Sav­ing for re­tire­ment is hard, fig­ur­ing out how to spend it is harder

The Prince George Citizen - - Worklife - Thomas HEATH

One of the big­gest things on my mind these days – right up there with the Wash­ing­ton Na­tion­als’ woe­ful bullpen – is re­tire­ment. I am a few months from turn­ing 64, so I’m not putting in my no­tice any­time soon. But 25 mil­lion or so Amer­i­cans, ages 55 to 64, are, like me, won­der­ing what they will live on dur­ing their “golden years.”

I have to be hon­est: I thought the hard part was liv­ing within your means and sav­ing for re­tire­ment. It’s not.

Try­ing to fig­ure out how to cash out your nest egg – your tax-de­ferred re­tire­ment ac­count, your tax­able in­vest­ments or both – so it will last the rest of your life can be even harder. It has me gnaw­ing at my fin­ger­nails.

There are many vari­ables when fig­ur­ing out re­tire­ment fi­nances. How well do you want to live? Do you want to leave any­thing? Do you want to help the kids or oth­ers? Char­ity?

One point that needs to be made is this: if you’re wor­ried about your re­tire­ment money last­ing, pay off as much debt as pos­si­ble be­fore you re­tire. Get rid of the monthly mort­gage and car pay­ments if you can. Keep credit-card debt un­der con­trol.

Jeffrey DeMaso re­cently wrote a two-part series on this sub­ject for the In­de­pen­dent Ad­viser for Van­guard In­vestors, a news­let­ter for which he is di­rec­tor of research.

So I called him.

The first ques­tion is, “How long do I have left?”

Men who make it to age 65 in 2020 will have, on av­er­age, an additional 19.3 years, ac­cord­ing to the U.S. So­cial Se­cu­rity Ad­min­is­tra­tion. Women that age will have, on av­er­age, an additional 21.7 years. So let’s just say, right off the bat, that you can ex­pect to live for 20 years af­ter re­tir­ing. Now let’s dis­cuss, “How much do I need?” House­hold ex­pen­di­tures for Amer­i­cans 65 or older, as of 2017, av­er­aged $49,500 a year, ac­cord­ing to the U.S. Bureau of La­bor Statis­tics. In­come from So­cial Se­cu­rity and pen­sions for those same house­holds av­er­aged just shy of $25,000, the BLS said. (We are talk­ing pre­tax money here.)

“That leaves a $25,000 gap that you need to fill,” DeMaso said. Where do you get that money?

Statis­tics on re­tire­ment sav­ings are all over the place.

Van­guard Group re­ports that its av­er­age 401(k) ac­count, the pop­u­lar tax-de­ferred em­ployee sav­ings plan, holds $104,000.

The Cen­ter for Re­tire­ment Research at Boston Col­lege said data from 2016, the most re­cent avail­able, in­di­cated that house­holds ap­proach­ing re­tire­ment had a me­dian bal­ance of $135,000 in a tax-de­ferred 401(k) or in­di­vid­ual re­tire­ment ac­count (IRA).

The me­dian ac­count bal­ance for some­one in their 30s earn­ing $40,000 to $60,000 a year is $34,799, ac­cord­ing to the In­vest­ment Com­pany In­sti­tute, which rep­re­sents the mu­tual fund in­dus­try.

The me­dian ac­count bal­ance was $375,718 for peo­ple in their 60s who earn $100,000 a year and who have had decades to save, ac­cord­ing to ICI.

Let’s say, for ar­gu­ment sake, that you have saved $1 mil­lion and that you want to de­pend pri­mar­ily on the in­come that it gen­er­ates and to pre­serve the prin­ci­pal.

A mil­lion bucks sounds like a lot, but is it re­ally?

Many money man­agers live by the “four per cent rule.” That rule of thumb, in­tro­duced

in 1994 by fi­nan­cial ad­viser Wil­liam Ben­gen, posits that a re­tiree can live safely for 30 years with­draw­ing four per cent from their port­fo­lio, with an­nual ad­just­ments for in­fla­tion.

Four per cent of $1 mil­lion is $40,000 pre­tax dol­lars. That takes care of the $25,000 gap, at least on paper.

But stock mar­kets fluc­tu­ate. Your $1 mil­lion port­fo­lio might in­crease to $1.3 mil­lion in a good year.

Or it could get crushed, the way the Stan­dard & Poor’s 500 in­dex was crushed when it fi­nally bot­tomed out March 9, 2009. The peak-to-trough drop – from Oct. 9, 2007, to March 9, 2009 – was 56.78 per cent.

If you in­vested $1 mil­lion in an S&P 500 in­dex fund at the top of that mar­ket cy­cle it would have been worth about $432,200 when the mar­ket hit bot­tom.

“In­vestors need to be able to ride through that kind of volatil­ity,” said Howard Sil­verblatt of S&P Dow Jones Indices.

“Peo­ple in their 20s will see many bear mar­kets. Re­tirees may not have the time to ride out a down mar­ket.”

