Posted by: drdata921 | September 15, 2013

The Importance of Work in Retirement

The Value of Working in Your Post-Retirement Years

In the “New Retirement,” work is a part of the equation. As lifespans increase, there is a need to fund a longer period of time. Besides, do you really want to “move out to pasture” at age 65 or 66 when you are likely to live well into your 80’s? Beyond the obvious financial benefits of this income stream, there are psychological benefits as well. Retirement is not a time to go off to die or become irrelevant. It is a time to go on to the next and potentially freer stage in life. Most people still want to contribute, to have a purpose. So, look at this as a multifaceted benefit. You can work on your own terms and this will help you stay engaged.

My own preference is to not have to put in a grueling work-week where the job takes up a significant part of my waking hours. However, to become a person of leisure is not particularly appealing either. I want some balance where I still have the mental challenges, but with much more freedom than is possible before retirement.

Post-retirement income could be an important factor in your financial security. Don’t underestimate the importance. Any income needs that are not covered by Social Security and pension must be funded through withdrawals from savings. If you and/or your spouse continue to bring in income after the retirement of one, savings withdrawals can be minimized or even delayed. This could have a huge impact on the how long your savings will last. Each year savings withdrawals are reduced or delayed means not only preservation of the balance, but potential growth due to investment returns and interest during that period of time. So, what are the options?

Exploring Some Income Options

Blogging for Dollars: How do you make money from a blog? The standard model for both blogs and websites is to include advertising on your site that advertisers pay for. Content on a blog or website is generally free, although you may find a way to monetize the content. For example, you can offer some for free, but for “premium access” some monthly subscription is required. Notwithstanding this, advertising is the most common business model for creating an income stream.

One common way to make money from a blog is through Google Adsense. You can search Adsense on-line and sign up on the Google website. With Adsense, you allow Google to put advertising on your blog. This advertising is targeted to people who have an interest in your specific content. For example, on my retirement blog Adsense may place ads for reverse mortgages or single seniors looking for partners. For you to get paid, a person visiting your site must click on an ad. If they simply go to your site and don’t click on the ad, you don’t get paid. I have not done this for the Journey into Retirement blog at this point because my weekly traffic is usually around 40 – 60 hits per week. I understand that the rate you are paid is somewhere around $0.07 – $0.20 per ad click and somewhere around 1% – 10% of visitors to your blog may click on an ad. So, this will only be viable if you have a high traffic blog. But, there is a lot of information available on-line about how to increase you blog traffic. So, this may work depending on the content you are posting.

Having said that, there are websites like ezine.com that use this brilliantly. What ezine does is to get people to write articles for their website and to post these articles for others to read. These articles run the gamut of content. This is a free service to readers. The authors of these articles don’t get paid for writing them, but are allowed to put a blurb at the bottom of their article driving people to their website, blog, or business. Each article that goes up has several Adsense ads attached. So ezine gets paid by using other people’s content. By their own report they have slightly less than half a million authors posting on their site. So, even at a 1% hit rate on the ads, they get paid handsomely. Could you develop something like this?

Standard Part-time Employment: You can take the standard employment route such as working at retail or for a company part-time. Being a Walmart greeter could be fun – at least for a time, although expect minimum wages. This is the easy, although not particularly lucrative route. Still, this may be the easiest option.

Consulting: If you have built up skills and expertise over your working years, perhaps you can consult with other companies or retail business. You can propose project work and make some income this way. You would be surprised at how many companies have the need for your expertise, but don’t want to incur the cost of a full-time employee. You might be someone’s perfect answer!

Freelancing: Related to consulting you can go onto websites such as elance.com or odesk.com. These sites pair up companies who are looking for services to people offering those services. These include a wide variety of things. For example, you could get paid as a freelance author or ghost writer. You provide your areas of expertise and they pair you up with people or companies looking for articles on those topics. You could offer personal assistant services that help business people get organized (although you generally are competing with people from India and the Philippines and you may not make much money since you will need to keep your rates down). There are a number of services offered. So, go onto these sites and explore.

Home-Based Businesses: If you have some product or service that you can offer from your home, this may be for you. You may or may not make much money from this, but if you can turn a hobby into an income source, there is the psychological benefit of a labor of love. By the way, if you are interested in something like this, I would refer you to a very interesting book by Timothy Ferriss entitled “The 4-Hour Work-Week” which may give you some useful ideas for starting a business.

These ideas only scratch the surface. The possibilities are nearly endless in a wired and highly interconnected world. There are a multitude of income generating possibilities for a retiree. This will help you can stay intellectually engaged and make some money to boot. And, let’s be honest: you will probably have the time. So, explore!!

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Posted by: drdata921 | September 7, 2013

Forecasting Your Retirement Savings

Retirement savings are a critical part of your financial security. Whatever expenses you cannot cover through Social Security, Pension, or post-retirement employment must be made up by your savings. The question as to whether you have enough money to retire is fundamentally a question about how long you savings will last – in other words how long you will be able to cover the expense gap left after you consider your other sources of income.

However, herein lies the rub. Retirement savings is a source of income that accumulates over time as you save through your working years. Let’s say that you are ten years away from retirement. How do you figure out what you savings will be when that magic day comes?

