Retirement: A Full-Time Job

It's (Still) the Economy, Stupid!

Understandably, there is a lot of talk out there about the "R" word:  Recession.  Whether we are technically in a recession or not is a call to be made by the National Bureau of Economic Research.  The common measure of a recession is two consecutive quarters of negative GDP, and so far, we've had only one; unless the first quarter of 2008 is revised downward as the last quarter of 2007 just was.  Our last recession in 2001, however, did not fit this criteria but was nonetheless declared a recession, a distinct possibility today as well.

An economist in the New York Times today was quoted to say "All my cousins already know it's a recession. . .  They have the luxury of not having Ph.D's."  But whether it's technically a recession or just some bad times, the distinction is mostly irrelevant for many Americans who are watching food and energy prices go up, the stock market go down, home foreclosures go up, and the jobless rate hitting a 4-year high. 

The current debt crisis sure isn't helping matters.  Former Secretary of Labor, Robert Reich, posted some interesting insight into the situation on his blog last week.  He believes the current financial woes are caused because, "for most Americans, earnings have not kept up with the cost of living."  He explains that Americans have done three things for the last four decades to try and remedy this situation:

1. We've increased the number of dual-wage households,
2. We've increased the number of hours we work each year, and 
3. We've gone into debt to make up what we can't make up for doing the first two.  

If it is, in fact, true that just keeping up with the cost of living has contributed significantly to our current debt crisis, I'm a little worried about how we're going to get out of this slump!  If real wages are, in fact, sliding after inflation, what will Americans do next to at least keep treading water?

I recently found some interesting U.S. Census Bureau Statistics:

As of 2004, the percentage of U.S. adults over 24 with:

1. At least a college degree:  28%
2. At least a high-school degree:  85%, 
3. Leaving 15% with neither.

The average wage of workers 18 and over was:

1. $74,602 with an advanced degree,
2. $51,206 with a college degree only, 
3. $27,915 with a high-school degree only, 
4. $18,734 with no degree. 

When Americans don't have enough money, they can't spend.  When they can't spend, the economy, which is 70% fueled by consumer spending, does not grow.  When the economy does not grow, we all feel the pain.

Since we've pretty much exhausted the methods above for dealing with stagnating wages, we're going to need a new solution.  I have a feeling it has something to do with education.  (Oh, and that would increase the ranks of the Fox-News-dreaded "cultural elite," which would have the extra-added benefit of totally pissing off Sean Hannity and Bill O'Reilly.) 

Related Posts:

My Dirty Little Secret

Are You Smarter than a Fifth Grader?

Retirement Into a Down Market-Part II

Am I nervous about the stock market, having just retired while it is diving?  Yes.  Do I know better than to be nervous?  Yes. 

The logical, finance-person part of me realizes that over the next 50 or so years of my retirement, the market is just going misbehave from time to time.  I know this.  But the emotional part of me screams “why now?”  Why, right at the beginning of my retirement? 

I’ve been retired for almost 4 months.  In my detailed finance-nerd spreadsheet that I created to assure we would have enough money to live comfortably (not excessively) until the ripe age of 95, we need to make an average of 6% on our investments (while experiencing an average 3.5% inflation rate, and dying promptly at age 95).  

I know that in any given year, we will not experience a 6% growth rate in our assets; it will be higher in some years and lower in others (and in some years, like this year, so low it’s NEGATIVE).  This year, for the four months since I retired, our assets have declined by 4%.  That may not sound like a lot, but we should only be withdrawing 3% per year to live on, so we’re already down over a year’s living expenses with eight months to go of this first year.

At first glance, this doesn’t sound catastrophic, like all we have to do is die at 94 instead, right?  Wrong.  Due to the miracle of compounding, it actually has the miraculous effect of shaving TEN years off our allowed life span.  At this point in my life, I’m not ready to plan on throwing in the towel at the sprightly age of 85.

But in a way, it’s good that we are experiencing a market freefall during our first years of retirement rather than a huge market increase.  Why?  Let’s say by age 95 we experience whatever ups and downs the market has in store (and do manage to eek out an average of 6% per year).  Let’s say that year 1 was a huge up year.  If that were the case, I think that would have given us the impression that my retirement budget was too strict.  After all, look how much money we have with this huge upswing.  I think, in that scenario, we might grow accustomed to spending based on our new increased asset base. Then what happens if we encounter some big down years beginning in year 10?  It might be to late to recover from 10 years of overspending if we had been lulled into a false sense of security in the early years.

But since this first year looks to be a hard-slogging one, this is forcing us to see where we might be able to cut some costs, just in case.  Better we learn this lesson and make adjustments now, rather than when it’s too late to recover from overspending in early flush years.  It just means we forego some of the extravagances this year (and maybe the next couple of years).  With 50 years to go, it’s ok if we don’t get on that European vacation right away—more time to brush up on a foreign language.  Maybe we won’t eat out as much this first year; excellent, then we won’t waste all these veggies that are growing in our garden.

I guess the big question is, will we still remember these lessons years down the road when we do have some large upswings in the market?

Related Posts:

Retirement Into A Down Market

Retirement and the "B" Word

Am I Drinking My Retirement Savings Away?

Money and Graduation Season

Last week a friend's daughter graduated from high school.  We celebrated with the family following the ceremony, and caught up with some old friends we haven't seen in long time.

On the way out, I said to the graduate's father, "be sure to bring those presents inside--there are some very valuable envelopes there."  He said of course he would, but added that his daughter doesn't really seem to know the value of money, "How do you teach them the value of a dollar; I have no idea?"  He went on to tell us how, when she needs money, they give her money; twenty-dollar bills seem to fly out the door with her daily.  He knew this approach was not instilling a great sense of fiscal responsibility in his daughter.

On the drive home, I remembered the rather complex financial system my mom set up in our household while I was growing up.  We didn't have a whole lot of money, but my mom was good with it.  I either inherited that gene from her, or the system she worked out set me up for a financially savvy future.

On the 1st and the 15th of each month, when my dad got paid, I got an allowance of $15.  Mine was one of the larger allowances among my friends, but from that allowance, I was expected to purchase everything I would need (including clothes--which most of my friends received on top of their allowances).  If I spent my money on candy, records, movies, or fast food, I was on my own.  If I spent money on clothes though, my mom would match me dollar for dollar up to $15 per month.

It was kind of a clothes 401(k) matching program.  I usually spent my money on clothes.  I do remember, though, having enough saved to buy an $80 stereo at Thrifty's Drugstore at one point.  I think I was a pretty good saver.

When I was 15, I got a job at H. Salt Fish and Chips.  Everyone I knew had a job at some fast-food joint.  Even at $2.65 an hour, the money added up a whole lot quicker than an allowance (which I no longer received, since I had a job).  I really saved a lot during that time.  I liked having the money so much, I hardly ever spent it on anything (except, of course, clothes).

I don't have kids, so don't really know whether the allowance system still exists.  I do know that none of my friends' kids work during the school year (maybe a couple have summer jobs).  I think nowadays parents want their kids focusing on school work rather than fast food work.  This may serve them better in the long run, college-wise and career-wise, but probably at the expense of learning a little financial savvy.

Not to mention never getting to have the experience of coming home smelling like greasy fish!

Embarrassing Myself at the Library

Well, it's been awhile since I've had a library card.  Things have sure changed.

I applied for the card on-line so that it would be waiting for me upon my first visit; there was no such thing as on-line when I last used the public library system.  When I entered the library, I saw three people at computer terminals at desks near the exit and mistakenly assumed they worked there.  I made a complete fool of myself and asked the closest one, "Excuse me, where do I pick up my library card?"

The look on his face said "I'm not the hired help"; out loud he said, "Well, I would imagine with that lady over there?"  The one that actually works here, yeah, I get it.  The people standing at these terminals were library patrons checking out their own books.  In the old days, you handed your stack of books to the librarian to check you out.  She stamped a little card on the inside jacket with the date that you had to return the book.  Now it's self serve!

I picked up my library card from a woman that actually worked at the library and went in search for my first library book in 20 years.  I got completely sidetracked by the huge reading room filled with new releases.  All these wonderful books and TOTALLY FREE!  It's a million times better than that feeling I get in a bookstore.

On my way to the older books, I stumbled upon a rack where you could purchase three paperbacks for one dollar.  I almost immersed myself in this section when I remembered; there are FREE books here!  I found the book I was looking for, a Steven King memoir about the craft of writing.

On my way out, I drifted through the thousands of magazines--but I only had five minutes left on my parking meter, so needed to high-tail it to check out.  I didn't want to embarrass myself again, so I carefully scoped out another actual library employee.  She showed me how to scan my library card so that my name pops up on the check-out terminal.  Now, I simply had to enter the last four digits of my phone number.  The last four digits of my phone number--what are the last four digits of my phone number?  There goes my attempt at avoiding embarrassing myself again.

I kept saying my area code and the first three digits out loud, but the next four digits would not follow.  Nothing I could do could bring them out of my memory bank.  She sympathized that this happens to a lot of people.  That helped, I remembered.  She showed me how to scan the book, and out came the receipt with my due date.  She told me that I could renew it on my home computer from the comfort of my own home.

