Sunday, April 17, 2016
So? You're Retired?
So you retired a few years ago, how’s that working out? You made your plan and then—life happened. I have been retired for a little over three years. I can’t complain, but it hasn’t happened like I planned. I expected to be retired after I retired, but in the last three years I haven’t been able to take a vacation. Let me explain. First I had to prepare a house in MD for sale. Then I had to find and buy a house in SC. Then we moved. Then I had to close out my mother-in-law’s estate. Then I finally sold my house in MD. Then I thoroughly enjoyed three months of retirement, before the family emergency that lasted for over a year. Now I am in the new normal, overseeing my father’s affairs and managing his care. We still haven’t made it to Hawaii nor have we taken that Mediterranean cruise that is the top item in my wife’s bucket list. It’s OK. Our day will come. How about my financial affairs? The omniscient THEY tell us to plan to spend more in the early years of retirement. Golfing vacations in Hawaii can be rather expensive. Then as you slow down, your expenses should drop pretty significantly until they haul you off to the nursing home. Then, for the last few years of your life, plan of spending a lot, maybe $100,000 a year or more. I am assuming you were debt free on the day you retired. Larry Burkett taught that if you haven’t paid off your mortgage you have no retirement plan. Maybe that is an overstatement, but I think it a pretty good rule of thumb. It starts with your renewable income from rental properties, pensions, Social Security, and annuities. Is it enough to handle those normal every month expenses like food, clothing, gasoline for the car, utilities, and rent? In an ideal world, you don’t want to start dipping into savings for ongoing expenses if that is possible. Do you need to adjust your living expenses up or down? Remember, you won’t live forever and your body will continue to age. If you want to hike the Appalachian Trail or ride a motorcycle across Europe, most likely you have already missed your opportunity. It is highly improbable you will set off on any great adventures when you are 85. How are those investments in your taxable accounts performing? Do you need to adjust your percentages between safety (cash, bonds, bond funds, gold, CDs) and capital gains necessary to protect you from inflation (equities)? I have noticed that conventional wisdom went from your age in bonds to your age less 15% in bonds. Hence at age 65, we were first told 65% in bonds. Then that dropped to 50% in bonds. In fact I saw it drop to 40% in bonds and 60% in stocks! I noticed in the latest edition of Charles Schwab On Investing we have returned to 40% stocks, 50% fixed income, and 10% cash. Please don’t forget the cash, particularly if you own an older home. If you are going to deviate from the conventional wisdom, whatever that might be; err a little on the side of safety. It is hard to rebuild capital if you don’t have a job. Fortunately, I haven’t yet needed to tap my Government version of a 401(k). Since it is sitting there, continuing to grow in a nice little tax sheltered hot house, I have chosen to spend other funds in taxable accounts. If you have a 401(k) and you need a guaranteed source of income beyond Social Security, look into options your company might offer for annuitizing this account. While I can’t find a single retail annuity in this Zero Interest Rate Policy (ZIRP) environment that I could recommend, the annuity option offered by your employer may or may not be worthwhile. Check it out. The four percent rule isn’t perfect, but it is probably the best we have. The four percent rule states that there is a 98% probability that your nest egg will last at least 30 years if you maintain a balance of 50% fixed income and 50% equities if you withdraw no more than 4% the first year of retirement, then that amount adjusted for inflation in subsequent years. Obviously if the market crashes, you might want to rethink that number. There is another reason you might want to migrate towards fixed income in your later years. I have read that our ability to make financial decisions peaks around age 55, then our decision making ability declines. I might not want to be picking stocks when I am 85 years old. It is almost impossible for me to believe that my father, once an outstanding research scientist, now suffers from late mid-term Alzheimer’s. Following our attorney’s orders, I have managed to get almost all of my parents’ assets into an appropriately structured family trust. Since I am the sole trustee, I am thinking about trusts and trustees. Who am I going to trust to be my trustee? If I live long enough I am going to have to trust someone other than myself. This will be true even if you don’t have a trust. You will need to give someone durable power of attorney, when you can no longer remember to pay your bills. While we are on the subject, don’t neglect your will and other end-of-life documents. My wife and I were very pleased with our will when we signed it, but life happens. I can’t believe it, but it already needs to be rewritten, because—life happens. Revisit these documents at least every five years or when a significant event necessitates a change. Life goes on. Before writing this paragraph, I checked the news on Google. There hasn’t been an outbreak of Dengue Fever in Hawaii for three weeks, but Governor Ige has extended the state of emergency for another 60 days. Hopefully, we will return to the islands sometime this year. Then—Maybe—Just Maybe; Italy, the Greek Islands, Slovenia, Croatia, and coast of Turkey.