We need a way to forecast the balance from now until your planned retirement date. There are a couple of steps you can follow to do this:

1) First and foremost, you need to develop a spreadsheet that tracks the end of month savings balances for each of your retirement savings accounts. These monthly data points will allow you to establish a trend. The more individual months of data you have to do this, the better the forecast will be. I have been collecting end-of-month totals on my accounts since 2002. The more monthly data points that you have the better. If you have not been doing this for your accounts you need to start. I would not attempt a forecast with less than six monthly data periods and preferably 12 months or more. I go on-line and gather this information for my accounts on the day following the last day of each month.

2) Second, you need to determine what the trend has been. Another way of saying this is you need to calculate the growth rate over time. The technical metric I use is the compound annual growth rate (CAGR – pronounced Kegger, but it has nothing to do with beer). Hang on because I know that this sounds complicated, but help with this is to come.

3) Finally, the last step is to take the growth rate you calculated from the trends and use this to extrapolate your current savings balance to your proposed retirement date. How do you do this:

– You could line graph the data in your spreadsheet leaving the months from now until your retirement data blank in the graph. Then using a sophisticated statistical instrument such as a ruler, draw a straight line through the data and read the savings total where the line intersects your retirement month.

– However, there is a much better approach because the ruler technique misses one very important dynamic that you get when you save over time. That dynamic is called compounding and here’s how it works. Let’s say that at age 45 you have $100,000 in a saving account and that balance grows at a 10% annual rate. At the end of the year you would have gained an additional $10,000 ($100,000 x 10% growth rate = $10,000). Over time this savings balance should increase with help from the market and your contributions. Now fast-forward to age 60 and your balance has grown, for example to $650,000. That same 10% growth rate would yield $65,000 ($650,000 x 10% = $65,000). This is the magic of compounding and this dynamic is picked up in the CAGR calculation. You see, as your resources increase over time, the same growth rate will produce greater dollar gains. As you approach retirement, you may get a boost that you weren’t expecting. Of course, if the market crashes, it could work to your detriment as well – but, let’s keep a positive attitude here, shall we.

Now, I am betting that many of you are saying that you haven’t been collecting the end of month totals for your retirement savings account and even if you have been, forecasting sounds very complicated. To this, I would say two things:

1) You need to start collecting this information as a disciplined approach to managing your investments. I am offering you an approach to figure out what financial resources you will have to work with when you retire. However, without this data, it can’t be done. So, start with end of August data. After six months or a year you can begin to use the tool I am about to give you.

2) Next, look at the top of this blog page and you will see a tab labeled “Retirement Tools.” Click this tab and you will see a list of tools. Click on the tool labeled “Savings Forecaster” and this should automatically download to your PC. You will need to have a copy of Microsoft Excel for this to work. You can enter your monthly data into this tool and the forecasting is done for you automatically by clicking the buttons on the right-hand portion of the screen.

If you need help, you have a couple of options. If you have a Kindle or Kindle app on your I-Pad, you can download a copy of my book from Amazon (see the “Don’s most helpful book” blog tab – the book is $4.99 and is chocked full of useful information and links to other tools). The chapter on Income has detailed instructions on how to use and interpret the Savings Forecaster tool. If you don’t have a Kindle or I-Pad, provide your e-mail address in a blog comment and I will e-mail you a copy of the Income chapter.

The Savings Forecaster tool calculates and uses a variation of the compound annual growth rate (CAGR) and projects this forward to your retirement date. It incorporates compounding so it is markedly better than using a ruler. As I add new data to the Savings Forecaster each month, I reforecast. The more months you have in your data, the less volatile the forecast will be from month to month. Again, you need a decent string of monthly data for this to work correctly. However, the benefit is that you will not be flying blind when it comes to this important component of your retirement financial planning.

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Posted by: drdata921 | August 31, 2013

Physical Fitness in Retirement is Your Key to Quality of Life

In this blog post, I will talk about one of my favorite topics: Physical Fitness. In my 50’s, after what was a “health crisis” wakeup call, I became a regular at the local gym. Physical fitness is important at any age. However, in your senior years it becomes a critical component of your quality of life.

Look around and you will find people who are clearly in shape and live an active and fulfilling life. You will notice others who have let themselves go and look and act 10 years older than they really are. As you age, this can come back to haunt you. It’s your choice: rich and healthy or sick and poor.

In this blog, I talk a lot about the financial aspects of retirement. As important as this is, what is the point if you are physically incapable of enjoying life because you are weak and unhealthy? Sure, it is a natural consequence of aging that you decline in your physical capabilities. However, there are degrees of decline and no reason that you can’t continue to enjoy an active and healthy life well into your later years. But, to do this you must actively take steps to keep yourself healthy. This includes both diet and exercise.

I must admit that I struggle with the diet part of the equation. I like wine and steak too much. However, the exercise part of the equation is something that I follow religiously. My normal schedule is five days a week for a vigorous one hour workout of cardio (running), strength machines, and sometimes free weights. When I am on plan (and I do slip sometimes) I both look and feel much better. I will admit that it requires a routine that must become part of your daily life. If it is something that you do occasionally, it is little more than self-torture and probably has limited health benefits. Also, you need to be aware that gym time may not be your only solution to physical fitness. Perhaps you enjoy a brisk walk of a couple of miles each day. Perhaps, your solution is to garden which can provide a lot of physical challenges. Maybe you like to cycle on a local bike trail. If doing penance in the gym is not for you, then look for other alternatives. Whatever your preference, some form of consistent physical activity is necessary for quality of life in retirement.

The running joke is that in January, because of New Year’s resolutions, the gym can become quite crowded. However, you always know that by early March, the crowds will have thinned out. The beautiful thing about retirement is that you have complete freedom to workout when you have the time. At this point in my life, I arrive at the gym at 5:00a because I need to get through the session so that I can go to work. When retirement comes, this will probably slide to 7:00a which is a much more civilized hour.

The Benefits of Physical Fitness Are Many

The most obvious are the health benefits. You can gain improved cardiovascular functioning, better muscle tone and endurance, and flexibility. In addition, exercise has been linked to stronger bones which means that you may be able to partially deal with osteoporosis (with the additional help of diet and medications). You will have greater agility, balance, and coordination. These are clearly the physical benefits – any question that these can lead to a better quality of life?

However, let’s not forget the psychological and social benefits as well. Studies have found that people who are physically fit have better self-esteem and less depression than those who don’t. If you look and feel good, why would you be depressed? Exercise also can be a social experience. There are group exercise sessions where you can meet people. There are runners clubs for people who want to jog together. Where I go, people use this for an occasion to socialize. In fact, some socialize so much in the gym, you sometimes wonder whether they are there to workout or to socialize – sometimes it is hard to tell.

In retirement, physical fitness becomes a particularly important determinant of your quality of life. You don’t have to be a gym rat to reap the benefits, but you do need to make exercise a part of your daily routine. My philosophy: You can live your senior years healthy, wealthy, and wise OR sick and poor. Which do you prefer?

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Posted by: drdata921 | August 16, 2013

Retiree Activism: The Growing Need for Seniors to Speak Out

As I have mentioned previously, the primary focus of this blog is not to serve as a platform for political commentary. However, political events over the last couple of years and particularly in the past couple of months are worth a look in terms of how they might affect retirees.

Despite continuous denials, Republicans and Democrats both engage in class warfare to further their political agendas. Republicans are focused on the wealthy while vilifying low income people by characterizing them as lazy cheaters who game the system. Democrats, on the other hand cater to those in need of help from the social safety net and vilify the wealthy as power hungry, greedy and people who game the system. Both cater to the middle class, probably because that’s where the votes are. During any election cycle, you can see class warfare in full bloom while both parties fervently deny that is what they are doing.

Now we have budget deficits that threaten the longterm health of the economy. So, how long will it before both parties switch to generational warfare in an attempt to reduce Social Security and Medicare costs. Advocates for seniors will point out that we are only asking for those benefits and services that long have been promised by the politicians of both parties. Those advocating for younger workers will point out that despite the promises, the benefits that have been promised are unsustainable. Hence, for the longterm good of the country seniors should allow benefit cuts to occur. They can find ways to adjust. They always do – or at least that will be the rationale.

Recently, I have started thinking about this because of three things that have happened:

• First, I have begun to get frequent e-mails from AARP asking me to send protest letters to congress in response to proposed changes in Social Security and Medicare. I have obliged.

• Second is the recent happenings in Detroit where the city has threatened bankruptcy as a tactic to get out of a crushing pension obligation. OK, pension benefits in Detroit are probably a little too lucrative. However, this is not the issue. The issue is that these benefits have been promised in exchange for worker loyalty and support to the city. So, going forward, you may want to back off. However, people already in the system deserve what they were promised. When you are planning retirement, you need to be able to count on these sources of income.

• Finally, locally in St. Louis there has been recent court decisions in favor of the Patriot Coal Company which has declared bankruptcy and has asked to be alleviated of their pension and healthcare promises to retirees. This has been particularly disturbing because Patriot Coal is a subsidiary of Peabody Energy who appears to have created the company with the sole purpose of alleviating themselves of their legal obligation to retirees and other debts. The legal system has played along despite the clear chicanery of Peabody to game the system for their own benefit and those of their executives.

As the latter two events have unfolded, there has been frequent commentary in the news media of how other companies and government entities have been watching. Read this as an attempt to find a way to alleviate themselves of their promised and legal obligation to retirees. If these succeed, is there any doubt that the floodgates while have been opened with nobody’s promised benefits being safe. If the lawyers can game the legal system to deprive the many of promised benefits to the advantage of the few, then activism and protests will probably be required. If the legal system allows this to go on, is there any doubt that social activism will be required to right the wrongs.

The advantage that seniors have in these battles is that they have organizations like AARP vigorously pushing their issues. In addition, sheer size helps. Seniors represent a huge voting block that has greater voter participation than most other age groups. So, if you are a politician, you tangle with boomers at your own peril. Of course, judges have little accountability.

The happening in the city of Detroit and with Patriot Coal are obvious and “in your face.” So, protests have been quick and loud. Both may eventually get away with their tactics, but there will be a price to pay in the end – or one would hope. If nothing else, other stakeholder groups will witness what’s going on and organize to preempt these tactics.

