Posted by: drdata921 | January 9, 2017

What Can Your Spouse Expect From Social Security at Retirement

I’M BACK!!!!

Well, it has been a little over a year since my last post (October 2015).  I actually took the retirement plunge in May 2014 and have been a bit lax maintaining this blog.  Truth be told, it was much easier to come up with content and perspectives prior to my retirement as I was in the planning phase.  I am now living in retirement versus just planning for it.

Surprisingly, I still get considerable traffic on the blog and requests for notification of posts.  There is clearly interest in the topics I have posted.  So, I have decided to make another run at maintaining this blog with an important alteration.

I will still make posts on retirement planning topics as I think about and research them.  However, as I have entered retirement, I have gained a whole new perspective.   Before they jump over the retirement cliff, many people wonder what’s at the bottom?  Will retirement be like a bungee jump or a fall to your death – metaphorically speaking.  This is a valid topic for this blog.

So, let’s proceed with a planning topic that can affect people either before and after retirement:

WHAT YOU SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS FOR YOUR SPOUSE

Probably the most important question in retirement is what you can expect your income to be.  If you have a spouse, this equates to the combined household income for both of you.  It can get very complicated, but in this blog post I want to discuss the topic of spousal Social Security income.

First, some Social Security basics:

  • To qualify for Social Security benefits, you need to have earned 40 “credits.” To get a credit you need to earn a certain minimum income.  For example, in 2016, you got one Social Security credit for each $1260 you earned up to a maximum of four credits for the year.  Generally, if you have worked 10 years, you will have the credits you need to qualify for benefits.  Your actual benefits are calculated based on your earnings history.
  • If you have not worked, you can still collect benefits based on your spouses work history if you are at least 62 years old. I will discuss this in more detail further down.  However, one important point – the benefit is reduced if you file to collect before your full retirement age – usually somewhere between 66 and 67 years of age.

How does Social Security work for a spouse?   Let’s look at a common situation:

Your spouse retires at the same time or after you do.  During the course of both of your work histories, you have earnings that were substantially greater than his or her’s.  What will your spouse collect at retirement?

The Social Security Administration will calculate benefits for your spouse based on their earning’s history.  However, they will also calculate what is called the PIA (Primary Insurance Amount) for you.  The PIA is the amount YOU would collect if you retired at your full retirement age (let’s say 66 years).    How do your benefits affect your spouse?  The way it works is that if your spouse retires at his or her full retirement age, they will get the greater of either their normal benefit based on their own work history or 50% of your PIA.

Note that the caveat is that your spouse retires at their full retirement age.  What will they get if they retire early?  Of course, generally (but not always) you need to be at least 62 years old to collect any Social Security benefit.  The full amount is reduced if you retire before your full age.  However, how much of a reduction would you expect?  Let’s assume, for the purposes of this example, that your monthly PIA benefit is $1341 (the average monthly benefit paid in 2016) and that your spouse’s full retirement age for the purposes of Social Security is 66.  Refer to the table below to determine how your spouses benefit would be determined:

  BASED ON SPOUSE’S EARNING HISTORY                  BASED ON YOUR PIA
       
SPOUSES RETIREMENT AGE % OF  YOUR SPOUSES FULL RETIREMENT AGE BENEFIT THEY RECEIVE % OF YOUR PIA SPOUSE WILL RECEIVE MONTHLY BENEFIT AMOUNT
62 75.0% 35.2% $472
63 80.0% 37.5% $503
64 86.7% 41.7% $559
65 93.3% 45.8% $671
66 100.0% 50.0% $671
67 108.0% 50.0% $671
68 116.6% 50.0% $671
69 126.0% 50.0% $671
70 136.0% 50.0% $671

 

Let’s review this table.  If your spouse retired at age 62, they would receive 75% of their benefits based on their own work history or 35.2% of your PIA (whichever is greater).  This reflects the fact that your spouse took early retirement.     The policy of Social Security is to reduce the monthly benefit if you retire early because you have longer to collect.  If your spouse waited until their full retirement age, they would receive the greater of 100% of their benefit based on their own work history or 50% of your PIA.

If your spouse worked beyond their full retirement age, their benefit based on their own earning history would continue to increase at 8% per year until age 70.  However, this is  different for the “50% PIA” option.  The benefit based on your PIA would not increase beyond the point when your spouse reached their full  retirement age.  At retirement, Social Security would compare the amounts based on your spouse’s own work history and 50% of your PIA.  They would award your spouse the greater of the two.

There are three major takeaways from the table:

  • First, your spouse’s Social Security income is the greater of their benefit based on their own work history or that based on your PIA. The PIA is based on your full retirement age benefit, even if you retired early.  When you filed for benefits does not seem to matter in terms of what your spouse will collect.
  • Second, If you retire early, your Social Security benefits will be reduced by a set amount for each year of early retirement. The same is the case for your spouse whether the Social Security benefit is based on their earnings or your  PIA.  There is a clear benefit for your spouse working until at least their full retirement age.  Beyond the obvious income implications of when you retire, you should be aware that you are unable to collect Medicare benefits until you reach 65 years of age.  This is a major consideration for most people.
  • Here is a final wrinkle. If you continued to work beyond your full retirement age, you would get an increment in Social Security benefits (about 8% more each year) until you reach age 70.  The same is true for your spouse in regards to their benefit based on THEIR work history.  However, your spouse’s benefit amount based on your PIA only increases until your spouse reaches their full retirement age.   After that, it is frozen at 50%.  Of course, their benefit based on their own earning history will increase if they keep working until they are age 70.   Let’s say for example, that your spouse decides to forego retirement until age 70, their benefit would be the greater of the benefit based on their work history accruing until age 70 or 50% of your PIA.  Of course, your PIA is calculated at the time of your spouse’s retirement, which could increase somewhat because of the inflation adjustments to Social Security benefits over time.

Timing is everything since the “50% PIA” benefit is available only if the higher earner has filed for Social Security benefits before the lower earner.  In the past, there has been what is called a “file and suspend” option” to get around this.  With this option, the higher earner files for Social Security benefits, but immediately petitions to suspend those benefits.   This made the lower earner eligible for the 50% PIA rule.   However, this option no longer exists.  Just keep this in mind.

This all might sound very complicated, mainly because it is.  However, it is to your benefit that you get a handle on Social Security income before you retire.  Knowing what you have to work with and whether it will be enough is a critical component of retirement planning.

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Posted by: drdata921 | October 30, 2015

Reducing Retirement Expenses Without Reducing Your Standard-of-Living

The big question in retirement is how to make your money last through the duration.  One thing that you can do to help you is to reduce your expenses.  However, no one wants to live in austerity for the 20 or 30 years that retirement might last.  So, how do you reduce your expenses without reducing your standard-of-living.

LONGTERM STRATEGIES

A lot of the things that you can do to cut expenses must happen at or before retirement.  For example:

  • Downsize your house to cut expenses like utilities, insurance, and maintenance.
  • Move to a locations with a cheaper cost-of-living.
  • Reduce the number of cars that you own (if you no longer commute).
  • Cut your debt like mortgages, credit cards, etc. before you retire.

There are slew things that will reduce your ongoing expenses.

SHORTTERM STRATEGIES

The longterm strategies keep giving over time.  However, what can you do on a day-to-day or week-to-week basis to save money without reducing your quality of life?  Here are some shortteerm strategies that can save you big bucks:

Senior Discounts: Don’t forget the huge number of senior discounts that are available.  Many are available to you once you become 60 years old.  For many people, senior discounts present a psychological barrier (or at least they were for me).  Once you start tapping into these discounts you might be admitting that you are old.  Don’t let your vanity get in the way of some substantial savings available to you.  Go to the website, www.seniordiscouts.com to search for discounts in your local area.  Here are a couple of businesses that offer discounts that I was able to find.  Note that I have listed companies that are largely national, but there are locally based discounts as well:

DINING                             TRAVEL

Denny’s                                 Alaska Airlines

Dunkin Donuts                   American Airlines

Outback Steakhouse          Amtrak

Papa Johns                          Greyhound Bus Lines

Applebees                            Southwest Airlines

Ben & Jerry’s                       United Airlines

Bennigans                            US Airways

Burger King

Chick-Fil-A                         CAR RENTALS

Chili’s Bar & Grill               Alamo

Einstein’s Bagels                Avis

Krispy Creme                      Budget

McDonald’s                        Dollar

Mrs. Field’s Cookies          Enterprise

Sonic Drive-Ins                  Hertz

Subways                               National

Taco Bell                             Thrifty

Waffle House

Arby’s

Kentucky Fried Chicken

HOTELS

La Quinta                                        PETS/PET CARE

Hampton Inn                                  1-800-PetMeds

Motel 6                                              PetSmart

Best Western

Baymont Inns & Suites                  PHARMACY

Days Inn                                            CVS

Marriott                                             Rite Aid Pharmacy

Embassy Suites                               Target Pharmacy

Grand Hyatt/Hyatt                        Walmart Pharmacy

Weston Hotels                                Walgreens

Wyndham Hotels/Resorts

Econo Lodge

Radisson Hotels

Many more may be available in your local area.

Couponing Do’s and Don’t’s:  In addition to senior discounts, coupons can help you save a bundle. While there are several websites that offer coupons, I have found one that is particularly useful. If you Google “coupons” you will be presented with a plethora of websites. However, I use couponsuzy.com. Couponsuzy typically lists 200+ products and discounts each week. You just click on the ones that interest you. After you have reviewed all of the offers and clicked on the ones that you want, you send them to your printer and bring them to the store with you. Of course, most newspapers also offer coupons on the weekends.

Coupons are a good way to save money. However, you need to be very careful how you use them. Manufacturers offer coupons to entice you to buy their products when you might not or to buy in greater quantities. They are a primary vehicle to advertise and incent purchase of new products. It is also a method to get you to buy their brand versus a competitor’s brand.

However, if you are truly trying to save money you must be judicious in how you use coupons. What I do is to construct a shopping list before I go to the store. Research has found that shoppers with a list actually spend less money than those who go to the store and wing it. Once you have a shopping list, seek out coupons for the products on your list. Avoid purchasing products that are not on your list just because you have a coupon.

If you know that you will need to purchase a product not on the list in coming weeks and you have a coupon, you may want to move up timing of that purchase – buy it now rather than wait. However, beware of the “buy more to save more” fallacy. Just because you have a coupon does not mean you should buy a product. If you do, you could easily increase your expenses and end up buying products that you don’t really need. Many manufacturers rely on a shoppers impulsiveness to sell products on coupon or on an in-store deal.  Use coupons as a way reduce your expenses while still getting what you need.

Remember, the goal is to reduce your expenses while maintaining your standard-of-living – get the same, but spend less. Searching for coupons can take some time. However, if you find and bookmark your favorite sites and know what you are looking for, you can speed up the process and save a lot of cash.

Adopt a “Shopping Strategy:”  Yes, you can cut your expenses at the supermarket if you adopt the right strategy. Here are a couple of suggestions that might help:

– Use Coupons: Read the section above for advice on how this can reduce your grocery bill and what to watch out for.

– Purchase Store Brands: Store brands, also know as Private Label brands are those specific to a retailer. In the past, shoppers have perceived them to be lower quality than their branded equivalets. However, in recent years this quality difference has largely evaporated in many product categories. The little secret that no one will tell you is that many of these store brands are made by the same manufacturers who make the higher priced branded items. In many cases, they virtually can be the same product, just with a different label. Most of the time, store brands are much cheaper than branded items. So, if you can get equivalent quality at a reduced price why not. Try the store brands. If you are unhappy you can always switch back to a higher priced branded item. However, I think you will be pleasantly surprised.

– Shop at Discount Retailers: Since my retirement, I have begun to shop at Walmart because of their lower prices compared to competing retailers. Previously, I have had some issues with how they treat their workers and how they treat their vendors. However, retirement has a way of making you much less philosophical and much more pragmatic. So I am going for the low prices. The majority of products sold at Walmart are the same ones sold at other local retailers, so why would you pay more. The big differences I have found are that some of the meat and produce items at Walmart can be lower quality. My shopping strategy is simple: when I can find equivalent quality items at Walmart, I purchase it there. When I need higher quality such as produce or meats, I go to a local chain that can offer this or shop at one of the local farmer’s markets. This allows me to get the quality I want and still save money.

