Retirement: A Full-Time Job

Picturing Retirement: Take Two

 

Photo Friday:  My dad took trumpet lessons when he was a kid.  Figuring it's never too late to brush up, he's taking lessons again.  Teacher should be very proud:  he took his trumpet with him on vacation to Mexico!  (That's My Funny Valentine you hear.)

 

(To submit your picture of retirement, email me a photo with how you would like it credited.)

Related Posts:

    Happy Birthday Dad!

    Photo Friday:  The Theme is Hereditary

    Picturing Retirement:  Dance Like No One is Watching

 

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Picturing Retirement: Working at Living

Photo Friday  I have a backlog of fabulous retirement photos from readers to post, but this one from Margaret inspired me today because it also came with a wonderful description:

"After 50 + years, of living at work, Friday the 30th of March I retired. Saturday the 31st of March I begin working at living."

Congratulations Margaret!

 

(To submit your picture of retirement, email me a photo with how you would like it credited.)

Related Posts:

    Picturing Retirement:  Dance Like No One is Watching

    Photo Friday:  The Theme is Hereditary

    Photo Friday:  Retired Teacher with Wanderlust

 

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Inspiration and Marigolds

Three seemingly unrelated items:

1. I have found someone to replace myself at my part-time consulting gig, so I should be back to full-time retirement within a few months!
2. I have seen the trailer to The Best Exotic Marigold Hotel, four times now and I really want to see the movie.  I might even want to visit India.
3. A couple of years ago my father-in-law wrote this post about traveling and learning with Road Scholar (formerly Elderhostel).

One of the things I have learned about myself while working at my part-time consulting gig this last year is that it’s important for me to do things that are hard.  I don’t mean all the time, but I need to intersperse periods of leisure with periods of challenge.  I’d prefer to find the balance that doesn’t cause undue stress, but I know that I have to do this for myself now that I won’t be consulting anymore. 

In a job situation, it comes naturally; the challenges present themselves without much effort to find them.  In retirement, you have to set the challenges up yourself.  They don’t generally present themselves on their own.  After I’ve had a chance to unwind from this last working gig, I’m going to be looking for something to do where I feel like I’m contributing, like I’m part of a team, and where I am challenged.  I’ll be looking for a volunteer gig.

My strongest passion, when contemplating volunteering, is working with dogs.  I am happiest when in the presence of dogs.  Yet, I’m not quite ready to commit to a canine member for our family.   I’m enjoying the freedom to travel and make spontaneous plans too much to adopt a dog.  And I fear that if I volunteer at an animal shelter, I’ll fall in love with too many dogs and I won’t have the willpower to resist bringing them all home.

But there is some amazing matchmaking going on now with dogs and their people.  Like the match made by an Ohio organization, 4 Paws, between Chancer, a Golden Retriever, and his boy Iyal.  Iyal was adopted from a Russian orphanage by an Atlanta couple.  The couple learned after years of difficulties with Iyal that he was a victim of fetal alcohol syndrome.  Chancer is helping Iyal.

And in another heart-warming story, Devon, another sweet Retriever, is helping his Iraq war veteran deal with the debilitating effects of her post-traumatic stress disorder.   Where therapy and medication have failed, Devon is succeeding.

These stories inspire me.

But back to the three seemingly unrelated items. 

Inspired by the release of the Marigold movie, and “building on the film’s themes of hope and reinvention in the second half of life,” Participant Media has joined with Encore.org and Road Scholar to sponsor a contest, “Marigold Ideas for Good.”  Contestants over 50 can submit their ideas for bettering their communities, and 30 of them will win a $5,000 grant to help make it happen. 

I’m looking forward to reading their inspirational ideas, and maybe even yours!  (Click here to enter.)

 

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Looking Through My Camera at Retirement

I went to Golden Gate Park with my photography class last weekend, and now I have 186 photos of a place I’ve been to a gazillion times but have never really noticed before.

