to manage their living expenses. Let's look at how they should think of these decisions one at a time.

Social Security

In this example, let's assume the primary breadwinner has been the husband, who currently earns about $75,000 per year. To make the most of his Social Security income, he should delay starting Social Security until age 70, when his benefits would be about $2,700 per month. Let's also assume the wife has worked only sporadically throughout her career -- not enough to earn her own Social Security benefits -- so her Social Security income will consist of her spouse's benefit based on his earnings history. In this case, I suggest that she start her spouse's benefit at age 66, which would amount to roughly $1,000 per month.

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In this scenario, they would have a combined Social Security income of about $3,700 per month starting at age 70, or $44,400 per year. In addition, they would receive about $12,000 per year from age 66 to 70 from the spouse's benefit.

How long to work

In this couple's case, the best choice would be for them to not touch their retirement savings until age 70 in order let them grow as much as possible until they fully retire. To cover their living expenses until that time, the husband and wife will need to continue working.

They don't need to make as much money in their sixties as they did when they were younger, since I'm assuming that they're no longer saving for retirement. All they need is to earn enough money to cover their living expenses until Social Security kicks in for the husband at age 70, when they can start drawing from their retirement savings. AARP and T. Rowe Price have called this strategy "practice retirement."

They can ease up a little at age 66, when the wife's Social Security benefit adds an income of $12,000 per year. An important job criterion would be for one of them to be eligible for medical insurance from their employer, at least until age 65 when they're eligible for Medicare.

I acknowledge that it may be difficult for this couple to find work at salary levels comparable to their prime career years, so they may need to look for work that's more available to current retirees. While they might consider this work to be "beneath" them, it's what they'll have to do to survive.

According to the Bureau of Labor Statistics, the unemployment rate in May among workers age 55 and over is 6.5 percent, lower than all but one other age group. This means that 93.5 percent, or about 14 out of 15 people in this age group, are employed, so this should be an attainable goal for most people.

Deploy retirement savings

Let's assume this couple invests their $200,000 very conservatively in a stable value account in their 401(k) plan, which earns 2 percent per year. By age 70, their savings will have grown to about $244,000. As with the current retiree I discussed in my previous post, I suggest that this husband and wife use an inflation-adjusted annuity to generate a lifetime retirement income. If current annuity purchase rates remain in effect until they're age 70, they could buy a 100-percent joint-and-survivor annuity that increases 3 percent per year, with an initial retirement income of about $936 per month, or about $11,232 per year. (I calculated this amount using the tools on the website of Hueler's Income Solutions, which is offered through Vanguard's Annuity Access program.)

Adding this annuity income to their Social Security benefits, this couple's total retirement income at age 70 would be $55,632 per year. The great news is that this income is recession-proof -- it won't drop due to stock market fluctuations, and it's indexed for inflation.

At this income level, this couple has plenty of company, since according to the U.S. Census Bureau, the median family income in 2010 was a little under $50,000.

Keep home equity in reserve

I suggest that this couple not tap into their home equity until they're really desperate, either when they're no longer physically able to work or not able to pay for potential long-term care expenses. The only exception to this suggestion would be if they decide to downsize their house; doing so would help them save on utilities, property taxes, and maintenance.

How to improve their situation

Their retirement income would get better if the wife had worked most of her life and has a Social Security income higher than the spouse's Social Security benefit. It would also improve if the couple were able to save like crazy between now and age 70 to boost their retirement savings. One more idea would be to take a little investment risk to earn more than 2 percent per year and invest in a mutual fund that's balanced between stocks and bonds.

Making ends meet

As with the retired couple in my previous post, this still-working couple -- and most boomers on the verge of retirement -- will need to be resourceful and creative to make ends meet. They'll need to closely manage their living expenses, focusing on the largest items in the typical Americans' budget -- housing and transportation. I suggest they do this before getting their backs to the wall financially by investigating a few different options: downsizing their home; sharing living quarters with family or friends; and/or using public transportation, possibly trying to get by with just one car. They could also rent out a room or two for additional income.

Once again, this couple's retirement planning will need to morph into career planning, expense management, and nurturing relationships with family or friends. I believe it's possible to find joy and fulfillment in life while they're working and living on modest financial resources. They'll have to put in time and effort to make it work -- it won't be handed to them on a silver platter -- but it can work.

