Tag: Retirement Finances

If you’re approaching or actually entering your retirement years, be aware that it’s not a homogenous era. It’s actually quite transitional with roughly three periods that are distinct from one another. The way you live and spend will vary as you progress through these years.

The big unknown is how long each period will be for you. That will depend on a number of factors but is mostly reliant on two key ingredients: your finances and your health. Here’s a summary of the 3 periods:

The Vibrant Period

You’re a new arrival to retirement. You’re healthy and vigorous and can travel, seek adventure and enjoy hobbies. Spending tends to be fairly high, with most of your money going toward enjoying your newfound freedom. You’ll want to adopt a “Do it now mentality” because tomorrow isn’t promised to anyone.

The Transition Period

Aging is now catching up with you. You start to physically slow down; you’re not as mentally sharp as you used to be. As you cut back on traveling and venture out less often, spending generally falls since you simply aren’t engaging in as many expensive activities.

You strive to keep your independence, but now need to seek help in areas of your life. You may consider downsizing your house and simplifying life. Aging in place becomes a focus, but, more and more, you need to hire people to do housework, prep meals, and maintain the yard.

The Assisted Final Period

In the last phase of your retirement, you may have significant health issues that require care. There’s a good chance you’ve outlived your close friends and perhaps even your life partner.

It’s important not to play ostrich in planning for this, don’t be in some form of false denial, it’s been surveyed and only 14% of working Americans believe they will need ongoing daily assistance at some point during retirement, yet 66% of us actually will – take notice.

For many retirees, a nursing home or some form of long-term care becomes necessary. But even for those who can care for themselves independently, there’s often an increase in doctor appointments and prescription drug costs. Spending tends to increase in this phase of retirement due to healthcare services and potentially long-term care.

The body starts to fail and you need to have all your affairs in order – you’re ready.

Financial Planning for the Three Distinct Periods

In a nutshell, your spending can be heavy during your vibrant period, then contract during your transition period, and could shoot up during your assisted period depending upon how much care you require.

Since your spending is reduced in your transition years, means that, within reason, you can spend more heavily in your vibrant years and go for the gusto while assuring there will be ample reserves to die with.

It’s key to properly plan for your finances for all three periods as to how aggressively you can make withdrawals from your retirement savings. There’s a gentle balance between financing a world class retirement during your vibrant period yet not running out of money during your assisted period.

Because you’ll start to slow down during your transition years, you’ll most likely still be living at home and only require a moderate amount of care, if any at all. Perhaps a visiting health care assistant and someone to do the cleaning and yard work.

But those multi-week world trips or that cross country trip in your RV become a thing of the past and funds are no longer required for such. Take the peddle off the metal and keep an appropriate cash reserve for the final phase.

Specific Financial Planning for the “Assisted Final Period”

The wild card is the Assisted Final Period. It’s unknown how severely your health will decline and for how long before you enter the pearly gates. It’s best to plan for the very worst.

Our last days on earth can be quite costly and we’ll need a sufficient balance in our retirement savings to pay for our portion of end of life.

Dying Isn’t Free

Adding it all up, to fund a terminal illness, hospice, burial, and estate settlement, you should have a minimum of $60,000 remaining in your savings when you check out. Your life partner will need the same, so you’ll need a minimum of $120,000 for both of you.

Special Accounting for Severe Dementia

If you’re fortunate enough to make it to your mid-eighties you would not like the Las Vegas odds of contracting Alzheimer’s. At age 85 about 50% of the population has Alzheimer’s — scary.

Medicare will only pay for up to 100 days of skilled nursing home care under limited circumstances. However, custodial long-term nursing home care is not covered.

The national average cost for nursing home care is about $86,000 a year.

The average life expectancy after diagnosis of Alzheimer’s is 8-10 years. If we assume the first couple of years the symptoms are mild enough not to require assisted living, one would have to budget for 6 years or $516,000 to get to end of life. And, Medicare’s 100 days of coverage won’t amount to a row of beans.

But it poses another financial challenge to have that much money in reserve for the possibility of (a) living that long and (b) actually contracting this expensive protracted disease.

In another post FitCommerce has written about keeping the value of your house in reserve so that in the event you have to provide Alzheimer’s long term care, you can reverse your mortgage to finance such without draining your retirement savings.

 

 

Extending the Vibrant and Transition Periods While Shrinking the Assisted Final Period

Wouldn’t it be great to be one of those “Blue Zone” residents, you know the ones that are working, playing with their great grandchildren, walking, gardening, and then one night they just die in their sleep. Score!

Although technically it can be possible, most Americans will progress through all 3 periods until the last day and probably die in an ICU.

The goal becomes to extend the vibrant period as long as possible, well into the eighties, perhaps even into the nineties. Easy enough said, but how?

What’s totally out of our control is our genetics, there is a FOXO3 gene that turns on the body’s defenses against disease and aging throughout a lifetime. Should you hit the lottery and have this gene, you could have a longer life in spite of your lifestyle.

Without the FOXO3 gene, you’re not doomed, it just means you have some work to do if you want to extend your vibrant years. There’s something called epigenetics that can be tweaked to extend both lifespan and healthspan even if you don’t have the longevity genes. We’ll offer 4 practices to help expand your vibrant years and minimize your assisted final years:

• Avoid carcinogens – the most insidious being smoking.
• Proper Nutrition
• Regular Exercise
• Bio Hacks

Proper Nutrition

If you read all the current literature on proper diet you will go slowly mad: carnivore diet vs. vegan, paleo diet, Atkins diet (remember that one), Mediterranean diet…the list goes on.

