Financial Planning for Retirement

Debby and I have been retired for six years. To be accurate we have been semi-retired for six years.  We have both done some part time teaching during that time, she far more than I.  I thought it would be interesting to write about some of the things we did and learned in planning for and then beginning retirement, focusing this  time on the financial considerations.  Of course our experiences form only a single data point, and my comments are only those of an amateur who has participated in planning and executing a retirement exactly once.

The first thing to consider after people decide they want to retire is whether they are able to retire. This reduces to the question of whether they will be able to pay for the life they want to lead for as long as they will be living it once they no longer have paychecks (or have much reduced and sporadic ones). Many of the articles about planning for retirement start with assumptions about the fraction of pre-retirement income people will need in retirement. While these assumptions may be useful in a general way, particularly for people a long way from retirement, I think it is more useful for people near retirement to start with a careful analysis of what their spending in retirement is likely to be. This involves serious thinking about what people want and expect their lifestyles to be after they retire. (Debby and I did this in some detail while deciding whether we really were ready to retire. Our overall estimate has been fairly accurate so far, though our projections were well off base for some categories. In particular we well underestimated the rapaciousness of our local government.)  A careful job of this would include a good estimate of spending needs at the start of retirement, considerations of ways spending needs might change over time including disability or the death of one of the partners (single people can skip the death part), and projections of spending out through very old age unless there is a good reason to assume a person won’t last very long.  It is not necessary to run full scale Monte Carlo simulations, but people should consider at least a few obviously possible scenarios.

The planning for expenses should pay particular attention to costs for health care, both before and after the age for starting Medicare, including an objective review of one’s present state of health.  This one has to be worked on thoroughly and carefully, with individual planning for each partner. It also should  include planning for the costs of possible nursing home care. This is at least somewhat important for everyone, even people who are sure they would rather be dead than confined in one of those places. People change their minds, and events can unfold in ways leaving a person without the wits to remember his decision and desires. It is very important for people who would never consider taking action to shorten their lives.  Nursing home insurance can help provide a solution, but it can be very expensive if bought at or near the age of retirement.

The next step is to consider the assets one will have to meet those spending needs. These are usually mainly annuities, pensions, and savings. Unless there are  very good reasons for doing so, I do not think people should bank on either second careers or part time employment as necessary sources of income in retirement. Second careers may not pan out. (Since retiring Debby and I have begun second careers as authors. While this has been immensely rewarding personally, to date it has not added anything to our top or bottom line.) Employment opportunities may not be there. Despite both the immense  skill and great wisdom we older boomers so obviously bring to the marketplace and regardless of the slothful cretinism of many of the younger members of the working population, lots of employers just are not interested in hiring geezers part time. I think expected future inheritances also should be viewed as possible bonuses rather than essential parts of a plan for retirement, again unless there are strong reasons for doing otherwise. The well to do relative may change his mind or blow through his entire estate, either voluntarily or in a nursing home. Neither, I think, should most people count on projected windfalls from selling their homes and downsizing and/or moving to places with cheaper housing unless they have definite plans to do so fairly soon. Otherwise, when the time comes, people may not want to downsize or move to a new city. Even if they do, transaction and moving costs can eat up lots of the profits.

Almost everyone will have an annuity in the form of social security.  People near retirement can get a good estimate of promised social security benefits from calculators at the Social Security Administration’s website. Younger people can use the same calculators, but their inputs will necessarily contain more years of guesswork. People age sixty and over probably can count on receiving almost the promised payments from social security  - “almost” and not “all” because it is likely the  government will continue to jack up the Medicare B premiums it deducts from social security payments. Younger people need to plan for getting well less than the promised payments, just in case.  I like using a simple calculation in which a person under age 66 adds 34 to his age, divides that sum by 100, and multiplies the result by the promised benefits to get  an estimate of social security payments he will use in his planning.  A good thing about the annuity from social security is that it is indexed to inflation, so that, to the extent the government’s calculations on inflation are fairly accurate, the payments remain constant in real terms for life. Of course the payments stop at death. So a couple planning for retirement should remember that each month a surviving spouse will have only the larger of the two social security checks they received when both were alive, not both of them.

At present people have a choice of when to start receiving payments from social security. They can start as early as age 62, but the longer they wait up until they are 70, the more they will be paid each month after they start. In making this decision people need to consider their health, the age at which they want to retire, their ability to live without social security payments during the years, if any, when they will be retired but not receiving payments from social security, and, for married people,  the various tricks involving spouses starting collecting payment at different ages.  This can get fairly involved and will necessarily include a great deal of guess work. (Debby and I took the easy out of planning based on both of us starting payments at our “official” retirement age of 66. I think this works  fairly well for most healthy couples who are both about the same age, but it certainly does not hurt to run calculations based on different schemes.) Of course  if people want to retire at a certain age and will need payments from social security immediately to do so,  the question becomes moot.

Many people also have pensions and/or private annuities as well. Each pension plan or annuity will have its own rules and options, and people need to see which choices fit best into their plans. In making plans, it is important to remember that most pensions and private annuities are not indexed  to price inflation and thus will likely have less valuable payouts in real terms each year. Many pensions offer couples a choice of a higher payment for the life of one spouse or a lower payment continuing until they are both dead. I think the second option makes sense for most couples, because the surviving spouse probably will still have most of the expenses  the couple had and will necessarily lose the smaller of their two social security payments and be required to file income taxes as a single person.  Another important factor with pensions is the likelihood of the organization committed to making  the pension payments  actually doing so when the time comes. This varies from case to case.  For example  there are a number of states where people expecting pensions from the state’s government may need to be checking their hole cards.

That leaves savings. The best investment advice I ever got came from Harry Browne in one of his books. Browne, who had become famous in the 1970’s by warning people of the dangers of the inflation and monetary troubles of those days and urging investors to buy silver and the Swiss franc, wrote that, while his recommendations paid off and had been based on sound reasoning, he had also been lucky, and that no one, including Harry Browne, can predict where markets will go next with certainty. I  think people should take that observation to heart and  accept the solution of broad diversification of one’s investment portfolio among several  asset classes and a rigorous separation of one’s investment portfolio from one’s gambling and guess-following money.   (The book is Why the Best-Laid Investment Plans Usually Go Wrong. I recommend it highly. It should leave a reader permanently skeptical of market gurus of all flavors. It is also fun to read.)

People should remember the defining financial characteristic of retirement is not having income from working to pay the bills and accordingly act prudently with their savings.  Stocks have seen two really bad bear markets in the last  few years. Prices of gold and silver collapsed in the 1980’s and 1990’s. Bonds were losers in the 1970’s and are looking really dangerous right now.  Cash often loses value to inflation. Real estate prices sometime decline. No class of assets does well all the time.  (Debby and I had the interesting luck to retire right before the financial crisis and the worst bear market for stocks in over thirty years. )

Any plan for retirement which requires a retiree’s being fully invested in  a single class of assets and requires that class of assets always to perform well  is not a safe plan. Diversification is boring and will leave people as only partial participants in every bull market. However it will also make them only partial participants in the bear markets. The objective in retirement is not to get rich but to remain solvent and have enough income to cover expenses.

People should also be aware there are lots of people out there ready, eager, and able to separate retired people from their wealth and plenty of others who might do it by accident. Retirees should be cautious and spread their holdings among several reputable custodians. This sort of diversification is particularly important if one is placing any money for active management and even more important if one is doing so with an individual or a small firm.  People need only to watch the news to see why.