Ms. Ghilarducci answers, “Why you should plan to retire at 62 and how much is enough?” in her recent book “How to Retire with Enough Money: And How to Know What Enough IsThis is the 6th book in our  Aging With Freedom book club review.  

Ghilarducci: Why should you plan to retire at 62?

Teresa Ghilarducci is a strong voice for improving retirement options for Americans. She is a thought-leader in our retirement security debate spanning the last decade. Her proposal to overhaul the U.S. retirement system was named by the New York Magazine as the best idea of the year in 2008. More on the specifics later.

Ms. Ghilarducci is a professor of economic-policy analysis at the New School for Social Research in New York.  Previously, Teresa Ghilarducci was at the University of Notre Dame for twenty-five years.

We enjoyed her book, How to Retire with Enough Money: And How to Know What Enough Is.  It is refreshingly simple, direct and unique among the slew of retirement planning books. In a nutshell, Ms. Ghilarducci advises:  

  1. Plan to retire at 62. The workforce may let go of you before you’re ready. Plan for it. If you can work after 62, great, but lower your wage expectations. Use that income to delay collecting Social Security. You may want to work until 70, but health challenges and employers don’t always cooperate. Remember, Social Security is insurance, not a retirement plan.  If you build your plans to retire at 62 and you can work later — do it!  Ideally, you want work to 70 and maximize your Social Security income but for your own security, build your plans to retire at 62. 

  2. Avoid too much debt. Don’t carry a mortgage beyond 15 years and try to keep it to 7 years. You don’t want debt in retirement.

  3. Save more, save more, save more.  Social Security alone is not enough to sustain a middle-class lifestyle, especially since people underestimate their share of medical costs after retirement. Medicare does not pay the full cost of healthcare.

  4. Avoid unneeded costs that will erode your savings. This includes avoiding commission-based financial planners.

  5. Downsize now.  Live, today, on 70% of your income. Ms. Ghilarducci warns that few will have a retirement income equal to what they are making during their working lives. Seventy percent is the highest rate most can hope to achieve. (See #3 above)

  6. Focus on staying healthy! Avoid illnesses such as diabetes, obesity, and osteoporosis as much as possible through exercise and diet. Health problems can undermine your savings because insurance doesn’t cover everything. Chronic diseases are expensive on many levels.
  7. Invest & Diversify:
      1. Max out your 401K or other employer-based retirement savings options. Invest in your 401K to get your employer match, and don’t pay high fees charged by actively managed funds! Comparatively few people take this advice, which is why Ghilarducci also recommends changes to federal law regarding retirement savings.
      2. Low-cost Index Funds. Invest ONLY in low-fee index funds. “…every 0.1 percent in (mutual fund) fees results in a 2 percent reduction in total return over ten years. So every 1 percent in fees leads to about a 20 percent drop— actually, a bit more, given that we’re dealing with compounding and its snowball effect.”  Low-fee index funds are all you need. The illustrations here are scary, compelling, and convincing.
      3. Diversify your asset allocation. Diversify your index funds in both bond and stock index funds. Begin with a 50/50 stock/bond mix.  Move toward heavier bond mix as you age. “Your annual portfolio review is about balancing risk and return, not about reacting to market fluctuations.”

If you’re already past 62, there’s even advice to deal with the realities of a job market where opportunities look more like those offered to 17-year olds. This steely realism and practicality are strengths of Ghilarducci’s book. You can’t just plan for the best case scenario.

How much to save?

This is the question for which everyone wants an answer. What’s your goal? Ms Ghilarducci recommends you plan to put away 8 to 10 times your annual earnings before you retire. This is assuming a 3-5 percentage annual withdrawal. But remember numbers 1 and 5 above. Plan to live on only 70% of your retirement income, while in retirement (allowing for taxes) and plan to retire at age 62.

The median annual income for those age 55-65 in 2014 was approximately $60,000. That yields a median retirement savings goal of $600,000.

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“By the day you stop working, if you’re like most people, you’ll need at least eight times your annual income in retirement accounts. Ten times is better. How do economists derive this figure? By assuming a 3 to 5 percent withdrawal amount each year. — ,” Teresa Ghilarducci

Ms. Ghilarducci likes the AARP calculator to estimate what you’ll need in savings. 