Putting weight loss aside for the moment, the current literature that appear to make the most sense from solely a healthy and longevity perspective is that your nutrition should have:

• A bias toward vegetables, the more varied, the better.

• A bias toward whole foods, if it comes in a box or a can, be suspicious. We don’t need chemical additives in our bodies.

• Fiber in the diet, and lots of it. So much is written about the microbiome on health and longevity.

• Limited protein. Yes, you’ve been told your entire life about the importance of protein, but too much of it will up regulate an enzyme called mTOR which promotes cells to grow but turns off their abilities for longevity and survival.

• Less dairy – in the book “The China Study”, researcher T. Colin Campbell makes a compelling argument for eliminating dairy from the diet and eat only a plant based whole foods diet – but we’ll save room for the occasional select cheeses.

Exercise

A great quote from the Dr. Kenneth Cooper is, “We do not stop exercising

because we grow old – we grow old because we stop exercising”. That pretty much sums it up.

Admittedly the way you exercise in your sixties will be different than the way you exercise in your eighties. But you should be exercising up to your very last day.

From a health viewpoint, exercise will stress your muscles and your cardiovascular system to make them robust. If you want to keep your independence as you age, you need not become frail, hence some form of strength training is necessary. In your sixties, you can easily use weights or strength machines in gyms.

In your nineties, you can still strength train but now perhaps using stretch bands of differing resistance.

As for cardio, when you first retire, you’re probably anxious to bike on those country roads. At 73, Arnold Schwarzenegger bikes most mornings. As you age, you’ll probably give up biking and begin walking, however, it’s important to walk at a brisk a pace as possible to keep that heart pumping.

Finally, most seniors forget to maintain flexibility, it will drop off as much as 60% if you don’t work at it. The best remedy is a regular yoga class, most gyms offer them and there are even good ones on YouTube.

If you’re over 55 and have never exercised, check out the “Silver Sneakers” program at your local Y or gym. They’re instructor lead, low impact classes. It’s a great way to add exercise to your older years. The fees are highly affordable and may even be covered under Medicare Part C.

Biohacking

From primordial times, living things have gone through periods of stress and then calm, including homo sapiens. It’s those times of stress that actually propelled our species evolutionarily forward. Science has shown that cells that are stressed go into survival and longevity mode. When there’s abundant food and comfort, cells don’t trigger survival mode but just keep on growing and dividing, the end result is a shorter life.

There’s a concept called “hormesis” which basically says a little bit of stress will make the organism stronger and more anti-fragile. Basically it’s “That which doesn’t kill you makes you stronger”. So, FitCommerce is offering a couple of biohacks to engender a hermetic response to improve healthspan and lifespan:

• Limited time eating
• Periodic Fasting
• Cold Therapy
• High Intensity Interval Training

High Intensity Interval Training

We’ve already addressed the value of exercising your entire life but HIIT as it’s called really stresses your body to get the hormetic response. The basic concept is about 30 seconds of all out exercise (pushups, burpees, jumping jacks, sprinting, and many others) followed by 30 seconds of rest/recovery, then repeat. There are hundreds of different protocols on YouTube, just pick your favorite ones and dot it.

Periodic Fasting

Our ancestral hunter/gatherer forefathers went through cycles of feast and famine. That’s what we’ve evolved to. In the modern era, we hardly ever go more than 4 hours without eating. No wonder obesity is so rampant. FitCommerce has written about the benefits of periodic fasting and the benefits to your body when you do fast. We would suggest a 3-4 day water only fast 4-5 times a year it’ll do wonders to boost your immunity and get that hormetic response in all your cells.

Restricted Time Eating

Perhaps supplementing your periodic fasting is a habit of restricted time eating. Our bloodstream was never meant to be bathed in glucose for 16 hours a day via three meals and two snacks 365 days a year. One easy way is a slight daily fast of limiting all your food intake to an 8 hour window that means your essentially fasting for 16 hours a day.

Impossible you say, not really, all you have to do is delay having your first meal until 11:00 am and finish your last meal by 7:00 pm – boom, done, you just fasted. We’re not even modifying what you choose to eat, just compress the time window by which you eat and it’ll do wonders.

Excessive glucose for prolonged periods of time causes a multitude of problems, you pancreas works overtime to neutralize it and that can lead to insulin resistance. Restricted time eating will go far to prevent insulin resistance. By the way, you may even drop a few pounds of body fat. The good news is that body fat lost during fasting typically doesn’t return as with fad diets, that’s because fasting doesn’t lower the metabolism rate that brings back the body fat when the fasting ends. Fat lost through fasting is generally gone forever.

Cold Therapy

Another hormetic response can be gained through cold therapy. Once again, if our cells are living in total climate control 24/7/365 they don’t induce survival mode. But, give them an occasional dose of cold water and they’ll trigger a survival response.

During summers, up north you could go for a swim in the ocean or cold stream without a wet suite of course. Barring that, regular cold showers will do the trick. Not a marathon, just turn the dial all the way cold for a 4-5 minute shower. If nothing else it’ll really wake you up.

Anecdotally, Katharine Hepburn practiced cold therapy through daily cold showers or cold swimming and swore by its health benefits. And, by the way, she lived to 96 — you go, girl.

Conclusion

Peace of mind in retirement comes from good planning and from having your eyes wide open to the most probable eventualities as you progress through all phases of your retirement. As of this date, there is no cure for aging, it’s not even considered a disease. Consequently, your vitality will decline with the ensuing years, but it doesn’t mean you can’t squeeze more juice out of life.

The task at hand is to expand our vitality period as long as we’re able and shrink the assisted period as much as in our control and otherwise live life fully.

