How Would You Answer This Million Dollar Retirement Question?

June 09, 2017

A recent article in the Wall Street Journal asked a question that has led to one of my favorite conversation starters, both with clients and over beverages at my local watering hole: “Would you rather have $1 million or $5,000 per month in retirement?” To me, the way a person answers that question tells me a lot about how their mind works around money. So far, the answers I get are split about 50/50. Here’s what I’ve learned:

I’ll take it all right now, please.

Those people who choose the lump sum tend to have a strong belief in their ability to be fiscally sound. When asked what they’d do with the money, they typically say that they would pay down every penny of debt, make a luxury purchase or two, then live fairly frugally to preserve the remaining money, while investing it to get some growth. Their hope is to be able to grow that initial lump sum well beyond the starting amount and also do some good in the world.

I’d rather keep a steady paycheck.

On the other hand, the people who say they’d rather have the monthly income tend to be wary of becoming one of those tragic stories about people who “had it all” and then blew it. They feel like they can live on the monthly income with ease and save a portion of it for future generations or charitable work. The WSJ goes into the psychology of this choice, which is something called “the illusion of wealth” versus “the illusion of poverty,” but you’re better off just reading the article to understand that one better.

Are you focusing on the right number?

Why do I mention this debate? So many people that I have talked to regarding retirement are completely fixated on getting to some “magic number” in their 401(k) before they’ll feel safe to retire. When I meet people who are locked in on needing X number of dollars in order to retire, they are almost always already in excellent shape for retirement. Why? I find that they’ve been so laser focused on the dollar value of their accounts that they haven’t really thought about the monthly income that the portfolio could generate.

In many cases they’ve saved enough that they can afford to have a higher monthly income than their current income! I can’t count the number of times I’ve told someone that they can walk back to their desk because they are choosing to, not because they need the paycheck.

The number that counts.

When we prepare retirement projections, the most important number – in my opinion – is the monthly income that a person will have from all sources (Social Security, pension, investment accounts, retirement accounts, etc.) during retirement. After all, most people have a lifestyle that requires a rather consistent monthly income. If that income, plus some, can be replaced today – work truly becomes an option, not a requirement.

Find your number.

What can you do? Run retirement projections at least annually. This is probably the most important thing anyone can do to track their progress toward financial security. After a few years, your projections should show a trend. If you’re doing things right, you’ll see that trend improve with each year. When it doesn’t, you can decide what actions to take in order to get the trend line back to being a positive. Regardless of your stance on the question of a big lump sum vs. a steady monthly income, running a projection to see how much income you can expect to have in retirement will help you determine a lot of financial decisions between now & then. To steal a line from Nike: when it comes to running retirement projections, JUST DO IT.

Can You Save Too Much For Retirement?

May 09, 2016

Is it possible to save too much for retirement? Isn’t that a bit like eating too many green vegetables? Recently, I read an article by journalist Constance Brinkley-Badgett, Are You Actually Putting Too Much Money Away for Retirement?, challenging the common financial planning guideline of using a generic “replacement rate” for retirement savings. Brinkley-Badgett quoted David Blanchett, CFA, CFP®, of Morningstar regarding his research into retirement income replacement rates. Do people really not need to save as much for retirement as they think they do?

The simplicity of this message worries me – a lot. According to a study by the Federal Reserve, 31% of American households don’t have any retirement savings at all…not one dime. Even if it’s true that some higher net worth households are “over-saving,” the far more urgent national problem is that most Americans are not saving enough.

There are two common, interrelated retirement planning guidelines. The first is that you should target replacing 70-80% of your pre-retirement income. Why 70-80% and not 100%? Primarily because you no longer have to save for retirement or contribute to Social Security.

However, Blanchett asserts that 80% may be inaccurate, and that based on his research the replacement rate range is a wide 54-87%. “The true cost of retirement is highly personalized based on each household’s unique facts and circumstances,” he wrote in the report summary, “and is likely to be lower than amounts determined using more traditional models.” It’s a thought-provoking piece of research, and if you are interested in financial planning, it’s worth a read.

Another general guideline is known as the 4% rule for retirement account withdrawals. Based on a 1994 article by William Bengen, CFP® in the Journal of Financial Planning, the idea is if you withdraw no more than 4% from your retirement accounts the first year of retirement, then adjust your withdrawals in subsequent years for inflation, a portfolio of 50% stocks and 50% intermediate Treasury notes should last at least thirty years. The two work in conjunction: save as much as you need to generate an annual 4% inflation-adjusted withdrawal from principal over thirty years to cover 70-80% of your pre-retirement income.