We go to New York almost every year.  We used to go for a week at a time, but the last few years we’ve gone for a month.  A month is great because you don’t feel compelled to race around trying to squeeze all the excitement of Manhattan into just one week.  Plus you get some more time to explore places you might not go when visiting for just one week, like the outer boroughs, and the less famous parks of Manhattan.  And you get a chance to relax in between events, a concept most of us don’t consider when contemplating a visit to the center of the universe.

When we get together with our friends that live or work in Manhattan, they are always amazed at the places we’ve explored.  Mostly they are places that they have never been to, despite living there for decades.  And I understand that, despite living in or near San Francisco for the majority of my life, I’ve never walked across the Golden Gate Bridge.  I’ve flown 3,000 miles to walk across the Brooklyn and Manhattan Bridges, and biked across the Queensboro and Triborough Bridges, but I’ve never biked or walked the Golden Gate.

It’s sometimes hard to give your own neighborhood the same fresh look you give a neighborhood thousands of miles away.  And that is the wonderful gift that learning to use my new camera has given me:  The chance to look in my own backyard with fresh eyes. 

Which now that I think of it, is one of the keys to a happy retirement, making sure to look at it each day with fresh eyes.

Related Posts:

            How to Keep Retirement Engaging

            Using Retirement to Get Really Good at Something

            Retirement as a Balloon Animal

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Another Retirement Formula

After you are comfortable that you have enough money saved to retire, the decision as to when to actually pull the trigger really boils down to a simple formula:

            When (value of remuneration from job) > (value of your time) = Work

            When (value of your time) > (value of remuneration from job) = Retire

Notice I do not not use the word money.

People work for a variety of reasons, more reasons than just the money.  However, since most people actually need money to live on, that reason can obscure those other reasons.  I do know a few people that have enough money to retire but don’t want to.  Because they receive other rewards that they find more valuable than the extra time that they would receive if they retired.

For some people those rewards might be challenge, or appreciation, or structure.  For others it might be the feeling of contributing, of being part of a team, or social reasons.  And for many it’s identity.  You are giving up all those things when you retire, and if you are not yearning for the time, you will most certainly miss those things, and probably the money too. 

Which is why my part-time consulting gig has been so great for me, because I got a chance to have all those rewards and still have so much time available to me, just for myself.  I knew when I started this gig, I even said so in my interview, that at some point the job would grow and they would need to get a full-time person.  I also told them that I would not be tht person.  Because despite the value of the many rewards I receive, I’m not willing to give up more time to get more of the rewards.

My part-time gig is about to cross that line for me, where it would require more time, time that I find too valuable to trade for the various forms of remuneration.  I love the appreciation, the feeling of contributing, and yes, the extra money.  But I’m not willing to give up any more of my time—it’s too valuable.  More valuable than those other things are to me.

So I’m going to be passing the reins to my full-time replacement once we figure out whom that will be.  I broke the news a few weeks ago.   It was hard and sad, and since I had been stressing about that conversation for months now, a bit of a relief.  I have loved being part of that team, and I will miss it.  But I have learned that I am open to this kind of thing again in the future.  For now though, I’m just appreciating the value of the wealth of time that will come with the return to full-time retirement.

Related Posts:

    What do You Want to Be When You Grow Up?

    Filling in the Blank in Retirement

    Is Being Content Preventing You From Being Happy in Retirement?

 

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How Safe Do You Want to Be?

During this blog's recent discussion of "how much is enough" to safely retire, one of my readers correctly pointed out that if, instead of using a first-year withdrawal rate of 4% or 3% you used a 2.4% rate, you would be virtually assured of never running out of money over a really, really long retirement span.  A span most people wouldn’t even live all the way through.  The result over most reasonable lifespans is that you would not only die with money, you would likely die with more money than you even started with.

That is indeed a very safe approach.

