retirement planning

Rule #3

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Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?

If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.

You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.

This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.

There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.

Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.


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

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

Financial Planning and Fortune Tellers

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We recently reviewed a financial planner’s article about strategies for claiming Social Security. They had software to do a complex analysis. The software required inputs of some raw facts: estimated Social Security benefits at different ages, household cash flow requirements, financial balances.

But the software required inputs, answers to questions about the future:

How much will investments earn in the future?

What will tax rates be in the future?

What will inflation be in the future?

How will household cash flow needs change in the future?

Many software planning tools even ask for the answer to the ultimate question: what will the date on your death certificate be?

The problem is we can’t know the future. So calculating that financial balances would be a tiny amount higher 30 years from now if one course is chosen versus another is probably about as reliable as consulting a fortune teller. Especially when it comes to trying to guess when your retirement will “end”!

But when it comes out of a computer, with charts and graphs and year-by-year tables of numbers, presented by a well-dressed person with initials after their name, it seems real.

At the dawn of the computer age, a phrase was used to describe the analytical version of “you reap what you sow”: “garbage in, garbage out” (or GIGO).1 We might do well to remember it.

Clients, if you would like to puzzle through any financial issue, we would be happy to use real life dialogue to sort out how the alternatives might work out. Email us or call.


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

 

Pin It Down

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Social Security is a key piece of the retirement puzzle for most people. The benefits can be worth a substantial amount of money, Each one of us must make decisions about our participation.

We advocate getting facts specific to your situation before making up your mind about what to do. There is a lot of information floating around, not all of it accurate. If you do a Google search on the term “social security” you find more than six billion references.

But there is only one Social Security Administration, and its official websites may be a good place to begin. The reality may be more complicated than indicated by articles in the media.

Recently a client wondered about whether to defer retirement benefits to age 70. Supposedly the benefit of waiting past Full Retirement Age would be an 8% increase per year, calculated to the month. But when they looked at their online benefit statement at SSA.GOV, the benefit of waiting to age 70 benefit was 17% greater than indicated by the 8% formula.

How could this be?

Social Security retirement benefits are based on your best 35 years of earnings, indexed for inflation. Working beyond Full Retirement Age would replace a low wage year from earlier in life with higher current earnings, for this client. So there were two factors working in favor of deferral, not just one.

Pin down the specific facts for your situation before making up your mind. Clients, if you would like help with this or to talk about anything else, please email us or call.


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

This is an individual example and is not representative of any specific investment. Your results may vary.

Moving Target

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We have observed that spending in retirement is a moving target. One theory says we spend more money in the early years of retirement than in the later years. Financial planner Michael Stein describes it this way: the Go-Go years, the Slow-Go years, and the No-Go years.

Spending in retirement impacts some of our most fundamental plans and planning. Retirees have a wide range of lifestyles, avocations, and circumstances which take money. It’s a personal thing.

In our experience we see people spend less as they age. When we first noticed this trend, we wondered if that was because some people run low on money. However, we recently have taken note that people with resources tend to spend less as time goes on. (Health expenses may run counter to this trend, increasing toward the end of life).

Each person has their own objectives and habits, and life throws some curve balls too. Case by case, it could make sense to plan on spending more in the early years of retirement. Bucket list items, to be done once, might come early in retirement.

The Alaska cruise, trip to Hawaii, or tour of Europe should be undertaken when you have the time and money and health to do it. The boat or camper, if one is desired, should be purchased when one has more years to enjoy it.

One of the most gratifying parts of our work is working with people on their plans and planning. We’ve worked with some of you from mid-career all the way into many years of retirement. Each one of you is as different as a fingerprint.

Clients, if you would like to talk in more detail about your retirement aspirations or anything else, please email us or call.


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 Worst State to Retire In

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It seems like everywhere you turn, there are opinions about retirement. We have not seen this particular bit of advice, so here goes.

After thought and study, we conclude that the worst possible state for retirement is… the state of confusion. Confusion may seriously impair the retirement experience.

• If we don’t understand the income potential of our lump sum balances, we may either be unnecessarily tight with our budget, or run the risk of winding up broke.

• Running out of money is a common and natural fear. Arithmetic guided by experience and knowledge may ease that concern.

• Decisions about Social Security benefits and pension payouts may have a large impact on financial security. The advice one gets at coffee break or at the water cooler may not be the best.

• Health care transforms for most people in retirement. Putting all the pieces together can be confusing. Medicare Part A, Part B, Part D, and supplemental insurance all enter into it. Personal health and financial factors play roles, too.

We advocate thoughtful approaches to major life decisions. A framework of solid information and the right arithmetic may help reduce confusion.

All in all, the state of confidence is a far better place to retire than the state of confusion. Clients, if you would like to discuss this or anything else, please email us or call.


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

Building a Retirement Fund: Two Simple Things

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As a rookie in business, I impressed myself with how much knowledge the work required. It was complicated! It did not take long to figure out that many people believe the same thing about their work.

The point was driven home when I made the mistake of suggesting that working in the ice cream factory must be pretty simple—to a fellow who worked on the production line. “Are you kidding me? You got all your different flavors, plus the ones with nuts or candy mixed in… it’s complicated!”