You’ve disciplined yourself for the past 45 years to delay gratification and to build up your asset base for retirement. Now that retirement is upon you, can you shed all those years of programming and suddenly start splurging on yourself? How much can you spend each year out of your retirement without outliving your money? And, what about the kids, “shouldn’t I leave them something”?

You’ll have to come to terms with these thoughts and emotions and have a plan where there’s enough money for the changing phases and spending habits during your retirement, but you’re also not naïve, you want to have enough funds to last your entire lifetime.

This article is not an advice column as to how much to save in your younger years to have a great retirement, that ship has left. We’re hereby addressing your crossing the threshold from work to retirement.

We’re going to solely address withdrawals and not investing or asset allocation, for more info on that read:

Don’t Outlive your Money in Retirement

The Tipping Point

O.K. during your working years you religiously listened to Tony Robbins and Suze Orman, and maximized your productivity at work and only bought “needs” and not “wants” and socked away 15% of your earnings into a tax deferred retirement account. You’ve paid down all debts including your mortgage, the flywheel is spinning as you cross the finish line.

Basically, you were super smart with your money and now retirement is upon you. You could be 60, 65, or even 70 years old.  After you get over the initial realization that there’s no more money coming in from an employer, you figure, “Hey, I now have Uncle Sam sending us a monthly check and he’ll be the last to go bankrupt (won’t he?). But social security just isn’t enough to make ends meet, you’ll need to start pulling money out of your retirement account. Yikes!

The Switch from the Long Game to the Short Game

After those years of working, pinching pennies, saving for your kids’ college education, paying down the mortgage you needed to really discipline yourself and do without in a lot of what, heretofore, you considered indulgences. That took a lot of mental discipline and daily habits and now it’s difficult to shut that off as you transition into retirement.

You got good advice in your youth and played the “long game”. Envisioning a future with a desirable lifestyle is why you took out your student loan and studied hard in college, graduated, got a decent job, made money, married a great spouse, raised beautiful kids – all on a disciplined budget.

Now that you’re at the cusp and retirement, can you shut it off?  Can you now play the “short game”, you know you’re going to die someday only now it’s not that far away. Can you intelligently spend to enjoy the fruits of your lifetime of earning and saving while making it last until the end for you and your spouse? The future is now.

 Yes, Indulgence is Allowed

The short game requires a flip of the switch in attitude toward money. You’re switching from “savings mode” to “spending mode”.  And, with a good forecasting spreadsheet, you can enjoy those indulgences and not suffer the consequences of running out before you meet St. Peter.

In reality, many retirees never end up spending all of their retirement assets. In a 2016 study, Vanguard reports that individual savings tend to rise even after retirement, and financial planners suggest that retirees are often too frugal, denying themselves pleasantries and ultimately never spending through the assets they’ve worked so hard to save.

A Word about Children’s Legacy

In the parlance of financial planning “legacy” is merely the inheritance your children will receive after you and your spouse have expired.

A very noble feeling is to want to leave money to your children when you go; to make life easier for them. Just don’t go overboard. If you’re not a baron with millions to pass on to the next generation, you’re probably wondering just how much to leave.

Think of when you were a younger adult and your attitude toward your parents’ retirement.  Didn’t you want them to thoroughly enjoy it?  When they passed, you weren’t counting on anything, and if you did get something, it was a bonus.  Well, your kids feel the same way about you. They don’t want you skimping just so they can have more.

It’s time to shake that feeling – no guilt.

The Spending Buckets

When it comes time to spend during retirement, you have to relegate your spending into two separate buckets.

The first is the living expense bucket, and the second is your fun spending bucket.

Living Expense Bucket

This is like death and taxes, they’re the expenses you face each and every year. It’s basically your family budget before you retired but with some notable drop in work related expenses.

What’s key about this bucket is that it’s fairly fixed and can be projected out a couple of decades or more. It probably won’t vary much.

Fun Spending Bucket

This is the “play money” bucket, this is where you can get a little frivolous:

• Boat payments
• RV payments
• World travel
• Second home in Florida

This second bucket will be more difficult to forecast, and it will vary depending upon investment growth. The withdrawal formula should be revisited each year.

The Fun Spending Downward Slope

One aspect of aging is the steady decline of the human body. No matter how much you exercise, eat right, sleep plenty, with each ensuing year, you’re going to be less vigorous.

World travel and traveling across America in your RV will be somewhat demanding on your physicality. It’s best pursue these adventure travels in your sixties and seventies.  In your eighties and nineties, you’ll probably be sticking closer to home.

If you believe in the 4% rule of withdrawing money from your IRA, you may want to consider bumping it up in your earlier retirement years to say 6%, with the idea of scaling it back in your later years to 4%. You’ll have more money for adventure in your vital and less in your older years when you’re probably more sedentary.

The Withdrawal Calculator

So, how do you determine how much you can withdraw over the next few years without running out of money in your later years?

This will require you build a spreadsheet with assumptions you can tweak to see how much you can safely withdraw now without bankrupting the future.

Build a column for each year of your retirement and belief as to how long you and your spouse will live. The first known data point will be your beginning balance of your IRA.

In our example, we use $920,000 which Charles Schwab determined from a survey of serious savers to be the mean. Again, yours may be more or less, whatever it is plug it in here.

Then you’ll need to make an assumption as to what rate your IRA will grow. In our example we use 5%. Obviously there will be better years, and unfortunately some really bad years. But keep adjusting year after year to the reality of the times.