When you aim for any of these first-year withdrawal rates, you can back into the amount your nest egg would need to be by dividing the withdrawal percentage into 1.  For example:

 

            A 4% withdrawal rate (1/.04) = nest egg multiple of 25 times expenses*

            A 3% withdrawal rate (1/.03) = nest egg multiple of 33 times expenses*

            A 2.4% withdrawal rate (1/.024) = nest egg multiple of 42 times expenses*

 

*Again, to prevent any major heart attacks, the multiple above at is the multiple of your annual retirement budget that is not already covered by other income sources like Social Security or pensions.  You just need the nest egg to support the spending that will not be covered by some other income source.  This is the portion of your retirement savings that you are ultimately responsible for.

For example, if you plan on starting out with a $50,000 spending level when you retire and your Social Security checks will total $20,000 per year, you’d need to multiply the difference, $30,000, by whatever multiple above, that achieves your desired withdrawal rate.

Clearly, the higher your multiple is, the safer you will be in retirement, and the more money you will likely leave to heirs. 

For most folks though, the prospect of saving 25 or 33 times your desired spending is daunting enough.   To reach the hurdle of 42 times my retirement budget, I would have had to work many, many more years.  And what would I get out of it?  When I die, I’ll have a nest egg that could be even larger than what I began with. 

Which is a problem for me, because for all those extra years on the job, I’m rewarded with a bunch of money I can’t use anymore.  Because of course, I’m dead. 

Related Posts:

            See Dick and Jane Retire

            See Average Joe Retire

            See Syd Retire

 

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Building Your Retirement Budget

One quick comment before I cause any of my other readers to have a near heart attack.  In all these discussions about how much money you need to accumulate to cover your retirement years, we are talking about covering the expense needs that are not already being met by your other income sources such as Social Security or pensions.  Your annual “withdrawal” would only be the shortfall, or difference between your other retirement income and your expenses.

So let’s talk expenses.  I just saw this morning that CanadianMDinvestor has a great series about building your own retirement spreadsheets.  I like that he is actually starting at the beginning:  the budget.  As commenter, deegee, pointed out, this is really the foundation around which the whole process revolves. 

As I've said before, I don’t believe in short-cutting this process by assuming your budget will be 70% (or some other random percent) of your current income or current spending level.  I believe you have to go line by line and look at exactly what you are spending now, and then project the expenses that will increase, like health insurance, and those that will decrease like commuting costs. 

Once you’ve captured every single expense, break it down into two categories, non-discretionary and discretionary (or as CanadianMDInvestor calls it, needs versus wants.)  I’m not going to get all judgy about what is a want versus a need, for example, I view a housecleaner as discretionary, but I know for many of you that is a non-negotiable need.  This is your budget.  You get to decide.

Our breakdown landed at 70% non-discretionary:  Auto (repairs, fuel, insurance), computer and computer supplies, groceries, home maintenance and repairs, property taxes, mortgage payments, homeowners insurance, medical insurance and expenses--and 30% discretionary:  charitable donations, clothing, dining out, education, entertainment, gifts, recreation, subscriptions and vacations. 

When I originally went through this exercise, I included every want.  But I couldn’t make the retirement spreadsheet work with that budget.  And I really, really wanted to retire.  I wanted retirement more than I wanted to have someone else clean my toilets.  I wanted retirement more than I wanted to have someone clear my weeds.  I wanted retirement more than I wanted to work out at a fancy gym or stay in fancy hotels. So I cut those expenses and eventually trimmed enough fat to make it all work.

The reason I think it’s important to know how much of your budget is discretionary, is in the case that you feel you need to go to Plan B.  There are any number of factors that would require you to tap into Plan B, an unexpected medical expense, a dead car, or as in my situation, a 50% market decline.  The more cushion you have built in on your discretionary budget, the more flexibility you have to respond appropriately.

So maybe instead of calling it the discretionary portion, we should call it the peace of mind portion.

 

Some great related posts from Tamara at Early Retirement Journey:

            Budget Allocation in Early Retirement

            Retirement Budget Tracking

            Establishing Priorities to Achieve Early Retirement

 

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See Syd Retire

So here’s a little factoid.  I had never heard of William Bengen or the 4% rule before I retired.  How could I possibly have calculated whether I had enough money to retire if I had never heard of The Rule?