There has been a lot of dis­cus­sion about the four per cent rule, with some peo­ple ar­gu­ing that you should with­draw less and oth­ers ar­gu­ing that you can with­draw more.

It depends, in part, on whether you want to pre­serve your prin­ci­pal at all costs or are will­ing to spend it down as you grow older.

Some thrill-seek­ers may pull out eight, nine or even 10 per cent, but fi­nan­cial ad­vis­ers do not rec­om­mend that you spend at that rate for very long.

“If it’s only go­ing to be for a cou­ple of years, maybe that’s fine,” DeMaso said. “But re­tire­ment isn’t static. If you think you can stay at eight per cent for decades, that’s prob­a­bly not re­al­is­tic. The four per cent rule still does roughly hold.”

I don’t know that much about the bond mar­ket. But I am pretty sure bonds aren’t pay­ing any­where near four per cent, un­less you go into high-risk ter­ri­tory.

You can prob­a­bly find some div­i­dend­pay­ing stocks – for in­stance, shares in oil com­pa­nies, tele­coms and utilities – that yield four per cent or more. But you might sac­ri­fice long-term ap­pre­ci­a­tion be­cause dividends tend to be paid by lower-growth com­pa­nies.

One way to conquer your fear of run­ning out of money is to buy an an­nu­ity. Most an­nu­ities are sold by insurance com­pa­nies.

They aren’t cheap. They can be com­pli­cated. And you are hand­ing over a big chunk of cash, maybe your en­tire life sav­ings, which can be dif­fi­cult for some of us.

“An­nu­ities can sound re­ally great on paper, and they try to re­move the risk of run­ning out of your money, which is what ev­ery­one is wor­ried about,” DeMaso said.

“But they are of­ten ex­pen­sive. There is not a free lunch.”

Our fi­nan­cial ad­viser has talked to me and my wife about an­nu­ities, but we balked for the reasons DeMaso cited.

A Mar­cus on­line sav­ings ac­count, with Gold­man Sachs, is pay­ing 2.25 per cent an­nual in­ter­est. That would yield $22,500 on your $1 mil­lion in sav­ings. Not bad for a sav­ings ac­count these days.

As a fi­nan­cial con­ser­va­tive, I lean to­ward the classic bal­anced in­vest­ment port­fo­lio of stocks, bonds and enough cash to ride out any tu­mult. Stocks are a hedge against in­fla­tion be­cause the com­pa­nies that is­sue them can in­crease prices.

Black­Rock chief ex­ec­u­tive Larry Fink has said that peo­ple should be 100 per cent in­vested in the stock mar­ket and stay that way. But stocks will al­most surely drop at some point, as they did last fall, when the S&P 500 fell 14 per cent. So hav­ing some bonds – to ab­sorb the volatil­ity and keep your blood pres­sure down – is wise. I also keep some cash around to tide me over for a year or two, so I don’t have to sell stocks in the midst of a shel­lack­ing.

But how to cre­ate a stream of in­come from a bal­anced port­fo­lio?

We can look again at dividends, but they’re unlikely to pro­vide enough. The S&P 500 div­i­dend yield is 1.97 per cent. Do the math, and your $1 mil­lion in an in­dex fund is throw­ing off $19,700 a year in dividends.

An­other op­tion is to sell some stocks or mu­tual fund shares ev­ery year in­stead of try­ing to pre­serve your prin­ci­pal and live only on the dividends.

“Peo­ple should fo­cus on the to­tal re­turn of their port­fo­lio,” DeMaso said. “That in­cludes cap­i­tal ap­pre­ci­a­tion and dividends. The point is not to be sin­gu­larly fo­cused on in­come. Look at the whole port­fo­lio.”

There are some other strate­gies out there. You could get a re­verse mort­gage. And some states and lo­cal­i­ties al­low re­tire­men­t­age home­own­ers to de­fer prop­erty taxes, with the de­ferred amounts to be paid with in­ter­est when the house is sold.

“Home eq­uity is usu­ally a per­son’s largest asset,” said Amy Grzy­bowski of the Cen­ter for Re­tire­ment Research at Boston Col­lege.

“If you have a gap in terms of the in­come you need and don’t have enough through tra­di­tional pen­sions or So­cial Se­cu­rity, you can tap your home as an asset.”

You can also work, and save, un­til you’re 70, when the Internal Rev­enue Ser­vice will make you start spend­ing your re­tire­ment sav­ings.

If you have your sav­ings in a tax-de­ferred re­tire­ment ac­count, the IRS will re­quire that you be­gin with­draw­ing a min­i­mum amount af­ter age 70 1/2. It’s called the re­quired min­i­mum dis­tri­bu­tion, and it cur­rently is in the neigh­bor­hood of that golden four per cent rule.


Water King, a 69-year-old re­tiree from Seat­tle who now lives in Sun City, Ariz., and his dog Stu­art sits in his golf cart out­side a su­per­mar­ket. De­cid­ing how to use your re­tire­ment sav­ings can be a dif­fi­cult de­ci­sion.

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