You’ve heard that baby boomers, as well as Generations X and Y, are behind on their retirement savings, right? These demographics are regularly bludgeoned in the media and by the financial industry’s marketing machine for their negligence in saving for the future.
While some in the media are well-intentioned in their criticism, I can’t help but recognize the bias within the financial industry when it admonishes savers to save more — in their proprietary savings vehicles, of course. Because of this bias, the emphasis has always been on new and different ways to invest. And while I certainly do believe your investment strategy plays a very important role in the retirement planning process, it’s decidedly less important than two behavioral moves that can dramatically improve your retirement readiness.
The first retirement silver bullet may be the most powerful: MOVE, to an area with a lower cost of living.
The huge impact this maneuver can have on an investor’s retirement prospects becomes especially apparent when comparing the areas with the highest cost of living to the areas with the lowest. According to Sperling’s Best Places, an online resource that estimates the cost of living in areas across the country, the median home price in Chevy Chase Village, an idyllic Washington D.C. suburb located in Maryland, is $1.5 million. The cost of living there is 252% higher than the U.S. average. By comparison, the median home price in Great Recession-battered Detroit is $35,700. The cost of living there is a full 26.7% lower than the U.S. average.
But if that example appears all too convenient and unrealistic, consider this contrast: Washington D.C. suburb Alexandria, Va., boasts a median home price of $444,200 and a cost of living 55.5% higher than the U.S. average. Meanwhile, Knoxville, Tenn., the vibrant and colorful home of the University of Tennessee, has a median home price of $109,200 and a cost of living 19.3% lower than the national average.
Let’s picture a prospective couple in Alexandria trying to figure out their plan for retirement:
- Their home is now worth $500,000.
- They have a $200,000 mortgage (from college costs and home improvements).
- They need $100,000 in annual income to cover expenses:
- Mortgage principal and interest payment ($200,000 loan at 5 percent for 15 years) = $19,000 per year
- Other income needs, less mortgage = $81,000 per year
- They took a pension lump-sum offer, invested in a 401(k) and have total retirement assets of $800,000.
- Social Security plus a 4 percent withdrawal from their retirement accounts = $50,000, or 50 percent of their estimated need.
- They could purchase a comparable home for $200,000, mortgage free.
- They could add the $100,000 in net proceeds from the sale of their home in Alexandria to their retirement nest egg, now $900,000.
- According to the cost of living ratio, a $41,120 annual income in Knoxville would feel like their $81,000 income in Alexandria.
- Social Security plus a 4 percent withdrawal from their retirement accounts = $54,000, or 119 percent of their estimated need.
This is the set of choices our prospective couple is facing presented in chart form:
If you find yourself in a retirement planning pickle, I’m not suggesting you read this and immediately put a “for sale” sign in your yard. Cost of living should not be confused with quality of living. If your geography and proximity to friends and family is where you derive the most joy from life, I’m not suggesting that you have a financial duty to uproot. But, if you’ve reached a retirement plan dead-end and find yourself without options and a yearning for a refreshing change of pace, there is no question that transplanting your financial life to a lower cost of living area can transform a bleak retirement into one that is quite comfortable.
The second part of this series, which covers our retirement silver bullet #2: WORK, can be found here.
This commentary appeared July 11 on Forbes.com
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