retirement planning

Case Study: The Looming Retirement of Mr. & Mrs. C

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We recently were consulted by folks who are just a few years from retirement. Mr. and Mrs. C had a chance to make a major purchase that they had long considered and would really enjoy. Some people want a camper or a boat, others a cabin…you get the picture. They wanted our help to figure out if it would fit with the rest of their plans and planning.

The process we used to help them is the same framework we use to help people understand how retirement will work for them, financially speaking. Perhaps it will be of interest to you.

There are four kinds of numbers that figure in.

  1. Monthly outgo—how much will it take to run the household in retirement, to live as you plan to live?
  2. Monthly income—what are the pieces of recurring monthly income? Monthly pension benefits, Social Security, and rental income are in this category.
  3. Planned lump sum purchases or obligations to pay. This was the thing that stumped Mr. & Mrs. C. They had a chance to lay out some money that could improve their lives a lot, and needed to know whether it would work out.
  4. Lump sum resources available. Long term savings, 401(k) plans, IRA’s, investments, and money from planned sales of assets are the main categories here.

Fortunately, Mr. & Mrs. C have expected retirement income sources that should sustain their lifestyle in retirement. Once that was determined, we could move on to sorting out the best way to handle the purchase they planned.

There are tax considerations to withdrawing retirement plan dollars, cash flow considerations from taking on debt, and opportunity costs to cashing in investments. We framed the costs and benefits of each alternative so they could figure out what they wanted to do. If you would like to talk about your situation, please call or email us to set a time for discussion.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Fruition, What a Wonderful Word!

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We’re inspired by recent conversations with clients and friends whose plans, as they say, have come to fruition. Fruition—the realization or fulfillment of a plan or project—scarcely begins to describe the satisfaction and joy we’ve seen.

The recent retirees after downsizing to a maintenance-free home, going to art festivals instead of pulling weeds, having more dinners with their descendants, seeing more ball games… people going on that Alaska cruise or the tour of Italy… hobbies becoming true avocations. These are some of the plans we’ve seen come to fruition for people we are close to.

A wise person once said that a plan is a dream put into writing. We are in the business of trying to make the arithmetic work for people who would like to try to make their dreams come true. We’ve written before about the best way to retire and the point is, dreams are personal. What are you trying to do? Where do you want to wind up?

One of the privileges of long experience in our work is seeing the realization or fulfillment of plans made long ago. But life sometimes throws curve balls. So we’ve also seen adaptations and adjustments made by people who would have preferred to avoid the need for adjustments. Not everyone we love lives as long as we wished, health may be fleeting, and circumstances often present a mixed bag. The point is, sound plans usually put us in better shape to deal with the unanticipated.

Money is not the most important thing in the world. But it is also true that resources give us options we might otherwise not have. Wealth may free up our time, and time is what life is made of. Dreams and arithmetic working together may make the best things more likely. If you would like to discuss your dreams and plans in greater detail, please write or call.

Sooner or Later…

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When I was a young man, my father told me that the mortality rate is 100 percent. I apologize for speaking so plainly, but sooner or later there is a funeral in store for every one of us.

This sad fact weighs on many of the financial decisions we make later in our lives. The issue is that we never get to know ahead of time when our funeral is going to be. A new retiree might live another forty years, or they might not live to see their next birthday. Plans that make sense for one scenario may not make sense for the other, and we do not get to know which scenario we will face.

When possible, we prefer to invest for retirement on a sustainable endowment-style basis, aiming to generate portfolio income to live on rather than spending down principal: “owning the orchard for the fruit crop.” The longer you can maintain your principal, the less likely it is that you will outlive your money. This approach also has the advantage of leaving a legacy intact to pass down to your heirs, if that is a priority for you.

But not all of us are fortunate enough to be able to comfortably retire on portfolio income alone. And not everyone is content to lock away a lifetime of earnings without getting the enjoyment of spending it themselves. Spending your principal is also an option if you want to live more luxuriously, although this increases the risk of outliving your money—you may wind up merely trading future comfort for present pleasures. The decision you make at 65 may haunt you at 85.