For the federal government in regards to Social Security and Medicare the politicians are a little wary. So, their solution is not so blatant. They attempt to use tactics that are below the noise such as:

• Cut Social Security expenses by using the “Chained CPI” adjustment for inflation. The reduction in benefits seems so small – only 0.25% off of the inflation adjustment each year. This is only a small sacrifice – right? However, in the end, benefit reductions and increases in taxes that result from this could be anything but minor. This is sneaky and backdoor, hoping that no-one will notice.

• Means test social security. If you are an affluent senior, we should cut your benefits because you really don’t need them like lower income retirees. Sounds reasonable, right? In time we can just reduce the income needed to be called affluent and this will cut Social Security expenses. Savings accomplished!!

• For Medicare, we can let income determine the monthly premiums and simply adjust the criteria we use to generate revenue against Medicare expenses paid out by the government. A couple of dollars here or there should not be noticed, unless you are defined into an affluent group where higher monthly premiums could cause financial distress. Maybe we can means test the benefits provided as well.

Let’s get it straight, politicians are smart, but sneaky and most have an agenda. Class warfare will probably not go away, but now we can layer generational warfare on top of that. Yes, in the future there will be a need for retiree activism and I think that most of us will be in the trenches. But hey, in retirement we will probably have the time. We will definitely be in the voting booth. See you on the front lines!

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Posted by: drdata921 | August 10, 2013

For Retirement Planning, the Only Certainty is Uncertainty

BLOG CORRECTION: For those who have read the blog post on how to estimate your lifespan, there was an error in one of the links. The link that should take you to the Dr. Thomas Perl site was wrong and took you to a lookalike page. This link has been corrected in the original post, but here it is for your convenience:

http://livingto100.com

Let’s start out this discussion with a simple exercise. Think back, if you can, over the past 30 years. What has happened over this period of time? We have had both good times and bad times in the economy and the stock market. The geopolitical environment has been in rapid flux with the emergence of China and several eastern bloc countries. We have also seen the mighty fall as in the case of Greece, Italy and some would argue the UK. Global warming has become a reality that has clear implications for the lives of each of us. And finally, technology has exploded. The year 2013 looks nothing at all like 1983.

Even though many of these things are playing out on a global stage, they have clear implications for each of us in terms of our lifestyles and our finances. So, why do I bring this up? Because many of us will soon be entering the retirement phase of our lives that could easily go on for 30 years or more. Does anyone truly believe that the next thirty years will be any calmer, more predictable, or less impactful on our lives than the last 30 years? Retirement planning, because of all of this uncertainty, is complex and unpredictable. Anyone who puts this whole process on autopilot is making a big mistake because nothing stays the same.

So how do you deal with a situation that is this unpredictable? I would suggest a couple of things:

1) Don’t put retirement on autopilot. Be vigilant of the things than can affect you. Above all, you need to be flexible. If global warming causes drought conditions that increase food prices, how will you adjust your spending to compensate? Maybe you start a vegetable garden or get more creative in the recipes you use. If the stock market becomes more volatile, how will you shift your investment strategy to protect your retirement saving? If inflation, in the future, becomes a huge issue, how will you adjust your spending to ensure that you will have enough money to fund the duration of your retirement (despite rising costs)?

2) Plan for the uncertainty. Now to some of you, this is going to sound like a contradiction. If something is volatile and unpredictable, how could you possibly plan for it? Well, it is not like day one of your retirement is when the world begins. Many of the things that are likely to happen in the next 30 years have probably happened, in some form or another, previously. How did people deal with it then? What has been written that can help you develop a coping strategy. This is where vigilance is important? If you see some issues starting to bubble up on the horizon, plan for it now. Don’t wait until the wave crashes to figure out what you are going to do!

From a retirement financial perspective, incorporate uncertainty into your assessment of whether you have enough money to retire. One way that financial planners do this is to use “Monte Carlo” techniques in their assessments. What, you may ask, is this? Well Monte Carlo is a statistical procedure that has been used for several decades to deal with variation and volatility. When you ask the question about whether you have enough money to retire, a typical financial calculator will come back with some estimate of how many years you savings will last given the assumptions that you enter into the calculator. For example, it may come back and tell you that your money will last for 25 years. However, some of the key inputs, such as investment returns on your savings or inflation can vary considerably year-to-year. If you get these inputs wrong (and you probably will), the answer will be wrong. Monte Carlo techniques take this volatility into account based on historical variation. Rather than giving you a specific number of years that your savings will last, it changes the question to the probability that your savings will last for various time periods. So, what is the probability that your savings will last for 20 years, for 25 years, or for 30 years?

While the past is not always a good indicator of what you can expect in the future, it is the best estimate that you have of what to expect. So, incorporate past volatility and variation into your plans. However (and this is critical), update, update, update. You can’t do your planning once and forget it. You need to change you assumptions and re-estimate as conditions “on the ground change.” This allows you to adjust.