Well, the spreadsheet that I provided in my last post was the starting point for the spreadsheet that I designed for myself 20 years ago.  As I lusted more and more for retirement, I added columns and tweaked the spreadsheet until it became an extremely complicated CPA’s work of art, a lay-person’s nightmare. 

First, I separated my asset base between those held in retirement accounts and non-retirement accounts.  For my retirement accounts I assumed a higher rate of return than in my taxable accounts, since I would be holding more of my taxable accounts in cash and bonds.  (I would need the liquidity in the early years to get me through the first 15 years before I could touch my retirement accounts.  I would be much more sensitive to market moves over those years if I were relying heavily on equities in the short-term.)  Since the retirement accounts were going to live for 15 more years untouched, and would then be needed to fund the next three decades, I would put the more aggressive portion of my allocation there. 

Later, I decided to add a column showing what I thought our Social Security benefits would be if we started taking them at age 70.  (I only figured on one-half of the SSA’s benefit statement amount, to be conservative.)

Later on, I tweaked it again to show another column with the decline in expenses after my mortgage was paid off.  I incorporated lower tax rates for the early years when my taxable income is low (the income I generate off my assets barely exceeds my itemized deductions.)  I increased the tax rate for the years when I would be drawing out of my retirement accounts, as that would shoot me into a higher tax bracket.

I played with the inputs, changing up the growth rates, inflation assumptions, and life expectancy.  I was trying to get the spreadsheet to deliver us to age 100, even though it’s unlikely Doug and I will both live to be that old. 

After several years watching the spreadsheet only get me as far as 80 or 90, I realized I would be willing to tap into my home equity at that point (or earlier) if I needed to, so I added a column to track the inflation adjusted value of my home in case I wanted to pull some equity out in with a reverse mortgage or by downsizing—varying the amount pulled out to prevent the 100-year old nest egg from turning negative.

I added a column for unusual expenses like a new car a from time to time.  I made customization after customization.  I played with the spreadsheet more and more frequently as the desire to retire became stronger and stronger.  I was determined to figure out ways to make an early retirement work.  The spreadsheet is now 12 columns wide after all my special customizations.

Many, many years ago, the retirement spreadsheet said I could retire if I could average 8% returns each year, a few years later, with more saved, it would have worked at 7%.  But I didn’t feel comfortable assuming I could achieve either of those.  I felt comfortable assuming a 5% rate for my taxable assets (which are less weighted toward equities), and 6.5% for my retirement assets (which hold a higher allocation of equities.)  While I am an optimist, before I retired, I wanted to get my assumptions down to a conservative earnings rate, a substantial inflation rate, and a long, long life for both of us.  Worst case, we would die with a little money.

When I was ready to leave my job, I felt I had been adequately conservative in my planning.  I didn’t ask myself, “How much do I need to retire?”  I asked myself, “With what I have accumulated right now, what does the spreadsheet allow my budget to be without turning the last cell negative?” and “Can I be happy living on that?”  When the answer was yes, I retired.

A few years ago, I decided to write a post about this whole process.  By that time though, I had heard of William Bengen and his findings, so I went back to my original retirement-spreadsheet and laughed.  My first year’s budgeted withdrawal rate was 3% of my nest egg, give or take a few 100ths of a percent.  So I trashed that post in favor of a post explaining the short-cut.   While some might think it was a waste of time to have spent all that time and energy creating my own road map, I felt comforted. 

Related Posts:

            Retirement and the Magic Number

            The Marshmallow Test for Retirement

            Happily Obsessed

 

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See Average Joe Retire

Disclaimer:  Accountants will love this post, everyone else will hate it.

Dick and Jane have left the premises because they have better things to do.  But Syd is still here and in light of this blog’s spirited discussion of the 4% rule (or 3% rule, whichever applies to you), I wanted to illustrate how distributions work over the lifetime of your retirement when you use the 4% rule.

This particular retiree, Average Joe, actually winds up doing better than the worst-case scenario that drives the 3% rule—the result is that he dies with a little money left over, based on the facts I create.  (I could have chosen facts that would result in a better or worse outcome, it doesn’t matter, I’m just trying to illustrate how the withdrawals will work for Joe.)

No one will ever experience a steady growth of exactly the same earnings and inflation rates each year, but I wanted to provide a simple example to show you generally how your retirement withdrawals might look 10, 20, and 30 years down the line when you use the 4% rule:

Joe starts with $1 million.  He experiences exactly a 3.5% inflation rate every year of his retirement, and also a steady 5% return every year of his retirement.  (Remember the 4% rule is that Joe withdraws 4% of his nest egg in the first year and then adjust that dollar amount by the inflation rate each year.  For Joe that’s a 3.5% inflation rate each and every year.)  Here’s how his distribution history would look:

*Dollar Amount of first year withdrawal adjusted annually for 3.5% inflation rate.

 

Here are the two things I'd like to point out:

1)   In the early years Joe's assets keep growing from year to year.  He begins at $1 million and because his earnings are larger than his withdrawals, his nest egg grows to $1.049 million by Year 9.

2)   After that, the inflation adjusted amount of his withdrawals becomes larger than the growth his nest egg generates.  Eventually his nest egg declines to $280,000.

3)   The percentage of his nest egg (final column) that he is actually drawing each year is only near 4% in the early years.  As inflation increases the withdrawal amount it represents a larger and larger share of his nest egg balance.  By year 15 he's actually withdrawing over 6% of his nest egg, and by year 25, nearly 13%.  If he lives long enough, his final withdrawal would be 100% of his assets and he would die with nothing.

No matter what facts you assume, this will always happen, i.e. that when using a flat starting rate, say 3% or 4%, that you adjust for inflation each year, your nest egg will grow for some period in the early years and shrink after that, down to nothing depending on how long you live.

If you tried to keep your actual withdrawal rate at 4% for a long period of time, you would find that a) you can’t buy as much as you used to, and b) you might actually die with a bunch of with money left over.  Which might be ok for those of you with heirs, but I’m trying to bounce that last check.

Related Posts:

    See Dick and Jane Retire

    The Scary Impact of Inflation on Your Retirement Budget

    The Impact of Inflation:  Your Mileage May Vary

 

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See Dick and Jane Retire

 

You often see the “3% rule” quoted in retirement literature.  Many times it is applied incorrectly, so I’d like to revisit the rule, clear up some misconceptions, and let Dick and Jane show you how it works in their retirements.

Refresher Course

Financial planner William Bengen is responsible for the 3% rule, although that’s not what he called it.   Actually it’s the 4.5% rule, but he didn’t call it that either.  He called it “Safemax,” and it goes like this:

“If you spend 4.5% of the assets in your tax-deferred accounts in your first year of retirement and increase that annual dollar amount each year by the inflation rate, your nest egg will last at least 30 years under all the historical scenarios tested.” 

Bengen realized that relying on the last 80 years’ averages for stocks, bonds, and inflation only helps the hypothetical retiree that actually experiences those exact averages.  But what about a retiree in a real 30-year time chunk during that historical period?  How would he have fared in the best of times and in the worst of times?

His research showed that a retiree in the worst 30-year time stretch over the 80 years that he studied (which included some whopper recessions and even the Great Depression), would not have run out of money if he withdrew 4.5% of his nest egg the first year of retirement, and then adjusted that dollar amount each year for inflation.

Caveats

-This only held true for retirees that could stomach at least 50% of their portfolios in equities.  If you want to do it all on treasuries, the rule does not apply to you.  Your money would not have lasted in the worst of times if you were not willing to invest at least 50% in equities.

-In many of the time periods studied, your money would have lasted even longer than 30 years (or put a different way, you could have withdrawn more than 4.5% over those 30-year stretches).  The Safemax is purely to figure out what would have been the worst outcome.  In the case of the 4.5% rule, the worst outcome would have been that you would be left with no money at the end of 30 years.

-Thirty years isn’t long enough for a healthy retiree wanting to retire in her 40’s or 50’s.  That’s why I often quote the 3% rule.  It’s just the 4% rule adjusted for the research showing the Safemax for 50 years instead of 30 years.

