Retirement planning

[atgcpaul]

I'm envious of you guys with pensions. I've never worked at a place that offered one, but my Dad was on me to get my 401K going when I started working straight out of college. I haven't always maxed it out but they seem on track--at least looking 20+ years out. My wife will get some pension so I guess I'm sticking with her.

All this talk of retirement has me bummed, though. I've been in the workforce for almost 20 years and have at least another 28 to go to reach full retirement. Ugh. Mid life crisis time.

Any of you rich geezers want to adopt me?

[capncarl]

Because we have a pension does not necessarily mean we are rich. During the times of the pension most of the employers did not pay enough for the employee to save, nor were 401 type plans in existence for most of our working carriers. Stocks and bonds were usually out of reach for most workers as well. The savings plan for the first 10 years of so of my 35 yrs with employer #1 was the equivalent of 2 weeks pay/ yr. That was promptly taken out to buy bikes and sporting equipment of the kids Christmas. This = 10 yrs of no savings. I'd really like to have been able to save then as well. Saving was really not taught that much in my early years.
capncarl

[JimD]

This is in response to Neal's post but others have contributed similar and additional very useful thoughts. Thanks.

1. Our plan also offers a 75% option for the pension which is what I plan. I think 50% isn't enough but 100% isn't necessary. My wife seems to agree. We will see when the time comes.

2. My planner actually reigned me in on the % I have in the market. The money he sees is in a fairly conservative fund (Windhaven's middle option) that tries to limit downside. I plan to keep the majority of money in the market after retirement. That means I need to also have a plan for what happens when the market goes down. I hope to be able to not withdraw money for a year or two during downturns.

3. Our employer offers retiree health care. But they fixed their cost several years ago and when the cost goes up, the increase is totally the retirees problem. So it is a useful option but isn't cheap. That cost is in my planning spreadsheet. Maybe there is a better option under Obamacare but I don't know how long that will even exist.

4. We are debt free. House and cars are paid for. My two kids have no college loans but my step daughters are not as fortunate. That is an uncertainty that needs to be decided to finalize planning. I would rather work a year or two more (assuming health continues) for them to not have that debt - and possibly to help with a downpayment on a house. There will also be a couple weddings to pay for, we are hoping. So while we do not have debt, we still are looking at some significant expenditures for the next several years.

5. Living on the amount I will make in retirement is an interesting thought. We aren't doing exactly that but I have a year's expenses in a spreadsheet I plan to continue where I look at the broad categories of where we spent money to see if that would have been covered by my retirement income. So far it clearly would not be. I also have estimated how deductions will change in retirement so I can better estimate net income (instead of gross) at retirement.

When estimating what we might be able to take out of the 401K I am using the 4% rule. So for $1M in investments we could possibly take out $40K/year and not run out of money. That isn't guaranteed but seems like a reasonable estimate. I know people at work who took the lump sum pension option thinking they could make 8% a year. That didn't work out so well for them. I plan to be much more conservative and take the pension and count on 4% from the investments - but hopefully spend that on things like vacation we can avoid if the market is not "performing".

I also agree about kids. My kids had no debt when they graduated college and I hope we can do the same for my step kids. I also helped my kids put at least 20% down when they purchased their first house. I'd like to do that for my step daughters too. I like the idea of giving a little money into a college account when each grandkid arrives. That's the kind of assistance I have in mind for kids. Mine are both employeed and making their payments. They are careful with money. I would be very reluctant with providing any sort of on-going assistance for kids able to work. My mom hasn't needed any more than occasional help but could.

I also agree with the thoughts about letting my investment advisor know more about my situation so I can get his thoughts. I don't think I'll learn a lot but I could. He is going to want to know how much we need in income and that question is one I am working on but not currently ready to answer. I've been married to the current wife for a little less than 2 years and we spend money differently than my late wife. So I need to let things settle down so I have reliable figures on that.

Thanks again to everybody for your thoughts.

Jim

[leehljp]

I forgot to add one item. When husband and wife both work (at the same time/shift), there is often about a 20% reduction in utilities simply because no one is home to use the utilities (and if you cut the AC /heat back a few degrees while not at home.)

Then when both are home all day most every day in retirement, utilities may go UP 20% or so.

[JimD]

Hank,

I wish that was true. We keep the heat pump going for the two Yorkies. We only use one of the heat pumps when either the girls are home or my wife wants to use her office, it heats and cools the upper level. So maybe we will run it more in retirement. I am not done changing this house and some of that should reduce utilities. But right now it is yet another uncertainty. How much will I spend and how much of an effect will it have.

Jim

[capncarl]

Don't look for your health costs to remain the same. As you age your health only gets worse. Obamas Socialized medicine may help with the costs, we will see.

