When Conventional Wisdom About Retirement is Good Enough

Money Magazine, Dan Dorfman, July 27, 2014

Retirement investing isn’t an exact a science. Rather than worrying whether the rules need to be tweaked, just start saving.

What keeps you up at night?

As a money manager, I recently polled my clients on several questions, and that was one of them. Replies ranged from “my bladder” to worries about the Federal Reserve printing too much money.

The most common answer, though, was fear of outliving one’s savings.

For decades, people have confronted the issue of how much they need to retire. Today the topic hits with special force. People are living longer, and the financial crisis of 2007-2009 set millions of people back twenty squares on the economic game board of life.

Now, there’s much debate about whether traditional retirement planning advice needs to be tweaked.

The traditional advice on income, for instance, is that people in retirement need about 60% to 70% of their old annual income to keep roughly the same standard of living. Remember, when you retire, your taxes may be lower, your children may be grown, your commuting and clothing expenses may shrink, and you may move out of a big house into a smaller house or apartment.

If savings and investments were your sole source of income, you would need – again, by conventional wisdom – about 25 times that sum in hand when you start your retirement. That is based on the traditional assumption that you can safely withdraw 4% of your initial nest egg each year and still have it last at least 30 years, regardless of market conditions.

That means if you earned $100,000 a year at the peak of your career, you would need about $65,000 a year in retirement, and 25 times that amount is $1,625,000.

Of course, inflation may increase your costs as years pass. If inflation runs at a 3% clip, a loaf of bread that costs $2.50 today will cost $4.50 in 2034. At 5% inflation, the same loaf would cost you $6.62.

You can offset some of the effects of inflation by your savings and investments, post-retirement. My father retired at 77 but invested in the stock market, logging prices and trends on charts he kept by hand. When he died at 98, his net worth had increased 75% from the day he retired.

Social Security can help, too. Despite doomsayers’ screeds, I believe the Social Security system will be around in 30 years. But benefits may be a little less generous than they are today.

These days, I see a lot of articles by financial planners questioning the guideline that it’s prudent to withdraw 4% a year.

I’ve seen planners argue for anything from a 2.8% withdrawal rate to a 5% one.

Those arguing for a smaller withdrawal rate — which implies the need for a bigger nest egg — say it’s hard to earn 4% a year after taxes without wading into risky investments. Savings accounts are paying a paltry 1% to 2%, and that’s before taxes.

But I think that’s a short-term view. Savings rates probably won’t stay as paltry as they are – just as inflation didn’t stay sky-high, as it was in the early 1980s.

For the long run, I think the 4% rule provides a decent, if crude, approximation.

Let’s be realistic here. Accumulating a pre-retirement hoard of 25 times the expected annual need is an ambitious target to start with.

But it’s something to strive for.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


10 Ways to Retire on Less Money

These strategies will help your retirement savings last longer

By Tom Sightings, July 29, 2014 | US News and World Report

Retiring on 100 percent of your pre-retirement income may be an option for one percenters who leave work with golden parachutes, but it’s not realistic for the rest of us. Most of us will get by on a combination of some retirement savings in addition to Social Security and a pension if you still have one. Whether your nest egg is large or small, here are ten ways to make it last:

1. Pay off debt before you retire.The first thing to do is count up your assets and debts.  Hopefully, by the time you retire you have more assets than debts. You should no longer have student loans, and your mortgage might even be paid off. Now is not the time to take on new debt. If you have to float a big loan to buy a new car, it’s probably better to keep the old one and fix it up.

2. Downsize your housing. Once your kids are grown you don’t need three or four bedrooms anymore. A lot of retirees hang on to the old place in case the kids want to move back in. But this is a “what if,” while the expense of carrying a home is a certainty. If your budget is limited, then move to a smaller place in a less expensive neighborhood with lower taxes and smaller utility bills.

3. Get a part-time job. Many people choose to work in retirement because they need the money, a place to go in the morning or some new friends. Retirees are no longer concerned about a career, so they don’t need to stress out over promotions or workplace politics. Think of your retirement job like the summer job you had as a kid – have fun, make a few bucks and then go live your life.

4. Share your home. If you’re single, consider sharing a home with a friend or relative. Many older houses feature mother-in-law suites, and some newer construction offers two master bedrooms. Two can live cheaper than one, and this setup can offer companionship as well.

5. Rely on friends. Don’t be afraid to ask for a favor and then offer to reciprocate. You can save a lot of money driving each other to the airport or the store instead of calling a cab. Exchange yard work for housework or financial expertise for culinary skills. Don’t think you have to pay someone to do everything for you. Help each other out.

6. Search for free entertainment. If you want to cruise the Mediterranean, you may need 100 percent of your pre-retirement income. But most people don’t do that. Your community likely offers free summer concerts and fall festivals. Check out your library for free seminars, book clubs, movies and lectures. Your church, veteran’s association or social club can provide rewarding activities, all at little or now cost.

7. Eat out early in the day. We all like to splurge a bit and skip a turn in the kitchen. If you’re going out for a meal, go early in the day. Breakfast is cheaper than lunch. Lunch is cheaper than dinner. If you insist on dinner, go early for the senior citizen discount. Or consider trying a place that serves breakfast anytime. Eggs and sausage are definitely less expensive than steak and potatoes.

8. Stop subsidizing your kids’ lifestyles. The old saying goes: Give your children roots and wings. You’ve already given them roots. Now it’s time for wings. It doesn’t really help anyone to let them settle into their old bedroom. They need to find their own apartment, prepare their own meals and learn to live on their own.

9. Take advantage of discounts.  Take a trip to town hall and find out about real estate tax breaks and other senior citizen discounts.  Check out programs for free transportation, low-cost meals and subsidized health services.

10. Go international. Some people retire to the land of their grandparents, where they enjoy the support of family members. There are retirement enclaves in Mexico, Costa Rica and other Latin American countries. And a new trend points toward Asia and countries like Malaysia and Thailand, where the cost of living is low and people respect the elderly. Retiring overseas requires a lot of research, but it’s an option more budget-minded people are considering.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Seven 401(K) Mistakes That Can Cost You

Wealth Management.com, Carlos Dias Jr.Jul 29, 2014

1. Not Caring About Saving Properly

The most fundamental mistake someone could make is to be apathetic about saving for retirement and not make the effort or sacrifices needed to put money away. For those who have experienced a financial shock or prolonged financial hardship, the idea of putting money into a savings vehicle may be laughable when they are faced with incoming or overdue bills.

However, neglecting good saving strategies breeds financial apathy. This could lead to problems later on.

2. Putting Too Much in Your 401(k)

Yes, you can in fact put too much in your 401(k). Many people will pour as much money as they can into their 401(k) plan. But that’s not always the best idea. 401(k)s may have expensive funds that will diminish your returns every single year. And even the tax breaks that accompany them may not be in your best interest in the long run. Tax rates are currently at historic lows and are likely to go up in the future. So, you might be taxed at a higher rate in retirement than you would be if you paid the income tax now.

To solve both of these problems, contribute enough to your 401(k) to take advantage of the employer match, and then switch to traditional IRA and Roth IRA contributions. Once you max out an IRA, then decide whether it’s best to contribute more to your 401(k) or a taxable account.

3. Not Making the Proper Spending Decisions

While putting too much money into a 401(k) can be detrimental, so is not being disciplined about contributing to your IRAs and taxable accounts. You need to deposit money into these accounts from each paycheck and increase your contribution amount every time you get a bonus or pay raise.

For those of you who know that you will spend every dollar that isn’t automatically withheld from your paychecks, the company 401(k) is a much better savings vehicle for you because 401(k) contributions are taken out of each paycheck without fail.

4. Not Taking Retirement Account Withdrawals Until They Become Required

Withdrawals from most traditional retirement accounts don’t become required until after age 70.5. But sometimes it’s best to withdraw some money from your tax deferred accounts before that age, even if you don’t yet need it.

This is because for some people with large 401(k) balances, the required minimum distribution plus Social Security benefits might push them to a higher tax bracket. You can avoid this problem simply by withdrawing some money from your IRAs, penalty free, before the required age. Taking withdrawals early allows you to reduce your overall lifetime tax rate.

5. Early Withdrawal Issues

Conversely, withdrawing too early can also be problematic. It can be tempting to draw upon a well-fed 401(k) at times, particularly in these economic times. While withdrawals are sometimes necessary, early ones should be avoided if possible. Withdrawing funds from a 401(k) before the age of retirement can be met with a 10 percent penalty.

Funds withdrawn early from a 401(k) are also worth more inside of the account than they are outside of the account. Inside the 401(k), your money is invested and enjoying tax-deferred growth.

Make sure what you need the money for is absolutely essential and that there is no other reasonable way to finance the expenditure before you make the withdrawal. Also, before you do, look through the details of your plan to see if you qualify for any withdrawal benefits.

6. Maintaining Too Many 401(k) Accounts

Not everyone moves their 401(k) account to an IRA or their new company’s 401(k) plan when they change jobs. Consolidating your retirement accounts doesn’t mean you will have more money upon retirement, but it is definitely a helpful step in simplifying your financial plan—allowing you to better manage your finances and make more informed decisions.

401(k)s try to offer incentives such as pre-tax contributions and tax-deferred growth, which can provide enormous value. If you neglect to feed your 401(k), then you will miss out on both any matched contributions and the tax-deferred growth, both of which are enormous value-adds over other savings vehicles.

7. The Importance of Diversification

This mistake comes two parts:

1. Diversifying each account instead of your overall portfolio.

2. Not over-concentrating or investing in just one stock.

It’s important to figure out an appropriate asset allocation for your investments. But you might not be taking advantage of how some tax rules work in your favor if you try to have the ideal mix of stocks and bonds in every single account. Instead, think of all your financial assets as one giant portfolio and divide them up accordingly, putting tax advantaged investments like stocks in taxable accounts while leaving the bonds in your retirement accounts.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Cruising Through Retirement on Less Than $18,000 a Year

Expat cruisers at expensive resorts paying cheap boat docking fees are sharing the same views as $342-a-night hotel guests, International Living says

Think Advisor, JULY 29, 2014

Imagine a yearlong cruise stopping at resorts like Italy’s Amalfi Coast, and most people would think that is beyond their financial reach.

Yet, to the contrary, a report by InternationalLiving.com proposes that all this and more can be had for under $18,000 a year.

A growing number of people are choosing to retire on a boat — much as many Americans tour national parks lodging affordably in their campervans — and finding that the vagabond lifestyle provides them adventure in exotic locales, a community of likeminded expats and access to their essential needs — all at prices they can afford.

Expat boating provides access not just to the essentials but even to luxuries that that the wealthy pay steeply to secure, according to the publication’s new report on the boating retirement trend:

“On the the cliff overlooking our anchorage was a hotel that charges $342 a night,” the report quotes Carol Witt, who with her husband, Kent, has been cruising Capo Palinuro, south of Naples. Witt says these well-heeled tourists also need good heels to access the beach they are docked at.

“Guests have to walk down a rickety network of several hundred steps to reach the cove that serves as the resort’s beach. At night we went ashore and enjoyed the fancy hotel’s sunset views and ambience for the price of a cocktail.”

And in a quote that Ernest Hemingway would surely approve, Theresa Collins, who with her husband Curtis galavants among various Carribbean and Central American locations, put it this way:

“There are no schedules. We hang out in a place until it’s not fun anymore.”

So how do these young-spirited seniors do it?

The report says a well-equipped, 40-foot sailboat has more than enough room for 2 people and can be had for as little as $89,000.

Living expenses, depending on location, range from $1,000 to $1,500 a month, including marina fees, which run from $150 to $600 a month, with Asian and Central American docks on the low-cost end and European ports on the higher end. Those fees generally include water, power and Wi-Fi.

Then there’s the matter of operating the boat, which International Living assures is “easier and safer than ever” thanks to modern GPS and radar.

“With GPS for navigation you always know exactly where you are, a safe route to get where you’re going and how long it’ll take to get there,” the report says. “You program in the destination just like with a land GPS. You have radar for monitoring weather” in addition to systems that help you stay clear of large ships.

Would-be cruisers start by taking a sailing class, as did Gary and Julie Pierce, quoted in the article.

“Over…four years my wife Julie and I prepared, taking the baby-steps approach to sailboat life. I read everything I could get my hands on about sailing and cruising. We started taking sailing lessons in Kemah, Texas, 90 miles from our home.”

Basic classes cover safety and basic seamanship, but future cruisers will need to also learn skills like engine repair.

Those with basic skills in reading the weather and navigating and maintaining their boat may want to joined a “crewed charter,” working with a professional captain and crew on a Caribbean or Mediterranean location before taking on a “bareboat charter,” where you rent your own vessel for a first foray into cruising.

Once a “professional,” expat sailors can read up on the world’s various cruising desitations, equipment sales and favorite restaurants. InternationalLiving.com links to a variety of such resources.

The report offers some snapshots of the cruising life close to home — in the Carribean — as well as the European and Asian scene.

For those who might find some aspects of this daunting, the report helpfully notes:

“By the way, although plenty of people do it, there’s no need to cross the Atlantic on your own. You can have your craft shipped over and meet your boat on the other side.”

Other handy bits of advice include the knowledge one gains from experience (preferably that of others), such as the benefits of a safe haven in the Atlantic during hurricane season.

One couple quoted in the article favors Guatemala’s Rio Dulce during that June to Novmember season — “a place of natural beauty where steep tree-covered cliffs line the river before you arrive at a large lake where more than a dozen marinas and related services cater to boaters.”

Indeed, the cruising life need not be one of constant wandering. Some couples, like the Collinses, maintain a home (theirs is in Guatemala) which they alternate with cruising places like Panama’s Bocas del Toro archipelago.

Some benefiting from the cruising life, depending on their taste, favor classical music performances in ancient Roman amphitheaters in cobblestone Italian towns while others enjoy tapas and bar hopping in Spain or exploring a North African souk for souvenirs.

Apart from destinations, lifestyle options include “dry sailing” — spending a few hours or a day on the water but then seeking the comforts of landed life at dusk — or making your boat your house docked at a marina.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP®