Retirement: A Full-Time Job

Retirement Planning for Beginners: Part Three

This week Money Mondays is going to last for three days:  Retirement Planning for Beginners in three steps.  I'm pleased to publish a guest post series by reader and frequent comment contributor, D. G. Pratt.  DGP (as he is known in the comments section) retired over a decade ago at the age of 45, so his retirement strategy has been well tested, surviving not one but two nasty bear markets. Monday he covered the basics of creating a budget, yesterday how to figure out how much you'll need, and today, putting that all together.

Where we left off yesterday

But, what if you want to retire early, that is before you reach Social Security age?  For the time, however long you want to make it, between your actual retirement age and your Social Security age (generally about age 66 to 67) you will need to fund your living expenses entirely from your nest egg.  So long as the savings that remain by the time you reach Social Security age are enough to fund your retirement income you will be ok.  Therefore, your nest egg needs to be somewhat larger to pay for the extra years of retirement. 

For example: your retirement budget is $30,000.  Your anticipated Social Security benefit is $10,000 per year.  The difference, $20,000, will need a nest egg of $500,000, as described yesterday.  Suppose your Social Security age is 66 but you want to retire at age 55.  You will need to fund your retirement for 11 years before Social Security kicks in.  You will need additional savings to provide for the $10,000 per year for 11 years.  The simplest way to calculate this is to just multiply $10,000 by 11 for a figure of $110,000.  That number is actually a bit of an overestimate because that money will be generating income until it is spent, but this is a good rough estimate of what you need.  So, $500,000 plus $110,000 equals $610,000.  That is the nest egg you would need to retire at 55 at an income of $30,000 per year, inflation adjusted, for the rest of your life, assuming a 4% real investment return.  [Using a 3% real return you would need $666,000 plus $110,000 for a total of $776,000.]

Step 3: Keeping Score

Now you know how much you need.  How are you doing?  Add up your assets, subtract your liabilities (debts) and you will get your net worth.  Some of that will be your house.  Subtract the cost of a house in the area you expect to be retiring to.  The result is the current size of your nest egg.  Too small?  You have several options.  You can revisit your budget and see if you are willing to live a little more frugally when retired.  But most people will just have to tighten their belts to save more (or get those kids out of the house so that you can really start to save!).  And you can check your mix of investments to see if you can grow the money you already have a bit faster.  At least now you know what target you are aiming for! 

To continue to keep track of your progress I suggest that you revisit your retirement budget every few years and plug in current costs and estimates of what you will need to live, since they will be increasing with inflation.  Then you can generate a new estimate of what your nest egg will need to be.  Your savings and investments should be growing more quickly than the inflated size of the nest egg that you project that you will need.

Good luck!

Thanks to DGP for the great series, Retirement Planning for Beginners!

Related Posts:

    Retirement Planning for Beginners:  Part One

    Retirement Planning for Beginners:  Part Two

    Don't Let Fear Paralyze Your Retirement Plan

 

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Retirement Planning for Beginners: Part Two

This week Money Mondays is going to last for three days:  Retirement Planning for Beginners in three steps.  I'm pleased to publish a guest post series by reader and frequent comment contributor, D. G. Pratt.  DGP (as he is known in the comments section) retired over a decade ago at the age of 45, so his retirement strategy has been well tested, surviving not one but two nasty bear markets. Yesterday he covered the basics of creating a budget,today, how to figure out how much you'll need.

Step 2: How Much You'll Need

Now that you know what it takes to fund your lifestyle on an annual basis, how much of a nest egg do you need to provide the income you need?  Let’s start with possible income sources.  Do you expect to have a pension?  (Most people will not have one.)  Are you eligible for Social Security?  If so, you will have received a form that estimates your benefit when you retire and when you can claim it.  (Editor's note:  The Social Security Administration has suspended sending paper estimates due to budget issues, but you can obtain an estimate on-line.)  [You will also be eligible for Medicare, such as it is, but will need to budget for medigap insurance and other items not covered.]  Social Security (and pensions, if any) will provide part of your income, the rest will have to come from your savings and investments.  Subtract the estimated Social Security annual total from your annual budget.  The remainder will be how much you will need to fund on your own.

Now you need to figure out how much of a nest egg will generate that income.  I prefer to use a moderately conservative “real return” of 4% in such estimates.  [Important: “real” return means the amount you earn after adjusting for inflation.  This is why your estimated budget and all other calculations can be done in today’s dollars; your investments will likely keep up with inflation and earn more than 4%.  You are solely concerned with the return over the rate of inflation.]  Some people will get even more aggressive and assume a real return of 5% or even 6% (this is nuts, in my opinion).  Others, to be on the safe side, might use a figure of 3%.  This return is generated by the investments, usually a mix of stocks, bonds, and cash equivalents such as money market funds and CDs.  It assumes that the total portfolio generates 4% above inflation over the long term.  Your actual investment performance will fluctuate over time with the vagaries of the stock market and interest rates but, over time, you ought to be able to make a 4% real return fairly easily and safely.   [How to do this is a subject for another day.]

At 4%, you will need a nest egg 25 times the size of the amount of the budget you need to fund.  [100 divided by 4% equals 25.]  So, let’s assume that your budget, less Social Security, is $20,000 per year.  To generate that income you will need a nest egg of $500,000 [$20,000 X 25 = $500,000].  This number is exclusive of the value of your house; since you will be living in it, the house will not (likely) be generating any income.  However, if you choose to sell your current house and buy a less expensive one elsewhere, the equity you pull out of the transaction, if any, is part of your investment nest egg.  This is a very common strategy used by retirees to generate a portion of their nest egg.

So, multiply the income you will need by 25 and that is the target you need for your nest egg.  If you choose to use an aggressive 5% real return multiply the income you need by 20.  If you choose to use a conservative 3% multiply the income you need by 33.  Yes, it really is that simple.

But, what if you want to retire early, that is before you reach Social Security age?

That and figuring out if you are on track tomorrow in Part Three.

Related Posts:

    Planning for Retirement:  Part One (Budget)

    How Much Money Do You Need To Retire?

    How Much Money Will You Need To Retire?

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Retirement Planning for Beginners: Part One

This week Money Mondays is going to last for three days:  Retirement Planning for Beginners in three steps.  I'm pleased to publish a guest post series by reader and frequent comment contributor, D. G. Pratt.  DGP (as he is known in the comments section) retired over a decade ago at the age of 45, so his retirement strategy has been well tested, surviving not one but two nasty bear markets.  The first step, the dreaded B-word.

Step 1: The Budget

Many people wonder, “How much do I need to retire?” but haven’t a clue how to figure it out.  If they read books on the subject, or listen to the “professionals,” they get showered with misinformation, such as, “you need 80% of your pre-retirement income in retirement,” and similar nonsense.  The goal of this series is to demystify the process of determining how much is enough. 

You can’t know how much it will take to generate the income you need until you know how much you will be spending.  Therefore, you need to create a retirement budget.  If you are one of the rare people who already uses a detailed budget you can adapt it for this purpose by subtracting out the categories that will become obsolete when you retire.  [Plan to pay off your mortgage?  Then you don’t need to budget for a mortgage payment, but you do need to make line items for property taxes and homeowner’s insurance if those are currently included in your mortgage payment.  Do you have children?  Your expenses ought to drop when they are through college and emancipated.]

How do you make a budget?  Make a list on a piece of paper, or spreadsheet, of all the things you can think of that you spend money on.  Examples might include food and sundries, gasoline, electricity, telephone & iternet, water, property taxes, health insurance, gifts and donations, car license, and so on.  Be sure to include a category called miscellaneous for those things you forgot, like postage or the fee you pay to renew your driver’s license.  You might want to look at a checkbook register or credit card statement to get an idea of what you spend money on.  Be sure to include a hobby or recreation category; many people will want to include one called travel.