While it is true that the 80% and 4% rules are “one size fits all” generalizations that can be improved by personalizing them based upon your health, your expected monthly expenses, your total savings and your expectations for activities in retirement as Blanchett correctly notes, not everyone can afford to have a personalized retirement plan made for them. What does this mean for someone who’s saving for retirement in their 401(k) plan and does not have access to the ongoing services of a financial planner? It is tempting to listen to the “save less” recommendation. After all, if you save less for retirement, you’ll have more money to enjoy life now. However, when we consider the basis for the 80% and 4% rules, we can see how even if your personalized replacement rate was 50 to 60%, you might still want to save for the 80% replacement rate (or higher).

A 95% success rate still means running out of money 5% of the time.

These rules were developed based upon studying how people could spend money in retirement in such a way that they can feel a level of confidence that they will not “outlive their money.” If one followed the 4% withdrawal rule, then you would have about a 95% chance of being able to live on your savings for 30 years. 95% confident sounds like a lot, but is it enough?

To see what this means, consider what would happen if you lived the same retirement over and over again thousands of times. In some of those lives, you’d get lucky and retire in a bull market, where stocks rise significantly, so your portfolio would always be enough. In others, you’d retire and the markets would fall 30% in the first year. The bottom line: during 5 out of every hundred lives you would run out of money before your thirty year retirement is up.

Past performance does not indicate future results

The model in Bengen’s original paper used long term historical rates of returns and inflation. However, the future may be different. While that could work out in your favor, with higher rates of return during retirement and lower than expected inflation leading to your savings lasting longer than predicted, the opposite could also be true. Rates of return could be much lower, and/or inflation could be higher, which means your money could run out sooner. You could also have the bad luck of retiring at the beginning of a bear market, with a few years of successive negative returns leaving you with a smaller portfolio to generate retirement income.

You could live much longer

According to the Social Security Administration, “a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.”

Even if your needed retirement replacement ratio were lower, perhaps because you paid off your mortgage or otherwise had significantly lower expenses, there is still a chance that you’ll outlive your savings. What if your money has to last you 40 or 50 years? One way to address that is to save more before retirement, but not spend more afterwards, so you have something left in your nineties. Aim for a 99% confidence level that you won’t outlive your money over a long retirement period.

When you consider that poverty is the price for outliving your money, you can see why financial planners generally want you to oversave for retirement. I don’t know about you, but I plan to live longer than 30 years. Since I can’t change what happens in the economy, I’m planning to save more – not less — than the 80% and 4% rules tell me.

How about you? What do you think are the ideal rules for saving and spending in retirement? Email me at [email protected] or follow me on Twitter at @cynthiameyer_FF

Retirement Planning Shouldn’t Be Like Counting Jelly Beans

May 06, 2016

When I was growing up, there was a local store that would “give away” a huge stuffed animal to a person who could guess the exact number of jelly beans in a gigantic jar. I think that stuffed animal was still in the store when my kids were about the age I was when I first saw it. There may not be a right answer to that question. After all, did someone spend most of a day painstakingly counting jelly bean after jelly bean and keeping a running tally? Is the number that the store owner believes is correct an actually correct number?

After this long, I’m sure some of the jelly beans have merged together and that might change the correct number anyway. I don’t know if people have actually won the stuffed animal and there are lookalikes that keep getting placed where the old one was…or if it’s one constant big bear sitting there taunting everyone who guesses at the number of jelly beans. But it is certainly a source of entertainment and mystery for kids and for that, I’m thankful that it’s there.

Entertainment and mystery…that’s how many of the people I talk to view their financial lives. They see the “game” of planning for retirement a lot like the jar of jelly beans. “How many are in the jar?” Who knows? “How many will it hold?”

“How much money will I need to live the rest of my life?” “When should I take Social Security?” “How much should I contribute to my 401(k)?” “What will taxes look like in my retirement period?”

These questions aren’t that much different from the jelly bean question, but they certainly are a LOT more important in the grander scheme of life. The good news is that with some thought, some preparation and some planning, you’ll be able to get much closer to the “right answer” with your retirement questions than I ever got with the jar. I am a big fan of simplicity, so when I meet someone who is completely baffled by the concept of retirement planning, I go through a quick retirement reality check with them. It’s a two stage process and I’ll share it here:

Step 1: We use this Retirement Estimator calculator to see if their current course of action will get them close to reaching their goals. If they are on track, we check in annually to make sure they’re staying on track and to see if anything new has developed. If they aren’t on track, we tweak some things to see what it would take.

