Planning to Use Your Home as a Retirement Nest Egg? Not So Fast.

The Wall Street Journal - May 26, 2020

Like many people, my nest egg has taken a beating of late. My home, though, is paid off, and I like to think of this as my safety net in retirement. Is this a reasonable expectation? What are your thoughts?

This idea sounds comforting, but the Covid-19 pandemic highlights how the home-as-piggy-bank strategy can come up short.

Most people who hope to tap the value in their real estate have two options: trade down to a smaller, less-expensive home, or borrow against their equity. The first option could well result in lower annual expenses and a nice addition to your nest egg (again, assuming you walk away with a profit).

But timing is critical. A homeowner who might have been considering trading down this year or next suddenly has the coronavirus to contend with. Economic uncertainty, a sharp spike in unemployment, fears about simply walking out one’s front door—all are leaving many potential home buyers on the sidelines. Both Fannie Mae, the mortgage-finance giant, and (which is operated by News Corp., parent of The Wall Street Journal) are forecasting that home sales nationwide will fall about 15% in 2020.

Even in the long term, buyers might not be as plentiful as retirees hope. A study published last November by Seattle-based real-estate company Zillow estimates that about 21 million homes could hit the market through the mid-2030s as older Americans, including many baby boomers, pass away or search for new housing (such as assisted-living communities). Gen-Xers and millennials, though, might not be able or willing to absorb that many homes that quickly.

As for the second option, borrowing against your home could be tricky. A full-blown recession, whether as a result of the current downturn or one that occurs later, could push home values down, meaning you may not be able to pull as much money from your property as you wish. (Indeed, a survey published earlier this month by the Federal Reserve Bank of New York found that 44% of households expect home prices to decline in the coming 12 months.) A reverse mortgage is a possibility, but fees tend to be high, and the amount you can borrow depends on your age, prevailing interest rates, and your home’s value.

In short, your home isn’t a foolproof way to beef up your nest egg. If you must trade down, try to do so sooner rather than later. Given that many retirements today will last 20 years or more, it’s never too early to reduce expenses and shore up savings.

I first claimed Social Security at 66, my full-retirement age. I am now 70. I earned the maximum taxable income for 35 years. As such, I believe I should get the maximum payout from Social Security, which is $3,011 a month in 2020. But I received a letter from the Social Security Administration stating that I will get $2,896 a month. Who’s correct?

Most likely, the Social Security Administration is correct.

This figure—the maximum monthly benefit for a particular year—is, admittedly, a confusing one. That’s because the number changes from year to year. For instance, the maximum monthly benefit for a person who filed for Social Security at full-retirement age in 2018 was $2,788; in 2019, it was $2,861. And this reader is correct: In 2020, the maximum monthly benefit for a person retiring at full-retirement age is $3,011.

Why the difference?

Each of us, when we claim Social Security, will receive a benefit based on our highest 35 years of earnings. But to get the maximum benefit, you need to earn Social Security’s “maximum taxable income” in each of those 35 years, the maximum amount of income subject to payroll taxes.

That figure—maximum taxable income—keeps changing. It gets bigger. In 2000, the maximum amount of income subject to payroll taxes was $76,200; in 2010, it was $106,800; this year, it’s $137,700. As that figure rises, workers pay more in taxes, and, over time, pump up the benefit they receive when they eventually file for Social Security.

So, I imagine that, when you retired in 2016 at your full-retirement age, you received the maximum monthly benefit, which, at the time, was about $2,640. But that doesn’t mean that you get, or jump to, the current maximum monthly benefit of $3,011. Rather, your initial benefit has been increasing due to cost-of-living adjustments (and possible adjustments if you have returned to work since 2016). Those adjustments, apparently, are resulting in a monthly payout in 2020 of $2,896.

How can I get a quick estimate of how long my savings will last in retirement?

Spend a few minutes with Vanguard Group’s aptly named Retirement Nest Egg Calculator.

This tool asks you to enter four figures: how long you expect your retirement to last; your nest egg’s current balance; your estimated annual expenses in retirement (read: annual withdrawals from savings); and how your savings are allocated among stocks, bonds, and cash.

At this point, the calculator will run what’s called a Monte Carlo simulation, which looks at tens of thousands of hypothetical market scenarios (up markets, down markets, and everything in between) and gauges the impact on your savings in retirement.

Let’s say you enter the following figures: a 30-year retirement; a starting balance of $1.5 million; an asset allocation of 60% in stocks, 35% in bonds and 5% in cash; and an annual withdrawal of $70,000. The probability of this particular nest egg lasting three decades, according to the calculator, is 82%. Reduce the withdrawals to $60,000, and the probability jumps to 91%.

Of course, these probabilities are simply that: probabilities and not guarantees. As Vanguard notes on its site: “The future may contain scenarios that are better or worse than anything considered by this tool.” As such, “the results should never be the sole basis of your financial plan.” Still, if you’re looking for “quick,” this calculator can help.

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