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I was in a groovy mood last night, so I decided to look at retirement planning through the prism of the grooviest music of all time—the music from the psychedelic 60s. Can I get a “woot woot” for Janis, Jimi, Mick, and the Lizard King? Yes, I know that’s weird. And, no, I wasn’t smoking mother nature or channeling my inner Timothy Leary. Just hear me out.
The Sunshine and Lollipops Approach to Retirement
Okay, my first approach to retirement is courtesy of Lesley Gore. I call it the Sunshine and Lollipops approach. And under this approach, nothing goes wrong. Mrs. Groovy and I remain in exemplary health, my pension is paid in full, and the taxpayers never chafe at the cost of my Obamacare subsidies—regardless of how inefficient and ravenous the healthcare industrial complex becomes.
Under the Sunshine and Lollipops approach, Mrs. Groovy and I will need a portfolio of $512K to meet our unfunded living expenses in retirement. Check out the numbers.
| Annual Living Expenses | $63,376 | |
|---|---|---|
| Less Mail Box Money and Healthcare Subsidies | ||
| New York State Pension | $19,500 | |
| Obamacare Subsidy | $23,376 | |
| Total Mail Box Money and Healthcare Subsidies | $42,876 | |
| Unfunded Annual Living Expenses | $20,500 | |
| Retirement Target Amount Based on a 4% Withdrawal Rate (25 x Unfunded Annual Living Expenses) | $512,500 |
But what if something goes wrong? What if Mrs. Groovy or I suffer a serious illness? What if the Millennials grow a pair and decide to smite the excesses of the Baby Boomers?
If the proverbial poop ever hits the fan, the Sunshine and Lollipops approach to retirement won’t fare too well. So let’s look at an approach to retirement that accounts for the misery and folly that so often intrudes upon man’s hopes and dreams.
The Eve of Destruction Approach to Retirement
My second approach to retirement is courtesy of Barry McGuire. I call it the Eve of Destruction approach. And under this approach, a lot goes wrong. New York’s fiscal woes worsen and my pension gets a haircut; Obamacare implodes and its replacement offers much smaller subsidies; and Mr. Market decides to bestow returns that are a notch below Wall Street’s historical average.
Here, then, are my assumptions for the Eve of Destruction approach.
- New York’s pension plan is only 88% funded as of now. I will thus assume a 12% haircut. (If you want to know how underfunded your state’s pension plan is, here’s the link.)
- Our country’s national debt is close to $20 trillion. We can’t afford to give healthcare subsidies to rich and middle class people. I will thus assume a 50% cut in my Obamacare subsidies.
- Because Mr. Market will be less generous going forward, I will thus assume a safe withdrawal rate of 3% rather than 4%.
Okay, under the Eve of Destruction approach, Mrs. Groovy and I will need a portfolio more than twice the size of the Sunshine and Lollipops portfolio to meet our unfunded living expenses. Ouch!
| Annual Living Expenses | $63,376 | |||
|---|---|---|---|---|
| Less Mail Box Money and Healthcare Subsidies | Lollipop Amount | Reality Adjustment | Eve of Destruction Amount | |
| New York State Pension | $19,500 | 88% | $17,160 | |
| Obamacare Subsidy | $23,376 | 50% | $11,688 | |
| Total Mail Box Money and Healthcare Subsidies (Eve of Destruction Amount) | $28,848 | |||
| Unfunded Annual Living Expenses | $34,528 | |||
| Retirement Target Amount Based on a 3% Withdrawal Rate (33 x Unfunded Annual Living Expenses) | $1,139,424 |
But what will happen 12 years from now when Mrs. Groovy and I are eligible for our full Social Security benefits? Will the Eve of Destruction approach to retirement look just as scary?
Oddly enough, it doesn’t. Here are the numbers.
Note: I use the same haircut percentage for my pension and healthcare subsidies. For my Social Security haircut, I use 21%. That’s what the trustees say it will be when the Social Security Trust Fund runs out.
| Annual Living Expenses | $104,055 | |||
|---|---|---|---|---|
| Less Mail Box Money and Healthcare Subsidies | Lollipop Amount | Reality Adjustment | Eve of Destruction Amount | |
| New York State Pension | $20,500* | 88% | $18,040 | |
| Social Security Benefits | $44,136 | 79% | $34,867 | |
| Medicare Subsidies | $47,025 | 50% | $23,512 | |
| Total Mail Box Money and Healthcare Subsidies (Eve of Destruction Amount) | $76,419 | |||
| Unfunded Annual Living Expenses | $27,636 | |||
| Retirement Target Amount Based on a 3% Withdrawal Rate (33 x Unfunded Annual Living Expenses) | $911,988 |
Final Thoughts
In 2003, Mrs. Groovy and I refinanced our condo so we could use some of its built-up equity to remodel our kitchen and bathroom. The appraisal report for our new mortgage showed that our condo had tripled in value. And I remember being very leery of that valuation. How, after all, did our condo triple in value in 6 years? Had Long Island’s mean household income tripled in value since I bought it? My household income certainly hadn’t—even with the addition of Mrs. Groovy. So what was going on?
I instinctively knew that the run up in housing prices was a lie. Our underlying economy simply wasn’t strong enough to sustain such a fantasy. And fortunately for Mrs. Groovy and me, we sold our condo just before the fantasy came crashing down.
Well, I don’t mean to be a nattering nabob of negativity, but I feel the same sense of foreboding about our pensions and entitlements as I felt about our housing market in 2003. I just don’t see how our underlying economy will ever be strong enough to support all of the promises. Something will have to give. And my advice to you is to prepare for the worst. Please take an Eve of Destruction approach to retirement planning. Better to have a nest egg that is too big in retrospect than to have one that is too small.
Okay, groovy freedomists, what say you? Are our pensions and entitlements sustainable? Will hollowing out our military and offering refuge to tens of millions of more migrants solve the problem? Or am I just being an abject fool for having so little faith in our political and cultural elite? I’d love to hear your thoughts. And, more importantly, I’d love to hear what approach you’re taking to retirement planning. Are you going the Sunshine and Lollipops route? Or are you going the Eve of Destruction route? Peace.
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