Himalayan-sized goals freeze most of us in our tracks. We might stare at a cloud-shrouded peak. But doing a 180 and heading for the beach is a lot more appealing. Saving for retirement is a lot like that. It’s easier to bury our heads in the sand.
Alicia H. Munnell, Anthony Webb, and Wenliang Hou wrote, “How Much Should People Save?” for Boston College’s Center for Retirement Research. Their findings say that we need 70 percent of our working income to retire comfortably.
CNN Money reported that the median U.S. household earned $53,657 in 2014. Seventy percent of that is $37,559. But the average couple on Social Security receives just $25,681 per year. So, if the typical retired couple wanted to live on 70 percent of their working income, about $12,000 a year would have to come from investments.
To generate $12,000 a year, a retired couple would need a $300,000 investment portfolio. That’s based on a sustainable 4 percent withdrawal rate. For most people, that portfolio size might as well be Everest. According to the Center For Retirement Research, the median American household approaching retirement has $111,000 in retirement accounts, including IRAs and 401(K)s.
So let’s think outside the retirement box. Better yet, let’s blow that box to bits.
Keep Your Home, Rent A Suite
Many people who haven’t saved enough consider a Reverse Mortgage. Such a program lets retirees live in their homes while a financial institution buys it back. The retiree can live in the house as long as they want. If they live a long time, they can come out well ahead. Such a solution, however, isn’t for everyone.
If you want to keep your home and pass it down to your children, renting a suite within your home could be a solution. The average American home is huge, by global standards. NPR reported that the typical U.S. home in 2006 was 2,349 square feet. It was only half that size in the 1950s. That means you probably only need half your house. By converting part of a home into a self-contained rental suite, a retiree could earn an extra $8,000 to $15,000 per year.
Redlands, California retiree Ingrid Smith (I changed her last name to protect her identity) owns a 1,300 square foot home. In the backyard, there’s a former garage that was converted into a small cottage. “I rent it out anywhere from $650 a week to $850 a month,” she says. “I prefer to rent it out for 6 to 12 months at a time.”
Ingrid could also easily earn $10,000 a year in a part-time job. Compare this to a portfolio of stocks and bonds. Based on a 4 percent withdrawal rate, she would need a portfolio valued at $250,000 to provide $10,000 a year.
Location, Location, Location
I love Numbeo.com. The site makes it easy to compare costs of living in different cities. Assume that you live in Portland, Oregon. If your home equity has increased, but you haven’t saved much, consider moving elsewhere.
Bend, Oregon, for example, isn’t far from Portland. Men’s Journal, rates it one of America’s best places to live. Three bedroom apartments in downtown Bend average $1,650 per month. In Portland, they average $2,689. By moving to Bend, a downtown renter saves about $1,039 per month. That’s $12,468 per year. To put that in perspective, that’s almost as much as the average American earns from Social Security. This is a game you can play---you might also find a desirable, lower cost city near your current home.
If you don’t have any money at all, consider retiring in Mexico. The Lake Chapala region, where I spent three months last year, is safe, cheap and culturally inviting. It started to become popular in early 1950s. Today, it has the largest community of American retirees outside of the United States.
Jim and Carole Cook have lived in Ajijic (a Chapala lakeside town) for eight years. “We spend about $1,600 a month down here,” says Jim. They take an annual trip to the U.S. They eat out a few times a week. And they rent a cute house in a complex with a shared swimming pool.
Such ideas are different. But writer Ray Bradbury gave words of wisdom to those who feared trying. “Don't think. Thinking is the enemy of creativity. You can't try to do things. You simply must do things.”
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat