Q. Many columns ago, you wrote that the 50s decade of life was the "make it or break it" decade. Well, I think I really messed up. I'm 57, invested in oil and gas mineral rights and subsequently lost $240,000. My broker also has me with $516,000 invested in life settlements.
I don't think I'll see much of that oil and gas money again. The life settlements probably won't pay off for a long time. I have about $100,000 in individual stocks (small and medium caps) and about $100,000 in my 401(k), to which I contribute the maximum. I plan on working as long as I can ($114,000 gross salary) which hopefully will be another 8 to10 years. I currently owe about 35,000 on my house. I have no other debt. Am I in bad financial shape?—C.B., by email
A. You’ve made some unfortunate investments (more about that in a minute). Your retirement situation may not be as bad as you think, however, because you won’t need an income of $114,000 in retirement.
You can estimate how much you’ll need by subtracting your share of the employment tax, 7.65 percent, your 401(k) contributions which could be a big slug of cash ($22,000 if you’re also taking advantage of the additional amount you can contribute as someone over 50), the mortgage payment on your house, and some amount for costs related to working. All of those commitments will be gone by the time you retire. As a result, the income you might need to replace in retirement could be as low as $75,000.
If you work until full retirement age, 67, Social Security benefits will bring in about $25,000 a year. That means your savings will have to replace only $50,000— and probably less because your income tax bill will be lower. Since you already have $200,000 and are saving a lot, your retirement income is likely to be somewhere between $50,000 and $75,000 even if your life settlement investments are worth zilch. It’s a fair bet, however, that many of those contracts will “mature” over the next 10 years.
A broker who puts $756,000 in illiquid and speculative investments knowing that your other liquid resources are only $200,000 is either an idiot or he is working to maximize his commissions regardless of what it does to his client. Don’t trust him with another dime of your money, ever.
Q. I, like probably most of the nation, thought we still had another 10 years or more before we were spending more than we were earning. Can't believe we're already there. That brings me to my question. I'm about to turn 57 and was planning on retiring when I'm 60 to 62. My plan was to delay taking Social Security until I was close to 70 so that my monthly checks would be much greater. But after reading your columns on government debt, I'm starting to think that I should probably start receiving checks as soon as I retire. Basically, I’d better get what I can, as soon as I can, because if I wait, who knows if I will get anything.
What is your guess on whether I should start as soon as possible vs. waiting? — B.Y., by email from Austin, TX
A. You might take benefits at 68 or 69, but deferring benefits is still a good bet. Social Security is not an all-or-none situation. It is a gigantic, slow-moving enterprise. It will be slightly short of revenue this year but that’s not to be confused with disappearing. Indeed, even if nothing was done and the system could only rely on employment tax revenue, benefits would not be reduced by more than 27 percent in 2037— 27 years from now.
Meanwhile, consider what might be happening to other sources of income at the same time, if Social Security actually had to cut benefits. It’s not a pretty picture. My bet is that something will be worked out for Social Security benefits and delaying them will continue to be advantageous for your personal financial planning. Remember, the real elephant in the room is Medicare. Its unfunded promises are a large multiple of the underfunding of Social Security.