Example Retirement from Money Magazine
26 July 2006Money Magazine has an interesting exercise in which they look at a real family approaching retirement, examine their income, and give them advice on what they should do. They profiled Calvin and Daisy Dixon, a doctor and his wife who are 57 and 56, respectively:
Calvin’s income fluctuates, and in 2005 it topped $200,000. Each year Calvin makes the $12,500 maximum contribution to his Simple IRA, a small business retirement plan.
Daisy, a medical technologist, works part time for Calvin and draws a salary that covers her IRA contribution.
Last year they gave $40,000 to charity, spent $35,000 on home improvements and saved another $7,200.
In retirement, the Dixons would like an annual income of $96,000. To cover that, they have $335,600 spread among different IRAs and brokerage accounts.
About 65% of their money is in stocks (nearly all large-caps), 18% is in bonds, and 17% is in cash. They’re also planning to sell Calvin’s practice, which they value at $200,000.
They are in poor shape at the moment for the retirement income they want. CNN’s advice centered around saving $55,000 a year until age 65, which would give them enough money to meet that goal. The article gives them some good advice, such as making their son pay for his own graduate school and partnering with a younger doctor so he can sell his practice early. I would add:
1) Cut out the charitable giving. It sounds harsh, but let’s be realistic - if you’re giving $40,000 a year in charity and not saving for your retirement, you’re doing something wrong. For some people this won’t emotionally be an option - but I would suggest either paring it back or getting rid of it entirely and willing a large chunk of your money to charity when you die. There are also plenty of alternatives to giving away money if you want to do your share of good deeds, especially for a doctor. Why not volunteer to service poor communities for free in your spare time? Or stop giving to charity for 8 years until retirement, and then volunteer to keep yourself occupied and salve your conscience. I’m not saying that people who want to give to charity should cut it out entirely, just that you should not ruin your financial planning when doing it.
2) Cut out the home improvements. $35,000 a year? That’s 10% of their current retirement savings - way too much to blow on improving the house. And even under their ambitious plan, they’re going for a nest egg that will give them income of less than half what they earn now - a pretty big drop in quality of life.
Between those two, they’d have another $75,000 a year - enough that they could exceed the recommended plan of $55,000 a year and live much closer to their current spending levels.
While it won’t do anything to help the Dixons, I think their story should serve to caution younger people about the problems with waiting until the last minute until starting to retire. If they didn’t make over $200,000 a year, they would be hopelessly in trouble for retirement with that level of savings. Most people won’t make that much - and if you don’t start looking at retirement until your 57, it is much harder to save what you need in that short a time period. It’s a lot easier to do it over 40 years than it is to do over 8, even if you’re making a lot less money. They have a tough, doable task ahead of them, but many Americans find themselves in a hole too deep to dig out of at that age.
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