Our example, we went heavier on the withdrawal in the earlier years of retirement and then scaled it back later on. With that, you can see that there’s a comfortable balance for you and your spouse all the way to age 90 and should continue for years further if necessary.

Here is a spreadsheet you should build for yourself and tailor to your parameters.There are a number of issues we did not cover, namely end of life costs for assisted living, nursing homes and hospice, for more info on that please read:

Entering Your Golden Years? Managing your IRA disbursement can be Tricky

Black Swans

The big what if?

What if some unforeseen financial calamity occurs and your retirement balance is too low to cover it?

• You or your spouse contract Alzheimer’s and need expensive care
• A granddaughter has a rare deadly disease but there’s an experimental drug that may help but it’s uncovered by insurance, do you spend the $200,000 for treatment?

Your formula will need a healthy balance for end of life for you and your spouse. It’s costly to die.

FitCommerce advises you keep the value of your house at its maximum through proper upkeep. In the unlikely event some unforeseen but very costly event occurs, you have the option to reverse mortgage your house. This is the only scenario we recommend doing so.

If you never face a black swan, then the house will be added to the legacy you leave to your kids.

Conclusion

Nobody has a crystal ball. It’s unfortunate that we know our exact birth date, but we have no idea what our end date will be. That makes it difficult to plan retirement spending. Too aggressive and you outlive your money. Too little and you leave it all to your heirs without properly enjoying the fruits of a life of work.

Build your own spreadsheet, keep modeling different scenarios until you find your comfort level and adjust it annually.

No go out and enjoy your well-deserved retirement.

 

 

Contrary to those TV ads by the big mutual fund firms most of us won’t have the $2-3 million in retirement savings when we reach 65. But we can enjoy a retirement that gives us some play money today and protection for our spouse and heirs tomorrow.  Here’s how the math works.

Congratulations boomers you made it to retirement.  Perhaps you’ve looked forward to this day of no more work, no hellish commute, it’s now time to kickback and let the days drift by. If you’re like most new retirees from the private sector, you most likely don’t have a pension — you have to live off social security and your own IRA savings.

Hopefully, you’ve maxed out your social security contributions during your working years and have delayed taking social security payments so that you have the maximum payout. The good news is that it’s fairly certain you will have those payments for life.  There will be a revolution if the federal government tried to cancel social security payments.

Even if you don’t believe you’ll live a long time, you have to consider the financial needs of your surviving spouse. Would you want to leave them destitute because you ‘lived it up’ a little too much during your early retirement and burned through the money?  Even though your spouse, at age 66 or greater, is entitled to social security “survivor benefits” at 100% of what you receive, you’re best to assume they’ll live many years after you’re gone, and that will impact your IRA withdrawal strategy.

Living off your IRA presents an interesting math exercise. Just how much money can you pull out each year and not run out of money before you die?  Just what is the mathematical equation to figure it out?  The missing piece in the equation is: we don’t know how long we’ll live. Is it 15 more years? 25? 30? Who knows? It definitely presents a challenge.

Remember the book, “Die Broke”? The author, Stephen Pollan, advised your net worth should be zero on the last day of your life. In actuality you can’t.

The fact is you may need a hefty balance in your IRA just to pay for end of life. Dying isn’t free, it comes with a price. There’s nursing home care, hospice, funeral, memorial service, etc. Also there can potentially be whopping fees for health care and nursing home care not covered by Medicare. You’ll therefore need a decent balance in your account so your kids aren’t left picking up the tab when you cross to the other side.

Does the 4% Rule Work?

Most financial adviser would advise that you can take 4% out or your retirement account each year forever and the principal will, over time, remain intact. But is that really true?  It assumes constant principal appreciation ahead of the income tax you will have to pay (if you’re totally in a Roth, there is no income tax).

Data from the Federal Reserve’s Survey of Consumer Finances for Americans ages 65-74 have an average retirement account of $358,000. Yours may be higher or lower, depending.

Source TheStreet.com:

https://www.thestreet.com/retirement/average-retirement-savings-14881067

So, let’s game play with a retirement savings of the $358,000 for a 65 year old, and using the 4% withdrawal model.

4% x $358,000 = $14,320 a year, or just shy of $1,200 a month.

The theory is that your portfolio will increase by at least 4% a year and you’ll remain at parity. Do you really believe this?  As of this writing you can’t get that kind of growth investing in total safety like U.S. Treasuries, the 10 year treasury bonds yield less than 1.70%, far short of the 4% growth. Therefore you’ll need to invest a portion of your IRA portfolio into equities and that means more risk.

There has been a bull market since the great recession bottomed out in 2008, we’re long overdue for major correction and perhaps a full blown recession. You can see why, projecting forward, it may be hard to sustain that assumed growth of 4%.

Hold on, we’re not done with our math exercise yet, Uncle Sam wants a piece of your IRA withdrawals, after all he let you reduce your income taxes when you putting money in. So, let’s reduce that number by a conservative 25% to pay our income tax.

$14,320 x 25% = $3,580.

$14,320 – $3,580 = $10,740 for year one. Or $895 per month net of taxes.

What’s Your New Monthly Nut?

It’s great to play with “income” numbers which are inexact and variable. What’s most likely fixed are your living expenses. Now that you’re no longer working, can you meet those expenses over the next 25 years or further?

In the U.S., on average most retirees live off or $38,000 a year, so there’s a gap between our yearly living expenses and the cash our IRA will yield. Good news, we still need to include our social security payments.

If you worked your entire life and paid into the system, waited until age 65 to begin receiving payments, you could expect a social security check of about $2,500 a month. Again, give Uncle Sam his due of 25% in income taxes, you’ll have $1,875 per month net of tax, or $22,500 a year.

