Income Replacement Fallacies
by Richard
In an earlier post on the new managed payout funds, the focus was on the mechanics of a managed portfolio that would provide steady retirement income, without the creaky and cost laden structure of an annuity.
But it also brings to mind the fallacy that infects the thinking of many heading into retirement, who have an exaggerated notion of how hard their money will work in replacing their workplace income.
You may, from time to time, disparage your job, and yearn to be set free.
But be careful of what you wish for.
Using 4% as a “safe” withdrawal rate on a mix of retirement assets, you may not be in such a hurry to tell the boss to “take this job and shove it” as you slam the door on your way out.
Let’s first examine a salary very close to the median family salary today….$50,000. What would it take to plug the gap if you left in high dudgeon?
More than You Think
At the 4% yield just mentioned, it would take a cool $1.25 million invested in CDs to throw off the same cash flow. Maybe the old ball and chain is not so oppressive as you once thought.
But reality intrudes, and it’s often not solely your decision. Businesses today run lean and mean, and the art of downsizing has been honed to perfection. When your old firm is bought out, redundant positions are eliminated, and the acquiring firm will choose the survivors.
The cold math skews the equation. If you are in your mid-fifties, maxing out your pay range and benefits, you can be replaced with a younger Millenial employee at perhaps half the outlay.
I know. There ought to be a law. There is a law.
But there is no amount of age discrimination protective legislation that can impede a company intent on controlling their biggest expense….salaries. Highly skilled and highly compensated consultants will walk the company through this minefield.
Part-Time…with benefits…
In my experience, many newly surplused and downsized workers tend to think of retirement as being an all or nothing proposition. But this view should be tempered with a healthy respect for your own version of voluntary downsizing.
You may not want the pressures of trying to hang on to your perch in a hostile workplace environment, but you might want to dust off your old credentials and skills and carve out a 3 or 4 day work schedule that may not produce a breadwinner’s salary, but that gives you a halfway house from which you can continue to receive health insurance, 401ks, and all the other benefits of employment.
Your new $30,000 replacement salary is a significant step down in both pay and prestige, but when we crank up our 4% yield comparison, it replaces $750,000 in retirement assets that can continue to grow and compound, and lets you decompress in stages.
You must always focus on the alternative. It’s either you working for money, or your money working for you. Dollars are fungible. They don’t care where they came from.
The future can be capricious. We never know how long we will enjoy the benefit of good health and employability. But large numbers tell the story from the other side.
Take Advantage of the Labor Crunch
Employers are facing a demographic challenge. So many baby boomers are becoming eligible for retirement that essential staffing is threatened in a wide swath of industries.
The irony is that the same company that was on the warpath to cut costs and clear out the older employees will be forced to come hat in hand, hoping to entice the same workers to return. Serves them right.
Do it on your own terms, and for your own good reasons.
Keep your powder dry for the day when you have no other options.