Like any field of endeavor, retirement planning has those who seek to impress with how complicated it is. But if you get just two simple things right, you can put yourself on the road to progress.

Your Savings Rate. The money you put away is the raw material of your future retirement. The first thing is to set aside money every payday. 401(k) plans make it easy, but you can do it with or without one. It seems like many people starting out cannot save 10% or 15% of their earnings—one needs to buy groceries and electricity, too.

But wherever you start, even at 1% or 4%, you can increase that 1% per year until you get to 15%. Or put half of any raise into the plan—if you get a 4% raise, add 2% to your contribution rate.

Your Long Term Strategy. Put your long term money into long term investments. Various investments offer short term stability or long term returns—but not all of both. If your retirement is decades away, investments that promise a stable value tomorrow or next year do nothing for you in your real life. You might aim for higher returns instead.

(Some people are unable to live with the ups and downs of long term investing. We aren’t suggesting that living with volatility is right for everyone. But if you require stability, you will probably need to save more in order to reach your goals.)

Clients, if you figured these things out long ago, you might pass this along to younger folks. To talk about these ideas or anything else, email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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

 

Peak Experience

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You know we are endlessly fascinated by the search for investment bargains, the interplay of human behavior and the markets, and economic cycles. We enjoy talking with you, and collaborating on your plans and planning. But the pinnacle of our work is in a whole different category.

Once, a life-long friend of a close client had not been able to solve the question, “Can I afford to retire?” Mrs. S had raised two children on her own after being widowed at a young age, and was working at a job that had become onerous as she approached retirement age. For two years she had pursued the answer, but could not find it.

She needed to gain the confidence that she could retire. The resources were there, through her lifetime of diligent saving. We were able to explain the meaning of her wealth, how it could help her work toward where she wanted to go, in terms she could understand.

A year and a half after that, she called to ask another question. Would it be possible for her to own a home, or was that a pipe dream? She had spent thirty years in a modest rental duplex. Some time later she began her home search.

These questions, and others like them, are the reason we are in business. Our real work is not about making money. It is about helping clients make decisions that could change their lives.

Mrs. S was never our largest client. She never paid us the highest fees. But the personal satisfaction we felt from our work was vast.

Many will never need that much help. They come to a comfortable understanding of the meaning of their wealth without our context and perspective. We are still very happy to play a role investing their resources, and answering those financial planning questions that do arise.

Clients, if you would like to talk about these things or anything else, please email us or call.


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

 

Have You Heard About Unretirement?

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Retirement is a fascinating topic. New ideas about it seem to pop up regularly.

For nearly all of human history, we worked while we could and stopped only when we couldn’t. The average person had no reasonable chance to accumulate capital on which to live.

But by the middle of the 20th century, things began to change. With Social Security and greater amounts of private savings, most people retired from work at some point. A new lifestyle was born.

Now, anecdotal evidence suggests that some people plan to work as long as they are able—at one thing or another. One client tells us of her plans to do something she enjoys. Another likes working at the state park. Consulting offers some a way to stay engaged, but on a less-active basis, either part-time or seasonal.

We also know people who simply never left their primary occupation after they reached normal retirement age. They enjoy the work and their coworkers, and could not see the point in quitting.

Obviously, this form of “unretirement” is not for everyone. Some go back to school, pick up new or old hobbies, volunteer for causes in which they believe, or spend time helping with family. Travel, reading… the list of things one might do in retirement is limited only by one’s imagination.

Although we each have our own ideas about what retirement means, we all have one thing in common. Our choices will be richer, more varied, and better if we have money. The option to continue working is a better situation than not having a choice because of financial necessity.

Clients, if you want an assessment about the money end of your retirement, please email us or call.


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

Made It! Age 62, Eligible for Social Security

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Yes, at age 62 I could claim Social Security benefits. But I won’t.

After talking with you for decades about your Social Security benefits and the tactics you might use in claiming benefits, I’m looking at my own situation. There may be lessons in it for others, so we’ll talk about it here.

Suppose my benefit at age 62 would be $1,500. That’s $18,000 a year! Why wouldn’t I claim it?

1. If I wait until later, my benefit will be larger. That’s $2,128 monthly at full retirement age (66 and 4 months) or $2,856 at age 70.

2. If I claim now, since I want to keep on working, my benefits would be reduced by 50 cents for every dollar I earn over about $17,000.

3. My benefits would be partly taxable because I would have other income of over $23,000 for the year, basically. (It’s complicated—consult your own tax advisor.)

4. Flexibility: A decision to defer claiming Social Security can be changed at any time in the future, if circumstances change.

Since I want to work to age 92, my guess is that I won’t claim until age 70. But that’s just me. Under what circumstances would it make sense to claim at age 62?

A. If your spouse qualifies for benefits twice as large as yours, check into claiming on your record at age 62 and changing to a claim on your spouse’s record at full retirement age. This gives you some benefit from your earnings record, which might otherwise go unused.

B. If you have an impaired life expectancy, an earlier claim might make more sense. A person who plans to claim at age 70 but dies at 68 ends up collecting nothing.

Clients, this is intended to illustrate some of the basic considerations about Social Security strategy. You can learn more at www.SocialSecurity.gov, where you may sign up for a personal account and obtain personal benefit estimates at any time.

Please email us or call if you would like to discuss this at greater length.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.