Consumer Reports Finds Not All Strategies Created Equal To Retire In The Black

CR Tests Retirement Strategies; Test Couple’s Standard of Living Dips When 401(k) Contributions Are Doubled

YONKERS, NY — For many Americans, the dream of a secure and comfortable retirement is slowly receding. Rising debts for health care and housing have made current retirees the fastest-growing age group filing for bankruptcy. And retirement incomes are likely to be insecure as pensions are replaced by 401(k)s, which provide no set benefit.

Financial planners, investment counselors, and other advisers recommend a variety of common strategies to boost income in retirement. The January issue of Consumer Reports tested six of the typically recommended strategies for a fictional couple to determine how each of the strategies might affect living standards in retirement. Shockingly, saving more cost more. Consumer Reports’ test couple’s standard of living dipped by about $500 a year when contributions to 401(k)s were doubled. Moving to a less expensive community and delaying retirement were the two most successful ways for the test couple to boost their retirement income.

For the analysis, Consumer Reports used ESPlanner, financial planning software that determines a person’s highest sustainable living standard, or consumption level, for the rest of his or her life. The software was developed by Lawrence Kotlikoff, professor of economics at Boston University and co-author of “The Coming Generational Storm,” and Jagadeesh Gokhale, senior fellow at the Cato Institute.

The fictional couple, “The Hypotheticals,” were aged 55, had an annual income of $90,000 plus $1,500 in interest income, owned a $300,000 home with a $200,000 mortgage, had $250,000 in 401(k)s, a $50,000 inheritance, and $8,000 in credit-card debt. ESPlanner projected that upon retirement, the couple would have a consumption level of $50,870 a year – excluding savings and housing costs. To see how commonly recommended strategies might boost their income, Consumer Reports plugged in the various scenarios.

* Downsizing – More house generates more expenses and so it’s often a good idea for couples with overspending and debt problems to downsize their home and relocate to a lower-cost area. For The Hypotheticals, this boosted their consumption level more than $5,000 a year to $56,175.
* Delaying retirement – Delaying for even another couple of years can allow a couple to spend more and draw a higher Social Security payment. Delaying four years boosted the test couple’s level more than $3,300 to $54,202.
* Working at a lower-paying job – If neither of the couple’s employers is willing to keep them on the payroll as they age, a lower-paying job would still boost the standard of living. In this case a $22,000 job as a clerk bumped the spending power $1,500 to $52,392.

* Paying off the mortgage – Getting rid of the mortgage can lighten expenses by shaving thousands of dollars in interest and lowering expenses. But in the case of the hypothetical couple it only netted them an extra $178 a year.
* Paying off the credit cards – Getting rid of credit card balances and interest charges is always a good idea but for The Hypotheticals, paying off their $8,000 credit card balances right away only got them $54.
* Boosting savings – Current saving rates, both in and out of tax-favored retirement plans, are nowhere near what they need to be to guarantee that most Americans who are currently working can afford to retire comfortably. Shockingly, when The Hypotheticals doubled contributions to their retirement plans they reduced spending power by almost $500 per year. The extra contributions raised their tax bills in retirement more than the contributions lowered their tax bills during the working years. Instead, the couple would have benefited by putting the extra savings in a taxable account or Roth IRA.

Bottom line: Not all retirement strategies are created equal.