Now look at the list.  Did you remember to include a line for car maintenance if you plan to keep a car (and who doesn’t?)  How about car replacement, since you will need to buy a new one someday; this is the cost of a new (or used) car, less the amount it will be worth (if anything) when you sell it, divided by the number of years you expect to keep it.  Do you have an income tax line?  You can estimate your future income taxes by assuming that your entire budget will be your future income.  Do you have house maintenance?  How about dental or medical self insurance?  The latter category covers what you might spend that is not covered by your health insurance. 

Now, fill in the numbers you spend, or expect to spend, each year for each category.  [Ignore inflation, all numbers should be in today’s costs (more on this tomorrow's post).]  If you aren’t sure what something will cost, just make your best guess.  Things like health insurance can be looked up on-line (try www.quotesmith.com).  You might want to budget for long term care insurance if you think you might want that.  Make a generous estimate for the miscellaneous category to cover anything you forgot.

Add up those numbers.  The total is the amount you need to live on if you were to retire today.  That’s simple enough.

(Tomorrow:  How much do you need?)

Related Posts:

    Retirement and the B-Word

    Spend Money on Whatever You Want in Retirement

    Happiness is Cheaper in Retirement

 

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Picturing Retirement: Enjoying Other People's Pets

Photo Friday:  Daisy the Beagle on our pet-sitting vacation.

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

 

Related Posts:

    Enjoying Retirement With Doggies

    Retirement and the Temptation to Get a Dog

    Will Work For Wine

 

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Aging in Place and Watching Your Trees Grow

I used to think that in another five or 10 years, after I’d done my time in suburbia, I’d make Doug pack up his bags and move with me back to San Francisco.  Apparently that’s what many builders and developers thought too.  According to this article in Forbes, we retirees were eventually supposed to ditch our suburban communities and head in droves to high-end urban housing.  I expected me to do that too.

But apparently that’s not what we’re doing.  According to the latest census data, some retirees are choosing more affordable Sunbelt communities, but the vast majority of folks are choosing to age in place.  I can see the appeal of this now. 

I was browsing my photos last night and ran across the one above.  This was at a party we had a few years ago after we had just planted a couple of cherry trees, and landscaped the area right off our deck.  Today it looks like this:

Those little cherry trees produced a ton of fruit this year, enough for a lot of home-made cherry turnovers.  My pomegranate tree finally has fruit on it this year, six years after we planted it.  And the apple tree hasn’t yet managed to give us more than two or three small apples.  I want to be here when that tree is heavy with fruit.  I want to be here when the blood orange tree gives us so many oranges I have to give them away to the neighbors.  I want to be here when the little maple gets big enough to hold the other side of a hammock.  I don’t want to leave all this, I want to see what it all turns out to be 10, 20, and 30 years from now.  I get it.

Related Posts:

    Where to Live in Retirement 

    Do We Really Want Everything We Want?

    Aging and Retirement

 

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Racing to a Milestone

Posted in Wellness Wednesdays

I turn 50 in two years and four months.  It should be obvious what I’m going to say next:  28 months to get in the best shape of my life.  And I have to say, good thing I’m getting a head start, it’s not as easy as it used to be.

Nineteen years ago, this month, I was in the best shape of my life and it took virtually no effort.  Yes, that was in part due to age, but it was also due to the fact that I was getting married, and there’s no motivator like a walk down the aisle in a white gown to get a girl in shape.  But a milestone birthday is a close second. 

If you are like I was when I retired, you probably think retirement will automatically bestow upon you the greatest shape ever.  After all you have all that time to work out.  But as I’ve mentioned before, it wasn’t my job keeping me from getting in the best shape of my life, it was me.

So a couple of months ago I borrowed a set of P90X DVDs from some friends of mine.  I’ll be the first to admit that being retired is a major advantage in finding the time to commit to this P90X thing.  The program schedule includes six tough but varied workouts a week for 90 days.  I’ll also admit that at 139 bucks for the set of 12 DVD’s, it’s much better to have friends you can borrow them from, at least to check it out while you decide whether you can stand it.

It was great fun to have my friends cheering me on with daily emails that first week, asking me how it was going.  After workout number one, I reported that I could barely lift my arms to wash my hair afterward.  By day three, when I emailed my friend to tell her that now every body part ached in unison, she replied, “Aahh, Day Three, I remember it well.”

Before you start the program, you are supposed to take “before” pictures of yourself to compare to the “after” photos you take at the end.  I just couldn’t bring myself to take a photo of that unfit Syd, so I’ll have to report back to you in four more weeks from memory alone, and maybe even a change in the way my clothes fit.

Interesting Fitness Reads:

            Why Doesn’t Exercise Lead to Weight Loss?  (New York Times)

            Studies Show 15 Minutes of Daily Exercise Can Help (AP via Yahoo)

            Why Exercise Won’t Make You Thin (Time Magazine)

 

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In Praise of the Staycation

Posted in Traveling Tuesdays

I get why some people don’t like to travel.  Actually it can be a royal pain in the ass.  Figuring out exactly what to pack for your trip while trying not to lug too much stuff.   Taking off your shoes, removing laptops and liquids from your carry-on for TSA screening, and then schlepping your luggage past miles of airline gates, only to battle for limited space in the overhead compartment and then fold yourself into your allotted space.

Upon arrival, you wait at baggage carousal number three, hoping your checked luggage actually made the whole trip with you.  You trek to the rental car lot, all while crossing your fingers that the hotel actually lives up to the promise of the website’s photos.

Despite the inconveniences of travel, there can be plenty of benefits too, and this last trip gave me a new one:  an appreciation for what's right in my own backyard.

Doug and I are not big sightseeing people.  When we travel, we mostly like to explore the neighborhoods, take in the restaurant, bar, and music scene, and people-watch while we sip a cappuccino or a glass of wine.  We’ll head to the major sights, but mostly to enjoy the surroundings, not always to join the throngs inside.

So how is it that in my very own town, I’ve failed to notice the little side street that hosts free live jazz every Monday night during the summer?  I have lived here for almost seven years, and while I was well aware of all the shops, restaurants, and live music venues on the main drag, I was totally unaware of this little side street dotted with restaurants and a bar that features live music every single night of the week. 

Once a week, the street is blocked off, a stage is set up, and the restaurant tables flow out into the street for the festivities.  Restaurants, did I already mention, that I had never even seen before?   Without the hassles of traveling to a distant land, we enjoyed music and people watching while sipping a martini a mere 10 minutes from home.  We marveled at how much we felt like we were on vacation.  And all in the city deemed “climate best by government test.”  You can’t beat that!

Related Posts:

            This is New York

            Is it Worth it?

            How to Stretch a Travel Dollar in Retirement

 

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How to Lose Money in the Stock Market: Don't Invest in it

Posted in Money Mondays

Was it really a lost decade for investors?  Let’s say you’re in your early 60’s and you’re getting ready to retire.  You’ve been working for four decades, and saving steadily for your retirement for the last three of them. 

Well, unless you stashed all your retirement savings into cash and then had the great misfortune of investing it all in the stock market on November 9, 1998, it probably wasn’t really a lost decade for you.  Oh, and did I mention, you would have had to have the greater misfortune of picking all individual stocks that paid no dividends.  But yes, if you did exactly that, it has been a lost decade.  Raise your hand if that scenario applies to you.

Now, for the rest of you that dollar-cost-averaged into stocks over the decades of your working years, find the year in which you started investing on the chart above.  Draw a line across the chart beginning from the stock market level for that year--for me that's 1990 (the lower line beginning at 1990). 

Here’s a picture of how much money you have made.  The gray area between the two lines is how much money you’ve made, the gray area above the red line is the money you lost (shares you purchased at a higher value than they are today), at least on paper.  For those that have been disciplined investors for two, three, or four decades, the gray area between the lines is greater than the gray area above the red line.  You came out ahead.  Way ahead.

