This is a Worst Case Scenario

Jun 1, 2020 David Kennon

Social Security is not going broke.
Inflation is not going to bankrupt you.
Medicare covers more than you realize.
Your savings may go further than you think.
You don’t need a million dollars to retire.

Now that we have that out of the way, let’s get pessimistic.

For about 50% of retiring Boomers, as soon as you retire you need to start spending a reasonable amount of savings each year. My rule of thumbs is to “spend the money the money is making.” If your CD is paying 2%, spend the 2%. If you stock and bond portfolio is returning an average of 5%, spend the 5%.

“But Dave,” I keep hearing, “nobody can guarantee the future. While what you say is logical and sensible, you never know what might happen.”

Ok. If that’s the way we want to think, let’s go down that road.

Story #1

Joan Smith retires and starts spending her money in a responsible and reasonable manner, making sure never to spend the principal, but enjoying the interest and dividends her investments paid out.

She uses the money on things she enjoys- things that are important to her. She spends more time with the kids and grandkids. She spoils herself at the spa from time to time. She goes out to dinner with friends. She confidently lives her retired years, knowing that she has a plan in place.

In fact, as she reached her late 70’s she really started to spend some money (“You can’t take it with you”, she always said.). She bought a small condo for her sister who was recently widowed. She organized and financed a large cruise/family reunion with her extended family. Sure she was spending the principal, but she figured, “I’m not going to live forever.”

Then it happens. Early in her 90’s the money starts running out. “I never thought I would live this long,” she quipped. She was reduced to living on her social security, small pension, and the small amount of money left over.

Is she thinking to herself, “What a horrible mistake! I had such a great retirement. I enjoyed my kids and grandkids. I deepened relationships with people I love most. I helped people in need. But now here I am, living on a small fixed income.”?

Do you really think she would have looked upon her retirement spending as a mistake? Do you really think she will look back on her life with regret? Of course not! She’s 92 years old. Her bucket list has been achieved. She might not live high on the hog anymore. But she’s 92 years old.

Story #2

Jane Smith has found herself in financial trouble. After making a few poor decisions (including investing in a new apartment project in Puerto Rico), she found herself with very limited savings in her late 60’s. Her daughter offered to let her Mom move into their home.

“This is my worst nightmare,” Jane thought to herself. “I am a burden to my children. I can’t believe this is actually happening to me.”

But, as Jane settled into her new life living with her daughter, son-in-law, and three grandkids, she discovered something awesome.

Living with her daughter was a joy. Her grandkids desperately needed more attention from their busy parents, and Jane was able to help out.

Her daughter felt blessed for helping out her Mom. Jane’s grandkids will be forever changed by her presence in their life. “Life is funny,” Jane chuckled to herself. “My worst fear ended up being one of the best things that ever happened to me.”

Story #3

John Smith always worried that the economy was going to collapse. Once he retired, his worries got even more intense. “I’m not going to spend a nickel unless I have to. I am going to grow and defer this money as long as possible. Because you just never know….”

Well, in this example, John’s fears came true. The economy faltered. In fact, the country started to experience such economic devastation that the landscape of the U.S. started to look more like the Great Depression than the 21st century.

Banks began to fail. People, desperate for their money, begin rioting and looting. The stock market drops 80%. A majority of Americans begin to default on their mortgages. 30% of the population is homeless. Marauding bandits fill the streets, making a simple trip to the store an exercise in hand to hand combat.

John saw his investments and cash evaporate. The nightmare he had always imagined had arrived.

So my question is: Did it matter that John deferred and grew his savings? No. No, it did not.

If this scenario were to actually happen, we are all in the same boat. 

In fact, if anything, John missed out on the only chance he had to enjoy the money. By the time economic Armageddon arrived, he lost everything anyway.

Story #4

Janice Smith always worried about needing nursing home care. She never spent a penny of her savings. 20 years into her retirement, Janice developed dementia and ended up in a 24/7 nursing care facility.

The nursing home used up all of her money over the next few years. Janice, with the disease progressing, was completely unaware that her life savings were being drained. Looking back, maybe Janice should have used some of the money on things that were important to her while able.

Who do you want using your money?

You.
The government.
A nursing home.
Your good-for-nothing son-in-law. (after your daughter inherits the money)