Retirement Planning Silver Bullets, Part I (of 2)

Moving truck A recent Wall Street Journal article by Karen Damato entitled, “Retiring in 10 years? Uh-Oh,” addressed a justified fear striking the hearts of millions of prospective retirees: that they won’t be able to afford to retire.  The article is well founded and focuses largely on the investment aspects of retirement planning—the schizophrenic battle in retirement nest eggs to seek growth to make up for past losses while attempting to adequately ensure capital preservation.  The focus of this first of two posts is to provide you with one of the most powerful things you can do, OUTSIDE of your investment portfolio, to improve your retirement plan: MOVE.

If you are already retired or planning to be so within the next 10 years, as the WSJ article clearly articulates, you cannot solely rely on compounded portfolio growth to save you.  Additionally, you may find yourself on the wrong end of the real estate bubble with substantially diminished equity in your home and more debt than can be floated without a salary (and a dwindling desire to perpetuate that salary).  What’s left? MOVE, to a lower cost of living area.

This maneuver is especially compelling when contrasting the highest cost of living areas with the lowest.  According to www.bestplaces.net, an online resource estimating the cost of living in areas across the country, the median home price in Chevy Chase Village, a DC suburb in Maryland, is $1,022,570 and the cost of living is 166% higher than the U.S. average!  Whereas, the median home price in the Great Recession bludgeoned, Detroit, is $65,440, with a cost of living 23.30% lower than the U.S. average.

But if that comparison appears all too convenient and unrealistic, consider this contrast: Baltimore suburb, Parkton, MD, boasts a median home price of $444,350 and a cost of living 54% higher than the U.S. average.  Meanwhile, Knoxville, TN, the engaging home of the University of Tennessee, has a median home price of $125,930 and a cost of living 15% lower than the national average… and it doesn’t snow as much.

Let’s picture a prospective couple in Parkton, trying to figure out their plan for retirement:

In Parkton

  • Home now worth $500,000o
  • $200,000 — mortgage (from college costs and home improvements when house was worth $600,000 and rising)
  • Need $100,000 of income to cover annual expenses
    • Mortgage principal and interest payment ($200k loan @ 5% for 15years) = $19k per year
    • Income need less mortgage = $81,000o
  • Took pension lump-sum offer, invested in 401k, total retirement assets of $800,000o
  • Social Security plus 4% withdrawal from retirement accounts = $50,000 (50% of estimated need)

In Knoxville

  • Comparable home purchased for $200,000—mortgage free
  • $100,000 additional net proceeds from home sale added to retirement nest egg, now $900,000
  • According to cost of living ratio, $45,360 income in Knoxville would feel like $81,000 in Parkton
  • Social Security plus 4% withdrawal from retirement accounts = $54,000 (119% of estimated need)

If you find yourself in a retirement planning pickle, I’m not suggesting you read this and put a for sale sign in your yard.  COST of living should not be confused with QUALITY of living, and if your geography and proximity to friends and family is where you derive the most joy, it’s not my suggestion 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 plan into one that is quite comfortable.

Part Two (of two) of Retirement Planning Silver Bullets will be released on Friday, December 10th.

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2 thoughts on “Retirement Planning Silver Bullets, Part I (of 2)

  1. GREAT piece! I found it very interesting and thought provoking. one thought is what would $50k and $54k be in Knoxville dollars? I think a comparison like that would show an apples to apples demonstration on how much higher of a standard of living someone in htat situation might find themselves in.
    keep them coming!
    – Rodney307

  2. Thanks, Rodney. The discount, specific to this particular analysis–of Knoxville, TN and Parkton, MD–is about 0.56. So hypothetically, dividing $50,000 by .56 would suggest that $50k in Knoxville would be the equivalent of $89,285 in Parkton, MD. $56,000 in Knox would be an even $100,000 in Park!

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