Sunday, April 21, 2013

How to Balance Saving Money With Enjoying Retirement 
Dave Bernard (US News, April 19, 2013)

" may have to accept that you cannot do everything your heart desires.  But you do not necessarily want to deny yourself of [all] life's pleasures either.  Try to be realistic about what you can afford and then make smart choices."

I agree with Mr. Bernard, and have written several times about the two potentially conflicting goals of  1) spending enough to enjoy a certain standard of living and 2) not spending so much that accumulated savings is depleted prior to death.   As mentioned in my March, 2010 article, retirees who worry about outliving their retirement assets often spend too little, denying themselves an enjoyable retirement."

The key to managing the risks of withdrawing too much or too little of your accumulated savings is to have a good sense of how much you can spend each year.  In my opinion, this knowledge can only come from crunching the numbers each year using the spreadsheet and process set forth in this website, or some other reasonable approach.  If you know how much you can spend each year, you are in a much better position to make the "smart choices" that Mr. Bernard refers to.
Reverse Mortgages
(Federal Trade Commission)

With the housing market beginning to recover, tapping into home equity may once again become a larger part of retirement planning.  The article in the link above contains a good explanation of reverse mortgages from the Federal Trade Commission.

My original March 2010 article describing the general actuarial process for developing a spending budget (which is the foundation for this entire website) indicated that accumulated assets to be input into the provided spreadsheet generally would not include home equity.  That opinion was the conservative actuary in me talking.  I have recently revised the original language as follows:

If you believe that you will eventually have access to some of your home equity (as a result of downsizing to a smaller, less expensive home or apartment, or through a reverse mortgage that will pay you a lump sum or monthly payment while allowing you to remain in your home) and you want to factor the value of this future action in your spending plan, you can include an estimate of the present value of the net equity you expect to receive in the amount of accumulated savings you input in the spreadsheet. Note that doing so is less conservative than not anticipating such action and could leave you more vulnerable to future financial surprises, such as unanticipated medical or nursing home costs.

Thursday, April 18, 2013

Why 4 Percent Annual Withdrawals are Still Safe
David Ning (US News, April 17, 2013)

"But with the original 4% annual withdrawal rate already too low for many people to sustain a comfortable lifestyle, what is a future retiree to do?"  Ning argues that the 4% rule is still conservative and appropriate as long as you are willing to adjust your future spending to reflect actual investment experience and you are also willing to eliminate unnecessary expenses.

Since I have ranted against the 4% rule in previous posts, readers may be somewhat surprised to know that I'm not in violent disagreement with Mr. Ning's post.  Using the spending calculator on my site (Version 2.0) and inputting $500,000 of accumulated savings, $0 immediate or deferred annuity income, 30 year payment period, 5% investment return, 3% inflation and no amounts left to heirs, you get a spend rate for the first year of 4.34% of the accumulated savings.  Note, however, that if you change the immediate annuity amount to $15,000, you get an initial spend rate of 3.45%.

The reason I'm not too upset with Mr. Ning's post is that he suggests that you can't blindly follow the 4% rule as intended by its inventor.  Of course Mr. Ning does not provide any guidance as to how your spending budget should be adjusted for actual investment experience.

So, I suggest rather than simply pulling a percentage out of the air, you need to 1) do the math based on your personal situation and 2) make adjustments in the future as outlined in the original March, 2010 article (actuarial approach) on this site in order to keep your spending plan on track.
Society of Actuaries Committee on Post Retirement Needs and Risk

While mostly focused on providing pre-retirement planning information for "actuaries and other professionals with an interest in modeling and conducting research regarding individual financial risks and needs after retirement", this site does contain some useful information for individuals who are trying to develop a budget in retirement.

While some retirees may find recent articles regarding "middle market retirement strategies" somewhat unfocused and confusing, some of the earlier material, particularly several of the issue briefs contained in the "Managing Retirement Decisions" are understandable and potentially helpful.

The committee makes excellent points in their material regarding the importance of planning for "shocks", such as unexpected health problems or entering a nursing home.  In addition, some of their material discusses the use of home equity to supplement income in retirement.

Monday, April 15, 2013

Planning your retirement: The best ways to generate lifetime income
Steve Vernon (CBS Moneywatch, April 15, 2013)
Thanks again to Steve Vernon for mentioning my simple online tool (which has been subsequently updated to Version 2.0) in his April 15 blog post as one of the recommended systematic withdrawal approaches (Retirement Income Generator #2).
While Steve mentions three different types of Retirement Income Generators (RIGs), it is important to remember that retirees don't have to utilize just one of the three RIGs.  As each type of RIG has advantages and disadvantages, you may wish to apply one of the RIGs to a portion of your accumulated savings and another RIG to the remainder of your accumulated savings.  For example, you could buy an immediate annuity (or deferred annuity) with a portion of your accumulated savings and use a systematic withdrawal approach with the remainder of your savings.  And my simple online calculator will enable you to see what the effect of such "RIG mixing strategies" will have on your expected income in retirement.

Monday, April 8, 2013

Taking the Mystery Out of Retirement Planning
(Department of Labor)
Kudos to the U.S. Department of Labor, Employee Benefits Security Administration for attempting to provide education on retirement planning.  This site contains an online calculator which follows the booklet prepared by the DoL with the same name published in February, 2010.  Unfortunately, its focus is primarily on helping individuals who are about 10 years from retirement with their planning rather than helping retired individuals determine a spending budget.  Here is the link to the booklet 

The following are some of the features of the online tool that I found disappointing:

After laboriously completing the many input items, the spreadsheet compares the present value of future expected income with the present value of future expected expenses.  This is useful in determining an overall shortfall or surplus, but it doesn't tell you how much you can spend each year.

In determining the present value of future expected income, Social Security amounts are not indexed with assumed inflation.  As far as I can tell, this is just an error in the program.

If you are over age 70, the program doesn't work for you.  I guess retirement planning is no longer a mystery after age 70.

The program uses an assumption for inflation of 3.5% per year for non-health expenses and 7% per year for health related expenses with no flexibility to adjust those assumptions.

If you are currently retired and have a fixed immediate annuity, the program does not allow you to input a fixed deferred annuity.  Also, there is no way to reflect a bequest motive, and the retirement period is fixed in the program to end at age 95.

The program converts accumulated savings into fixed (non-cpi indexed) payment amounts at retirement.

The booklet provides links to other online savings calculators that are also primarily focused on pre-retirement savings accumulation rather than post-retirement decumulation.

If you use this tool, don't use commas in your input items as the program will reject them.