October 12, 2020

How Covid Might Affect Our Retirement FInances



If you are one of the tens of millions who have lost their job, or found their hours and pay cut because of the Covid attack, the answer is obvious: retirement may not be possible in the foreseeable future. With predictions ranging from two to five years before the economy is back to it's pre-virus state, the odds of that old job coming back quickly are not good. The unemployment rate will remain well above historical standards.

With the massive shift to work at home in virtually every industry, is it unreasonable to assume some of the perks that once came with a job will take a hit? Companies might find that even medical insurance can be reduced under the argument that they can't be responsible for accidents or sicknesses you pick up at home.

With so many working from home, what about all the businesses that depended on buildings filled with workers to support them...coffee shops, restaurants, delivery services, office supply stores?

All that means the money that was destined to be saved, invested, or otherwise made available for retirement will not be there. The best scenario? Your retirement is delayed for a few years. The worst? Retirement is not likely to be an option.

For those already retired, the outlook is also a little unclear. There are a few storm clouds that we should not ignore:

Social Security and Medicare will remain under siege. With a 3 trillion dollar deficit, the government cannot continue on the path of borrowing unheard-of sums forever. Whether they admit it or not, the mound of debt will have to be dealt with. The pandemic has made things worse. Trillions of stimulus dollars coupled with massively reduced tax income are creating a perfect financial storm that is not about to magically go away. 

Unthinkable as a target even ten years ago, Social Security and Medicare are not immune to cuts to begin to reign in our financial mess. Talk of reduced benefits, means-based distributions, and delays in when one can take advantage of these critical elements of virtually everyone's future is not restricted to behind closed doors, but being talked about in the open.

Housing prices are rising rapidly right now.  If you are ready for a smaller home or decide it is time to move to a CCRC, the high home prices are in your favor. No one knows for sure, but the consensus is things will stay hot for the next year or so.

Because we are spending so much time confined to our living space,  there is a noticeable surge in major upgrade projects of homes. If you plan on spending several more years in that dwelling you should be OK when it is time to sell. On the other hand, if your future holds a move in the next few years, these projects may be risky. At some point, we will face the inevitable housing pricing downturn. The cyclical nature of our economy guarantees it. How soon today's hot market will last is unknown. 

And, just as an aside, I wonder if an at-home space dedicated to working will become as important as that third bedroom, dining room, or large family room? A space for working remotely might become a must-have for many buyers. 

Interest rates remain unable to keep up with even minimal inflation. My original retirement plans included investments generating a good part of my yearly living expenses, as well as allowing those investments to grow. That scenario died several years ago. CD rates at 1%? Bank savings accounts at .05%? 

Greater growth percentages are available in other ways, like stocks, bonds,  but they carry substantially more risk and have no promise of stability.

Medical costs, particularly prescription drug prices remain stubbornly out of control. Politicians talk about controlling costs during election season, but too often that is the end of it. As long as our medical system is primarily built on the backs of a for-profit system, people's wellbeing will always come after the bottom line is taken care of.

At some point, the massive U.S. deficit will have to be faced and dealt with. That means higher taxes and/or reduced services. As noted above we cannot sustain a multi-trillion dollar deficit without a societal cost.

The trickle-down economic theory will not die even though it has been proven, time and time again, to be pure fantasy. The "trickling" stops with the wealthiest members of our society.

No one likes to pay taxes, but isn't that part of what our society, our country, is built on? Have we not agreed that we, the citizens, will contribute to the maintenance and protection of ourselves through the group effort of taxation? 

Who exactly will pay for road maintenance, airports, educational systems, military protection, the safety of electric and water distribution? Who will (in theory) protect us from disease and products that might harm or kill us? 

The answer is obvious: only the federal system has the resources to perform these necessary functions. States can barely keep school doors open or have enough money for fire protection. Can you imagine what our infrastructure would look like if left to individual states? What New York or California can afford would be pure fantasy for Wyoming or Iowa or New Mexico (to name just three).

We must have a tax system that asks the well-off to pay their fair share: not $750 or finding every loophole and pushing the tax code to its breaking point. We must provide actual incentives for working people to save for retirement. In the long run, such restructuring will make retirement years more stable and productive for everyone.

This is not an exhaustive list of how what has happened, and what might occur for the rest of 2020 that could affect our retirement finances and what our post-work world looks like. So, I encourage you to add your thoughts. It seems rather apparent that this virus has fundamentally changed our world. For how long, and in what ways, are the questions we really can't answer yet.

But, it would be foolish to ignore what may happen and not make reasonable preparations. 


29 comments:

  1. You covered a huge amount of ground here my friend. 🤣 It seems your overall view is that there is no easy way out of our problems? I will give you a possible solution. Right now the US has the fourth lowest tax rate in the world. If we went only to the average most of the problems you cite could be solved. I just don't understand why we continue to try to run the most prosperous country in the world on a shoestring. We don't have to go as far as the Scandinavian countries, but then again they consistently have the highest proportion of "Happiness" so maybe even that wouldn't be a bad thing.

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    1. RJ,you made some very good points!I like to add:how much money can I, WE give away to poor people in our country and around the world?

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    2. Raising the tax rates on the wealthiest is long overdue. After the Trump tax cut an unfair system became much worse. No country has ever shown that giving the rich all sorts of tax breaks and loopholes results in anything other than more economic inequality. When someone like Warren Buffett freely admits he should pay a whole lot more in taxes, the problem becomes glaringly obvious.

      The other part of that problem is our society's judgement of relative worth. Build a dozen new fighter jets or provide enough money for a robust educational system? Cut the tax rates for the top 1%, or provide a solid support for Social Security? As a country we seem to be making only binary choices: either or. And the answer seems to always be the wrong one for the vast majority of our citizens.

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    3. Good points Harry and Bob. We always blame the inefficiency of our government on the politicians or the political party, but in our democracy aren't we the overseers in all that. If we don't like something then we vote those who don't do anything about it out of office. That's our job, and we are just not doing it very well. Many are just too lazy to be good overseers, others are just don't seem to want to do anything but complain.

      See my post over at RJsCorner.net today for another possible solution.

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    4. As someone who has lived with one of those countries with higher staxes for a long period of time, Where most everyone is cared for, potholes are rare and all that other good stuff I have two observations. The first is that they were worth it. The second is that Americans are as afraid of the T word as they are the S word. And that we would be better comparing total costs. A professor told mee once years ago that any "fee" or required payment was just a tax by another name. Before dismissing high taxes out of hand.....Imagine no copays. No premiums, no toll roads, no arguing every two years about school funding and improvements in the ballot, no school fundraising, minimal to no tuition for college, annual vacations of thirty days and automatic family leave, no weekly requests for food for shelters or soup kitchens and so on and so forth and THEN discuss the value of higher taxes.

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  2. I remember attending financial planning seminars with Ken back in the early 90's, being advised not to chase the 9% of the stock market when you can be completely content and safe with the 7% in municipal bonds! Oh those were the days!!!!! Now: I see all the same issues as you do and wonder how our young folks will ever find jobs,pay off student debt, buy homes,start families, retire. A lot of small towns in American may eventually thrive again as workers leave big cities and revitalize the smaller pockets of our nation. Families may revise their 3 car, 2 job, everyone running helter skelter to expensive activites..and trade it is for a simpler lifestyle. Maybe there will be more move towards growing gardens,family time, less consumerism. I am reading that some families are enjoying family dinners around the dining table TOGETHER again for the first time in years.. will they want to return to the crazy schedules of "before times".. ?? With the prices of restaurants going through the ceiling, and probably the cost of travel also going through the roof in near future, activities like cooking,camping,hiking,fishing, and seeing the USA in a Chevrolet will all be making a comeback.The larger issues of social security cuts, and taxes, I agree with your observations.Jeff Bezos needs to pay his share. Presidents,too. The future will be calling for all our resourcefulness..and a sense of community can't hurt either.

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    1. A lot of the initial building of my retirement portfolio was on the backs of tax-free municipal bonds. They were a safe and smart way to get a good return.

      I'm not sure if Covid will have a lasting effect on urban vs. small town living choices, but, working remotely does make that type of shift more doable for many. With money invested in fast rural Internet and WiFi capabilities, working from Ottumwa, Iowa will be as easy as Michigan Ave in Chicago.

      I do expect to see a focus on travel within the U.S. over the next several years. Especially for those of Medicare age, being stuck overseas with a serious illness or another Covid outbreak is not an attractive scenario. If I get sick in Syracuse, N.Y. I will be just fine. If I am near ancient Syracuse in Greece, not so much.

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    2. Ironically I happen to be in Santorini, Greece on vacation as I read this because I’m an expat American enjoying not living in the worst-inpacted country in the world (thank you DT). I decided to inquire about buying my thyroid medication at the local pharmacy. First, I didn’t need a doctor’s prescription, already saving me a bundle, & here I was able to buy a month’s worth of the exact same Merck made medicine for only
      1.50 euros. Needless to say it costs exponentially more in the US. Same for doctor or hospital visits. I stocked up on 8 month’s worth as the expiration date is 2022. On top of that, the pharmacist said she would ship me my future meds at that price to Switzerland where I live, so I’m set up nicely now... a year’s supply of my chronic meds for the price of a pizza dinner in Switzerland. Getting ill in Greece woukd be better than in the US, certainly from a cost standpoint & the Greek people are wonderfulky kind & friendly to boot.

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  3. I would say that raising taxes and closing loopholes are necessary to reduce inequity which is at historic levels. The level of inequity we have today is as large as we've ever seen and as in the past it is leading to the destabilization of society. Stock markets soaring during a pandemic that throws millions out of work shows that the general well being of the society is no longer linked to the well being of corporations and the wealthy that control them.

    Along with taxes, governments in the past usually reduced their debt load with inflation. This means the actual debt remains but the relative value of it falls over time. It's pretty much what they did with the government debts incurred during WW II and from other wars as well. For those of us old enough to remember the inflation of the post war years and the difficult "stagflation" years of the 1970s it's a scary prospect but if nothing else it did reduce the value of debt.

    One thing to keep in mind is that a national government not a household so trying to manage government finances as if it were your household budget is fruitless (government is not a business either). At a basic level, as a household, you have a limited earning power over your lifetime, have no control over interest rates, only a little control over how much income we have, and most certainly can't print money to pay bills. None of that applies to national governments. Countries more or less live forever and so can carry debt forever, they control the interest rate levers, set their own income levels through tax rates, and control the money supply. That's a lot of things that individuals simply cannot control. Perhaps this is why the government can be trillions in the hole (for decades no less) and yet the country's economic life carries on normally.

    Dickens wrote in David Copperfield: "Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." For us as individuals (and sub-national governments too) this pretty much sums up finances but for national governments not so much.

    To digress there's a whole other discussion about what money is. At it's core money is not a real thing and us humans essentially just made it up to allow for ease trade and paying for labor. These days money isn't even the paper bills coming off the printing press at the mint, it's just numbers moving around in our accounts. Don't get me wrong, I watch my numbers as closely as anyone and make sure that no one takes any of my numbers but my numbers are only worth anything as long as we all agree that they are worth something. For those that are interested you may want to read up on "Modern Monetary Theory". I have no idea if the economists that are proponents of this theory are right, many other economists think they are wrong, but it is interesting.

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    1. Money is somewhat like the concept of time. Neither are "real" beyond what value and systems for control we apply to them. But, both are critical to a functioning existence.

      I remember the stagflation time of the 70's. Few situations are worse for a consumer-driven society than one in which prices continue to rise while unemployment and production fall.

      You are correct about government's relationship to money. A deficit would only become a real issue if all the countries and entities we owe money to wanted to cash in their I.O.U.'s at the same time. Even so, I am sure there was ways around that dilemma...maybe not ethical or entirely legal, but doable.

      Read enough history and it becomes clear that severe economic inequality can be fatal to the form of government in power. We are on that path if the massive imbalance between us and them (the uber-rich) isn't corrected, or least gives some hope for the future.

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  4. Well, some interesting issues and questions. I used to think I understood economics, but no more. How can the stock market be at all-time highs when the economy is sputtering along with Covid? How can inflation be so low when the deficit is so high? Can we really keep the economy going by just printing more money? And an uncomfortable question for us seniors: Why is it that the government spends so much money on old people, but so much less on young people, esp. children who are poor through no fault of their own and end up with substandard health care, a poor education and no hope for the future?

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    1. Your questions are even more troubling than mine, Tom. Sounds like a good bunch of topics for your blog.

      The only one that seems rather somewhat clearer to me is the stock market situation. The market continues strong because it doesn't reflect the conditions "on the ground." Rather, it is the result of the wealthy doing stock buybacks, cutting expenses and looking to the future when vaccines exist and pent up demand is satisfied.

      Most of us think the stock market reflects today's news. While it will react to something dramatic or stupid coming out of Washington, the overall trend is a judgement of the future of the economy. While not helping many of us today, that should be encouraging.

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  5. No easy answers here and ever present greed and corruption make solutions very difficult. I think we will have to hit rock bottom ( and we are not there yet) before things can ever begin to turn around in the sense of not going back to the past, but to totally invent new ways that are for a cohesive, inclusive, fair and honest government, without prejudice and that benefit us all and not just the super wealthy and the big corporations. If trump is re elected, it will make this almost impossible to ever attain.

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    1. The way our system of government has evolved (or devolved) makes it very difficult to accomplish anything unless all three branches (House, Senate, and WH) are controlled by the same party. Of course, that isn't even close to what bipartisanship is supposed to look like.

      In this situation are left with a government that is only working for roughly half the country. Things happen, but the minority viewpoint and needs are ignored until the next election when the balance of power can be shaken up again.

      Our system is remarkably inefficient. Donald Trump spent a lot of his time undoing what Obama had put in place. If Mr. Biden wins he will spend the next four years undoing most of what Mr. Trump did. Then, the next time a GOP president is in charge, that person will undo what the Democrats did. Without true bipartisanship and a shared vision we end up being jerked from one side to the other and back to the original side every few years.

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  6. I just found a great article, "The Impossible American Dream. Welcome to Hard Times on $44,500 a year". It addresses almost exactly what you did. It was written in 1987 by a struggling boomer about the older generation that had it all.
    The question that comes to mind for me is what are each of us willing to give up? Are we willing to give up part of our Social Security or Medicare so that the tax dollars can hit those who really cannot afford it? Are we willing to give up our tax write offs on our starter companies so those loop holes can be closed? Pay taxes on the money made and spent on sales trips? Furniture in the office? Office buildings? Are we willing to take $10,000 from every high property tax area's child to balance the education in the US? Are we willing to pay much higher taxes on capital gains and inheritance? How about no car- since gas and electric in most of the nation is fossil fuel produced? Are we willing not to get involved in every fight in the world and cut the defense machine off? Will we start to lobby to cut our benefits and medical care- especially end of life care? Will we begin to cut off lobbying groups altogether- they are really a boomer take over.
    Why doesn't Buffet voluntarily just give the government his money? How about Gates? How about Bezos?
    It has to be a group effort. It is easy to point out and not back at ourselves.

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    1. Bill & Melinda Gates are in a class of their own in how they’ve used their wealth to help a tremendous number of poor people around the world. Just like Jimmy & Roselyn Carter used their status to help so many through the Carter Center. (It now occurs to me... I shutter to think what a Trump presidential library will be like, don’t you? Halloween hall of mirrors I guess)

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    2. All very good questions, Janette. For me I am not able to take advantage of any tax loopholes and I do pay taxes on our Social Security income, plus the RMD from an IRA means taxes on money I din't really need to withdraw.

      But, I know I live a privileged life compared to many so I am not adverse to those taxes to help support the system.

      If our tax code were simpler there would be fewer opportunities for those who exploit all the loopholes and special provisions.

      A VAT system like much of Europe uses is an intriguing idea. It generates taxes on consumption. Spend less on things and pay fewer taxes. That seems both fair and helps cut back on waste. Those below a certain income level would get tax credits back for some of the Value Added Tax they pay.

      The tax code would be straight forward and much more difficult to take advantage of.

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    3. We have a VAT type tax in Canada called the GST (Goods and Services Tax) and one thing for sure everyone hates it. Like a sales tax it's added on at the cash so it's very visible, the government of the day was pressured to have it that way so it's not a "hidden in the price" tax as in Europe. The high visibility was probably a mistake and because it's so visible it is a bit of a political football but on the upside it raises lots of revenue and the rich pay it on their shoes (and Ferrari) the same as everyone else. If you buy something you pay and there's not much you can do about it though sometimes people pay their plumber (for example) in cash to have their tap fixed to avoid paying the tax. For those with low income there is a GST rebate calculated when you file your taxes at the end of the year.

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    4. Interesting comment, David, regarding whether the tax is "hidden" or visible. It seems like such an obvious approach to tie taxes to consumption rather than get bogged down in things like capital gains, investment credits, etc.

      I wonder if anyone in America has ever compared a "typical" family's tax liability with a VAT versus the current hodgepodge system.

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    5. Don't get me wrong Bob, our tax system in Canada is convoluted too. We just happen to have a consumption tax to go along with it.

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  7. A small suggestion that might make us look at the issue of our annual budget differently. Undo what LBJ did. Remove social security from the annual budget. No more pie charts showing SS basically the same percentage as Medicare and military spending. The reason is SS is self supporting. Those SS taxes are dedicated to a pay as you go system that has worked up to this point. The corrections needed to keep the system working are fairly simple and easy to do. This is probably the easiest thing to fix in the annual budget. Once this is done we need to include in the share spent on the military all of the interest on the debt we took on to fight multiple totally useless wars. Once we see this number as a percent of total discretionary spending its puts things in a whole different light. We will see how nuts we are.
    I am starting to change my opinion on healthcare spending. Americans as a group are not ready to talk about changing the entire system into a version of what the rest of world has. Healthcare costs will continue to outpace inflation. This will be sped up by the increasing number of people on Medicare. I am willing to allow it to bankrupt the working class. Then and only then will everyone be willing to have a rational conversation.
    The worsening of the division of wealth accelerated since the 1980's. As long as we have stock options and stock buybacks it will never get better. These two items provide a built in incentive to milk the company for every thing it is worth in the short term and give zero thought to the long term consequences to employees, customers, the company & the cities/countries in which they are located.
    My final comment reflects what has already been said. We did this to ourselves. Any drastic cutbacks in future benefits should be accompanied by commensurate reductions in existing benefits. Lets quit screwing our grandkids so we can continue with our current spending levels.

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    1. Oh my, Fred, so clear-eyed and reasonable. You have addressed several of the screwiest parts of our fiscal nonsense and approach. Isn't part of the problem because we are such a wealthy country (in theory!) that deficits, expenses, and accounting tricks don't really register with people? We are sheltered from the true costs of much of what we do and spend.

      As long as we have this image of ourselves not a lot is going to change in how we allocate our resources and plan for our future.

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  8. A comment on real estate prices . . . We live in a rural area that's rife with weekend homes owned by residents of several large urban areas. The threatening presence of COVID and its related restrictions combined with the increased ability (or necessity) to work remotely created a flurry of buying in our area. On our road (approximately 4 miles long) within the past six months alone, a home assessed at 366K sold for 520K, and one assessed at 459K sold for 739K. There are two more currently on the market with sales pending. The one assessed at 232K was on the market for 399K. The other, assessed at 310K was on the market for 429K. (That one sold just three years ago for 285K - a nice profit, if you can get it.) These last two with pending sales were only on the market for a few weeks each. Anyone selling high in a "hot spot" would, naturally, have an advantage and better options when shopping for their next house. But anyone looking to move into their first home or upgrade to a larger one in those hot spots will be facing overpriced housing now and risking serious depreciation if or when the housing bubble bursts. It's not a pretty picture, even with historically low mortgage rates. It seems that retirees who are interested in selling the family home and moving to a locale with a lower cost of living may have an excellent opportunity during the current situation. But anyone purchasing in an area with artificially inflated prices may have to deal with the depreciation monster down the road.

    On a related note, our son and his longtime girlfriend began house hunting early in the year when the maintenance situation at the apartment they were renting was rapidly deteriorating. They found a lovely little, one owner, well-maintained home on four acres in a rural area about 45 minutes from us that was on the market at the pre-COVID price of 245K. Their offer was made and accepted just at the time urban residents began to escape the cities in droves, and "the kids" closed on the house during the summer. I'm no real estate expert, but I would expect that their home would sell for 350K in today's market without the blink of an eye. It will be interesting to see what happens down the road with housing prices. If COVID-19 makes owning a home much more attractive than renting an apartment, the price of homes could remain elevated for quite some time. Again, no expert here, just sharing some observations.

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    1. All true. We live in a highly desirable city and have a small cabin in a (now) highly desirable mountain location. The prices are ridiculous! Both are very small by today's standards (1650 and 1250sf) and have nearly quadrupled in value in 20 years! We're grateful to be mortgage free and we'll stay put!

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    2. It reminds me the housing bubble run up several years ago where homes for sale were snapped up within hours of being listed at or above asking price. Of course, we all remember what happened: 2008-9 and those over-inflated prices disappeared like a leaky balloon. People upside down on mortgages, foreclosures, folks simply walking away from a home worth less than they paid for it....all of that will happen again with the pricing insanity you cite.

      The only difference this time around: lenders are being more cautious than they were 12 years ago. Folks who had no business getting a huge mortgage were approved without blinking an eye. I think new regulations and lessons learned from that experience, has made banks less likely to encourage economic collapse.

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  9. The middle-class society has lived beyond its means for years. What is middle class? My husband and I are retired without a pension plan; he worked in IT, his own business for years, and I worked professionally as a registered nurse (no, the majority of nurses have no pension plan, but a 401K). We happily own a home in Rhode Island, listed as 922 square feet (gasp)! Our utility bills are low. I keep track of how much I spend, and total the monthly grocery bills. We live 4 miles from a beautiful beach, that we go to, packing a lunch and walking the sands from June->September. Remember: It is easier to cut your spending, then to go back to work.

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    1. The middle class has lived beyond its means, but also been squeezed by stagnant or falling wages and decreasing opportunities.

      Your final sentence is absolutely true.

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  10. We have two living spaces now: a park model in a Tucson retirement community (620 square feet) from November to May, and an 800-square apartment on the lower level of our family home near Seattle. Our needs are quite simple. As soon as we get most things in the garage rehomed, it will be even simpler. But we're lucky, with three pensions and Social Security.

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    1. What an efficient arrangement: 2 places in 2 different climates all taking up less than the typical home's square footage. While some may think 620 sq feet in a Park Model is too small, much of winters in Tucson is spent outdoors, and the models I have seen have been extremely well laid out.

      With your living setup taken care of, three pensions and Social Security means you are financially set for life.

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