Returning from the Great Retirement
Inflation will do that
Four years ago, Bubba Turner had had enough. Covid, the lockdown, and too much time spent at the furniture factory kept him out of the RV and off his bass boat. Lake Livingston is Bubba’s oasis, a place where he and Helen could enjoy some of Helen’s fried chicken and hush puppies while sitting on their polyester-strapped aluminum lawn chairs. Half a six-pack of Bud was enough most evenings as long as they were together.
It wasn’t just Helen’s company Bubba valued. On the occasional Saturday afternoon, Bubba and his fishing buddies Kenny and Reggie would get into a betting contest. Passed around Kenny’s phone and took turns calling around to rural Texas DQs, asking, “May I speak with Bubba?” More often than not, the caller had a winner. If Kenny were the caller, he would say, “Bubba, I am with your Daddy; when you come home, bring us a coupla’ dip cones?” Click. Laughs all around. Little Bubba would roll his eyes and go back to the char-broiler. The caller must be a Sam Houston State frat boy, he thought.1
Inflation Changes the Life Plan
Time with friends and Helen was enough most days. Up to the spring of 2022, life was good. Bubba’s early retirement in 2021 made financial sense. His last year of work was his highest-paid year; he earned about $73,500 pre-tax. The stock market was doing well, inflation was under wraps, and more time together during the Covid lockdown convinced Helen and Bubba they had made the right decision. Their financial plan was to live on a level withdrawal from Bubba’s 401(k) and use the checking account funds as needed until age 65. At that time, they would begin pulling Social Security retirement benefits.
The problem is that under-anticipated inflation has eroded their purchasing power, and their checking and 401(k) accounts are not keeping up, earning negative real rates of return. Fixed-income living has led to Kroger private label purchasing of their food staples, but that hasn’t been enough to make them feel comfortable about the future. A woeful Congress, a confused Fed, and economic uncertainties conveyed nightly by the KHOU newsroom do not leave Bubba and Helen feeling that comfortable about their early retirement decision.
Indeed, compounding those adverse effects with no work-related income, the Turners feel they are in a pickle. Plus, add a fourth concern. Can Bubba re-enter the job market at the same level? Should Helen work? The Turners feel they need a reset. Do they? Let’s play “what if” to understand the financial effect of the Turner’s original decision in light of inflation and the prospect of unretiring for a few years.
The Status Quo
Some details about the Turner’s financial background: Helen and Bubba are 63 and live in Cleveland, Texas. During their 40 years of marriage, Helen stayed at home with Bubba, Jr., and once he was grown, she spent the week in “Circle” with her Methodist friends. Never brought home any bacon, but always enjoyed making the farm-to-market road trip to Conroe for some shopping. The Turners live in their original family home, a smallish 2,000 sq. feet ranch with a red-clay stained foundation with a market value of $225k, fully paid for as of two years ago. Proud moment that day when Bubba wrote his last check on his mortgage. He paid his bills and saved, too. Bubba accumulated $350,000 in his 401(k), and he and Helen have about $80,000 in a joint checking account at Reliable Bank of the Southwest. The real economic value of Bubba’s 401(k) began at $350,000, but he expects that inflation for the next two years will be 10% per year, plus he will not earn a nominal return any greater than 0% during that period.2 That is a -10% annual reduction in the real value of his 401(k) over the next two years!
In Personal Finance Economics, I use MaxiFi for economics-based financial planning. The Turner’s “best living standard” financial plan is attained under the no more work, high inflation, and negative real investment returns status quo driven by four (4) sources of cash from their current ages 63 to their prospective max ages 90:3
Level 401(k) withdrawals from today through age 90
Bubba’s Social Security retirement benefits begin at age 65
Helen’s spousal Social Security retirement benefits begin at age 65
Tap into the appropriate amounts of the checking/savings account balance each year for the next three years
The stacked graphic below shows the high household value ascribed to Social Security retirement benefits. Helen’s (pink) and Bubba’s (blue) benefits represent about 70% of their source of cash for optimal spending beginning at age 66. Importantly, those benefits are indexed for inflation.
The chart below shows the Turner’s optimal, economics-based spending amounts over the remainder of their lives. In today's dollars, their standard of living level of discretionary spending is $41,762 for the next three years, then increasing to $45,579. This effectively sets an optimal budget after accounting for housing costs, Medicare Part B premiums, and a low federal income tax bill during retirement. In total, Helen and Bubba have a remaining lifetime living standard of $1.783 million in today’s dollars. That is the status quo benchmark to which Bubba’s return-to-work scenario is compared.
Returning to Work Helps
Intuitively, a bit more work should give the Turner’s financial flexibility at the cost of togetherness. Suppose Bubba returns to work part-time for four years and earns $30,000 per year in today’s dollars. Enough to permit the Turners to delay pulling Social Security retirement benefits until age 67, their full retirement age under the system. From a macroeconomic perspective, nothing has changed in this alternative scenario. Bubba and Helen are still subject to near-term inflation and poor investment returns that eventually move to historically normal rates while maintaining the level of withdrawals from Bubba’s 401(k).
The chart below displays the change in household discretionary spending from the stay-retired status quo to the part-time work scenario. There is an immediate 8.39% increase in discretionary spending for the next three years, which increases to 14.19% each year thereafter. Total lifetime discretionary spending for the Turner’s increases by about $237k in today’s dollars over the status quo. That is a significant positive living standard change. Why so high? Delaying Social Security retirement benefits really matters. Here is the breakdown of how sources of cash have expanded while also considering additional taxes:
$134,626 more in today’s value of Bubba’s work earnings four four years
$134,952 more in today’s value of increased Social Security retirement benefits
$31,929 less in today’s value due to additional federal income tax and FICA taxes.
Get Bubba back to work! Helen, Kenny, and Reggie are better off
What should the Turners do now? Their choice. Less time with Helen during the week and Kenny and Reggie getting a wealthier Bubba on Saturdays may sway the decision. The good news is that the Turner’s standard of living is being helped by Social Security retirement benefits that are indexed for inflation (thank you, Congress). If they defer pulling benefits until age 67, they are better off. Whether to delay initiating Social Security retirement benefits is an interesting financial planning question. There is an analytical, case-by-case solution to this question. Readers should know that, generally, if recipients are healthy and can otherwise keep the financial wheels on, delaying makes sense.
What is missing? Consideration of the nettlesome risk of those 401(k) investment returns. Moving to a 6% nominal fixed return for the balance of their lives is an assumption that needs attention in this analysis. I will drill deeper into that topic in a subsequent post.
One of the pleasures of being in a business school is the group of business practitioners I am able to meet. In my work life, there has been a Bubba who shared the story of his nickname, one to which Bubba Turner’s story is loosely related.
In 2024, I assume nominal returns on retirement assets will move to 6% nominally per year.
The Turner’s full financial plan is available upon request.