None of us knows the future, life has a way of getting in the way of our best laid plans. Our preference is to plan for a long, healthy life: we believe it is better to have money and not get to spend it than it is to need money and no longer have it. But ultimately, the choices you make about retirement are a matter of which risks you’re comfortable with. Figuring out your priorities is your job. Once you know what you want to do, talk to us and we’ll see if we can help you try to do it.

Persistence Pays in Many Ways

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We have noticed something so prevalent it borders on being a universal truth. In so many of life’s endeavors, persistence is the difference between success and failure.

Tenure in a career builds experience and skills and value to employers…and earning power. Building a reputation in business takes years but can pay off for decades. A friend tells us, a college degree tells potential employers one thing: a willingness to stick with something for at least four years. In a world where instant gratification is so dominant, persistence—or grit—is an asset.

Persistence usually implies effort, willpower, or self-control. But there are ways you can be financially persistent without much thought or effort.

A saver who commits to put $100 monthly into an investment or savings account will run into reasons why it would be OK to skip a month, perhaps intending to make it up later. Maybe they feel it’s not a good time to invest, the refrigerator will need replacing, or an auto repair popped up. So the commitment turns into 12 decisions each year, 120 decisions per decade, 480 decisions over a working career.

By simply setting up an automatic deposit from one’s checking account, one decision is made and it lasts for all time. It is much easier to get one decision right instead of twelve or hundreds.

Many people have 401(k)s, IRAs, or other voluntary retirement plans available to them. Here, too, inertia can help you build wealth. You sign up, and so many dollars go into the plan every payday without any sweat or effort on your part. Sometimes people nearing retirement find out they are in pretty good shape because a young person long ago put wealth-building on auto-pilot.

When you combine these automatic, systematic ways to invest with the power of compounding wealth, amazing things can happen. Call or write if you would like to discuss your situation in more detail.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

The Retirement Revolution

© Can Stock Photo Inc. / lsantilli

Retirement, a relatively modern concept, is changing. Demographics, economics, and social change are all working to rearrange our notions about later years. Some commentators think that the term “retirement” itself needs to be retired. We’ll look at the trends and how they may affect you or people you know.

The changes in life expectancy have been astonishing. Since 1970, the average person is retired for seven more years according to the New York Times. Ken Dychtwald, president of Age Wave, notes the extraordinary growth in the average life span this way: “On the first day of the 20th century, the average life expectation was 47. On the last day, it was 78.”

Bottom line, the increase in our life expectancy has been partly tacked onto our retirement years. But when actuaries predict that there will only be two workers per each Social Security retiree, one has to wonder whether a society can run with one out of three adults living in retirement.

With the high unemployment rates of the financial crisis in vivid memory, it is hard to think about a labor shortage—but that is what the demographics point to. Two good things may come out of that: higher increases in wages, and more flexibility for workers seeking reduced hours, phase-down jobs, or other retirement-friendly alternatives.

Potential social changes are harder to predict. Anecdotally, more people below age 60 have indicated a preference to “always be doing something” in the way of work. Usually the object is a less stressful role, or part-time, or in a field of interest. At the same time, more people are thinking about checking things off their ‘bucket list’ when younger, while their health is good. One client told us, “It makes no sense to scrimp and save until you are too old and sick to do anything.”

One might say that more leisure is finding its way into our working years even while more work is getting into our leisure years.

Now more than ever, learning is an important part of keeping up with changes in the world and the skills required to earn a living. So just as work and leisure are expanding out of traditional boundaries, education is no longer confined to our early years.

We’ve written about the ideal way to retire before. The key things are to know what you want to do, and make plans to get there. Please call or email us if we may be of service in this regard.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Make Sense of Your Financial Planning

© Can Stock Photo Inc. / Batman2000

If you go searching for financial planning help, you will find a great many tools at your disposal, from online calculators to professional financial planners who can help you chart a course for your future.

Whether you’re using online tools or seeing a professional face-to-face, the logic they will use is often the same. First, they will sit down and total the major expenses you expect to face over your lifespan: paying off debt, marriage, childbirth, kids’ college, new houses, retirement, et cetera. Then they divide the grand total of your expenses over the number of years you expect to live through to pay them off, adjust it for compounding interest, and arrive at a target percentage of your income that you should be saving each and every year of your life in order to afford these major milestones.