What happens if they increase their 401(k) savings rate? What if they work a few more years? What if they change their investment strategy and shoot for more growth?

During this step, we make sure they have current statements from any and all investment accounts, including their 401(k). We also talk about and enter any income streams like Social Security, pensions, rental income, etc. It’s a pretty straight forward calculator and we can usually build it in less than 15 minutes as we talk through the inputs.

Step 2: This is my “real world” sanity check of the numbers from the calculator. We look at their take-home pay based on their last few paychecks and figure out a monthly amount that they’re living on today. We can even shrink that number if they are regularly saving money, because those funds aren’t being spent now. We add back about $1,000 for medical coverage and some inflation, since that’s usually being deducted from net pay today.

Then we look at Social Security and pension income and come up with a gap that would be needed from investments. If it’s $1,000/month, I like to annualize that and call it $12,000 per year. Divide 12,000 by 3% (a fairly low withdrawal rate from a portfolio) to get to the amount of money they’d need in their investment accounts ($400,000 in this case – in today’s dollars). This is far from an exact way to calculate retirement needs, but it can help validate the results of the calculator. And, it’s a very easy and understandable way to see what retirement might look like.

Once people know the results, that’s when the real work begins. Sadly, not nearly enough people have ever run a retirement calculator. According to our 2015 Year In Review research, only 22% of the population knows that they are on track to replace 80% of their current income in retirement. That means there is a lot of work to do! Most people have never even run a retirement calculation.

Doing this quick two-step process puts you ahead of the game because at least you know where you stand. Only then can you knowingly make progress. Use the calculator – today! And use my way-too-simple sanity checker as a backup. If you do those two things, you’ll move from hoping you can retire at some point to knowing what it will take to retire when you choose and you’ll end up with a lot more than a stuffed animal.

Financial Rules Of Thumb: Retirement Savings

November 11, 2015

Continuing my financial rules of thumb series, this week let’s talk about a question that pretty much every person has asked me on our Financial Helpline: How much should I be saving for retirement and how much do I need total? While the answer varies depending on each person’s circumstances, goals and ultimately their values, there are some rules of thumb for those who either don’t feel like running a retirement estimator calculation or who just aren’t quite sure yet what their goals are. Continue reading “Financial Rules Of Thumb: Retirement Savings”

How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year

April 30, 2015

Last week, I wrote about my three favorite online investment services. This week, I’ll show you an example of how a couple of those tools saved a friend’s mother tens of thousands of dollars. When I spoke to my friend, his mother had just retired with a $1 million portfolio and he wanted to know how she should invest it for retirement. Since we can’t provide specific investment advice at Financial Finesse, this was a rare opportunity for me to be more hands-on. Here’s what we did: Continue reading “How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year”

Be an Owner Rather Than a Loaner in Retirement

June 26, 2014

One of the most common pieces of investment wisdom is that you should invest more in conservative “loan” investments like cash and bonds and less in more aggressive “own” investments like stocks and real estate as you get closer to retirement. This may have made sense when bonds were paying 6% or more but with long term bonds rates now closer to 3%, this could actually make it harder to retire comfortably or more likely you could run out of money in retirement. Cash is paying less than inflation. Rather than to low-interest bonds and cash, why not shift towards high-yielding dividend stocks and real estate? Here are some advantages of this approach: Continue reading “Be an Owner Rather Than a Loaner in Retirement”

How Much Income Will You Really Need During Retirement?

May 19, 2014

We hear a lot in the financial media about the looming retirement crisis in our country and in general, retirement confidence is lacking. Therefore, it comes with no surprise that one of the most frequently asked questions that financial planners receive is “am I on track for retirement?” This is commonly accompanied by this question: How much do I need to save for retirement? Continue reading “How Much Income Will You Really Need During Retirement?”

What’s Your Magic Number?

May 16, 2014

By “magic number,” I mean how much money will you need in order to retire comfortably? Without giving away too much, let me answer briefly. A WHOLE LOT!!!! Of course, it’s going to be a different number for each of us and there are countless ways to arrive at a number that makes sense for your life so my goal here is to try to help you figure out a reasonable estimate of what you might need without having to run numbers on a spreadsheet or a website that may or may not be worth the time it takes to prepare the estimate. I’m not saying it’s going to be super-easy but at least it won’t require much math! Continue reading “What’s Your Magic Number?”