So, let’s add it up:

IRA withdrawal:  $10,740 after tax

Social Security:    $22,500 after tax

—————–

Total:                                     $33,240 net per year

Not bad, it’s fairly close to that average living expense of about $38,000 a year. You can pay all those lousy bills until the day you die. But, is that all there is? Just get by?

Hold on! What about My “Golden Years”?

We’ve all seen the commercials given by Schwab and Fidelity of this happy grey haired couple walking hand in hand on the beaches of Bora Bora, taking Viking cruise trips up a Norwegian Fiord, and generally globetrotting.

So, what about us! Where’s our winters in the Caribbean and those summer trips to Europe?  Where’s our boat? Where’s our RV? Where’s that money going to come from?

O.K., O.K. so the 4% model theoretically leaves your entire principal intact regardless of when you die, be it in 5 years, or 50.  But you really don’t need to leave the principal wholly intact, you can start drawing it down at an intelligent rate.

There’s an Exit Fee

As we mentioned our last days on earth can be quite costly and we’ll need a sufficient balance in our savings to pay for our portion of the health care. We’re assuming you don’t want to sell off your hard assets like your house to pay for such.

Hospice terms vary but the median is about 24 days.  Medicare will pay for medical services but not occupancy.  The average room and board fee is around $320 a day that you’ll need above what Medicare will pay.

Source:

http://www.ssrhospicehome.org/what-is-hospice/what-does-it-cost/

A 90 day stay will most likely cost in excess of $30,000.

Adding it all up to fund a terminal illness, hospice, burial, and estate settlement, you should have a minimum of $60,000 remaining in your savings when you check out. Your spouse will need the same.

 

The Financial Heartbreak of Alzheimer’s

If you’re fortunate enough to make it to your mid-eighties you would not like the Las Vegas odds of contracting Alzheimer’s. At age 85 about 50% of the population has Alzheimer’s, scary.

Medicare will only pay for up to 100 days of skilled nursing home care under limited circumstances. However, custodial long-term nursing home care is not covered.

The national average cost for nursing home care is about $86,000 a year. .

The average life expectancy after diagnosis of Alzheimer’s is 8-10 years.  If we assume the first couple of years the symptoms are mild enough not to require assisted living, one would have to budget for 6 years or $516,000 to get to end of life.  And, Medicare’s 100 days of coverage won’t amount to a row of beans.

There are ways for a family member with visiting professional assistance to be the primary caregiver and save money, but that’s material for another post.

But it poses another financial challenge to have that much money in reserve for the possibility of (a) living that long and (b) actually contracting the disease. If you’re fearful you should talk to an estate attorney and perhaps place your assets in trust.

Principal Draw Down Formulas.

For purposes of these exercises, where going to assure there is a minimum $60,000 balance at age 85.

We already discussed that a 4% draw down from your IRA can go in perpetuity. But we want some “play” money.

We’ll assume good asset allocation will continually yield 4% growth. So let’s see what the effect is of increasing our withdrawal rate to a higher rate, say 8%:

 

Portfolio Growth of 4%
Age ==>	65	66	67	75	85	95
Total Retirement Savings	$     358,000	$ 335,088	$        313,642	$        184,774	$95,367	49,222.
Withdrawal @ 8%	$       (28,640)	$(26,807)	$        (25,091)	$         (14,782)	$ (7,629)	(3,938)
tax @ 25%	$         (7,160)	$  (6,702)	$          (6,273)	$          (3,695)	$ (1,907)	(984)
remaining	$      322,200	$ 301,579	$        282,278	$        166,297	$ 85,831	44,300
Income net of taxes ==>	$         21,480	$   20,105	$           18,819	$           11,086	$5,722	2,953.

Although in the early years, the shrinkage in the portfolio is not that dramatic, take a look at the last column should you make it to age 85, you will only have $85,831 in the account. Is that enough to die with? More on this later.

O.K. the 8% is too aggressive. How about we split the difference and go with a 6% draw down, that will look like this:

 

Portfolio Growth of 4%
Age ==>	65	66	67	75	85	95
Total Retirement Savings	$     358,000	$ 344,396	$        331,309	$        243,015	$164,962	$111,979
Withdrawal @ 6%	$       (21,480)	$(20,664)	$        (19,879)	$         (14,581)	$ (9,898)	$(6,719)
tax @ 25%	$         (5,370)	$  (5,166)	$          (4,970)	$          (3,645)	$ (2,474)	$(1,680)
remaining	$       331,150	$ 318,566	$       306,461	$       224,789	$ 153,590	$103,580
Income net of taxes ==>	$         16,110	$   15,498	$          14,909	$          10,936	$7,423	$5,039

What’s curious is that by drawing down at 6% vs. 8%, you will actually have more monthly income in the later years.  As you can see, at around age 75, the 6% income after taxes ($10,963) is fairly close to the 8% income after taxes ($11,086), and in the ensuing years, it actually surpasses.

In fact, over the entire 20 years of withdrawals, total income after taxes of the 6% is only $15,000 lower than the 8%.  Sounds like a winner.

A Last Word about Alzheimer’s

Somewhere around the 6% draw down rate from your retirement savings, augmented with social security, is about right to keep you financially independent through all your senior years. But we’re betting the roulette wheel comes up “red” that we don’t contract Alzheimer’s, what if it comes up “black” and we do get it? How are we going to pay for that extended nursing care?

One could have taken out “long term care” insurance and not have to worry about it. But those policies are very expensive and premiums need to be paid even while you’re retired but healthy thus adding to your annual expenses. An alternate solution is to self-insure.

Self-insuring means you may have to look at liquidating those assets beyond your retirement savings, namely your house. It would have been nice for your kids to inherit it, but life isn’t always nice.

Tweaks

It gets a little scary working these formulas but there are other things you can do:

Wait to draw social security until you’re 70 instead of 62, it could add $12,000 per year income. Again think about the welfare of your surviving spouse.

Keep a part-time job, see our post The Paradox of Semi-Retirement.  Imagine you can run a small business or find a part-time job to meet all your expenses and you did both of these: waited until age 70 to start social security and waited until age 75 to go to a full stop work retirement, here’s what that scenario would look like.

 

Portfolio Growth of 4%
Age ==>	65	66	67	75	85	95
Total Retirement Savings	$      358,000	$ 372,320	$        387,213	$         529,927	$206,362	80,361
Withdrawal @ 10%			$	$         (52,993)	$ (20,636)	(8,036)
tax @ 25%	$		$	$          (13,248)	$ (5,159)	(2,009)
remaining	$      358,000	$ 372,320	$        387,213	$         463,687	$ 180,567	70,316
Income net of taxes ==>	$		$	$           39,745	$15,477	6,027

 

In this case, you can actually withdraw at a higher clip of 10% to end up with a balance at age 85 higher than our 6% example above but have a lot of play money in that decade. Just a thought

Premeditatio Malorum

The stoics have a philosophy of premeditation of the evils, or imagining all the things that can go wrong, not to be a paranoiac, but ensuring nothing takes us by surprise. It’s the unexpectedness that adds weight to the disaster.

As you journey to your end at least you have both eyes wide open as to the multitude of scenarios that can take place. And with your appropriate actions your spouse and heirs won’t get burned. Let’s hope for the outcome in Kenny Roger’s song:

“And the best you can hope for is die in your sleep.

 

 

You know your birthdate right? Now, do you know your future death date? Nobody does. Not to get overly morbid, but it’s the not knowing when you’ll draw your last breath that causes a major dilemma in retirement investing. If you could know the exact date of your pending death you could spend your money down until it’s zero on your death day – oh pray tell, no such luck, it’s a lottery.

The dilemma is, with a long life and over spending, you could potentially outlive your money and be destitute in old age, or, worse, a burden to your children.

Have too much money remaining in your retirement account when you die it’s all left on the table when you visit St. Peter. Oh well, at least your heirs will enjoy the French Riviera.

“It’s a Question of Balance”

So, how can you manage your retirement money with this big unknown? As the Moody Blues said, “it’s a question of balance”.

If you’re like most people you’ll have no pension coming in, so, it’s all on you to build and preserve your IRA. You’re probably already receiving a lot of calls from “financial advisors” or “wealth managers” in your area that are very willing to manage your money for you. Be advised that today’s financial advisors are yesterday’s stock brokers that are merely retooled.

Unless they are bona fide fiduciaries, they are a for-profit business. That financial advisor makes a hefty commission and guess where it comes from? It comes out of your portfolio and into his or her pocket. And although they have very arcane formulas to mitigate risks, they cannot guaranty portfolio growth but they will take their fees, most likely between 1% to 2% annually.

To minimize these fees, should you go it alone and manage your own IRA? If you decide to self-manage, you’ll need to adhere to one critical principle, that of proper “asset allocation” in a balanced portfolio. Even if you give all your money to a financial advisor, it will behoove you to know the basics of sound asset allocation.

Asset Allocation: The Basics

There are two basic buckets you can place your retirement money: growth or safety. Growth generally means investing in in more speculative asset classes such as common stocks or stock mutual funds. These are risky in that, over time, they can grow, but they occasionally tank for a substantial period.

Safety generally means investment in more stable assets that are less volatile like bonds, treasuries, or money markets. In the case of U.S. Treasuries, your money is 100% safe (but could be susceptible to inflation devaluation).

Living a long life is a good thing. To finance it you will want to grow your IRA continuously. This becomes even more important after you retire, when you’re no longer earning a salary and depositing to your IRA – the growth now has to come 100% organically from the investments.

Unless you just fell off the cabbage truck, you realize there are inherent risks to the stock market. You probably witnessed the drop in value of your IRA in 2008 caused by the great recession. That nasty bubble pop took 6 years to get back to its original valuation.

So, why not put it all in safety and avoid another 2008. Well, this particular year, 2017, safe investment in treasuries and CDs are yielding only 2.5%, in contrast to the S&P 500 index fund which is running at 16%. That means on each $100,000 investment, The S&P 500 index fund earned $13,500 more a year – difficult to ignore.

The answer is you need a portion of your portfolio to be in growth and another portion to be in safety. If the stock market tanks again, you’ll have a substantial portion of your portfolio protected. Conversely if the market continues to grow, that part of your portfolio will also grow.

The Proper Allocation

How much to allocate to the safety bucket vs the growth bucket is determined by two factors: (1) your age and (2) your risk tolerance.

Why your age? Take two extremes, the fifty-year-old and the eighty-year-old. The fifty-year-old has a good 15 years or more of earnings before retirement. He or she can sustain another stock market calamity. Conversely, the eighty-year-old may not live the six years for the market to come back.

Risk tolerance varies from person to person. Some are queasy and anxious when the market dips, they get beside themselves. Others want to bet big for a bigger return, albeit also willing to take a bigger loss.

A Simple Formula

For those of you with low tolerance for risk, use 100 less your age to determine the portion of your portfolio to allocate to growth (and therefore more risky).
For those of you with high tolerance for risk, use 120 less your age to determine the portion of your portfolio to allocate to growth.