Often calculations like these will give you worrying results. This arithmetic often tells you that you must put aside an enormous amount of income into savings or else you will never be able to afford to retire.

Fortunately, there are a couple of crucial flaws in this reasoning that may provide some relief. Young couples often stay up late worrying how they’re going to pay for a house, kids, college, and retirement, and the answer is simple: you’re not paying for all of those things at the same time. As we advance through our lives, new expenditures come up and old ones go away. When you buy a house, the money you were setting aside for a down payment turns into money you set aside for kids. When you send your kids off to college, the money you were setting aside for them turns into money you set aside for retirement. You don’t have to save for all your big expenses in advance: your cash flow (which will tend to increase as your earning power grows with age and experience) will help accommodate different expenses at various times.

Don’t get us wrong: saving more money is better than saving less money. But it’s important to remember what you’re saving money for in the first place, so that you can spend money on the things you want and need in life. Call us if you need any help making your plans and planning work.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Putting the Security Back in Social Security

© Can Stock Photo Inc. / CBoswell

There is a recurring concern that comes up when discussing retirement planning with clients. When we sit down with someone to break down various sources of retirement income, sometimes they will stop me and say “Mark, I don’t want to count on Social Security because I’m pretty sure it will be gone by the time I retire.”

It’s an understandable concern. We see headlines all the time calling for Social Security reforms (meaning cuts), throwing around scary words like “default” and “insolvent.” However, it is important to remember what these words really mean. If someone owes you $100.00, and they can only pay you back $99.97, they are technically insolvent. But you’re not really going to miss those three cents all that much.

The Social Security trust is short more than a couple of pennies, but the concept is the same: the program has merely enough funding to meet most of its obligations rather than all of them. You might hear estimates that the Social Security trust fund will “run out” within 20 years, but this does not mean the end of Social Security. Even without the support of the trust, the Social Security program is projected to have enough revenue to continue paying out approximately 75% of its obligations after the trust runs out (according to the latest annual report of the trustee board at ssa.gov.)

This is still a problem, obviously. No one wants to wake up in 20 years and hear their benefits have been cut by 25% because Social Security ran out of money. Thankfully, the fixes are not onerous. The math behind the Social Security trust, as with any pension fund, is based on the principle of compound interest—something that Albert Einstein is said to have called the greatest force in the universe. Staving off that future 25% drop can be accomplished by a smaller 13% decrease in benefits or increase in revenues today (representing a payroll tax of about 2%.)

These changes will undoubtedly cause some pain and there will be resistance to Social Security reforms. None of us knows what the future may bring, so it may be foolish to treat benefit projections as hard and fast numbers. But it seems clear to us that Social Security will likely survive in some form.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Very Best Way to Retire

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Have you been reading those articles with titles like “Ten Best Places to Retire” or “The Best Investments for Retirement” or “Six Best States for Retirement Taxes”?

Being in the business of retirement, and voracious readers besides, we read all that stuff. And we talk to scores of people about their retirement plans, and scores of retirees as well.

There is one sure thing about retirement: no one but you knows your best way to live in retirement. The articles are useful only to prompt your own thinking about your own situation. Most retirements are successful, in the sense that people are happier with greater freedom to pursue their interests and control over their schedules. These people often say, “I don’t know how I had time to work” because they are so busy. One client told us that “work is way over-rated.”

Other retirements do not work out as well. We believe there are a few aspects of retirement that successful retirees thought out in advance.

Where to live? A minority of people move to retirement destination locations. Most stay close to friends and family. Others split the difference and travel in winter or adopt a snowbird routine. With planning, you can do what you want to do.

What type of housing? Residential living encompasses more choices than ever before. Some people enjoy yardwork or gardening, or like to putter in the garage or shop. Others can’t wait to give away the rake and mower. The amenities of a condo or apartment community like a pool or exercise facilities are attractive to some. A townhouse setup with exterior maintenance and lawn care is the right choice for others. Staying in the family home is perhaps the most common option. Where do you want to wake up every day?