So, realize that there will be uncertainty during your retirement years, but don’t be unduly flustered by it. You have made it this far. I am sure that you will navigate retirement just fine. I will leave you with the sage advice of two historical figures smarter than I to point the way:

He who fails to plan is planning to fail.
Sir Winston Churchill – English Leader

Uncertainty and mystery are energies of life. Don’t let them scare you unduly, for they keep boredom at bay and spark creativity.
R. I. Fitzhenry – Businessman & Publisher

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Posted by: drdata921 | August 2, 2013

RETIREMENT RELOCATION: Finding Your Little Slice of Heaven

Retirement Relocation: Finding Your Little Slice of Heaven

Where will you live in retirement? Will you stay put or will you be the one of roughly 50% – 60% of boomers who say that they will relocate. Some retirees are happy in their pre-retirement location and some are looking for more. If you are looking for more, where will you “find your little slice of heaven?”

Perhaps you know where you will go. Maybe it is a favorite vacation spot or a city closer to family and friends. Or, you may know generally what you would like, but don’t have a specific location in mind. If you are looking for a location, how do you figure this out? Believe it or not, there are resources to help.

Leveraging the Available Resources

The premier guide for information about potential retirement locations is the book, Retirement Places Rated. This guidebook rates 200 potential retirement locations on several factors. These factors include climate, the economy, services, ambience, cost-of-living, housing, and personal safety. Each location is rated and ranked on each factor. In the book, there are detailed discussions for each of the 200 locations on each of the factors. So, you will know all about the climate, the economy, crime statistics, and the like. At the end of the book, these rankings are brought together and an overall ranking is provided. This is helpful, but for your use, you need to prioritize each factor so that you know which ones are the most important to you.

If you are heading for retirement and looking for a location that will work for you, this guide is a must have. This book was last updated in 2007 which dates it a bit. Nonetheless, it is a very useful guide. If you find a specific location of interest, Google the location and look at specific websites dedicated to it. For most places, you can view photographs, read descriptions and peruse reviews, etc. By the way, I have also found the YouTube website to be useful. Go to YouTube (www.youtube.com) and search for the location. Sometimes videos of the area have been posted.

Amazon Link to Retirement Places Rated

If you find locations where you would seriously consider moving, you can go onto the relevant MLS (Multiple Listing Service) site to look at houses for sale in your price range with your criteria for number of bedrooms, bathrooms, type of housing such as condo, single family, townhouse, etc. For example, we have decided to relocate to Pensacola, Florida. So we Googled “MLS Pensacola” and real estate that is currently for sale was listed with detailed descriptions and photographs.

Also, if you haven’t discovered “Google Earth,” this is a fantastic resource that you need to explore. If you find a specific address for sale on the MLS site that is of interest, enter the address into Google Earth and it will visually take you to the location so that you can see the house, the neighborhood around the house and, in some cases, a 3-D view at street level where you can do a 360 degree panorama. You literally start in outer space and zoom down to just above ground level. Google Earth can be downloaded and installed for free from the Google website (google.com). Many of the better MLS sites have automatic links to Google Earth right on the property description – just click the link and Google Earth takes you to the house. You may need to download and install Google Earth before you go to the MLS website.

One warning however: if you go onto a MLS site, in many cases, you will be required to provide personal information such as name, your e-mail, when you plan to relocate, etc. before you are allowed to access the site. After that, a realtor will begin sending you information about houses that fit your criteria as they come up on the market. These are detailed descriptions with photographs of the interior and exterior of the house. In some cases, I get daily e-mails. This is useful if you are serious about a location. Of course, you can always unsubscribe and they will stop sending information. I am still getting real estate listings from locations we were considering, but decided against two years ago.

If you have a specific city in mind for relocation you might visit the “Boomerater” website. Just Google “Boomerater” and it should be the first option on the screen. Then select the Housing and Community option to see if anyone has written a review about living in that location. Not all locations have been reviewed, but I have generally found the reviews that are available to be very useful for understanding the pluses and minuses of a location. These reviews are written by people who either live or have lived in the area. So, you get the perspective of someone who knows or at least has an educated perspective.

Don’t Forget the Financial Implications of a Move

Of course, retirement financial security may be top-of-mind. Relocation can help your solvency if you move to a place with a lower cost-of-living. On the other hand relocate to a places that is more expensive and you may deal you finances a blow. Retirement Places Rated will help. Also see my previous post (Relocation Possibilities II – April Archives) for a more detailed discussion about how to evaluate various locations on cost-of-living.

So, if your goal is to relocate to a city where you have good recreational opportunities, a manageable cost-of-living, great ambience and a place where you can keep your life journey rolling as you move to the next phase, leverage these resources to help you understand the options. If you do it right, you can retire to “your little slice of heaven.”

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Posted by: drdata921 | July 26, 2013

Five Steps to Assessing Your Retirement Financial Readiness

“DO I HAVE ENOUGH MONEY TO RETIRE?” As the wave of boomers approach retirement, this is the question on the minds of many. But, how do you find an answer to this most important, but complex of questions? Will a refrigerator crate over an urban heating grate be your version of “condo living” in retirement or will you thrive? There is a lot written on this topic, but how do you put the pieces together to get an answer for you?

As I have attempted to come to grips with this issue in my own retirement planning, I have identified five steps. Follow these steps and you should have a sense of whether you are able to retire from a financial perspective:

STEP #1: Determine what income will be available when you retire. Estimate these four sources:

• Social Security: The Social Security Administration can provide an estimate of your retirement benefits. Go to the following link to view your personal information.

http://www.ssa.gov/estimator/

• Pension Benefits: Pensions are becoming more and more infrequent these day. If your current employer offers a pension plan, contact your Human Resources Department for an estimate of benefits at your proposed retirement date.