It certainly has been a rocky ride this last decade.  But including some stocks in your retirement nest egg is still the only way to be sure you’ll be able to keep up with inflation.  “You can’t get to a retirement goal earning 2% or 3% in bonds when inflation is running at 3.5%,” Jeff Layman points out in this recent Market Watch article, Why Stocks Will Save Your Retirement.   He goes on to warn that over time, inflation is more devastating to a nest egg than “periodic rounds of volatility.”

It can feel safer these days to stash all your money in cash, but “don’t confuse certainty with safety.”  According to money manager Harold Evensky, that approach is “very unlikely to be safe for most investors because there’s not going to be enough money to pay the bills after you factor in inflation.”

Clearly it would be most lucrative to sell all your equities at each peak and buy them all back up again at each bottom, a very hard strategy to implement.  The data cited in the article shows that most individual investors tend to sell as the market is tanking, and then miss out on the rebounds.  From 1991 through 2010 this behavior reduced the average equity investor’s return from the 9.1% of the S&P 500 during that time, to a paltry 3.8%.  Kids, don’t try this at home.

The safest approach is still to figure out your own risk tolerance, create an allocation among diversified assets that will allow you to sleep at night, shop for funds with low expenses, and most importantly, automate the buy-low, sell-high process by rebalancing your assets regularly.

Related Posts:

            Don’t Let Fear Paralyze Your Retirement Plan

            The Impact of Inflation:  Your Mileage May Vary

            A Note About “Losing” Money in the Market

 

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Picturing Retirement: Quality Time

Photo Friday:  A visit with my neighbor, Smokey, on a weekday afternoon.

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

 

Related Posts:

    Enjoying Retirement With Doggies

    Retirement and the Temptation to Get a Dog

    Will Work For Wine

 

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Do French Fries Count as a Vegetable?

Posted in Wellness Wednesdays

Don’t ask me why I picked on meat, it just seemed like a good way to do penance for my sins. 

The first eight days of our stay in Montreal included French fries at least once a day.   Add to that the fact that we didn’t really focus on meals with nutritional value while we were there.  We were, after all, on vacation. 

I’m sure I’m not the only one out there that uses vacation as an excuse for eating junk.  There were whole days that included no vegetables at all, I mean unless you are counting the French fries as a vegetable.  So on the last day of our vacation I told Doug, when we get home we’re going to be vegetarians for a week.  It was intended as punishment.

The funny thing is, when we got home, we each had lost a pound.  Ok, not much to brag about, but it sure beats the alternative.  And that was with eating (and drinking) anything we wanted for two whole weeks.

It was all the exercise.  We didn’t do intentional exercise while we were there, but we explored every corner of Montreal using only public transportation, which meant a lot of walking.  We walked four or five miles each day. 

And Montreal’s public transportation system includes a great biking system.  I think the city has more Bixi Bike stations than subway stations.  For less than a round trip fare on the subway or the bus, you get the use of a bike for 24 hours, providing you get your bike to the next stand within 30 minutes.  But you can take out a new one two minutes after your dock the previous one.  The last day of our stay we rode all over that town, 25 miles by the end of the day. 

But still, I was feeling guilty about all the French fries, so I stocked up on fruit and veggies when we got home and made nothing but meatless meals the whole week.  Turns out I loved being a vegetarian.  I mean, I’m not converting or anything, but I do think I’ve found a new way to eat that’s much healthier than my old way. 

Instead of vilifying certain foods (carbs, alcohol, sweets, or in this case meat), and saying “no you can’t have those,” I’m aiming to get at least the recommended minimum each day of the foods with important micronutrients:  fruits and vegetables, and then eat whatever else I'm hungry for.  I wind up having less room for junk after I’ve managed to work 2 cups of fruit and 3 cups of vegetables into my day.

Oh and for the record, I don’t consider a glass of red wine to be junk.  It may not count as a serving of fruit, but it is made from it.

Related Posts:

            Retirement and Skinny Jeans

            Retirement Calories

            Exercise Like a Kid

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