Die Broke -- on Purpose: An Unconventional Retirement Plan

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This will probably come as a shocker to most people: Three economists from leading universities have found that "a substantial fraction of persons die with virtually no financial assets -- 46.1% with less than $10,000 -- and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support."

Got that? The findings, in a paper published by the National Bureau of Economic Research show that a huge portion of America is relying almost completely on Social Security, and that they die with hardly any money to their name.

Awful ... or Awesome?

Dying broke probably sounds just awful. But it doesn't have to be.

In fact, it should almost be a goal to which we all aspire. For many of us, a perfect financial life would be one in which we amassed exactly the amount of money we'd need in life, and in which we ran out of money the day we died.

After all, what's the sense of dying with lots of money in the bank? You can't take it with you.

The reality of those who do die broke isn't as neat and clean, though. The professors' data reflects millions of Americans not living perfect financial lives, but instead struggling to get by in retirement. They don't end up running out of assets on their last day, but long before it.

For a clearer picture of the situation, know that the average monthly Social Security benefit (as of early this year) is $1,230. That's $14,760 per year. Can you imagine yourself living on that – or, let's even up it a little, on, say, $20,000 or $25,000 per year?

Even if you can imagine it, would you want to live that way? Probably not.

Problems with the perfect plan

As nice as it might be to run out of money on the day you die, there are a few problems with that plan.

  • You don't know exactly how long you're going to live, so you don't know if you need to have ample funds for 10 years or 50 years.
  • You also don't know exactly how much money you'll need for the rest of your life. Sure, you can estimate it based on your expenses and assumptions, but a single medical emergency can eat up a big chunk of your nest egg, as can various other surprises.
  • You might actually want to leave a big pile of dollars behind, for your loved ones.

Given all that, the bottom line is that you probably need to accumulate a lot of money for your retirement -- just in case you have high expenses and just in case you live a long time.

Many experts suggest that when it comes time to live off your nest egg, you should plan to withdraw about 4% of it in the first year, and then adjust for inflation annually. Thus, if you're looking for income of $40,000 per year, you'll need a million dollars. (Remember that everyone's needs are different -- you might want more income than that, but you might also be expecting some Social Security income and perhaps even some pension money to make up some of that income.)

Make the 'Die Broke' Plan Work for You

If you're reading this wishing you'd started saving for retirement aggressively many years ago, don't freak out. All is not lost, no matter how imperfect your current financial situation may seem.

There are still a bunch of ways that you can make your retirement much more comfortable. Here are some of the main ones:

• Save more aggressively. The old rule of thumb to sock away 10% of your income is too low for many people. Aim for 15%, or even 20% or more, if you can. And remember that due to the ability of money to grow over time, the dollars you sock away today will likely contribute much more to your retirement than dollars you sock away next year or in five years. So don't put it off.

Invest more effectively. Keeping everything in a bank account isn't investing -- with interest rates below the average rate of inflation, you're actually losing buying power every year. Bonds are appropriate for those in or near retirement, but ideally in combination with stocks, which usually build wealth much faster. Within the stock world, you needn't take chances on obscure potential high-fliers, either. Over long periods, healthy, growing dividends can build great wealth. And if all goes well, the dividend payouts will rise over time, as will the stock prices, too.

• Retire a year or three later than you've been planning to, if possible. The benefits are many: For each extra year you work, you'll keep workplace benefits such as health-care coverage, and won't have to pay for them. You'll also delay tapping your nest egg for money to live off. And ideally, you'll be able to contribute to the nest egg for a few more years, as well. Meanwhile, for every year that you delay starting to receive Social Security benefits, they'll go up about 8%. Delay three years, and you'll collect roughly 24% more. That's a big difference!

• Cut costs. Another way to make your retirement fund last longer is to use less of it each year. You might move into a smaller house, for example, or to a region with a lower cost of living. You and your partner might make do with one car in retirement, instead of two, saving money on insurance and upkeep. And if you've been supporting some grown and able children or grandchildren, you might rein in that spending, too.

Some or all of these moves can have a powerful effect on your financial condition now and in retirement. You don't have to be among the 46% who die with more worries than dollars.



Selena Maranjian is a longtime contributor to The Motley Fool. You can follow her on Twitter here.


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Melissa Li

Why do you think people in retirement will fare better than they did while working? If you are living paycheck to paycheck while you are working, retirement isn't something you look forward to. People who live well while they are working will likely live well in retirement. We all may have been created equal, but from that point forward, people are not equal at all. Stop looking so shocked.

Saving just $50/month (average cost of cable TV subscription) with a 5% return would result in savings of over $95K after 45 years. While that is certainly not enough to retire on, it would be a nice supplement to one's social security. For a little perspective, the stock market has given a 7% real (inflation adjusted) return over the last 45 years. Using a 7% return, the investment would result in over $170K.

Think about it, give up cable tv and have nearly $100K when you retire. Buy a less expensive car and save another $50/month and retire with $200K to supplement your SS. You can even look to get better rates on stuff like insurance (I pay $25/month from Insurance Panda) to save even more. You just gotta cut corners where you can and save whenever possible.

Unfortunately, most people in America won’t even give up their “dog sitters” and “luxury manicures”, let alone put away a few dollars in the bank.

May 26 2014 at 2:21 PM Report abuse rate up rate down Reply
yocoty

I would rather die broke than have the government take whatever is left.

February 08 2013 at 1:05 AM Report abuse +1 rate up rate down Reply
gmydogbud

To Die Broke, is not hard to do if you are an American Citizen. Talked to a woman a few years back who had a Grandparent in an Assisted Living which was costing THREE THOUSAND DOLLARS PER MONTH and I thought that was an out of sight amount to pay, talked to some else a month ago and learned that amount has gone up to FIVE THOUSAND DOLLARS PER MONTH! So you see to Die Broke If You Are A LEGAL AMERICAN CITIZEN - Our Government will see to it that you will be able to do that without even trying! Doing The Right Thing In This Country = Being PUNISHED. If however you are an ILLEGAL ALIEN & Have An Anchor Baby Why Then Our Government Forces The American People To Spend Trillions On You - Why They Even Want To Make It Possible For You To Have The Right Of An American Citizen - The VOTE! Where Have We Gone WRONG!!! Is There No One To Stand-up & Protect The American Tax Payers??

August 18 2012 at 1:07 PM Report abuse +1 rate up rate down Reply
...and a bullet

I'm going to start a new club, called the Seniors Criminal Club, if your over 70 and just getting by, commit crimes to gain the extra cash. And if and only if when you get caught the Feds and the State has to feed you and house you with medical care also for the rest of your life. I mean, what the hell right. Its a plan.

August 15 2012 at 10:35 PM Report abuse rate up rate down Reply
curtisdacrab

what a pile of manure. the easiest way to retire and not worry about money(except should the government do more stupid stuff and break the country) is to save 10% of your income, invest it in wise and safe choices, always live within your means(income), have no debt when you retire and live high on the hog till you pass on.
it ain't had if you have the desire and will and the self control. unfortunately Americans don't have these assets.

August 15 2012 at 7:17 PM Report abuse rate up rate down Reply
Eric

I could live on that SS amount if I weren't making a house payment, which I don't plan to do when I retire. It wouldn't be fun, but based on my current spending I see it could be done. I save at least 15% of my income now, up to 30% some years. I started around 10%, putting $2000 into an IRA each year in the early 1990s when my income was in the low $20k range. For retirement planning purposes I'm assuming I will live to be 90. I might need to adjust that, but since it is 50 years away, I have time to do so.

August 15 2012 at 4:38 PM Report abuse rate up rate down Reply
MarkD

Well, there are only three alternatives: Die before you hit retirement age. Save enough to live in retirement. Don't save enough to live in retirement.

The comments show a lot of us headed for the third option. The advice, like it or not, is sound. Everybody can't take it, but I will note there are a lot of people driving new luxury vehicles and taking nice vacations and some of them are not saving enough. to live on later in life. They will, of course, have been unable to save.

You don't have to like reality, or even agree with it. You do have to live it.

August 15 2012 at 3:19 PM Report abuse rate up rate down Reply
Alec Sevins

The whole idea that nature owes a safety net to endless numbers of people is a false assumption of modern times. If we had a "steady-state economy" instead of one based on the mindless growth of debt, there might eventually be enough real wealth to go around.

August 15 2012 at 3:04 PM Report abuse +1 rate up rate down Reply
janescriv

So just what are the exact stats on the percentage of Americans who die broke or close to it? And is it, "Use all your money before you die" - or, "Die because you have run out of money?" You know what I'm saying. What percentage of Americans have caused their own deaths once they have run out of money? We've had the benefit of modern medicine and dentistry, abundance of food, social programs to mitigate the ravages of extreme poverty - so we're living longer. For myself, those things have saved my life several times. Without modern dentistry I would have lost most of my teeth long ago in my 20s. Without surgery and antibiotics I would likely have died from an infected blocked sinus in my 30s. Without surgery, I would probably have died from blood loss due to huge uterine fibroids in my early 50s. Also, without surgery, I would have lost the use of my right arm several years ago. Now I'm nearly 60, and running out of money fast. So what choices are there for me now? I don't think we really want to go back to the way things were at the beginning of the 20th Century, dying off from flu epidemics, infections, inoperable diseases, malnutrition, workplace accidents, starvation. But I can't see this country ever agreeing to a system where a person of mature years can independently make the decision to say, "I've lived my life, I've done the best that I could, I can no longer support myself, and I'm ready to go back to God." And have access to a safe, minimally traumatic death. No, people will be finding ways to end their lives by various frightening and dangerous 'accidents' so that their families will not have to live with the stigma of a suicide. Others will just grab the gun and go for it. Or any of the other obvious ways to leave this earth. That is the situation that many in this country, perhaps even millions, are in now. Wouldn't it be interesting to know just exactly what is going on out there, instead of hiding our heads in the sand and saying, "We didn't know." We need to face these issues like adults, not like frightened children. There needs to be more options, more acceptance that death is the inevitable result of living, not some unnatural evil. Of course I realize that this has little chance of happening due to the also inevitable abuse such access to life-ending options with younger family members pressuring the old ones to depart. Sad but true. And so we are stuck with an almost equally inhumane approach to the end of life.

August 15 2012 at 3:01 PM Report abuse rate up rate down Reply
vivian

My dear Selena: You are blowing smoke with your advice. While your article accurately describes the financial lives of Americans like myself, 80 and living on $1,000 Social Security plus a pension of $700 a month, with a nearly depleted 401K fund of $15,000 in a money market fund at Vanguard, your advice is worthless for today's woman looking toward retirement in later years. Save 20% of one's income? Ridiculous. And many women might respond with "What income?" And this applies more and more nowadays to men, too. And invest in the stock market? or even the bond market? Only fools have any trust in THAT these days. You simply don't live in the same world as most of us, I suspect.

August 15 2012 at 2:54 PM Report abuse rate up rate down Reply
1 reply to vivian's comment
Weston

"My dear Selena: You are blowing smoke with your advice. While your article accurately describes the financial lives of Americans like myself"

If it applies to you, then how is she blowing smoke? How do you know how "many women might respond" if you aren't one of those women?

"And invest in the stock market? or even the bond market? Only fools have any trust in THAT these days."

And only a fool would assume that the United States will be in a continuous recession for centuries. The market and country will recover, investing in stocks now will pay out later.

August 15 2012 at 8:15 PM Report abuse rate up rate down Reply