• Retirement Savings: If you have retirement savings in a 401K, IRA or the like you will need to guestimate the value at your proposed retirement date. Use the Savings Forecaster tool that you can download from this blog to forecast your balance to your retirement date.

• Post-Retirement Income: If you are anticipating working in retirement or hope to start a home-based business, you should estimate the annual income you may derive from this.

STEP #2: Estimate your expenses in retirement:

• Expenses: The general belief is that expenses will decrease in retirement, although this is dependent on individual spending patterns. Start with your anticipated income just before you plan to retire. Estimate your current expenses. If you use personal finance software such as Quicken, this should be easy. Then for each major spending category such as food, housing, taxes, etc., estimate what they will be in retirement. Some categories of spending may go up, such as entertainment, healthcare, etc. However, some will clearly go down. For example, you will not be contributing to a 401K or IRA when you retire. You will not have Social Security or Medicare taxes coming out of your check if you don’t work. Transportation cost should decrease if you are making a long commutes now. If you downsize your residence, your housing costs such as utilities and property taxes should decrease. Use the Expense Spreadsheet that you can download from this blog to help guide you.

• Relocation: If you are planning to relocate to a different city when you retire, the cost-of-living in the new location may increase or decrease compared to your current residence. There is also the issue of taxes that might change. To get a handle on the cost-of-living in your new location compared to your current residence, go to the following link:

www.bestplaces.net/col

STEP #3: Estimate the unknowns. There are three that are important here:

• Inflation: Inflation affects your cost-of-living and is important. We don’t know with any certainty what it will be in the future. However, one good bet is to use the longterm average of 3.4% – 4.0%.

• Investment Returns: Unless you plan to draw out your savings in retirement and stuff it in a mattress, you should earn a return on the balance. It is difficult to provide a specific percentage because it will vary with your mix of investments. However, you can research the internet for guidelines on the historic returns for each investment class you own and do a weighted average estimate of the returns you can expect. Investment returns extend the life of your savings.

• Lifespan: How long will you live in retirement? In other words, how long must your savings last? For an estimate of your expected lifespan, go to the following link and complete the on-line questionnaire:

http://www.liveto100.com

STEP #4: Bring all of the information you have gathered together to get an estimate of how well you are financially positioned for retirement. Typically, you will search out an on-line retirement financial calculator, put in the inputs you developed in Step #1 – Step #3, and get an answer. Retirement financial calculators are very useful for assessing your financial readiness. However, the more accurate your assessment of your retirement income, expenses, and the unknowns, the more reliable the results. Don’t be overly optimistic. In this case, hedging your bets (being a little pessimistic) will probably work better for you. You can download the Retirement Funds Longevity Calculator from this blog to help you.

STEP #5: Consider the uncertainties. Many on-line retirement financial calculators have relatively simple outputs. You put in your numbers and it comes back with a specific answer. For example, given your information, it may tell you that you will be financially solvent for 24 years or some specific number like that. However, the reality is that given the uncertainties a specific number may be deceiving and is likely to be inaccurate. The more sophisticated financial calculators use a statistical procedure known as “Monte Carlo” to estimate etirement financial readiness. Monte Carlo changes the question from “how long will my retirement savings last” to “what is the probability that it will last for various time periods. For example, what is the probability that savings will last for 20 years, or 24 years, or 30 years? There are no certainties in the world. There are only probabilities of various things happening. This is a much more realistic way of assessing your finances and takes into account the volatility and uncertainties. A Monte Carlo financial calculator is available on the Retirement Funds Longevity Calculator that you can download from this blog.

Retirement financial planning can be complex. However, if you follow the five steps above, you should be on more firm footing when trying to answer the question of your retirement financial readiness.

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Posted by: drdata921 | July 22, 2013

How Long Will You Live?

How Long Will You Live: An Important Input into Retirement Planning

As you enter retirement, there are several unknowns that can affect your financial Security. For example, the rate of inflation can vary year-to-year and affect your expenses. Your investment returns on your savings balance, which can affect your available funds can vary with a volatile stock market. However, among the top three most important unknowns is lifespan. The question comes down to how long your saving must last to cover your retirement years.

Obviously, you would desire a long life and it probably seems a bit morbid to be discussing this topic. On the other hand, retirement financial planning must take into account this most important of variables. You need to be able to estimate your “planning time horizon.”

The question is “how do you figure this out?” In this post, I am going to explore two ways that will help you get an estimate of your lifespan. These two approaches are:

– Life expectancy tables that look at the averages.

– Estimation of your lifespan given your lifestyle, demographics, health-related practices, and genetics.

What Do the Life Expectancy Tables Tell Us

First, what is a life expectancy table? Very simply, it is a statistical tabulation that gives you information about the averages. For example (in the context of the lifespan discussion), for people who have attained the age of 62, on average how many additional years will they live. The Social Security Administration has very good and current information about this. So using the tables that they have produced, I learned the following:

Retire at Age 62:
Males will live an additional 19.7 years, to an average age of 82
Females will live an additional 22.6 years, to an average age of 85

Retire at Age 66:
Males will live an additional 16.8 years, to an average age of 83
Females will live an additional 19.4 years, to an average age of 85

Retire at Age 70:
Males will live an additional 14.0 years, to an average age of 84
Females will live an additional 16.3 years, to an average age of 86

Source: Social Security Administration.

This is very useful information because it tells you what to expect on average. However, it is very general in nature. Averages are just that. Some people expire at a younger age, but some live significantly longer. Use this important input into retirement financial planning as the number applies to your anticipated age of retirement. You can hedge your bets by increasing this estimate by some factor. For example, add five years to the average or increase it by some percentage such as 10%. Of course, this is a guess, but it can provide a guideline that you can use. At least you will have a ballpark estimate of how long your savings must last.

How Do You Get an Estimate More Specific To Your Situation

Average are good for a general guidelines, but what if you want a lifespan estimate more specific to your demographics, lifestyle and family history. For example, we know that non-smokers tend to live longer than smokers. People who exercise are healthier and hence live longer. The longevity of your parents and grandparent is correlated with what you can expect your lifespan to be.

If you want this finer level of prediction for your retirement planning, there is a very useful website by Dr. Thomas Perl that can provide this. Using research on the factors that determine lifespan, he has developed a questionnaire that can provide you with a more pinpointed answer. Go to his website at:

livingto100

Complete the online questionnaire. This questionnaire probes into a series of factors such as demographics, health practices. Lifestyle, life stresses, and family history. After completing this battery of questions, he will e-mail you your expected lifespan given your responses. This is a much more targeted way to estimate your lifespan and will provide a better estimate that you can use in determining how long you retirement savings must last. Also, it may help you determine if you will need to adjust your expenses or income to cover a greater period of time in retirement.

Retirement financial planning is designed to provide you guidance with what you will need to be solvent in retirement. The big unknowns, such as inflation, investment returns, and lifespan can create considerable uncertainty. Use these resources to help you reduce this uncertainty in regards to your expected lifespan. However, even with the science provided by Dr. Perl and the Social Security tables, lifespan can still be uncertain. Despite the fact that these sources may predict a long life for you, you could still be hit by a bus tomorrow.

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Posted by: drdata921 | July 12, 2013

The Hidden Advantages of Delayed Social Security Filing

How to Maximize Social Security Benefits: The Hidden Advantages of Delayed Filing

Social Security is supposed to be simple. You work a number of years and contribute to the system. Then the government provides you with a monthly check to help support your retirement. However, so many options have been built into the benefits that it is difficult to determine how to maximize what you get. There are options related to when you file. There are options about how much your spouse can collect and the list goes on and on. It has gotten so complex that there are companies that, for a fee, will help you maximize your Social Security benefits.

Recently, as I began to assess my own situation, I examined the all-important issue of when to file for benefits. You can file for Social Security as early as age 62 with a reduced benefit. You get full benefits at your full retirement age, usually 66 or 67. And, you can get some additional increments if you delay up until the age of 70. The idea is that you get more on a monthly basis if you delay benefits because you presumably have a shorter time to collect. However, is there more to this than meets the eye? I decided to take a look.

Greater Benefit If You Wait Until Age 70 to File

If you begin collecting Social Security at age 62, your will receive 75% of the monthly benefit that you would get if you waited until your full retirement age. After you reach your full retirement age, you get an additional 8% for each year you delay up until age 70. So, my full retirement age is 66 and If I waited to file until age 70, I assumed that I would receive 32% more than I would If I had filed at my full age (4 year delay x 8% each year = 32%). However, as I examined the calculation that the Social Security Administration uses, I learned that the actual increment to the benefit would not be 32%. Rather it would be 36% because the added benefit is compounded each year. You do not add the 8% increments together. You multiply them (1.08 x 1.08 x 1.08 x 1.08 = 136% of the full age benefit). This was a very interesting and unexpected discovery, so I kept going.

Base Benefits Grow If You Wait To File

Say that your payout at full retirement age is $1254/month, the average benefit in 2012. If you retired at age 62 in 2012 you would receive 75% of that or about $941/month. What happens if you wait until age 66 (the year 2016) to collect. Well, Social Security benefits are adjusted for inflation each year. At age 66 you would not start with a $1254/month benefit because that applied to 2012 and during the four years that you waited, the base benefit was increased for inflation.

Let’s say that the inflation rate was 3.4% (the long-term average) during each of those years. When you start collecting at age 66, that benefit would have grown to $1433/month. If you waited until age 70 to collect, the monthly base benefit would be $1639. However, at age 70, you would increase that $1639 by an additional 36% to $2229/month because you got the compounded 8% for each year you waited. The inflation adjustment each year would not be a gain in real terms because it simply would help you offset a higher cost-of-living. However, as you do the math, be sure to factor this in.

Sum It Up

Say that we have a mythical retiree who has a presence in three alternative universes. In each they make a different retirement decision. In one reality, our retiree files for Social Security at age 62. In another, they file at age 66, their full age. In the third, they file at age 70. Independent of when you file, expectations about lifespan will not change much. The average male in their 60s would have an expected lifespan of about 84 years. As they turn age 85, the person who filed at age 62 would have collected benefits for 23 years. File at age 66 and you collect for 19 years and at age 70 you collect for 15 years. Did everyone collect the same amount?