Ghilarducci also makes policy prescriptions for elected officials:

Social Security Tax Income Cap.

The solvency of Social Security is one of those public policy challenges hanging fire. It’s unresolved and the problem is getting worse as the baby boom demographic wave is already hitting Social Security with retirement and pre-retirement disability claims. Most of the debate seems stuck on either cutting benefits or extending the minimum retirement age. But remember most people don’t get to choose when they retire and Social Security only provides thirty-seven percent (37%) of income for the average American over sixty-five. We may live longer, but that doesn’t mean jobs are lasting longer. (See a recent Motley Fool article: Is This the Best Way to Fix Social Security?)

Ms. Ghilarducci presents a contrarian view of the dire straits of Social Security finances. She says, “Any clear-sighted look at Social Security’s finances, free of politically motivated spin, shows that the program is in strong shape. It has a reserve fund to pay all benefits until 2031 without any change in current policy. And with some small policy changes— for instance, raising the payroll tax by 2 percentage points or eliminating the earnings cap— we could put the system in balance for the next 75 years. (The earning cap means that only wage income up to a certain ceiling is currently subject to Social Security taxes. In 2015, it was $ 118,500, but that figure will rise in response to wage inflation.) We are easily poised to keep the system healthy well into the future.”  

The cap makes the current Social Security tax regressive. Removing it makes it a flat tax. Politically, we’d far rather see a reduction and simplification of income tax rates and removal of the Social Security tax’s income cap. As of 2016, Social Security taxes only the first $118,500 of income. The tax rate is 6.2% paid both by the employer and employee, for a total tax rate of 12.4%. We don’t see why middle-class workers should pay a larger share of their nominal income into Social Security than the wealthy and professional class. A flat tax makes far more sense to us.

Teresa argues the real issue in our current retirement system is the 401(k).  “The (social security) program is perfectly instituted to solve a looming problem for the nation. In contrast 401( k) plans are woefully underfunded. In 2010, 75 percent of workers nearing retirement had less than $30,000 in their 401(k).”

Guaranteed Retirement Accounts.

The book closes with a pitch for the creation of mandatory, pooled savings accounts to supplement Social Security.  Ms. Ghilarducci has named these “Guaranteed Retirement Accounts” (GRAs).  If the problem is people don’t save enough for retirement, a forced savings program is Ghilarducci’s solution.

Good idea?  Needed?  You’ll have to review the details in this book to determine for yourself.  

We have a hard time jumping on board a new government mandate, but we also worry that there will be seniors left unprotected or not properly cared for in their retirement years. It’s tough balancing incentives and results. Protect people too much from their own choices and moral hazard invites more bad choices. E.g., Why save, if the government (taxpayers) will take care of me?

On the other hand, we see elderly relatives no longer able to manage their own finances being subjected to complex rules they can’t effectively navigate. We see them exposed to fraud and undue influence, sometimes from strangers, sometimes from family. Complex private investment options poorly serve this reality. The gap between the reality of $30,000 in retirement savings and the ideal of $600,000 is pretty stark. Perhaps the default setting should provide a forced savings solution. But we think simplicity is important and a fiduciary to represent the most vulnerable is an important component. For today, we’re left to solve these challenges for ourselves.

Ghilarducci’s book, How to Retire with Enough Money: And How to Know What Enough Is, provides a fast read and excellent information. We found it to be a good planning resource. It’s induced us to move-up our planned retirement.  We’re now planning to retire at 62. And we feel comfortable that we’re at the “enough” stage. We’re still struggling with the right asset allocation between now and retire at 62. The challenge is the risk that your retirement will correspond with a market downturn as experienced by many in 2008. Adding to the portfolio now is more about cushioning against ill-timed market potholes.

We also enjoyed lively discussions over Professor Ghilarducci’s policy prescriptions. She is thought-provoking regardless of your political leanings. You don’t have to accept her policy prescriptions to follow her advice for individual retirement planning. Ghilarducci offers great advice and a fair diagnosis of the errors or shortcomings of the status quo.

We highly recommend this book and her work. Read it and plan to retire at 62!

Update: Here’s a related article warning about retirement expectations The Coming Train Wreck for Older Workers