Three easy levers on retirement spending

Allow me to introduce the Power of Non-Financial Thinking. This is the kind of thinking that actual people can do. It involves none of the magical thinking preferred by those on Wall Street who make their living selling us the next financial cure-all. It also acknowledges something the financial services industry doesn't want us to know.

When push comes to shove, investments rank third or fourth when it comes to measuring the retirement security of nine out of 10 Americans.

I'm not saying investments aren't important. They're just not as important as two or three other things - Social Security, home equity and pensions for the small crew that still has them.

To illustrate, let's consider the case of Mad Max and his wife, Molly. He's nearly 66, married and earns an interesting amount - $102,000 a year. The amount is interesting because it is the top of the Social Security wage base this year. Only 6 percent of all workers earn more. Max has accumulated about $600,000 in his company 401(k) plan, and they've just made the last mortgage payment on a house now worth about $400,000.

Mad Max and Molly are well-off by most standards. They have a net worth of $1 million and high Social Security benefits. Mad Max will be eligible, this year, to take benefits of $2,185 a month, or $26,220 a year. His wife, who is the same age, will be eligible for $13,110 in spousal benefits, giving them total benefits of $39,330 a year. Their retirement income will be their benefits, their investment income, and the invisible income they get from home equity. (It's in shelter services, not cash, which means it isn't taxable. Their standard of living will be higher than a young couple next door who have the same cash income but make payments on a large mortgage.)

How can Mad and Molly increase their spending power?

They have three big levers: cutting investment fees, delaying Social Security, and downsizing their house. All three levers can be pulled with zero insight into what Ben Bernanke is thinking, what the price of oil will be next week or next year, who will be elected president in November, or whether interest rates (stocks, the dollar, etc.) will rise or fall.

Even more important, the three big levers aren't bets. They are certainties.

- Lever No. 1: Cut investment expenses. This is easy to do, and today, more than ever, Wall Street and its products deserve to be shunned. Rather than pay 2 percent, or more, in annual investment fees to have only a 30 percent chance of beating market returns, cut your expenses. Opt for less-expensive investments such as my Couch Potato Building Block index portfolios or a small number of low-cost balanced funds. This will allow you to stop sharing your retirement income with the flashy strangers who brought us the subprime crisis.

What's it worth to you? About 1.5 percent of your investments a year, maybe more. Mad and Molly, for instance, draw 6 percent from their investments before fees of 2 percent. That nets them $24,000 a year. By cutting out the legacy distribution system, they can draw 6 percent before fees of 0.5 percent a year. So the same draw on their money will net them $33,000. That's a one-decision income increase of $9,000. To get that from their legacy distribution system vendor, they'd need to add $225,000 to their account.

- Lever No. 2: Delay taking Social Security benefits. Every year that Mad Max delays taking benefits, he forgoes $26,220 of income, but his benefits will increase by 8 percent for the rest of his life (and his wife's, if she survives him). That $2,097-a-year tax-free increase would cost $42,627 if it was purchased as an inflation-adjusted life annuity. So even if he has to draw down his financial assets, he's trading $26,220 for another asset worth 60 percent more.

- Lever No. 3: Downsize your shelter. Mad Max and Molly love their home, but it costs about $16,000 a year to pay the taxes, insurance, utilities and maintenance costs. Sometimes it costs more. If they sold and reinvested in a house that cost half as much, their operating expenses would go down to about $8,000, and the $200,000 of equity they had to reinvest like their other financial assets would earn $11,000 after reduced fees but before taxes. It might net $9,350 - more than enough to pay the operating expenses on their smaller house. That's a spending gain, after taxes, of $17,350 a year.

Each of these levers is a sure thing. Not the phony hints of astounding profit opportunities from Wall Street.