Assuming an average 3.4% inflation adjustment, if you began collecting at age 62, as you turn age 85 you would have received a total of $384,258 in benefits. If you waited until age 66, at age 85 you would have received a total of $449,011. Finally, if you began collecting benefits at age 70, by age 85 you would have received a total of $512,199. This is an additional 17% in benefits if you waited until age 66 and over 33% more if you waited until age 70.

What drives these differences is a greater benefit at retirement coupled with a greater dollar inflation adjustment on that higher benefit. A person who waits until age 66 to file would catch up with the person who filed at age 62 in their tenth year. A person who waited until age 70 would catch up when they had collected around eight years. The inflation rate affects these differences. Higher inflation will increase these differences and a lower rate will shrink them.

It really surprised me when I ran these numbers. The discussions I have read on-line indicate that the monthly benefits increase as you delay. However, the logic sounded like it all added up to about the same total benefit in the end. If you are considering when to file for Social Security these results should provide some guidance. There is a real benefit to delaying because you will be much better off in the end, as will your heirs!

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Posted by: drdata921 | July 5, 2013

Retirement Financial Calculators: A Guided Tour of the Black Box

So, you have done your due diligence to assess your retirement financial situation. You have been on-line to understand your sources of retirement income. You have made an attempt to calculate your expenses and you have some vague idea of what you savings will be when you retire. Now what?

While there is no shortage of articles and books written on the topic of retirement financial planning, it is still very difficult to put all of the pieces together. Even when you have collected all of the pertinent information, the final answer is still unclear. What to do?

Behold, the retirement financial calculator. These calculators vary in their sophistication and the level of information they provide. However, their single focus is to answer questions about your retirement financial security. Among the questions are:

– How long will your savings last.

– What are the annual spending limits based on you income, expenses, and savings?

– What if inflation is more or less than you expect.

– What if the investment returns on your savings are more or less than you anticipate.

Some financial calculators are more comprehensive than others, but the general focus is to try to anticipate your situation in retirement. In their most basic form, financial calculators are mathematical computer programs that link the basic factors related to your financial success with information specific to your situation.

THE BASIC FACTORS AND THEIR LINKAGES

So, what goes on in the bowels of the typical retirement financial calculator? First, all of the factors that you have read about relative to retirement finances affect each other is some very complex ways. Let’s take a look these factors and how they interrelate:

RETIREMENT INCOME is derived from sources such as Social Security, Pensions, and post-retirement employment.

RETIREMENT EXPENSES are what you spend to maintain your standard-of-living.

HOW THEY INTERRELATE: If income is greater than expenses then you are good to go, at least in the shortterm. However if expenses are greater than income, then you have a shortfall. Retirement savings are one resource you have to cover this shortfall. The question is how long savings will be available to do this.

Income, expenses, and estimated savings are all basic inputs into most financial calculators. If this was all you had to worry about, it would be simple. In a simple world, let’s say that you have saved $500,000 for retirement and your annual shortfall is $20,000. In this case your savings should last for 25 years ($500,000 savings/$20,000 shortfall each year = 25 years). If only it were that simple. In addition to income, expenses, and savings, you have two other things that you need to consider:

INFLATION is the increase in the cost each year required to maintain your standard-of-living. Inflation whittles away at that 25 years. Inflation raises expenses and can make the shortfall greater, lessening how long your savings will last. You do have some help on the income side since Social Security is adjusted for increases in inflation each year, but generally inflation is a losing battle.

However, on the positive side, inflation is counterbalanced by one other factor:

SAVINGS INVESTMENT RETURNS. Unless you draw out all of your savings when you retire and stuff it into a mattress, you should be earning returns on your savings investments. So, while investment returns giveth, inflation taketh away! The question is how they offset each other.

Notice how complex this becomes. The purpose of a retirement financial calculator is to program these complex relationships among the various factors, take you specific information, and provide you with an assessment of how long you will be financially secure.

WHAT ARE THE ODDS

To invoke a line from a popular sales pitch, “but wait, there’s more.” While income and expenses are relatively predictable, inflation and investment returns can be volatile. So, if you are trying to predict your financial situation for a 20 or 30 year retirement and you are not sure about two key variables then what?

To deal with this some financial calculators use a statistical methodology know as Monte Carlo. I won’t get into a technical discussion of Monte Carlo. However, this technical add-on, which is included in some financial calculators, changes everything. Rather, than asking the question of how long you savings will last, which will vary with inflation and investment returns (two huge unknowns), it changes the question to “what is the probability that your savings will last for various time periods. For example, what’s the probability that they will last for 15 years, for 24 years, etc. Monte Carlo uses the uncertainty created by the volatility in inflation and investment returns to calculate these probabilities.

THE UNKNOWNS ARE WHAT DRIVES YOU CRAZY

Even with the help of Monte Carlo, there is still one huge unknown that is at the crux of the retirement financial question: How long do these resources need to last (i.e. how long will you live). What a typical retirement financial calculator will do is estimate how long your funds will last. You will need to guess whether that will be adequate given your expected lifespan. So, the net of this is use retirement financial calculators for general guidance, but understand that there are limitations to what these tools can provide.

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