Remember, your mantra should be spend less, but maintain your current standard-of-living. It will take some effort to do this and a little mental adjustment. However, I think that the result will amaze you.

 

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Posted by: drdata921 | September 3, 2015

THE THREE ELEMENTS OF RETIREMENT HAPPINESS

The one thing most striking about retirement is the utter freedom that it allows.  During the course of my working life, everything was so structured.  I went to work on Monday, worked for five days and sometimes the weekend, and with some variation, I came in at a certain time in the morning and left at a certain time at night.  Monday morning comes and you do it all again.

In retirement, there is much less structure.  With some limitations, you can do pretty much what you wish.  For the first year of my retirement that was great.  I had some activities that I had planned, but for the most part, I could be spontaneous with how I spent my time.  If I decided at lunch that I would like to spend my afternoon at the beach, I just did it.  If someone in the local kayak club sent a note on Wednesday about a paddle on Thursday, I was free to drop everything and go.  It was truly wonderful.

However, as time went on, I found that some of this freedom could be a curse.  I started some days with no plans and ended up doing nothing more than watching the news on CNN all day (like watching the stock market dive by 650 points or the progression of riots in Ferguson Missouri).  If this doesn’t make you wince nothing will.

I have found the need to reimpose some degree of structure into my life.  As I looked around for how to do this, I was pulled in two directions.  The first and most obvious was to impose the same structure I had prior to retirement.  I began looking around for a part-time job.

The second was to use this opportunity to explore new things and grow.  The key to happiness at any stage in a person’s life is to continue growing.  Stagnation is a scourge and there should be no reason for this to happen when you retire.  I began to plan my daily activities around personal growth and new experiences.  The focus was on Mind, Body, and Spirit.

So, what does this mean:

  • MIND: The idea is to keep your mind active and accept new intellectual challenges. My first activity was to sign-up for on-line college courses. If you haven’t explored coursera.com you are missing one of the great experiences. Noted university professors teach the courses and there is a range of subject matter. These courses definitely challenge you and the best part is that they are free! I also started to master software that allowed me to build internet websites. And, I am only beginning. I have written a book since I retired which was a great mental stimulator. I would recommend it to anyone.
  • BODY: It is trite to say, but true. The body is the platform on which the mind sits. It is very hard to stay mentally sharp if you body is weak or sickly. I work out at the gym five days a week, but have been doing this for several years. There is nothing new here for me. If you are not a gym rat like me, you can substitute house and yard work, which can be very physical. You can take walks to explore the scenery in you neighborhood or city. When it comes to your body the moral of the story is “use it or lose it.” Staying physically active in retirement is a must.
  • SPIRIT: This is your emotional side. Some people equate spirit to religion, but this is not necessarily the case. If you want to reignite your spirituality by joining a church or exploring another religion – there are no rules here. Alternatively, meditation is a good way to look within and better understand your innerself. Personally, I tune into my emotional side by listening to music. Or, trying writing your own songs and music. This is a combination of mind and spirit. The goal is to exercise your emotional side just like you would you mind or body.

The question I ask as I plan my day is what can I do today to stimulate my mind, strengthen my body, and exercise my emotional side.  This has lead to some very interesting experiences.

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Posted by: drdata921 | May 4, 2015

Author, Author!!

As I have talked with people who are approaching retirement, one common item that I find on many (if not most) bucket lists is the desire to write a book – to become an author. Perhaps it is a desire to move from a relatively anonymous existence to reach out to the world and yell out “I am here.”

As Henry David Thoreau once noted, “the mass of men live lives of quiet desperation.” One would assume that this applies to women as well. What better way to shout out to the world that “I am here” then to publish a book that others are entertained by or that provides great insights. Do you dream of being a top selling author?

In the past, this has been very difficult. Many obstacles were in the way. For example, you might need to retain a book agent who may or may not be able to help. You needed to convince a publisher that your book was worthy of publication and would turn a profit for them.   Stories abound of authors who eventually published top-selling books that were rejected by scores of publishers before they were successful. Or, you could self-publish and pay for production of hundreds of copies of your masterpiece that sit in boxes in your garage. Most people have no idea how to market a book and make potential readers aware or get them on the shelves of the few existing bookstores that are still around. Happily, the internet has changed all of that.

Wanting to Write a Book is Different From Actually Writing it

Now, before I go into a discussion of how to become the author that you have always wanted to be, let me make a couple of points. Wanting to write a book and actually writing one can be two very different things. I have published two. The first focused on retirement financial planning and is based on literally three years of research as I was trying to break the code for my own retirement. The second focused on retail pricing strategy.   It is the culmination of 30+ years of work for several large corporations.

Writing these “gems” took a lot of time and effort. First, you must have something to say that has interest to others. Also, in that light you need to express it in an interesting and engaging style. It has to be something that is of value and is worth paying to read and something that will hold the attention of a reader. Then you have to decide the content and organize it in a way that makes sense. Finally, you have to do the actual writing. It has to be coherent and easy to read. This requires you to sit down every day and work on a draft. After that the editing can be a time-consuming and tedious task. You have to be tenacious because in the editing, you will need to read and reread the content to make sure it makes sense, is grammatically correct, and is interesting. This phase can be somewhat of an ordeal.

However, in the end, if you stay with it, it can be very fulfilling. As one colleague noted, there is wanting something and then actually doing what you need to get it. Many people want to write a book, but never dedicate the time and effort required to make it happen. If you put in the effort, you can make it happen. So, what do YOU have to say that the world should hear?

Internet E-Book Publication

The big gorilla in internet publication, believe it or not, is Amazon.com. A couple of years ago they launched their Kindle e-reader. If you are not familiar with Kindle, you can go onto the Amazon site, find a book that is available in an electronic format and download it to your Kindle (or Kindle app on your I-phone or I-pad). In the past, you could order a hardcopy book and it would show up in the mail a week or two later. With Kindle, if you have an internet connection, you can download any e-book you want instantly, and it will automatically be charged to you credit card. However, here is the relevance to you. Where do you think the content for these e-books come from? If you said, “authors like you” you are correct. And, there are literally thousands of authors who have written Kindle e-books on a multitude of topics.

As an author, you write your book. After that, you make sure that the formatting is correct and then upload the book to Amazon. From there, it is a matter of making people aware of your book and they go onto Amazon to purchase. Amazon offers its authors a sweet deal. If you price your book in the range from $2.99 to $9.99, Amazon will give you a 70% royalty on each book sold. If you price your book outside of that range, they offer you a 35% royalty rate.

Now here is the catch. What I have found is that the difficult thing about publishing a book is not the actual writing. It is the marketing. Amazon will offer some help in this regard. However, most of it is up to you. If you are interested in exploring this possibility, let me offer you some resources. The first is an Amazon Kindle site that will give you information about publishing a book with them:

Amazon Kindle Help

The other resource that I have found useful is a series of books written by Amy McDaniel. The two must read books (downloadable as Kindle e-books) are:

Kindle Formatting Formula

Kindle Success Formula

Several useful books are available on how to market your Kindle e-book. Go to the bookstore on your Kindle and search under some terms such as “Kindle Publication” or something like that. You can also google similar terms and get some free advice. However, start with the Kindle Success Formula. It is cheap and well worth the money. There is no charge to upload an e-book to Amazon. They make money when you make money. This is the best business model from an author’s perspective.

E-Magazine Publications

What if you just want to dip your toe into the water before you dive head-first into a book. Several on-line sites can help you here as well. These are sites that publish articles that you write. These articles generally range in length from 600 words to over 1500 words. If you have a blog, business, or website, these are good places to advertise for free. The one that I have used most successfully is e-zine. With e-zine, you write an article and upload it to their site. They review your article and if everything looks OK (mostly from a formatting perspective), they make it available on their site. At the bottom of your article you can construct a “Resource Box.” The Resource Box contains information about you, your blog, your business, your website or whatever you want to make readers aware of.  The link to e-zine is:

E-zine Link

E-zine can be a little picky in how they want articles formatted and sometimes this can seem a little arbitrary. However, I have found that I get more readers on this site than other e-magazine sites I have used. You can go to the e-zine site and search for articles in your area of expertise or interest. This will give you an initial sense of what is being published and how people are constructing their articles. I have used e-zine to generate traffic to my blogs and it seems to have worked reasonably well.

You can google “e-magazines” and get a list of sites that publish articles. By the way, there is no charge to post an article – e-zine actually makes money from your articles. In exchange, you reach an interested readership and get free advertising.

So, if being an author is on your bucket list, try it. In the internet age, it is much easier than you ever thought and you can’t imagine the excitement of seeing your work posted on-line.

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Posted by: drdata921 | April 24, 2015

WHAT’S YOUR TOLERANCE FOR INVESTMENT RISK

In the previous blog entry, I discussed the importance of investment returns in partially offseting the effects of inflation. You can control the level of your investment return, in part, by how aggressively or conservatively you choose your investment options.

However, there is a catch. Historically we have seen that the more aggressively you invest, the greater your returns in the long-term. In this case, aggressive means that you invest in options that have both more growth potential, but also more downside risk. Aggressive investing can mean greater volatility. What is volatility? What you can expect is greater swings to the upside and the downside. In the great recession of 2008, aggressive investment would have meant a greater plunge in the value of your savings than if you have been more conservative. It could also mean a quicker recovery once the economy improved.

Conservative investing means that you take less risk in your investment choices. This leads to less volatility in the value of your savings. The gains are not as great, but the potential downside losses are also less. I you invested conservatively at the time of the 2008 recession, the value of your savings would not have dropped as much in comparision to more aggressive investments. However, the value of your savings would probably have risen slower once the economy recovered.

This is not to say that you couldn’t select investment options that have significant risks and low returns. On the other hand, some options may have relatively low risk and above average returns. It is important that you understand the risk – benefit relationship in the investment options that you select. However on average, greater risks mean greater long-term returns and lower risk means lower long-term returns.

Your Tolerance for Risk

So, what is the point of this discussion. I will make three points that are very important to your retirement finances:

  1. Investment returns on your retirement savings during your retirement will be one factor that affects how long your savings will last. That was my point in the last blog post.
  2. How aggressive you are willing to be in your investment strategy once you retire may affect those returns directly. However, an aggressive strategy carries significant downside risks along with the potential benefits. You must determine whether greater risk and volatility is worth the potentially greater gains or whether you would rather invest conservatively with more peace-of-mind, but lower growth. This is not an easy call.
  3. Your willingness or unwillingness to accept investment risks is a psychological factor and different for everyone. It is very important to understand your personal risk tolerance.

There are three levels of risk tolerance worthy noting:

  1. HIGH RISK TOLERANCE means the potential for large gains, but significant losses plus more volitility.
  2. MODERATE RISK TOLERANCE reduces the downside risk, but tends to limit the upside gains.
  3. LOW RISK TOLERANCE means you have minimized the chance for losses, but have also limited positive gains.

When investment professions recommend a retirement savings strategy, they often take your personal tolerance for risk into account. If you are the type of person who has a “don’t worry, be happy” mentality you might be a candidate for more aggressive investment choices. If, on the other hand, you are the type of person who ruminates over each small drop in the value of your investments – if you spend sleepless nights worried about your savings, you are probably a candidate for less risky investment options. With these choices come financial consequences.

Risk Tolerance Assessment Tools

There are several on- line tools that can help you make that assessment and give you advice about what this means for you.   I have found two websites that are particularly useful:

http://www.individual.ml.com/?id=15261_45434

This website asks a number of questions and provides a risk profile description based on your answer. Here is an example of the output:

Score 34 : Your risk tolerance is Moderate Investors in this risk category accept possible principal loss as a natural function of investment risk incurred in the pursuit of higher average annual total returns, typically ranging from 7% to 9%. The degree of risk is normally reduced through diversification and asset allocation as well as periodic revisions to rebalance any excesses that develop.

Wells Fargo Bank runs the second website. It is much simpler in terms of the number of questions that it asks to access your risk tolerance. However, as part of the output you receive an investment allocation recommendation. I found this to be particularly useful. The link to this website is:

https://www.wellsfargo.com/investing/retirement/tools/risk-tolerance-quiz

Here is an example of the output from this assessment:

WellsFargoRisk

Of course, we all want to maximize our investment returns, but not at the cost of our mental health. Consider your risk tolerance as you plan for your retirement and incorporate the resulting expectations about potential returns into your retirement planning.

 

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Posted by: drdata921 | April 17, 2015

INVESTMENT RETURNS CAN OFFSET INFLATION IN RETIREMENT

 

As I have discussed in previous posts, inflation in retirement can be the big gorilla in the room. Over the years, what may seem like minor levels of inflation can add up to a major problem as it kicks you expenses to a much higher level and rips into your retirement savings.
However, there are countervailing forces that can help you deal with the ravages of inflation. The first is that Social Security benefits are adjusted annually for inflation. So, annual benefits increases are designed to help you deal with inflation. The second are any investment returns that you receive from your retirement savings. The question that I want to address in this blog post is how investment returns can help to offset inflation.

Some of the tools that you can download from this blog will require you to estimate your expectations about the average inflation rate over the course of your retirement and the average investment return from you savings that you expect. How do these investment returns help you?

Investment Decisions Affect Returns

You can have some control over your investment returns by how you allocate your savings. There are several classes of investments such as stocks and bonds. You can aggressively allocate your savings to various classes or you can be relatively conservative. Aggressive allocations provide the potential for greater returns, but with more volatility. For example, if you had aggressive allocations of your investments prior to the 2008 crash you would have seen greater losses as the stock market collapsed. In theory, if you had maintained your aggressive posture the value of your investments would have rebounded more quickly.

If you were more conservative in your investments, you would not have seen as drastic a loss, but the rebound would have been much slower. So, aggressive investing can mean more upside, but also more downside risk. Conservative investing means that you have less upside, but also less downside risk – at least that is the theory.

The primary factor that determines how aggressively or conservatively you should handle your investments is psychological. It is called risk tolerance. I will do a blog post on this topic in the coming weeks. However, risk tolerance has to do with how much risk you are comfortable tolerating. If you have a high tolerance for investment risks, you will tend to be more aggressive in your allocations. In other words, if you have a “don’t worry, be happy” outlook on your investments, you will probably be more comfortable investing more aggressively. If you have a low tolerance for risk, you will tend to be more conservative. How you handle your investments will be an important determinant of the average gains you can expect.

How Do Investment Returns Offset Inflation

As I like to do when presented with such a cool intellectual question such as this is to do an analysis to find the answer. The exact analysis will vary according to your specific situation. However, I can provide you with some general guidelines about how investment returns offset inflation. I used the Retirement Funds Longevity Calculator tool that you can download from this blog. I developed a hypothetical example and varied the assumptions about average investment returns and inflation. Then, for each combination of investment return and inflation rate, I estimated how many years your savings would last. I then indexed all of these variations to how long your savings would last if your investment return equaled the inflation rate. This may sound a little complicated, but the table below should clarify this.

Again keep in mind that the specific results will vary according to your own situation, but you can get a felling for the relative differences. Also, put your own information into theRetirement Funds Longevity Calculator Tool and vary the assumptions about investment returns and inflation. This will provide the same information specific to your own situation:

                                                 How Long
Investment                          Will Savings
Return          Inflation       Last (Index)         In the Example

1%                     4%                         77                    Savings Last About 20 Years
2%                     4%                        81                    Savings Last About 21 Years
3%                     4%                        88                   Savings Last About 23 Years
4%                     4%                       100                  Savings Last About 26 Years
5%                     4%                        112                  Savings Last About 29 Years
6%                     4%                        117                  Savings Last About 34 Years

What is this telling us? If your average investment returns and inflation both equaled 4%, your savings would be expectd to last about 26 years in the example. If however, your investment returns averaged 1% and inflation averaged 4%, your funds should last for only 20 years or only about 77% as long. If your investment returns averaged 6% and inflation averaged 4%, your savings should last about 17% longer or about 34 years in the example.

So What?

So, as my father used to say, what does this have to do with the price of tea in China? The answer is simple. How aggressive or conservative you are when you invest your savings following your retirement could directly affect how long your savings will last. This is not only because you are adding to your savings over time, but because it could serve as a partial offset to inflation.  A more aggressive investment strategy will, in theory, help you better extend your funds although the volatility of the returns could be quite a rollercoaster ride. This also illustrates how well investment returns can offset the negative effects of inflation.

As you think about your investment strategy following retirement remember that there are costs and benefits to being too conservative or too aggressive. Factor this into your thinking as you plan for retirement.

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Posted by: drdata921 | April 11, 2015

SOME GOOD NEWS ABOUT RETIREMENT EXPENSES

A lot is made in retirement planning about developing your own personal “magic percentage.” This is the percent of your pre-retirement income that you will need when you retire. Many articles have been written on this topic and the net is much confusion. I have seen articles that claim that you can live on as little as 30% of your pre-retirement income. I have seen others that put that estimate as high as 150%. The reality is that it is different for each person.

The retirement tools tab on this blog contains a spreadsheet that you can download to figure out what this percentage is for you. However, there is a catch. People make the broad assumption that whatever magic percentage you calculate for yourself will remain the same throughout your entire retirement. Yes, there are some considerations about additional costs that might come along because of declining health. But generally, the magic percentage stays relatively constant for the average person.

    How Do Income Requirements Change

What if I were to tell you that your magic percentage will actually decline as you move through retirement, even with considerations for increasing healthcare expenses? Would you believe me? Well, this is exactly what a 2012 survey by the Social Security Administration found. Here are the highlights:

• The average retiree that they surveyed had a starting magic percentage somewhere around 74%. In other words, when they initially retired, they needed 74% of their pre-retirement income to cover their expenses.

• By year four of retirement, this average had dropped to only 65%. By year 10 of retirement it was round 58% of pre-retirement income.

• However, this drop in required income was not uniform. For higher income households, the magic percentage started out around the same place as everyone else, around 72% of pre-retirement income. However, it quickly dropped. By year 10 of retirement for this group, the magic percentage had stabilized at around 50%. This makes total sense. If you have higher income, you probably have more discretionary spending that can be shed in retirement.

• For the other income groups, the drop was not quite as steep and eventually settled in around 60% of pre-retirement income.

    So What Does This Mean to You

First, I am not saying that the economics are wrong. Inflation will continue to push your income needs up year-to-year. That is just the reality. However, what this research is saying is that there is a counter-force to inflation – a tendency to push income needs down because you are buying less. This is an important, but partial offset to the effects of inflation.

The implications for you are very important as you plan for a successful retirement. This offset in income requirements will make it easier as your retirement goes on. Further, if you anticipate this offset to expenses you can factor this into your long-term planning. If nothing else, you retirement savings will last longer than if inflation had no counter-force. Let me show you some comparisons that I made to clarify this point. One of the analyses that I have done is to look at the effects of inflation on income needs. What dropping expenses will do is to relieve some of the pressure of inflation.

Let’s assume as an example that when you enter retirement, based on your magic percentage you estimate that you will need $50,000 in income to cover your expenses. Let’s further assume that inflation averages what it has for the past 50 years – around 4.2%.

• If your magic percentage stayed the same after 20 years of retirement given an average 4.2% inflation rate, you would need around $109,000 to cover what $50,000 did initially. After 30 years of retirement, that requirement would have jumped to a staggering $165,000.

• However, if you take the same assumptions about inflation and factor in the drop in income requirements estimated by the Social Security Administration for the average retiree, these income requirements drop substantially. After 20 years of retirement, you would need about $86,000 (vs. $109,000). By year 30 of retirement, you would need about $129,000 (vs. $165,000).

• Note that these increases in the cost of living are still something you need to plan for. However, they are moderated substantially from what they would be if your magic percentage stayed the same throughout the duration.

This is very good news indeed.

    Will Expenses Really Go Down

OK, like any good social scientist I have engaged in a little fuzzy math. We do see expenses drop on an “Inflation-Adjusted Basis.” What does that mean? Well, if you mathematically adjust changes in expenses so that inflation is taken out of the equation (in other words if inflation were zero), you would see an actual drop in expenses. However, the possibility that inflation will rise is much more likely. So, the point of this discussion is that you will buy less, but inflation will push the cost of what you buy higher.

The good news is that the draconian effect of inflations will be reduced substantially and this will help you maintain your solvency in retirement. It will take you somewhat longer to deplete your retirement savings. I wanted to be the bearer of good news.

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Posted by: drdata921 | January 1, 2015

SENIOR ACTIVISM: Protecting the Promise

On various posts on this blog, I have mentioned the need for seniors to become more activist to protect the promises made about retirement benefits. As the Federal budget deficit grows and as there is more competition for limited Federal funds, expect this to become a huge issue.

When you look at the political ideologies of the Republicans and Democrats and despite denials on both sides of the aisle, class warfare is alive and well. The Republicans are advocates for the “haves” and more recently the “super-haves” and Democrats are advocates for the “have nots” and the middle class. In this regard, we would expect the Democrats to be the advocates for seniors. The real question is how long it will be before these battle lines shift to generational warfare (young against old) and the politicians try to balance the Federal budget on the backs of seniors. Can we expect the Democrats to be our advocates? The answer is “don’t count on it.”

Attacks on retirement benefits are clearly happening now. We see attempts to chip away at benefits by both parties, not just on the part of the Republicans. However, let’s start with the Republicans. The Bush (”W”) administration proposed privatizing Social Security. The idea was that some of your benefits would come from investment returns from a portion of Social Security taxes diverted to the stock market. If a portion of Social Security benefits are derived from investment returns, the government will not need to pay them out. Of course, if the stock market tanks, your benefits will be reduced. And, the reality is that we would be putting billions of dollars in the hands of the same greedy and corrupt banks and large investment firms that caused the 2008 crash. If this had been adopted, the 2008 crash could have put many retirees in dire straits. Of course with few exceptions, the banks and investment houses came out of 2008 just fine. It just goes to show you what campaign contributions can do.

Another example: In 2012 Paul Ryan, the congressional representative from Wisconsin and vice presidential candidate proposed a voucher system for Medicare. Retirees would be given a specified amount to find coverage in the private marketplace. It was generally believed that this could have significantly increased medical costs for seniors and reduced the quality of care that they could afford.

The Republicans and particularly the right-wing of the party have been the most vocal advocates for reducing retirement benefits to seniors as part of their general opposition to social welfare and related programs. However, the Democrats have also contributed to the angst. In 2013 negotiations with the Republicans, President Obama offered up a shift to a chained CPI approach to determining what inflation adjustments would be applied annually to Social Security benefits. This would have shaved about 0.25% off of the inflation adjustment each year. It was attractive because this could save the government $341 billion over a 10 year period. The reduction in the inflation adjustment does not sound like much, but over a 30 year retirement, this could cost the average Social Security recipient $40,000 or more in benefits. There are serious questions as to whether even the current inflation adjustments are adequate given the way that seniors spend their money. Moving to the chained CPI would make matters worse. For a great discussion of this issue, see the YouTube post by Robert Reich – link attached (Chained CPI Video).

Recently, Republicans have upped the ante. An unrelated rider in the recent continuing budget resolution bill broke new ground on the ongoing attack on senior benefits. The rider was narrowly directed at pension funds that are maintained by multiple employers. These tend to be pension funds that deliver benefits to retired union members. Since the Republicans are engaged in a long-term battle against the unions who generally side with Democrats during elections, this was just another salvo in that battle. Where this rider broke new ground – and why it should concern all of us – is that pension funds that were grossly underfunded and in danger of going bankrupt, for the first time were allowed to cut the benefits of current retirees. In other words, if you were already collecting pension benefits, this rider allowed your benefits to be slashed. One of the most important concepts in retirement planning is that you need to be able to anticipate your income. At the time of retirement, you need to know what you will have. This rider puts that in doubt for many retirees at a time when it would be very difficult to adjust. In addition, although this rider is very narrow in its scope now, how long will it be before it is expanded to cover virtually all pension funds that are underfunded? Certainly the large corporations who are bankrolling the politicians would love to have legislation like that. Once this trend gets rolling, how long will it be before pension funds are intentionally underfunded to the point of insolvency to capitalize on this legislative windfall.

So, for retirees near or in retirement, there are many reasons to be concerned about future benefits. Promises are promises until they are not. We already see examples of this. Peabody Energy in St. Louis spun off a subsidiary (Patriot Coal) and loaded up the new company with their debt and much of their pension obligations. Patriot Coal, weighted down by this huge debt, subsequently filed for bankruptcy protection and absolved themselves of promised pension guarantees to their workers and retirees. Peabody was able to circumvent their obligations to retirees through these legal maneuvers. The sad thing was that the courts sided with Peabody against the union. Again, promises are promises until they are not.

What you will hear from the politicians is that we all need to do our part. It is our patriotic duty to our country to bite the bullet. Reductions in Social Security and Medicare will be required to insure the long-term financial solvency of America they will tell you. This is total nonsense. These same politicians will load up spending bills with pork that benefit special interest campaign contributors. They will fund expensive weapons systems that the military neither needs nor wants because these systems are produced in their states. They will offer subsidies to rich and profitable corporations at the general expense of taxpayers, largely as rewards for campaign contributions. They will build a thousand metaphorical “bridges to nowhere” to court votes in their districts. And then, they will tell you that you must sacrifice your promised retirement benefits for the national good. Don’t believe a word of it.

I would recommend membership and involvement with organizations like AARP who are working to protect the rights of seniors. Don’t become complacent because promises by Washington and the corporations can be negated in a nanosecond and the courts seem quite willing to go along. You need to fight for what is legitimately yours!!! Make the government and large corporations honor their commitments or pay a significant price if they don’t. As important, watch how your elected representatives are voting and let them know how you feel with your immediate feedback. Beyond that, send a clear message on Election Day. Mess with retirement benefits at your own peril. Or, as Clint Eastwood would say “go ahead, make my day!”

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Posted by: drdata921 | December 28, 2014

Grabbing This Bull Called Retirement Planning by the Horns

Retirement planning is a process that requires active engagement. In this blog post I will discuss three levels that I have witnessed among people approaching that stage of their life and how this could relate to your ultimate success. These three levels are Assumption-Based, Active Assessment, and Active Management.

Assumption-Based

As I have planned my own retirement and talked with others at various points in their career and retirement readiness, I have been astounded at how many people have not done even the most basic research. This may be well over 50% of the people who are within 10 years of retirement. This obviously was not a scientific survey, but just my casual observation. However, it has been fairly consistent.

What this means is that a large number of people have not determined what their retirement income and expenses will be. In addition, they have done no assessment of how long their retirement savings will last. Among this group, it is not uncommon to hear comments such as “I will be 80 years old before I will be able to retire.” However, the reality is that they really don’t know because they have not done even the most rudimentary assessment. Their statements are all assumption-based and most really don’t know. The reality could be that they could actually retire today and be OK. Or, the reality may be that they will need to wait until they are 90 years old. In actuality, everything is an assumptions with a lot of uncertainty.

This is a very passive approach to retirement and leaves a lot to chance. If you think that you will be 80 years old before you can retire, that is probably when you will retire, because you will not know any better. You are making assumptions that may or may not be true, but this will drive your retirement-related decisions.

Active Assessment

The next level of retirement preparedness pertains to people who actually have tried to do some assessment of their financial readiness. This is somewhere between 20% – 40% of people who are within 10 years of retirement. The critical question for people at this level is “where am I now.” These people have assessed the Social Security and Pension income that will be available. Some have done some attempt at predicting retirement expenses. An, some have assessed their retirement savings and have done at least some back of the envelop calculation of how long their savings will last. A subset of these people have gone on-line to some of the financial websites and used the retirement assessment tools that are available to get a handle on these issues.

The Active Assessment level of retirement planning is certainly necessary for successful retirement planning because it will help you determine where you stand. However, it is also a very passive level of planning. If you have reached the Active Assessment phase of retirement planning you have done a necessary activity to plan a successful retirement, but it is not sufficient to guarantee success.

Active Management

The final stage of retirement planning is the adjustment phase. I would guess that maybe 10% – 15% of the people I have talked with will have reached this phase by the time they actually pull the trigger on retirement. Active Management is a very proactive process. It requires you to go beyond assessment to active management of your financial readiness. To reach this level, you must have completed your active assessment so that you know where you are now. That is a necessary precondition. The key question for people at the Active Management stage of retirement planning is “what do I need to do to make this happen.”

There can be many elements to adjustment planning. For example, you might ask some of these important questions:

• How can I Increased my income in retirement? This may involve delaying your retirement date to increase your Social Security and Pension benefits. Or, you might think about part-time employment in retirement. There are a number of possibilities that you could contemplate all focused around increasing your retirement income.

• How can I lower my expenses in retirement? More to the point, how can I lower my expenses without decreasing my standard-of-living? You could think about ways to reduce your expenses directly. You might consider relocating to a city with a lower cost-of-living. Or, you may find ways to spend your money smarter.

• How can I ensure that savings will last for the duration of my retirement? You might consider increasing your 401k contributions while you are working. Another option would be to be more aggressive in how you invest your savings both before and after you actually retire.

There are several points to be taken from this discussion. First, if you are “failing to plan you are planning to fail” – a famous quote by Sir Winston Churchill. However, beyond this you may be depriving yourself of an enjoyable retirement, particularly if you are looking forward to entering that life stage. Second, actively assessing you situation as you approach retirement is a prerequisite to a successful retirement. It will not guarantee success, but it is a required step because first you need to know where you are. Finally, actively managing your situation makes the process proactive. Rather than letting the current situation dictate to you how you will live your life, you actively manage to the situation you are trying to create.

Whether you are able to assess and manage the situation on your own or whether you need to engage a Certified Financial Planner to help you is up to you and dependent on your level of expertise and comfort. However, an active approach to retirement planning is an absolute necessity!! Putting in the effort is well worth the expenditure of energy that it will require.

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Posted by: drdata921 | December 22, 2014

How to Reduce Your Retirement Expenses without Lowering Your Standard-of-Living

    Retirement Economics

Retirement finances are actually fairly simple to understand. First, you have income coming in. Second, you have expenses going out. And, in retirement you have savings as a backstop. Retirement savings will cover any gaps between income and expenses. The question about whether you will outlive your money is basically an issue related to how long your savings will last. However, the whole thing is not just about how large your savings are. It is also a conversation about whether you can increase your retirement income and reduce you retirement expenses. If there is not a negative gap between income and expenses, the issue of how long your retirement savings will last becomes a moot point. If you don’t need to tap into savings or if your withdrawals are minimized, you should have the money you need to live.

In this blog post, I want to explore the expense side of the equation. The fundamental question is whether you can reduce your expenses without reducing your standard-of-living in retirement. Having entered retirement myself about six months ago, this has become an important topic for me. I will discuss three elements of retirement expenses that have worked for me: Smart shopping, senior discounts, and relocation.

    Smart Shopping

When people are asked in surveys why they select the primary grocery store that they do, the number one reason is convenience. What this means literally is a store within close physical proximity of their residence. However, reasonable selection of products and brands and good prices also rate relatively high in these surveys. Convenience is important to everyone, but sometimes good product selection trumps pricing.

However, the reality about selection is that most major brands are in most stores. So, if you can get a better price on those items that you want to buy, then why pay more. I have developed a personal shopping strategy around this idea. My primary grocery store is a Walmart Supercenter about 2 ½ miles from my house. Prior to retirement, I wouldn’t have been caught dead in a Walmart. However, retirement brings a certain pragmatism to your life.

Step #1 is to make a shopping list. It has been shown that having a shopping list helps reduce your total costs. I then go to Walmart and buy what I can knowing that prices will be generally lower than in any of the other major grocery chains in the area. However, if I can’t find the specific items or brands that I am looking for at Walmart, I make an extended trip to Publix, another large grocery retailer in the area. Whatever, I can’t get at Walmart, I buy at Publix. This allows me to get the best of both worlds: generally lower prices with the selection that I want.

In addition to smart shopping, it is also wise to look for coupons, either on-line or in the newspaper. I was always under the impression that Walmart did not take coupons. However, that is not true. While my savings using coupons has not been huge, I have been able to knock anywhere from $5 – $15 off of my grocery bill each week. This doesn’t sound like a lot. However, it does add up over the weeks. Reducing expenses is not always one big gain. Sometimes you need to do it with a lot of minor savings that add up to something much more substantial in total.

    Senior Discounts

At first, this was a difficult one for me psychologically. Asking for a senior discount from a business may be admitting that you are old(er). Before I retired, I generally stayed away from these for that very reason. However, mentally I have come to grips with my age and if senior discounts make my retirement finances more stable, why not use them? Sometime these are advertised and sometimes you need to ask for them. However, I am astounded by how many there are.

There is a website specializing in finding businesses in your area that offer them. Go to www.seniordiscounts.com to search out senior discounts. When I did this for Pensacola, Florida, our retirement home, I was surprised to find well over 100 listings. These ran the gamut from travel related discounts such as rental cars, hotels and cruises, to retailers in our local mall, to a whole range of restaurants (fast food and higher quality). I was also able to find discounts on eye glasses, prescription drugs, pet care items and electronics. Although some businesses are more generous than others, the savings in total can be enormous. Remember, every dollar that you save takes a little more pressure off of your retirement savings by reducing your expenses, without reducing your standard-of-living.

Finally, I am a bit of a gym rat. Before retirement, I was paying the YMCA $52 a month to use their gym facilities. However, in retirement I joined a Medicare advantage plan run by Humana. These plans deliver your medical benefits and are paid by Medicare so there are no additional costs involved beyond the monthly Medicare premium. As part of this there is the “Silver Sneakers” program where some gyms in the area give you a free membership and this is paid for by Humana. So, this saves me over $600 a year and still allows me to stay fit.

Are you getting the point? There are a lot of little savings that you can tap into that will add up to some fairly substantial savings in total. You can maintain your lifestyle at a reduced cost.

    Relocation

Relocation is something that I have addressed in this blog before. However, it is worth a revisit. There is a great website that allows you to compare the cost-of-living in various locations. This website is www.bestplaces.net/col.

Relocation is one potential way to cut day-to-day living expenses if you move to an area that is cheaper. Prior to retirement, I was living in Ellisville, Missouri, a suburb of St. Louis. As I began to search potential retirement locations, I explored Pensacola, Florida where we eventually moved. So, I went onto Best Places and looked at the cost-of-living comparisons. Here is what I found

Location———————Cost-of-Living Index
Average US City———————-100
Ellisville, MO—————————-105
Pensacola, FL—————————–88

What this was telling me was that the cost-of-living in Ellisville was 5% more expensive than the average US city. However, it was 12% cheaper to live in Pensacola than in the average US city. Let’s say, for the purposes of example, I had a household income of $100,000 in Ellisville. It would cost me only about $95,000 to maintain the same standard-of-living in the average US city.

But, what if I moved to Pensacola? The math is simple:

(Pensacola Index/Ellisville Index) x Ellisville income
(88/105) x $100,000 = $83,810 (relative Pensacola Index to Ellisville = (88/105) x 100 ~ 84)

In other words, the lifestyle that cost me $100,000 in Ellisville would only cost me about $84,000 in Pensacola, Florida. However, here is where it gets interesting. Before I retired, I calculated my “magic percentage.” This is the percent of my pre-retirement income that I would need in retirement. Everyone is different, but a good average is around 75%. Let’s say that you do the math and 75% is your magic percentage. This would apply directly to costs in your pre-retirement location, Ellisville in my case. Now, let’s say that I decide to move to Pensacola. I would have a new magic percentage, because the cost of living would be cheaper. The cost-of-living in Pensacola is only 84% of that in Ellisville. So, taking this into account, my new magic percentage would be:

75% (Ellisville Magic Percentage) x 84% (Relative Pensacola Cost-of-Living) = 63%

My retirement cost-of-living would drop to 75% of my pre-retirement income in Ellisville, but would drop even further to 63% in Pensacola. Look at this as another potential way to maintain your standard-of-living at a reduced cost. Obviously there is more to a relocation than just cost-of-living. However, in my case I smile each time I am paddling my kayak in the inter-coastal waterway in Pensacola in 70° weather amid reports of dire snowy and icy conditions in St. Louis. I think that I made a very good choice in a number of ways.

So, there are many ways that you can reduce your retirement expenses and still maintain the same quality of life. Just remember the point of this post. If you can cut your living expenses, you can extend the life of your retirement savings. If you can do this and still maintain your standard-of-living that would be the best situation of all.

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