Oct 27, 2020
I am excited to report that my wife and I have completed the first full year of our spending plan. Our goal was to understand and manage our expenses. The result of this has been a year of learning and surprises for us.
Our first step in managing our retirement finances was to do financial projections – how long would our money last, based on how much money we planned to spend. The question we answered was the amount of money we could take out of our investments and still have enough for the rest of our lives.
Now it was time to start tracking how we were doing. We chose to start a quarter year before I “retired.” I knew that we would be moving into a new phase of our life. Instead of living off our incomes from work, our income would come primarily from Social Security, pensions, and savings.
We found this quarterly-review process to be extremely helpful for many reasons, some unexpected.
- We learned a lot about where our money was going. As a result, we decided to decrease some expenses and increase others. Those decisions improved the quality of our lives.
- By working on this together as a couple, we ended up on the same page – with a common understanding and plan.
- When unexpected opportunities (expenses) presented themselves during the year, we were able to consider them more intelligently. We changed the question from “Can we afford to do it” to “How can we do it through postponing some other expenses.”
- What we learned gave us a sense of power and control over our lives. This turned out to be helpful in the time of the pandemic.
- We had already done projections about how long our money would last. We were able to see that we continue to be on track – our money should last longer than we do. That understanding took some of the edge off the question – will we have enough for the rest of our lives.
Even before we started, we knew that tracking expenses was going to be a lot of work. The first step in our process to get a handle on our money was to develop the categories of our expenses. Some expenses were predictable and frequent, such as groceries and rent. Car insurance happened predictably but only once or twice each year. Many expenses were as needed (or wanted) including travel, eating out, clothes, gifts, household expenses, etc.
Then we developed estimates for each category. We reviewed the last few years of expenses that we had been entering on Quicken, a popular money-tracking computer application. For more details on this step or if you don’t use Quicken, see Chapter 11 entitled “Enough Money for What?” in my book Serious About Retiring – see below in this email.
At the end of each quarter, after we had received our bank and credit card statements, we entered the detailed information into Quicken, downloaded the quarter’s information onto an Excel spreadsheet, sorted it, and voila we knew our expenses for the last quarter.
In each quarter there were many surprises. Some expenses turned out to be higher than expected, some lower. If we needed to figure out the source of the discrepancy, we had the details to discover where our money was really going. Was this a one-time difference from what we had expected, or not? What, if anything, did we want to do about it?
This whole process became easier to do as the year progressed. We got better at it. We have recently revised our spending plan for the next year and expect to continue this process for the foreseeable future.
I recommend that you consider having and using your own spending plan. It is one of the most fundamental steps you can take as you prepare for retirement.
Do you have to do this? No. Look at the benefits that we experienced (see above) and decide if they are important enough to you to proceed in this direction.
What are your plans to manage your money in retirement?
Jul 23, 2019
How much will your future lifestyle cost? Will your Social Security and investment income be enough to pay for the lifestyle you want?
If that’s not enough, you could have up to six other possible, less common, sources of income.
Two of the potential income sources would be available only if arranged long before retirement:
- You could work for one of the 5% of American companies that provides pensions. Right now these include Johnson & Johnson, Coca Cola, JPMorgan Chase, Merck and Prudential. In addition, schools and governments frequently offer pensions. Some employers will also provide a continuation of health benefits upon retirement. In any case, you should check all of your previous employers to verify what you are entitled to.
- You might accumulate property or develop products that will produce a regular income when you retire. You can purchase and develop commercial, residential or other properties to rent out in retirement. You might write a book or software or invent something. All of these could generate royalties—but only if successful and profitable.
To generate more income after retirement you could:
- Work part-time for pay. Part-time might be seasonal or some parts of the day, week or month. The work might be in the same company as pre-retirement or different companies. Job responsibilities could be the same or quite different from what they were before retirement.
- Sell something of value that you own. It could be a boat or vacation home. Or you could downsize your home. You would then invest the cash proceeds to generate supplemental income.
- Apply for financial aid if you qualify for it. Governments, charities and religious institutions are the largest providers. Government programs include Medicaid and food stamps. The most common financial aid for seniors is Medicaid to pay for long-term care, but each state has strict rules on income eligibility. These programs are generally available only for people with exceptionally low incomes and, in fact, only fifteen percent of seniors use Medicaid.
- Get help from family or friends. The most common providers of such aid in retirement are children or siblings. Sometimes the help is in-kind, e.g. room or board. Sometimes parents might provide support, if still alive, or thorough an inheritance upon death.
All six of these sources of extra income take planning, and some may not be feasible or desirable for you.
As described in previous blogs, your income from Social Security could be maximized by using an effective claiming strategy. Of course, the more you save and invest over your working years, the more money you will have as your retirement investment income. During retirement, you also can maximize income through your selection of investments and your strategy for distributing income while taking income taxes into account.
Feb 19, 2019
Your investments will probably be a major component of your retirement income. So it is important to avoid two serious mistakes as you prepare your investments for retirement. The first mistake is taking more risk than you are comfortable with. If your investments are too risky, you might bail out if there’s a big drop—this is called “selling low.” The other mistake is having too little risk in your investment mix so your investments won’t have enough horsepower to last for your whole lifetime.
Here is a tool to address both of these problems.
There is a cutting-edge computer application – an app – that evaluates your individual preferences in terms of how much risk you want to have in your investment portfolio. This app, which is called Riskalyze, lets you decide on the worst decline of investment values that you are prepared to accept over a six-month period without panicking. Riskier investments, in general, have the potential for higher long-term returns. But if the swings are too large for you, you might not be able to live with a mix that is too risky.
For example, you might be able to tolerate a maximum 12% decline if you have a similar chance of receiving an 18% positive return, but no more of a decline than that. Associated with that amount of risk is a number called your personal Risk Score.
This app also contains risk scores for almost all investments, including mutual funds, individual stocks and bonds, and annuities. The app can compute the Risk Score for any mix of investments that you might own. It takes the quality of diversification into account when computing the investment Risk Score.
The next step is to compare your personal Risk Score with your own investment Risk Score. Do they match or not? If not, optimally you would adjust your mix of investments until the two scores do match.
It should come as no surprise that an app which contains so much current investment information and is so powerful is not free. It is also not easy for an inexperienced investor to use. Financial planners may have the Riskalyze app in their toolbox to help you. As you prepare your investments for retirement, it would be prudent to ask your financial advisor if they can use their own copy of Riskalyze to help you in this way.
Another useful benefit of the Riskalyze app is that it calculates a projected long-term rate-of-return for your investment mix and also tells you the maximum amount of monthly income you can take out for your projected lifetime. Working with your financial professional, you can adjust your mix of investments and spending plans so that your money will last as long as you do.
Oct 16, 2018
How can you set yourself up so that you do not have to worry about money issues during retirement? The act of retiring has the feeling of being an irrevocable decision in an uncertain world. The stakes seem enormous. If you have a choice of when to retire, you do not want to make a serious mistake by retiring too early. And you may not want to work longer than you have to. You want to get your timing just right.
Before retirement your financial focus may have been on getting by and also accumulating money that you could live off during retirement. Your real choices were about how much money to spend or save and how to invest it in investments for growth. Most likely, your income from your salary has been fixed. It has been neither simple nor easy to make substantial changes to that income and cash flow.
But during retirement it is the other way around. Your investments are relatively fixed and you choose how much income to take from them. Your investments, after all, are nothing more than future income. Do you want your income now or later?
When you take income from investments and other sources, you need to match your income against your expenses. This is budgeting. Actually, the questions – Do you or will you have enough to retire? – is shorthand for – Can you match up your projected income and expenses to have the lifestyle you want? A retirement budget is necessary to show that the match will work throughout your lifetime.
The creative part of budgeting is to think through your alternative lifestyles and make the tradeoffs you need to make. Think of your budget as a guideline that provides you with some flexibility. Yes, you can spend somewhat more now with the idea that you may be spending less later, especially if you reach an age or circumstance when you do not get out as much.
What if there is a gap between where you will be and where you want to be? There are two basic approaches you can use to address the issue of having enough. One is to increase your income. The other is to pare back budgeted expenses to match your future income. Can you cut back without seriously affecting your lifestyle? Creativity will help your thinking.
