Vern and Shelley Green finally reached the point in life they had long waited for- retirement. Vern had been an employee and an independent contractor all his life and between his 401K and IRAs he had managed to save $600,000. Shelley had worked for the state for 30 years and she had a 403B with about $100,000 along with a CALPERS pension she could now start receiving of about $4800 per month. They own a 3 bedroom, 2 bath home in Napa that they purchased in 1993 for $132,000 that is now estimated to be worth $750,000 and they owe just $40,000 on their mortgage. On top of all this, they qualify to receive Social Security benefits of $2400 per month. To many around the country, the Greens would appear to have it made. They are millionaires and living the California Dream- or are they?
The Greens tell their Financial Advisor that they are worried about not having enough to last them in retirement. After a review, the advisor determines that their monthly expenses amount to about $7000. This includes gifts for grandchildren, charitable donations to their church, some monthly dining out dates they take together and some annual travelling they now want to do while both are still young and healthy enough. The problem is that living in California, being one of the highest tax states in the U.S., will only leave them with about $6200 of net income a month, after all taxes are paid.
The Greens now have a difficult choice to make. They can cut back on planned expenditures like gifts for grandchildren and charitable donations, or they can try and plan on less frequent and more modest travel to bring their planned monthly expenses down. They can also (against the advice of their advisor) take more out of their accounts each month to make up the difference knowing that this could risk completely depleting their accounts before they die. Finally, they can consider moving out of Napa and California, altogether, to a lower cost and lower tax jurisdiction. Their advisor explains that If the Greens move to Nevada where there is no state income tax and housing costs are much less, they would save more than $12,000 a year in income and property taxes. That difference is enough to fully fund their retirement deficit plus leave them with an additional $300,000 savings left over from the sale of their home and purchase of a replacement home. That extra $300,000 could be used to generate another $12,000 of annual income and also be used in case either develops a health problem necessitating long term care expenses (a common occurrence in retirement).
The Greens love Napa and really don’t want to move but all of the choices involve painful compromises. They ask their advisor if postponing retirement by five more years would change the situation and he says he would need to look at this further and get back to them.
The Greens may be fictional but the situation they portray is all too familiar and real to many individuals currently living and enjoying life in Napa Valley. One day the paychecks will stop. One day, a pension and some monthly income from Social Security or investments will be all that you’ll have. You already know how expensive it is to live in paradise. It’s not fun or practical to count on working into your seventies or eighties to afford the cost of living here. Make sure that while you still have time and options, that the numbers work.