Tag Archives: retirement investing

Questions and answers about retirement

A couple facing retirement asks:

I will retire in the Spring of 2018 (by then I will have turned 65). My wife is a teacher and will retire in June of 2018. When we chose 2018 as our retirement date, we paid off our house. At the same time we replaced one of our older cars with a new one and paid cash. We have no debt. We will begin drawing down on our investments shortly after my wife retires. Also we both plan to wait until we are 66 to draw on Social Security. Our current nest egg is divided 50/50 in retirement accounts and regular brokerage accounts. About 60% are in equities and mutual funds. The rest is in bonds and cash. I’ve read about the 4% rule, adjusting annually up depending on inflation, expenses and market performance. As of today, based on our retirement budget, we can generate enough cash only using our dividends to live on. In our case this approach would have us taking interest and dividends from all accounts, including IRA, 457 B and 403 B before we are 70 years old. Seems that this approach would make it easier to deal with market volatility, yet it does not seem to be favored by the experts.

My answer:

There are a number of different strategies for generating retirement income. The 4% rule is based on a study by Bill Bengen in 1994. He was a young financial planner who wanted to determine – using historical data – the rate at which a retiree could withdraw money in retirement and have it last for 30 years. The rule has been widely adopted and also widely criticized. It’s a rule of thumb, not a law of nature and there are concerns that times have changed.

Based on your question you have determined that the dividends from your investments have generated the kind of income you need to live on in retirement. Like the 4% rule, there is no guarantee that the dividends your portfolio produces in the future will be the same as they have in the past. Dividends change. Prior to the market melt-down in 2008 some of the highest dividend paying stocks were banks. During the crash, the banks that survived slashed their dividends. Those that depended on this income had to put off retirement because their retirement income disappeared.

I would suggest that this is an ideal time to consult a certified financial planner who will prepare a retirement plan for you. A comprehensive plan should include your income sources, such as pensions and social security. The expense side should include your basic living expenses in addition to things you would like to do. This includes the cost of new cars, travel and entertainment, home repair and improvement, provisions for medical expenses, and all the other things you want to do in retirement. It will also show you the effects of inflation on your expenses, something that shocks many people who are not aware of the effects of inflation over a 30-year retirement span.

Most sophisticated financial planning programs forecast the chances of meeting your goals based on a “total return” assumption for your investments. Of course, the assumptions of total return are not guaranteed. Many plans include a “Monte Carlo” analysis which takes sequence of returns into consideration.

That’s why the advice of a financial advisor who specializes in retirement may be the most important decision you will make. An advisor who is a fiduciary (like an RIA) will monitor your income, expenses and your investments on a regular basis and recommend changes that give you the best chance of living well in retirement.

Finally, tax considerations enter into your decision. Most retirees prefer to leave their tax sheltered accounts alone until they are required to begin taking distributions at age 70 ½. Doing this reduces their taxable income and their tax bill.

I hope this helps.

If you have questions about retirement, give us a call.

 

Tagged , , ,

The Fate of Social Security for Younger Workers – And Three Things You Should Do Right Now

We constantly hear people wonder whether Social Security will still be there when they retire.  The question comes not just from people in their 20’s, but also from people in their 40’s and 50’s as they begin to think more about retirement.  It’s a fair question.

Some estimates show that the Social Security Trust Fund will run out of money by 2034.  Medicare is in even worse shape, projected to run out of money by 2029.  That’s not all that far down the road.

So how do we plan for this?

The reality is that Social Security and Medicare benefits have been paid out of the U.S. Treasury’s “general fund” for decades.  The taxes collected for Social Security and Medicare all go into the general fund.  The idea that there is a special, separate fund for those programs is accounting fiction.  What is true is that the taxes collected for Social Security and Medicare are less than the amount being paid out.

What this inevitably means is that at some point the government may be forced to choose between increasing taxes for Social Security and Medicaid, reducing or altering benefits payments, or going broke.

Another question is whether the benefits provided to retirees under these programs will cover the cost living.  Older people spend much more on medical expenses than the young, and medical costs are increasing much faster than the cost of living adjustments in Social Security payments.  If a larger percentage of a retiree’s income from Social Security is spent on medical expenses, they will obviously have to make cuts in other expenses – be they food, clothing, or shelter – negatively impacting the lifestyle they envisioned for retirement.

The wise response to these issues is to save as much of your own money for retirement as possible while you are working.  There is little you can do about Social Security or Medicare benefits – outside of voting or running for public office – but you are in control over the amount you save and how you invest those savings.

As we face an uncertain future, we advocate that you take these three steps:

  1. Increase your savings rate.
  2. Prepare a retirement plan.
  3. Invest your retirement assets wisely.

If you need help with these steps, give us a call.  It’s what we do.

Tagged , , , , , ,

What is the difference between a 401(k) and a pension plan?

Both plans are designed to provide income for retirement.  There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.”  That means that you know how much you are saving but not how much it is worth when you are ready to retire.  That depends on your ability to invest your savings wisely.  The benefit is that your savings grow tax deferred.  Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.”  That means that you are guaranteed a certain amount of income by the plan when you retire.  The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans.  This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

Tagged , , , , ,

Retirement income and the 4% rule

There is nothing that worries retirees more than the fear that they will outlive their money.  There has been a great deal of interest in how much a retiree can take from his investments “safely.”  The 4% Rule was based on analysis done by William Bengen, a Financial Planner who published an influential paper in the Journal of Financial Planning in 1994.  Simply put, the “Rule” states that

 A person entering retirement could begin by taking up to 4% of their initial portfolio value, adjusting it each year for inflation, without fear of outliving their money

His analysis assumed that a person would begin taking a distribution from his portfolio at retirement and live 30 years.

The “4% Rule” has been widely used by people specializing in retirement planning.  There have been quite a number of articles both supporting and questioning if this is still a good way for people to manage their retirement income.  We believe that it’s a good starting point because Bengen’s analysis is based on a study using rates of return that include some of the worst financial-markets crises in U.S. history.

In many cases, retirees don’t need to draw down their portfolios at 4%.  Many want to leave a legacy for their heirs.  Bengen’s analysis also assumes that the client retires in their mid-60’s and has an average life-span.  Each individual is different and has different objectives.  We are happy to respond to your questions on retirement investing.

Tagged , , , , , , , ,
%d bloggers like this: