What options are available to a soon-to-be retired household that is financially constrained? What levers can be pulled if desired retirement spending is not realistic in light of retirement savings?
What options are available to a soon-to-be retired household that is financially constrained? What levers can be pulled if desired retirement spending is not realistic in light of retirement savings?
The financial profile we developed in related articles offers a case study of a financially constrained household.
Our hypothetical household--headed by William--needs to reduce his target retirement spending by a whopping 75 percent in order to have a reasonable chance of having enough money to last through retirement.
Since a spending reduction (and subsequently lifestyle reduction) of this size is extreme, let’s take a look at the other alternatives that exists.
Each of William’s levers or
retirement planning options will be placed under one of the following categories (of assets) on his personal balance sheet, and each of these options will be explored in more detail in future articles:
2) Social Capital
3) Financial Capital
Human Capital
Work Longer - William and/or his wife can work longer to enhance value of their human capital, earn more, and hopefully save more.
Social Capital
Social Security - the primary considerations are when William chooses to begin receiving payments and the larger, more blue-sky issue involving the sustainability of the overall Social Security system.
Inheritance - the average inheritance amount that baby boomers may expect is $64,000. This is a large number when placed in the context of average net worth that is less than $250,000.
anticipated inheritance and expected assistance from family, community, etc) -- what is average amount of inheritance that baby boomers can expect? $64K? http://www.
metlife.com/assets/cao/mmi/publications/studies/2010/mmi-inheritance-wealth-transfer-baby-boomers.pdf
Family - support from immediate and extended family may be considered.
Charity - charitable contributions may supplement retirement
income.
Financial Capital
Savings - William can push the imaginary rewind button and go back in time to save more or create assets (such as a privately held business) that are potential sources of cash flow when he is no longer working.
Health Care Expenses - a big, big factor to consider.
Pension Income - while not an option for many, it is worth acknowledging the importance and potential impact of pension income.
Home Equity - a large
asset on most personal balance sheets that can be a source of cash flow through products such as a
reverse Mortgage. And any other real assets to be monetized
Interest Rate Assumptions - how might interest rate changes affect the picture.
Investment Return Assumptions - how do changes in stock and
bond return and
volatility assumptions affect retirement planning.
Asset Allocation - changes in asset allocation can have a large impact. Arrive at prudent set of assumptions, and then look at impact of Asset Allocation
Sequence of Returns Risk - a real retirement risk that is directly impacted by volatility and asset allocation decisions.
Financial Legacy – there is a fundamental trade-off between
retirement sustainability and the amount William would like to leave to his heirs.
Annuities - how an
annuity may impact William’s financial profile.What options are available to a soon-to-be retired household that is financially constrained? What levers can be pulled if desired retirement spending is not realistic in light of retirement savings?The
financial profile we developed in related articles offers a case study of a financially constrained household.
Our hypothetical household--headed by William--needs to reduce his target retirement spending by a whopping 75 percent in order to have a reasonable chance of having enough money to last through retirement.
Since a spending reduction (and subsequently lifestyle reduction) of this size is extreme, let’s take a look at the other alternatives that exists.
Each of William’s levers or retirement planning options will be placed under one of the following categories (of assets) on his personal balance sheet, and each of these options will be explored in more detail in future articles:
1) Human Capital
2) Social Capital
3) Financial Capital
Human Capital
Work Longer - William and/or his wife can work longer to enhance value of their human capital, earn more, and hopefully save more.
Social Capital
Social Security - the primary considerations are when William chooses to begin receiving payments and the larger, more blue-sky issue involving the sustainability of the overall Social Security system.
Inheritance - the average inheritance amount that baby boomers may expect is $64,000. This is a large number when placed in the context of average net worth that is less than $250,000.
Family - support from immediate and extended family may be considered.
Charity - charitable contributions may supplement retirement income.
Financial Capital
Savings - William can push the imaginary rewind button and go back in time to save more or create assets (such as a privately held business) that are potential sources of cash flow when he is no longer working.
Health Care Expenses - a big, big factor to consider.
Pension Income - while not an option for many, it is worth acknowledging the importance and potential impact of pension income.
Home Equity - a large asset on most personal balance sheets that can be a source of cash flow through products such as a reverse Mortgage.
Interest Rate Assumptions - how might interest rate changes affect the picture.
Investment Return Assumptions - how do changes in stock and bond return and volatility assumptions affect retirement planning.
Asset Allocation - changes in asset allocation can have a large impact.
Sequence of Returns Risk - a real retirement risk that is directly impacted by volatility and asset allocation decisions.
Financial Legacy – there is a fundamental trade-off between retirement sustainability and the amount William would like to leave to his heirs.
Annuities - how an annuity may impact William’s financial profile.