As with my prior post, I don't mean to imply that this situation is the most desirable or to trivialize the plight of many retirees. It may not be the "golden years" that this couple had imagined, and their circumstances will be challenging for many people. But it's the reality they face, so, like the rest of us they'll need to make the best of their situation.

[JoeBGud13]

Nice dream couple, now try to figure how to retire went you have been a factory worker or truck driver, and you and your wife have perhaps $20,000 saved toward retirement.

Most of us have had to raise and educate children and take care of our parents, until they die
.
This is a unrealistic, smoke and mirrors, retirement couple who are able to work to 70.

If you are lucky enough to live to 65 and get on Medicare you need to realize that the monthy premium for Medicare is $110 PER MONTH. And suprise this is taken right out of each of the retire's Social Security.

Most folks drawing Social Security at age 65, will be lucky to get $2400 a month.

The costs for my wife, who is on Kidney dialysis, is over $150,000 annually. Which a lot is of out of pocket, uncovered medical expenses, for deductables and copays and the Hole in the Prescription Medication Medicare Plan. And don't forget the $1320 annual premimum for Medicare insurance.

[smc021-2009]

In other words keep working until you are nearly dead. Your advice is ridiculous.

[askagain]

smc021-2009 - On the contrary, not everyone has the luxury of being able to retire. Some people have no choice but to keep working to make ends meet. Just two years away from retirement age and very healthy and vibrant, I may continue working because I enjoy what I do for a living. In my case, having a retirement income is not an issue. Working beyond normal retirement age is a choice, not a need, for me. However, there are many people without pensions where they work and small accumulations of money who simply can not afford to retire.

[jaykay3141]

Working full-time till 70 can be unrealistic even for white-collar workers. It's tough enough for someone in their 40s to deal with 10-hour days and corporate plans to "improve the bottom line" by shipping work to Asia. Granted, a lot of 70-year-olds are still very vigorous and office work is NOWHERE near as taxing as working in public safety or construction, but the stress still takes its toll.

[askagain]

You are correct and this will become a bigger problem as science, medicine, and lifestyle changes raise the number of years most people live. It is fine to continue working if you are in good health and have the energy to do so. As you point out, not everyone has that option.

[taxed01]

Social Security sure discriminates against single people doesn't it?

[venusvegasvada]

Total dreamworld article.

"Let's assume a 75k income and you work till 70 and you have 200k in invest."

That's not the 99%.

How's this for an idea the next time you ant to write about this:

Get out of your cubicle office where you've spent the last 30 years and go down to a union hall and talk to some of the few construction workers that are actually still working. Go find the older ones.

Ask them about their union retirement plans- plans who's benefits are already being slashed because of the market crashes. Let's also recognize the primary difference between blue collar people and white collar people: I.E. blue collar people use their bodies to make a living.

By 60 most hard working blue collar people's bodies are toast. If they make it to 70 they are lucky and they will tell you that. Even luckier if they go beyond that. For them, working till 70 isn't going to happen. They are truly amazed if they make it to 60 in the first place.

Take a guy who makes 45k-60k a year (when he's working) with nothing more than a broken pension plan, an upside down house and zero savings. Also say he's 54 right now (on the wrong side of where the Govt wants to change the SS benefits package).

Tell me how that guy is going to retire at 60 to 65 and be able to draw full retirement from SS and his pension and live on that. Remember, he'll be lucky to make it to 70 and still be alive. Forget 70 for blue collar workers.

How does that work out in today's offshore everything, give all the money to the rich guys, let people fend for themselves mentality?

[jaykay3141]

That's how the far right wants to save Medicare and Social Security. All you slackers who weren't clever enough to be CEOs or Wall Streeters and now want to spend your last few years sponging off the multimillionaire class - go somewhere else and DIE.

[retiredgustav]

You are correct. I always had a union job with a large utility company. Because we had a defined benefit pension I was able to retire at 59. You are right about our bodies breaking down after all of those years being exposed to extreme weather and ungodly hours. The pay is nice but many do not make it to retirement. Those advocating working until you are 70 never worked a hard day in their life.

[kevsan1]

Financial planners live in a special place and make many assumptions. They don't know about being stuck in jobs that pay little, and other circumstances that can drain what savings you have if you've been lucky enough to save. I figure I will have to keep working until I die.

[endrepubs]

That is a pretty good outcome for that couple. Most working folks wont have it that good. 200,000 is a lot of money to have in retirement savings at age 60 and most working class folks just wont have that much to work with.