-The rule does NOT say that you withdraw 3% of your assets each year.  That is a common misconception.  Read this again:  You withdraw 3% of your assets only the first year and then adjust that dollar amount each year for inflation.  After the first year, you never again multiply your ending assets by 3% to come up with the withdrawal rate.

Meet Dick and Jane

Dick and Jane are both 50 years old.  The year is Year 1, and the S&P index is at 900.  Dick and Jane each have identical $1 million portfolios of which 50% is invested a well diversified mix of U. S. large-, mid- and small-cap stock funds as well as international developed- and emerging-market funds.  The other 50% is diversified among short-, long- and mid-term bond funds and includes a 3-year supply of living expenses in an FDIC-insured savings account.  (As the author of this story, I will not let Dick or Jane invest 100% of their portfolios in the 30 stocks that make up the DJIA.  That would be foolish, and as their advisor, I would not let them do something foolish.)

Dick decides to retire right now because his retirement budget is $30,000 and that represents exactly 3% of his next egg.  I failed to mention that Dick and Jane live in Podunk, where the cost of living is very low.  I also I failed to mention that Dick really hates his job.  (And of course Dick doesn’t know this now, but he will live exactly 50 years in retirement, unfortunately dying one day short of his 100^th birthday in a tragic bungee jumping accident.)

Jane likes her job ok and wants to stick it out at least for another five years, to hopefully let her portfolio recover from a Big Recession.  She retires in Year 5 when the S&P is at 1,400.  Now, of course her portfolio is more than the $1 million it was in Year 1, but it is NOT 56% higher as would be indicated by the measure of the S&P index.  Only half of her nest egg was even exposed to the stock market, and some of that was in international funds, so her portfolio is 20% higher than it was at Year 1, now at $1.2 million.  Dick’s is of course smaller since he has been taking withdrawals from his identical portfolio for five years.

(It might be a good time to tell you that Jane also lives for 50 years in her retirement, dying of natural causes on her 105^th birthday.)

Between Year 1 and Year 5 inflation has been 3.5% per year, so while her budget was identical to Dick’s five years ago, $30,000 doesn’t get you what it used to, even in Podunk.   Dick is now withdrawing $34.5k (his inflated base amount).  Three percent of Jane’s $1.2 million portfolio puts her first year withdrawal Safemax at $36k, which by the way, she really doesn’t need because she already lives on $34.5k—the inflated $30,000.  But she has expensive taste in shoes, so she decides to take out the whole $36k maximum.

Now some of you might be thinking, that’s so unfair, why does Jane get to take out more for the rest of her life than Dick does?  Just because of the arbitrary place on the S&P (and the affect on her respective portfolio)?

The 3% rule does not say that Dick can’t take out more.  The rule just says that if Dick had been unlucky enough to retire during a 50-year period that was as bad as the worst 50 years in recent history, he wouldn’t run out of money.  In fact, it’s likely that he didn’t retire in the worst 50-year stretch of history given that the market went up 56% in the first 5 years of his retirement.

In fact, it’s likely that Jane’s 50-year stretch is going to be worse than Dicks, given that Dick already experienced a great 5 years in the beginning of his retirement.  The next 45 years, they experience the exact same market together, and then even if Jane experiences a stellar market in her last 5 years of living, it would be on a much smaller asset base by that time.  But the rule says that even if she experiences a 50-year stretch as bad as the worst in recent history, she won’t run out of money either.

So what does this rule mean for Dick and Jane?  Since Dick and Jane’s retirement overlapped 45 of the same years, and Dick had a stellar first five years in the market, if either of them experienced the worst 50 years, it would have been Jane.  If Jane did, indeed experience the worst 50 years, based on Bengen’s research, this means that Jane dies with no money, and Dick dies with some money left.  That’s all the rule says.

Raise your hand if you have any questions.

Related Posts:

            How Much Money do You Need to Retire?

            How to Set a Retirement Savings Goal

            A Smarter Approach to the 4% Rule

 

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