So, the example of a sixty-year-old would be:

Low risk = 100 -60 = 40% allocated to growth (therefore 60% would be safe)

High risk: 120 – 60 = 60% allocated to growth (therefore 40% would be safe)

Another example of a seventy-five-year-old would be:

Low risk = 100 -75 = 25% allocated to growth (therefore 60% would be safe)

High risk: 120 – 75= 45% allocated to growth (therefore 40% would be safe)

Rebalance

O.K., so you set up your IRA with the proper asset allocation for your age and risk tolerance, do you now just ignore it? No, the magic lies in the rebalancing after the situation changes.

Let’s take the year 2016 as a low risk tolerant fifty-year-old, if you had a total of $200,000 in your portfolio, you would place $100,000 (50%) in stock funds, and $100,000 (the other 50%) in something safe like treasuries or bonds. That’s what it looks like on January 1, but one year later, the picture has changed, that stock fund went up 18%.

So, now the picture looks like this:

Growth: $118,000 — now 54% of the portfolio
Safety: $102,500 — now 46% of the portfolio

If you do nothing, you’re over exposed in stocks (54% when it should be 50%) and now need to take some chips off the table and place into safety.

So, to properly rebalance, you would sell off $7,750 of your growth bucket and place into it into the safety bucket to make them again 50% / 50%.

“Buy Low, Sell High” 

Here’s the magic: buy low, sell high.

Stocks don’t go up forever, eventually they top off and decline, but even the most prescient soothsayer cannot predict the exact top, so what you’re doing is moving money away from high risk to protection. You’re selling high!

If the reverse occurred, and stocks declined by 18%, you would actually sell the roughly $7,750 in bonds and buy more stocks. You’re buying low!

Conclusion

The world is fraught with risk, think Donald Trump and Kim Jong-Un, a lot of things are out of your control, so you need an investment strategy that meets your risk tolerance and takes into account how many years you’ll have on this planet. Allocate properly and rebalance once per year and you won’t go too far wrong. In a future post we’ll address a formula for withdrawals so you can enjoy your retirement and not run out of money.

Oops, you’re not far away from retirement, you looked at your IRA balance… meager. So how are you going to pull it off?  Paradoxically, working just a little during your retirement, can be the answer to achieving all that you ultimately wished for in retirement: time freedom, travel, stress-free. Here are some basic principles for you to develop a strategy and a proper attitude.

The Halcyon Days are Gone

Since you were very young, you heard your parents talk about “retirement” and how great it was going to be. Your mom might have stayed at home to raise you kids, and kept the home. Your dad may have been a middle manager at a firm that offered a pension. And when your parents turned 65 years of age they probably did retire, the house was paid off, there was a pension and social security, and those weeks in Florida during winter…life was good.

Is that what you’re expecting, boomer? That same scenario? Forgetaboutit. Why? Well, there have been a couple of seismic shifts from our parents’ generation to ours, just to vamp on three:

• The demise of pensions
• The elimination of decent salaried middle management jobs
• Longer life expectancies

The Demise of Pensions

The burden of securing funding for retirement has shifted from companies that offered pensions to either IRA’s or 401(k)’s where the employee is now solely responsible.  It’s a sad fact, but most boomers simply haven’t saved enough in their personal retirement funds. Yes there will be social security but that won’t be nearly enough.

In your father’s era, large corporations offered pensions that were carefully managed by highly educated and highly trained financial managers who could invest properly to fund the disbursements.  Plus, the new young hires would finance the old retiring employees, and it worked great for a while. But it turned out to be a Ponzi scheme that wasn’t sustainable in the long run, and it’s thus it’s gone. Poof.

The Elimination of Middle Management a/k/a Downsizing

In the post-World War II era, the world was economically ravaged by war. Because the factories were bombed out over there and not on U.S. soil, we were able to jump start a powerful peace time economy. It was so powerful that families only needed one income and we could have that “Ozzie and Harriet” family lifestyle.

However, when the other economies finally recovered, the world flattened and it became globally competitive. Cars were made in Japan, IT jobs moved to India and a new management surgical procedure was implemented – downsizing.

Many boomers, perhaps yourself, faced job losses at a later stage in life. Most never got the salary they were accustomed to and had to tighten the belt. With no pension, they just weren’t making the deposits to their retirement accounts.

Longer Life Expectancy

The good news, and bad, is that if you’re still alive at age 51, statistically speaking, you could live another 30 years to the age of 81 and even beyond. That means if you retire at say age 66, you will have to self-finance about 20 years of living.

Contrarily, if your parents were born around the 1930’s their life expectancy, statistically speaking, was to age 60. So, you’ll statically have an extra 20 years of life over them, but where’s all that money going to come from?

There’ also another big gotcha, how are you going to exit this world? Will you be stricken down by a massive heart attack and be buried 3 days later? (Sad, but not an excessive financial burden.) Or, will you and/or your spouse be stricken with a stroke or Alzheimer’s and require expensive assisted living for years and years gobbling up all your finances?

It’s a sheer lottery as to when our last day on earth will be, and how expensive health care and assisted living will be those last weeks or months.

You’ll Need a Contingency Fund for End of Life

This part is going to be really unpleasant, but better to realize it now rather than when the day comes.

According to US News, a semi-private room in a nursing home runs on average $222 daily, or more than $81,000 per year! And the average nursing home stay is 28 months. So, doing the math, if you’re average and require nursing home care you will need $185,000 per spouse, or $370,000 in reserve for this contingency alone. Will you have it? Or, pass the burden to your children?

Standard Retirement Income Streams

Keeping it simple, there are three standard income streams for retirees:

• Pensions
• Social Security
• IRA Draw Downs

If you started your career in the public sector, congratulations, you probably have a pension to fall back on. The rest of you in the private sector enjoyed more income during our working days, but there’s no federal annuity coming. So, nothing coming in from the pension channel.

Thank FDR for our social security benefits. But can you really live on $1,400 per month? That’s what the average payout is to over 40 million recipients. Hopefully, yours is much more.

The 3^rd factor and most variable is your IRA balance when you retire. Most middle-agers don’t have nearly enough. According to the Employee Benefit Research Institute, most Americans in the 55-59 age group average about $122,957 in their IRAs.

Sounds like a lot right? Wrong.

At age 55, if you’re socking away 10% of your $60,000 per year salary into your IRA, and maintaining a 5% compounded return, you will have about $295,000 in your IRA by age 66. If you start withdrawing 4% of your balance each year (the formula most financial advisors agree upon) that gives you slightly less than $12K per year. There goes your plans for a vagabonding through Europe.

Wait, what if you could add another income stream for that “fun” money in retirement?

Semi-retirement, the Magic Bullet

What if there was a way of adding another income stream without adding stress or minimizing your time freedom, or getting in the way of extended trips? There is, it called semi-retirement.

Imagine adding an income stream of up to $2,000 per month or $24,000 per year on top of your IRA draw down and social security, how much is that worth to you?

Well, if you do the math, at 5% yield and not touching the principal, you would comparably need $480,000 in savings to yield that amount. Amazing, more than you have currently saved up, right?

O.K., I hear you, “I’m tired of work, I don’t want a boss hovering over me, I want to fish more, I want to spend more time with my grandchildren, I don’t want to be hemmed in.”

I get it. So, let’s set some ground rules for the what we’ll need out of this semi-retirement job

It truly has to be “part-time”, 20 hours per week or less. The hiring firm has to realize that if they mess up they can’t expect you to work more than this amount.

Build in long vacation times and sabbatical. Your job can’t be so mission critical that you can’t take off for 6 weeks for a European trip if you wanted to.

Your ideal wage would be between $20 – $25 per hour so that you can achieve your goal of an extra $2,000 per month.

As for the stressful boss issue. Most companies are so grateful to get seasoned mature workers that they treat them like princes and princesses. And if they don’t, you walk.

Ideas Jobs for Part Time Work

O.K. where are you going to find that ideal semi-retired job?

You’re only limited by your own imagination, but let’s give you some fertile ground to explore:

Previous Employers

If you did good work for a previous company, the may be willing to discuss bringing you back in at a scaled down level – give it a shot.

If you were highly skilled in your field, you could hang your shingle out as a consultant, choose your clients and choose your hours.

Or, if you were a decent business person, you can hang your shingle out as a business coach. There are a plethora of young entrepreneurs that need mature business guidance.

Sales Reps

There are a host of products and services to be sold. Many companies are willing to offer commission only deals, but pick up expenses.  This could be selling via the phone in a business to business scenario. Or, merely generating appointments for field reps to follow up on. You can spend as much or little time as your wish.

If you’re a little more entrepreneurial, you can become a sub-agent in merchant services (credit card processing) or work under a realtor.

Until Amazon sells everything on the planet, there are many independently owned retailers just dying for reliable in-store sales associates.

Seasonal Work

With more and more retail sales occurring over the web, all those packages need to get delivered. That means seasonal hires but the big package delivery firms like UPS, FedEx and others. A good way to earn income in a few weeks and take the rest of the year off.

Start Your own Sales Business

Hundreds of thousands of people earn a living reselling stuff on eBay.  If you’re good at finding value at flea markets or peoples’ attics, this may be good for you. All you really need is a smartphone camera and the ability to write accurate descriptions of products.

If you’re good at design and making your own clothing, jewelry, etc. then Etsy may be for you.

Excess Capacity Opportunities

If you own a halfway decent car you can set your own hours and work for Uber of Lyft.

Similarly, if you have a decent apartment or home in area where people like to visit or vacation, and have another place to crash, you can rent your home on AirBnB, Home Away, and the like.

Education

Do you like to teach?  You can put your master’s degree to use and become an adjunct professor at a nearby college.  Or, how about a teacher’s aid in your local public school, a great way to get summers off.

Home Based Jobs

If you already know how to build websites, web development is ideal for part time work out of your home.  You’ll have to get out and network to pick up customers.

There’s a growing field for virtual assistants that can work from home. This may be helping a self-employed entrepreneur to focus on the core of their business while you handle the mundane of staying on budget, answering email, booking appointments, handling phone calls and the like.

With the aging population there is high demand for at-home non-medical senior care. With the high expenses of resident assisted living, the more affordable solution is at-home senior care. If you’re a care giver and enjoy intermingling with seniors, this may be an opportunity for you.

Pets are prolific, another freelance opportunity is to be a dog walker, or pet sitter. Pet sitting usually involves overnight stays which doubles up as house sitting. Most pet owners don’t like to place their loved pets in the kennels, so pet sitting is a growing field.

Multi-Level Marketing

Multi-level marketing is portrayed as a pyramid, but it need not be. If you find a product that you truly love, whether it be Amway, Avon, health juices, go for it and sell the product to everyone you know. If you happen to build a sales force under you than you’ll make additional passive income.

This is only a partial list. With heightened awareness, you can create your own par time job or business.

It’s up to you

Remember, the quality of your (semi) retirement lies solely with you, there’s no one else to blame. Get started now.