I chose the 100% spouse benefit after interviewing a number of earlier retirees. They influenced my reasoning. In case either of you die, almost the same living expenses will be there, and starting over again with 25% less would be harder for the survivor. The cost reduction for the 100% vrs 75% did not seem unreasonable for me.

8 yrs ago my planner suggested an Alliance annuity. I'm not a fan of annuities, especially the ones that target older people. I purchased this one for $100k, it's maturity time is 10 yrs for $200k or a percentage. I chose the percentage that equals to $1k per month for our lives and cashes out the remainder to our survivor. Now I wish I had picked 2 of these when they were available and I had the time for it to mature. I'm not pushing or suggesting annuities but this one looks like it will work for us.

[JimD]

Health care will have to go up, mine is essentially zero (just insurance costs, no pills or other on-going costs). I hope to continue my current pattern as long as possible. I need to get more regular checkups. Dental costs could also be significant but recently I've just been getting cleanings (but they aren't free).

Thanks for the annuity thoughts. I know they exist and they could enter our plan, especially if we need more monthly income.

Another complication is my wife will get a similar pension benefit as I will get but she is significantly younger so she isn't eligible as soon. So as long as I live long enough to get her to the time she can draw a pension that would more than cover the difference (might even justify taking the 50% option). But she also has to keep working to 58 to be able to take the early retirement option. Lots of details to think through. Sure would be nice if it was simpler.

[atgcpaul]

Another complication is my wife....is significantly younger....

You've mentioned it twice now in this thread so I smell a stealth gloat.

[Neal]

I like the 4% rate. The key here, in my opinion, is to have about 5 years worth of "income" in something which won't suffer from a significant equity market decline, which will happen at some point in the future.

The logic here is this. Since WWII, the average time to recover "Bottom to new top" is roughly 40 months. The extreme market events like 2000-spring 2003 and 2008-spring 2009, which were declines of at least 50%, took about 60 months. The point being you don't want to sell equity positions at market bottoms.

4% withdrawal rate x 5 years, is 20%. Build in buffer for other expenses, and you are looking at 25-30% minimum in lower volatility type investments. (I purposely do not say "less risky" as I do not equate price fluctuation to risk, they are not the same thing.) This way when the market takes a big hit, you can avoid selling the assets which have declined temporarily and allow them to recover through the natural cycle of the investment markets.

I don' know if there will be a better option for health insurance through the governments "program" or not. I doubt either situation will provide optimal solutions. Once you qualify for Medicare, there is a guaranteed enrollment period of 6 months for medicare supplements.

[vaking]

I am sceptical about the concept of retirement planning. It has too many assumptions and suppositions. It also relies on the past experience presuming that future will follow some similar patterns and I doubt it will.
For example - retirement planning assumes some future rate of inflation. Official rate of inflation today is considered to be around 2% but there was a period in the US history when inflation was over 10% for several years (around oil crisis). And I am not bying that inflation today is 2% as the official numbers are saying. A year ago I was buying beef brisket in the supermarket for $6 a pound, today the same cut is $8 a pound. That is price increase over 30%. The official explanation is that large areas of the country had some bad weather which affected crops which in turn affected price of beef, so the inflation index this year does not include beef. But the same official version also says that bad weather might have been caused by some long term events, like global climate change. If that is so, then we should expect that bad weather affecting crops will persist for a long time (and it already had for several years) and historical patterns and historical prices for beef and many other products are no longer achievable.
Most retirement planners assume long term inflation somewhere around 2%-3%. But in many countries where economy is not as strong as in US inflation is much higher. Most retirement planners suggest that you should count on spending as much as 30 years in retirement. Economic situation in United States 30 years ago was very different from what it is today. 30 years ago many companies were offering pensions, today private companies offer it as an exception. My company was offering pension when I started but 4 years later they dropped it. I received few grand as a lump sum instead of a pension. I do have Social Security and 401K but if inflation goes up - I am sure that SSI will not keep up. Local, state and federal governments so far offer pensions to government employees (my wife works for a government) but the bancrupcy of the city of Detroit was the first case in US when government benefits to retirees were reduced. I expect that in the next 30 years lots of things will change. I am not sure that 30 years from now United States will continue to be the world's strongest economy as it had been so far and if United States stops being the strongest economy - consequences will be very big and unpredictable.
When I was young I studied some probability and statistics and I know that long term projections are more often wrong than not. Look at the weather forecast - they usually tell you weather couple days ahead. Sometimes you can hear a weak's worth, never more than that. Try to predict a weather a year ahead - see what happens. Retirement planning is like prediciting weather many years ahead.

[JR]

I am sceptical about the concept of retirement planning.

