Solvent Seniors and the Matrix of Misery

Will we make it through retirement?

That question dominates my email as readers try to figure out how the recession, low interest rates and a dismal stock market will affect their future.

Without a crystal ball, the best tool is financial planning software. It can be used to explore “what-ifs.” It can show how higher inflation or lower returns will affect our future standard of living. In this case I decided to use the free, online version of  ESPlanner, called ESPlanner Basic. I use the full version for my own planning because, quite simply, it is the most powerful financial planning software yet created.

Most financial planners use long term average returns when they do financial planning. They do this because, like the rest of us, they don’t know the future. The averages would call for a return on stocks of about 11 percent, a return on savings of about 5 percent and an inflation rate of about 3 percent. Yes, I know those returns sound weird today, but that’s the historical reality.  Planners used the same averages in the 90s when everyone thought a good stock doubled every month.

Meet the Prospects, a newly retired 67-year-old couple. They own their $200,000 house free and clear. They have $200,000 in savings and $400,000 in retirement accounts. They have no pensions, but their combined Social Security income is $27,000 a year. The all-in expenses for their house are $10,800 a year and their Medicare premiums are $96.40 a month.

Are they rich? No. But they aren’t poor, either.

How much spending power will they have over the next 25 or 30 years? Using a conventional planning spending rate of 4 percent of their financial assets, the Prospects will have about $38,686 a year— after income taxes, Medicare, and shelter expenses.

ESPlanner Basic is a bit more generous because it assumes the Prospects “spend down” their savings to run out of money when they die at age 100, an improbable event. They’ll have $41,949 a year of constant purchasing power to age 100. It’s a modest 8.4 percent increase over conventional planning.

But what if future returns are lower and/or future inflation is higher? Suppose PIMCO’s Bill Gross is right about what he calls “the new normal”?

Well, if future stock returns are 7 percent and yields are only 2 percent, the Prospects’ lifetime spending power drops to $30,027. That’s a 28 percent decline. If inflation rises to 5 percent at the same time, the Prospects’ lifetime spending power drops to $21,837, a decline of 48 percent.

If things are still worse— a stock return of 5 percent and a savings return of 2 percent while inflation rises to 5 percent— their lifetime spending power falls by 55 percent to $18,745 a year (The table below shows the spending power for this couple using three different return assumptions and 4 different inflation assumptions.). It’s not a pretty picture.

Worse, these figures are optimistic because they assume constant returns rather than the real and damaging ups and downs of the markets. (This can be done with the commercial version of ESPlanner.)

The Prospects aren’t average Americans. They’re Solvent Seniors— people who have planned, saved and avoided (or overcome) the life disasters in health, marriage and employment that cause other workers to retire with little more than Social Security. Yet, in spite of their $800,000 net worth, a future of lower returns and higher inflation would basically leave them with a standard of living after shelter no higher than their Social Security benefits. Their entire net worth would be used to maintain their shelter and pay their Medicare expenses and taxes.

When I shared these results with Professor Laurence J. Kotlikoff, the Boston University economics professor whose firm produces the software, he simply said, “I’m shocked.”

This is not an apocalyptic vision. It’s output from a computer program based on assumptions that continue the “Hood Robin” policies of the Federal Reserve, suppressing yields on savings so banks can make money hand over fist.  It’s wildly optimistic when measured against stock returns over the last 10 years.

What does it mean?

If you’re a senior—or about to be— it may be time for “The Million Senior March on the Federal Reserve.” If you’re ready to march, let me know— send an email with “I’m ready to march” in the subject line to

Understanding the Matrix of Misery

This exercise, done with ESPlanner Basic, which you can use for free at, assumes a 67 year-old couple owns a $200,000 house mortgage free, has $200,000 in taxable savings, $400,000 in retirement plan savings, and no pension. It assumes Social Security benefits of $1,500 a month for one spouse and a $750 a month for the other, for a total of $2,250 a month or $27,000 a year. It assumes home operating expenses of $10,800 a year, that the spouses live to age 100, that they exhaust their financial assets, but leave their house as their estate. The historical portfolio assumes a return on fixed income savings of 5 percent and a return on stocks of 11 percent. The low return portfolio assumes a return on fixed income of 2 percent and a return on stocks of 7 percent. The very low return portfolio assumes a return on fixed income of 2 percent and a return on stocks of 5 percent. All three portfolios are 60/40 equities/fixed income. Rates of inflation are specified in the table.

The dollar figures below are the amount per year the couple could spend, in constant dollars, after they had paid income taxes, Medicare premiums, and shelter costs. The figures in bold are lower than their $27,000 a year in Social Security benefits— in spite of the fact that these retirees have $600,000 in investment assets and own their home free and clear.  In this case, more than 100 percent of their investment assets are being used to cover taxes, housing expenses, and Medicare Part B premium.

The $41,949 is the sustainable spending arising if the couple earns the historical nominal rates of return.  The figures in parentheses show the spending for the case in question expressed as a percentage of the $41,949.

The Matrix of Misery:
What Low Returns Mean for Solvent Seniors

Inflation Historical Portfolio Low Return Very Low Return
2 $46,038 (110 percent) $34,487 (82 percent) $31,163 (74%)
3 $41,949 (100 percent) $30,027 (72 percent) $26,757 (64 percent)
4 $38,142 (91 percent) $25,892 (62 percent) $22,578 (54 percent)
5 $34,587 (82 percent) $21,837 (52 percent) $18,745 (45 percent)