Keeping up with the (retired) Joneses

Think of this as a tale of two households who live side by side.

Their houses are equal in value. They have the same income, but from different sources.

They drive nearly identical cars, but there is one big difference. One family is retired, in their late 60s. The younger family is middle-aged - new empty nesters.

Another difference is less obvious. The retired couple has more money to spend. A lot more, actually.

How can this be?

The older couple pays less in taxes. They no longer save. They have no loans with monthly payments.

Consider this list of differences. It is based on household incomes of $70,000.

The working couple has income from a paycheck. The retired couple has income from a combination of Social Security and 401(k) withdrawals.

l Taxes. The employment tax, 7.65 percent, comes straight out of the workers' paychecks, $5,355 a year. The retirees also enjoy lower income taxes because part of their Social Security income won't be taxable.

If the retired couple gets half their income from Social Security and half from retirement accounts, about 60 percent of their benefits won't be subject to tax. That's about $21,000 of income. So the income tax difference is about $3,000 a year.

l Savings. The working couple saves 6 percent of income, enough to capture the employer's 50 percent match on the 401(k) plan. So another $4,200 a year is committed. The retirees are spending from their savings.

l Shelter. Lenders would happily lend the working couple the $200,000 they might owe on their newly purchased $250,000 house. The monthly payment on that loan would be $1,013 a month, assuming a 30-year mortgage at 4.5 percent. That's another $12,156 the working couple can't use for something else. The retired couple has no mortgage.

l Transportation. The working couple prudently has only one car loan, even though they need two cars. It's for $25,000 at 2 percent for 60 payments. That's another $438 a month. Their other car is six years old.

The retired couple also has two cars, but they are driving less. So they let the cars age out and have no car payments. The cars have plenty of miles left.

The total difference in committed spending is $29,967. That's 42.8 percent of gross income. It means the working couple has only 57.2 percent of their $70,000 left to spend on everything else.

It also means that changing from worker to retiree can release a great deal of discretionary spending - provided income remains the same.

The point here isn't that retirees are the new 1 percent. What's important is that most financial planning says that you need to replace 70 to 85 percent of your pre-retirement income to have the same living standard when you retire.

The figures in this column tell us something else. If a retired couple can enjoy the same living standard as a working couple with less than 60 percent of the working couple's income, maybe a lot more people are on track for retirement.

l Questions about personal finance and investments may be sent by email to scott@scottburns.com.