What?!

Are you suggesting that because brisket prices didn't follow the market as a whole in a two year period that financial planning should not be done?

I can see that making a plan based on assumptions of higher inflation and/or lower market performance might make sense. Have at it. But going through retirement with no plan is recipe for disaster, IMHO. It'd be a heckuva thing to be in middle of an around-the-world motorcycle trek (substitute your favorite bucket list item here) when your credit cards stop working.

[bigstick509]

What?!

Are you suggesting that because brisket prices didn't follow the market as a whole in a two year period that financial planning should not be done?

I can see that making a plan based on assumptions of higher inflation and/or lower market performance might make sense. Have at it. But going through retirement with no plan is recipe for disaster, IMHO. It'd be a heckuva thing to be in middle of an around-the-world motorcycle trek (substitute your favorite bucket list item here) when your credit cards stop working.

I don't think Alex V is advocating not planning but is making a valid point about uncertainly. I expressed a similar slant in post #3 in this thread. As to the Detroit pension reductions, being in a suburb of Detroit and having a state pension coming into our household I'm afraid this decision was a bell weather for more of the same across the country. I am not optimistic.

[JimD]

I am proud of my younger beautiful bride but her age also complicates retirement planning. She isn't eligible for early retirement for over 10 years after I am. She will undoubtedly retire at an earlier age than I will but probably after I do. Her age also increases the amount of reduction in my pension when I go to a 50% or 75% option for what she gets after I go to heaven.

I agree that there are a lot of uncertainties in retirement. There are also a lot of uncertainties while I am working. I don't know for sure I'll have a job tomorrow or a week, month, or year from now. I've been told I had to move before to preserve my job. Our benefits seem to change every year or so. Cost generally goes up. One of us could become seriously ill raising cost and potentially eliminating income. So uncertainty related to income is not unique to retirement. Uncertainty is a reason to have some sort of backup plan. Retirement plans have different sorts of risk. But not laying things out and figuring out what options you have adds even more risk to the situation. To me, laying out a plan is just thinking things through. My guesses will not be consistently right but if I think it through, have some margin for error in the plan, my risk is lower than if I just "wing it".

[Neal]

Uncertainty is precisely why one should plan, and periodically update the plan. We never know what investment returns or inflation rates will be. Generally speaking, we use a range of scenarios and always tag everything with your actual results could be better or worse than what is shown, and will most likely be different.

My 20 years in the financial business has taught me a few lessons which apply to the way I help people prepare.

1. Recency bias is a strong force in people's attitudes and perceptions about the future. It is very hard to drive forward while exclusively looking in the rearview mirror. We may not see equity returns near their historic averages, they could be worse, but they could also be better. The next significant decline in the stock market may not be anywhere near what it was in 2008-09, but it seems like everyone and their brother thinks it will be as bad or worse the next time.

2. Pessimism, over the longer term, has been a losing bet for generations. Very few people consistently make money by betting against the greatest companies in the greatest country in the world.

3. Inflation may be much greater than any government measure, if that is the case, you better do something to improve your future purchasing power. The math behind this will make a person ill.

4. If you can tell me the precise date, you and your wife are checking out and the amount you wish to leave behind, I can do the math to calculate the withdrawal rate needed to get you there. Inflation assumptions of whatever magnitude can be built in to the equation if you wish. (there is an old insurance agents joke about actuaries and the mob, where an actuary can tell you about when you will die, the mob can give you the date, time and place.) At the end of the day, most people with whom I work would much rather have their blood pressure go to zero before their asset base goes to zero. And since none of us really know when that is, it is far better to look at it from a 30+ year perspective than a 10 year perspective.

5. The younger you are, the higher priority you should place on saving for the time when you don't work, for all of the reasons vaking has stated. Pensions are going the way of the dinosaur and the spotted owl, Social Security is not a good deal for the younger generations. How much you save is one of the things in this life we can control (as is how much you spend), and one of the things which should receive a majority of our attention. Yet too much attention is placed on all of the other stuff which is well beyond our control.

[capncarl]

My fathers situation has taught me a lot, whether it follows the traditional teachings or not I must learn from it. He is 98, retired on his 65th birthday, had little savings but his house and truck was paid for, pension of about $65 per week and SS. He and my mother lived comfortably until she died in 05 and he went downhill slowly after that until he degressed to an customer pay assisted living. That has consumed all of his savings, house and property, pension and SS, and is nibbling on my $$. I'm not insinuating that you should beat the system and not pay for assisted living care because the Medicare provided care is a slum, but be aware that all of your assets will be used for this care. A minimum will be left for the surviving spouse and none for the siblings. Plans must be made if you want to avoid this situation.
capncarl