The other book I wanted wasn't at this branch, but through the miracle that is the modern library system, it will be waiting for me at my branch when I return this one.

Why does anyone go to the bookstore?

Related Posts:

Retirement and the "B" Word

Save for Later, Live for Now

Nostalgia About Being Poor

And With This I Would Marry Him All Over Again

When I retired from my job a couple of months ago, my husband, Doug voiced some concerns about the budgetary constraints I was proposing.  Clearly the lifestyle to which he had become accustomed was in jeopardy.  It's true, and I did feel a little guilty about that.  (Only a little, I did point out that if he felt it was too draconian, he could always go back to work.)

Our new budget (and by new, I mean that we actually have a budget now) requires that he pare back his wine purchases and his expectations of the level of luxury on our future vacations.  He must get used to the idea of driving our cars until they can drive no longer, and will have to accept replacements that are more economical when that day comes.  (Our SUV-driving neighbors will surely mock us upon the addition of a Prius to the neighborhood.)

In this draft of the budget, my labor fills in for services we formerly outsourced such as yard work, housecleaning, and painting.  It turns out, this house cleaning gig is hard work!  I spent 4 hours cleaning yesterday and barely made a dent.  (By the way, to make the budget work I also dropped the gym membership and personal trainer.  Now that I'm cleaning and gardening more, I can see that paying for exercise would have been a complete waste of money.)

I have been taking a writing course these past few weeks, the focus of which is writing for magazines.  Last week, when I was wondering if I would ever have time to clean the house, I mentioned to Doug that if I sold an article every so often, we could consider hiring our house cleaners back.  I expected he would really like this idea.  I thought the dirt was getting to him but that he didn't want to risk death by saying something to me.

But listen to the sweet words he uttered to me when I proposed this idea.  He said "I don't know, for 300 bucks a month, it seems like we should just put up with a little dirt."  I haven't heard words that have made me that happy since "Will you marry me?"

Retirement Tax Tips-Part 3

Taking Advantage of Low (or Zero) Capital Gains Rates

In Retirement Tax Tips-Part 1 I recommended fully funding your 401(k) accounts before retiring from your job.  In Retirement Tax Tips-Part 2 I discussed how converting a traditional IRA into a Roth IRA might save you some tax dollars. 

In this post I want to talk about a temporary capital gains benefit you may be able to take advantage of if you are a pre-retirement-age retiree (or otherwise in a very low income tax bracket.)

I mentioned in my previous post that I would be converting my traditional IRA into a Roth IRA little by little over the next several years, managing my income within the zero or lowest tax bracket.  But, I will not begin doing this until 2011, because in the meantime, I am first going to take advantage of the ZERO long-term capital gains rate currently available only for tax years 2008-2010.

Currently, long-term capital gains (gains on assets held for at least one year) are taxed at a maximum rate of 15%.  For those taxpayers in the lowest two income tax brackets, however, the long-term capital gains rate is currently (for tax year 2008) ZERO.  This provides an excellent opportunity for those no longer working (retired) that haven't yet reached "normal" retirement age.  In these interim years without a salary keeping you in higher tax brackets (and before social security and retirement plan distributions push you back into higher tax brackets), you may be able to manage your taxable income (income less itemized deductions) within the range necessary to take advantage of these provisions.

For 2007, the cut-off for this favorable rate was $63,700 for married filing jointly ($31,850 for singles.)  The 2008 brackets will be adjusted for the cost of living and are expected to be approximately $65,000 for married filing jointly (and approximately $32,500 for singles.)

So, if you have stocks or mutual funds that you must liquidate anyway over your pre-retirement-age retirement years, you may want to sell just enough in 2008 through 2010 so that your taxable income stays below these cut-offs and you can enjoy a ZERO % tax rate on these sales.

Under the current tax law, for tax years after 2010, these favorable rates are scheduled to expire and go back to their pre-2003 levels of 20% (and 10% for those in the lowest bracket).  For a very good (and very detailed) resource on this and related tax rules, see this article in the CPA Journal.

Of course there is always the possibility of tax law changes after the 2008 elections and these favorable rates could be legislated away.  But barring any legislative changes before 2010 you may be able to take advantage of these ZERO capital gains rates for 2008-2010 and save some tax dollars.

(Next in Tax Planning Tips-Part 4-Saving Tax Dollars by Converting A Vacation Home to a Primary Residence)

Retirement Tax Tips-Part 2

Taking Advantage of Pre-Retirement Tax Brackets for the Early-Retiree

In Retirement Tax Tips-Part 1 I recommended fully funding your 401(k) account before retiring from your job (and making contributions to an IRA if you qualify).  In this post, I will talk about how to save retirement tax dollars by converting traditional IRAs into Roth IRAs.

If you are retiring before "normal" retirement age (I'll call that 59 1/2, when you can begin withdrawing assets from retirement accounts without penalty) and are not going to be tapping into your retirement assets for several years, you may well be in the situation that I find myself in, a low tax bracket!  While I was working, my income level was too high to take advantage of the IRA contribution provisions.  After I reach retirement age and start collecting (hopefully) Social Security and begin taking distributions from my traditional IRA, my taxable income will once again be higher than it is now, in my early-retirement-post-working years.  My income tax bracket will go up right along with it.

I have 15 years to go before I will begin taking distributions from my retirement accounts, so will be living off of my non-retirement portfolio until that time.  Since the only taxable income I will be receiving will be the earnings on these accounts (which will go down each year as we spend down these accounts during our early retirement years), our federal tax bracket will be zero after taking into account our itemized deductions.

During this period of time, we can take advantage of our low (or zero) marginal tax rate and convert a portion of our traditional IRAs to Roth IRAs.  When you convert a portion of a traditional IRA into a Roth, you must include the portion converted in your current year's taxable income.  If your income is low enough (and/or your deductions are high enough), you can manage the year-to-year conversion amount to be just enough to keep you out of tax (or just enough to keep you in a lower tax bracket than you project to be in during your "normal" retirement years.)

Why would you want to do this?  Because withdrawals from a Roth IRA are completely tax-free when you follow the appropriate distribution rules.  Conversely, distributions from a traditional IRA will be fully taxable since those dollars provided you a tax deduction in the year you contributed them (which Roth IRA contributions do not).  You can read a very good article about this distinction here.

For tax years 2008 and 2009, you must have "modified AGI" below $100,000 to take advantage of these conversion provisions.  As the tax law stands right now, however, this income limitation goes away for tax years beginning in 2010.

With the current political climate, and an almost certain change in our tax laws on the horizon, it is likely tax rates will go up.  So even if your expectation is not to have a far greater income in your retirement years, it is certainly possible your tax rate will be higher anyway.

(Next post in this series: Tax Tips for Retirees-Part 3-Taking advantage of low capital gains rates)

Tax Tips for Retirees-Part 1

Squeezing the Last Bit into Your Retirement Plan

In my previous life (2 weeks ago) I was a CPA who knew a thing or two about taxes.  Now I'm retired, so I can devote such brain power not to my employer but all to ME.  Now that I work for me, I can use this power full-time for myself (and for you, to the extent these ideas may apply to you).  This is the first in a series of brilliant tax ideas that will save me precious dollars in my retirement.

Whether you are leaving your job permanently or simply switching jobs, my number one tip is to front-load your 401(k) contribution before you leave that job!  Generally, for 2008, you can contribute up to $15,500  to your 401(k) and an additional $5,000 if you are 50 or older.  Most of us take a little out of each paycheck, so that by the end of the year we have contributed the full amount.  However, there is no IRS rule that says you have to stretch your payroll deductions out over the whole year.  While your employer may limit the percent you can contribute of each paycheck, I recommend that you contribute the most you can early in the year so that you max out as soon as possible. 

Is contributing the maximum amount into your 401(k) a good idea?  Yes!  If you are retiring, you get one more full year of tax-deferred savings.  If you are moving to a new job, it's probable that your new employer will have a waiting period before you can join their 401(k) plan.  If you accelerate your contribution before you leave your old job, you won't miss a year of tax-advantaged savings.  And if your employer matches your contribution, you get extra "free" dollars!

The other boondoggle for which I am now eligible this year for the first time is contributing to a Roth IRA.  Until now, my income was too high to qualify for a Roth IRA, but since I only earned two months' salary in 2008, I can make a $5,000 contribution in addition to having maxed out on my 401(k) contribution.  Plus, I can make a spousal contribution of $5,000 for my husband.

So, by front-loading my 401(k) contribution and making Roth IRA contributions, I am able to make a "last-hurrah" contribution of $25,500 into my retirement accounts.

(Next Post:  Tax Tips for Retirees-Part 2-Saving Tax Dollars by Converting Traditional IRAs to Roth IRAs)

Retirement: More Time than Money

Good thing I'm retired; I can spend DAYS chasing 300 bucks!  Little do they know, I will not give up, they don't know who they are up against.  I've got nothing but time baby.  Bring it on.

My husband paid our estimated taxes in January, but apparently, inadvertently neglected to sign the check.  (I hope not a sign of the retired brain turning to mush but simply a mistake.)  Yesterday, I received a notice from the taxing authority of this great state of California telling me that the check was dishonored.  (Frankly, I'm surprised they went ahead and deposited an unsigned check, perhaps to generate more revenue for the state by generating a bigger interest penalty?)

Since the payment is "dishonored," we obviously had to submit that payment again, but now it is late, so we will not be "safe" paid for the 2007 tax year and will owe an interest penalty when we file our return.  But to really pour salt into the wound, they also sent us a notice saying we owe them $300 for a "dishonored check" penalty.  Ouch!  I figured 15 maybe 20 bucks for the returned check charge, but THREE HUNDRED DOLLARS?  How can California's budget be in such crisis with this kind of revenue generation?

Well, I called and held for 20 minutes (I've got more time than money these days), and was told if I would like to request a waiver, I would have to write a letter (which I of course did; they have no idea how much time I've got on my hands now).  If this does not work, I can appeal to the Taxpayer Advocate (you bet I will).

I do think persistence will pay off.  I've learned from my already-retired husband that you really can save a bunch of money by devoting some time to things you might have blown off when you didn't have time because you were working.  He was able to remove a mystery monthly charge from our phone bill by calling and asking what it was ("if you don't want that service, we can certainly remove it"--we didn't even know we HAD whatever service it was).  Most working people don't have the time or inclination to look over all the pecuniary charges in the small print on their phone bills.  Or the time he called the cable company to complain about the service that month and we received free HBO for six months.  (And when he called to cancel that at the end of the six months, he was offered another six months at a very reduced price).  He was able to reduce bills for garbage, pest control, and the alarm service simply by picking up the phone and asking.  He's filled out surveys to earn discounted bills and always sends in those rebate coupons.

Yes, it is true, he has had to spend much of his time on hold, but it all adds up.  When he was working, he used to say he had more money than time, but now we've got more time than money and infinitely more minutes to sit on hold.

Marriage and Money

I just read a post at Plan Your Escape about one couple's approach to handling their finances in marriage.  Ahhh, this one took me back.  This is exactly the illusion under which my husband and I operated when we started our life together 20 years ago.  When we first started living together, we each had our separate bank accounts.  We split all the joint costs, just like roommates would.  Later, we opened a joint bank account together and each contributed half the projected joint expenses into that account, keeping the rest of our money separate.

When we got married four years later, we continued this "yours, mine, and ours" approach as we could see that we were much better off than those couples that argued about money all the time.  We were so smart to do it this way and avoid all that conflict over the number one reason couples fight, right?  Wrong! 

Over the years we came to a few realizations:

This was a lot of work!  Maintaining 3 separate checking accounts, making sure the joint account had enough money, and making more transfers in when unexpected joint expenses came up.  We're both accountants, the last thing we wanted to spend our non-working hours on was more accounting work!

It made saving for common goals harder.  When we started saving for our first home, we each contributed to a joint savings account (yes ANOTHER bank account) in an agreed-upon amount to save for that house.  But the truth is, if one person wants to save even more (to get there faster), and the other is spending their "separate" money, one feels the sacrifice more than the other.  In trying to save for any goal, it's a lot easier just to dump all the money in one place and then make joint decisions (perhaps talking the other out of that new pair of boots) to keep that goal in mind (and know that you're getting there TOGETHER.)

You are either a couple that argues about money or you are not.  No amount of bank account gymnastics will change who you are.  I have a friend that still (25 year of marriage and 2 kids later), to this day handles their money in this separate fashion, and they argue about money all the time!  It's not the clever way you divvy up your money, how many bank accounts you have, or how the cash flows in and out of them that determine how a couple deals with money.  It's much more basic than that.  You either argue about money or you don't.

At some point, we just took the leap (and YES, it felt like a giant leap at the time) and threw all our money in the pot together.  It not only made life a whole lot easier without all that back and forth, it ultimately made it easier to save for an early retirement.  Putting it all together makes you more open about money, not less open.  And in marriage are you really aiming for what is "even" or are you a team, working to achieve joint goals for the joint life that you are building together?

The other thing to remember, is over the many years of a marriage, things change.  For us, my husband lost his job.  If we were still under the old methodolgy, he would have been made to feel that he was no longer "contributing" since he wasn't making deposits to that account anymore.  That may have caused him even more stress at an already stressful time in his life.  Ultimately we decided together that our life was much better with him staying home, so the convoluted money strategy wouldn't have worked anymore anyway.

Don't fool yourself into thinking that this is the reason you don't argue.  Toss it all in the same pot and I guarantee it won't change the way you relate to one another about money.  You are a happy, well-adjusted couple because you're a happy well adjusted couple, not because you've figured out the money secret of a lifetime.