How to Use Real Estate to Supplement Your Retirement Income (Part I)

May 07, 2014

One of the most popular workshops we offer at Financial Finesse is our workshops on retirement planning. That’s probably because retirement is a financial goal common to just about anyone that works for a living. In order to enjoy a comfortable retirement, many financial experts recommend replacing 70-80% of your income in retirement, which begs the question “What are your retirement income sources?” Continue reading “How to Use Real Estate to Supplement Your Retirement Income (Part I)”

Investment Options For the Soon-to-Be-Retired

August 21, 2013

As the early and late baby boomers get closer and closer to retirement (and in some cases are already there), we receive more and more inquiries about retirement planning, and in particular, distribution planning. Just recently, I spoke with a gentleman who is within a few years of his retirement date, and he’s done a pretty good job of saving for retirement, but what he is most concerned with now is how to make sure he invests properly throughout retirement so that he generates the cash flow he is expecting to get from his nest egg. There are a number of investment options that may achieve the goal, and each one comes with its own pros and cons. Here is a look at several different investment options that may be suitable for a retirement investment portfolio: Continue reading “Investment Options For the Soon-to-Be-Retired”

Four Key Questions For Your Retirement Plan

May 06, 2013

In last week’s blog post, I introduced my idea of creating a list of forty things to do before I reach my 40^th birthday. The ultimate goal in creating my 40 by 40 list was to establish goals across important areas of the life experience while at the same time, helping define my own vision of an ideal retirement. Regardless of what your retirement vision may look like, there are four basic questions that should be a driving force behind your retirement planning activities: Continue reading “Four Key Questions For Your Retirement Plan”

Three Common Retirement Questions You Need To Ask

January 28, 2013

Do you want to retire this year? Next year? Do you want to retire sometime soon? Continue reading “Three Common Retirement Questions You Need To Ask”

How Much Retirement Income Can You Really Get From Your Portfolio?

January 10, 2013

As a rule of thumb, financial planners generally say that you can safely withdraw about 4% of the value of your nest egg as income in retirement and increase it by inflation each year. That number was based on the “Trinity study” that looked at the outcomes of various withdrawal rates from 1926-2009 as well as additional research by financial planner and author William Bengen. However, I recently came across this interesting blog post that points out a few shortcomings of the study: Continue reading “How Much Retirement Income Can You Really Get From Your Portfolio?”

OK, I’m Officially Depressed

July 08, 2011

Wow. I don’t think I want to read financial news stories for a while now. This is one of those times I wish I were older. What am I talking about? This article talks about how many Baby Boomers and Gen X’ers are “at risk” where retirement income is concerned. The numbers get worse with each successive younger generation, and with each passing year. Here are some numbers (I know, who comes to a financial blog to see numbers…). Continue reading “OK, I’m Officially Depressed”

What About My House? (A Soon to be Retiree’s Dilemma)

June 24, 2011

I met with someone who is preparing to retire in the next year, and we started talking about what a day in his new-styled life would look like. I asked what I thought was a simple question, “Are you planning to stay in your house, move somewhere warmer (he lives in New England), or stay local and downsize?” It turns out, the question wasn’t so simple. Here’s why: Continue reading “What About My House? (A Soon to be Retiree’s Dilemma)”

Early Retirement Buyouts: A Good Idea for Who?

March 08, 2011

A school district in Minnesota recently announced an early retirement incentive program to entice their most senior (and highly paid) teachers to retire in order to replace them with less experienced teachers with lower salaries. The program has an interesting twist – if at least 10 teachers take the buyout, each will receive $15,000 but if at least 15 accept, then they will each receive $20,000. I can imagine a bit of peer pressure will be felt by those teachers who are on the fence about taking the bait.

How do I know these details? One of the teachers eligible for this early retirement incentive attended a workshop I was facilitating at her husband’s place of employment, where I happened to be discussing details on Retiree Medical and Medicare coverage (which happens to be next week’s subject I’ll cover). Continue reading “Early Retirement Buyouts: A Good Idea for Who?”

Is a Reverse Mortgage Right for Me?

March 03, 2011

It seems that every retirement planning workshop I do lately, this question rears its head. Used to be not too long ago many people didn’t know what a reverse mortgage even was (Quick definition of a Reverse Mortgage: A special type of home equity loan for persons 62 and older. The loan proceeds can be in the form of a lump sum, cash advance, or a line of credit. The loan does not usually have to be repaid during the homeowner’s lifetime, which is why it is often used by retirees.) Now that people are aware of this investment product, it has suddenly started becoming a first choice answer to retirement security for some people. Continue reading “Is a Reverse Mortgage Right for Me?”