What to do? There are as many retirement lifestyles as there are people. Some spend much time with family, attending ballgames and school events of grandchildren, helping with child care or errands. Others are busy with some combination of fishing, hunting, golf, tennis, hiking, traveling, exercising, boating or travel. Social clubs, meals with friends, bowling leagues, or card parties dot some retiree calendars. Part-time jobs are desirable for an increasing number of retirees, both for a little extra income and for the enjoyment. How do you want to spend your time?

A wise person once said, “Time is what life is made out of. Be careful how you spend it.” Your time, your life. Think about it. We are here to do the math; call us if you would like an office appointment or telephone conference.

Can Investment Arithmetic Buy Your Groceries?

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One of the enduring concepts used by successful retirees and endowment funds alike is the idea that portfolio income is what pays the bills, not portfolio market value. Market values change from day to day and minute to minute. As we’ve written before, “Own the orchard for the fruit crop.” It helps one’s sanity to focus on the fruit crop (portfolio income), not the value of the orchard (market value.)

Imagine a company, XYZ Widgets, whose shares trade for $100 per share and pay annual dividends of $3 (a yield of 3% annually on the stock price.) The price of XYZ stock can go up or down in the short term, but historically there is little correlation between changes in the market price and changes in the dividend.

Let’s imagine that XYZ stock falls to $50. While companies may sometimes cut dividends they are often reluctant to do so, so XYZ may continue paying $3 per share. Despite the drop in stock price, shareholders would still get the same $3 with which to pay their bills. In fact, XYZ may then be an even better prospect for income investors: at $50 a share, that $3 dividend now gives them a 6% annual yield on their cost.

The same applies to bonds and other income-generating investments. A 5% bond issued at full price may be sold off down the road for cheaper if bondholders are worried about the company’s prospects for making good on their debts. If you bought that 5% bond for 50 cents on the dollar you would receive the same amount of interest, but now it would be equivalent to a 10% return on your investment each year. If the company recovered and was able to pay full price at maturity, you would receive 100 cents for every 50 cents worth of bonds you bought at a discount.

This arithmetic is one reason why investors who “buy low” often have an edge. A market downturn can have alarming effects on your retirement savings. But while the purchasing power of your retirement funds may go down, falling prices also allow you to buy income investments at higher yields.

There is no guarantee that you will be able to find high quality investments at such steep discounts, or that discount investments will turn out to be high quality. These examples are intended to illustrate the arithmetic of portfolio income, not as advice to any individual to buy a specific investment.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Can You Afford Retirement? Part 2

© www.canstockphoto.com / Kenishirotie

In the prior installment, we wrote about determining how much income you’ll need in retirement.

The challenge we face in trying to understand retirement planning is that so many of our resources are in lump sum form. IRA balances, profit-sharing plans, and 401(k)s show one big number, the account value. But in the real world, we need recurring income with which to pay our bills.

So how do you take a lump sum and figure out the recurring income it will produce? Or, if you know the income you will need to fund our retirement lifestyle, how do you figure out the lump sum you need?

(If you would like us to do the arithmetic, or if you are actually getting ready to figure out your own retirement scenario, feel free to call for an appointment in the office or a telephone conference. If you are more the ‘do-it-yourself’ type, read on.)

Our baseline assumption is that a diversified, well-invested portfolio can stand withdrawal rates of 5% annually on a perpetual basis. So if your hypothetical retirement income target says you need $24,000 per year ($2,000 per month) from your portfolio after Social Security benefits and pensions, you can figure the size of the portfolio needed simply by multiplying $24,000 by 20 (or equivalently by dividing $24,000 by 5%.) Either way, this formula says you will need $480,000 in order to produce $24,000 of portfolio income per year.

Some commentators say that 4% is the right number, not 5%. A lower withdrawal rate will produce greater financial security, all other things equal. Our experience says 5% is workable, but this is not guaranteed. It is a rule of thumb. We would expect that the lump sum would go up and down in value with a generally rising long term trend, and that income withdrawals may increase from time to time.

Some people prefer to plan for a certain number of years, or use annuities, to boost planned spending for a given amount of retirement resources. Our preferred methodology, when possible, is to rely on generating sustainable levels of income on a continuous basis.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply.

All examples are hypothetical and are not representative of any specific investment. Your results may vary.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.