Retirement/Life Planning
"What Do You Want to Do and How Are You Going to Do It?"
(written: 15 July 2008; last modified: 9 August 2014)

The key to a successful retirement is to have a plan. It's never too early to begin, call it a retirement plan (if you're getting close) or just a "life" plan. The earlier you start, the better your chances for success. For the purposes of this little "essay", we'll focus on the 2-5 years before you actually retire. The time frame will depend on your progress through the steps discussed below. For us, it was a three year effort. I've listed the main categories we focused on. We chose not to work in retirement. Your personal situation may not allow you to do this, but you could still retire (do the things you want to do) while working part time to make up for any shortfall in your retirement assets. (Before we begin, let me state that this is how WE did it. It is by no means the only way. It's worked for us, but there's no guarantee it'll work for you.)

1. Deciding what you want to do.
2. Income Sources (with a brief discussion of Social Security)
3. Budgeting and Expense Management
4. Investment Portfolio
5. Health Care and Long Term Care
6. Legal Issues
7. Execute and Don't Look Back (you can always adjust the plan)

1. WHAT DO YOU WANT TO DO WITH THE REST OF YOUR LIFE?
I always knew I wanted to retire, but to do what? Start a new career? Start my own business? Play golf? Work part time? Travel? Volunteer? At one point in my life, I thought paradise would be living on a golf course, having my own golf cart, and playing every day. In fact, (although there were other reasons for doing so) I actually moved to a Florida golfing community while continuing with my full time job. Then my life changed drastically and I realized that golfing wasn't the answer. As I mentioned on my main retirement page, I read the book "Cashing in on the American Dream: How to retire at 35" by Paul (and Vicki) Terhorst. I had always enjoyed traveling overseas and even though I was well past my 35th year, this book really crystalized things for me. The Terhorsts became perpetual travelers (liquidating all their possessions and living out of a suitcase for over 30 years now). For me that would have been the ultimate, but my wife, Rory, wasn't too keen on the idea. She prefers a bit more "grounding". This is the key to making the "what to do with the rest of your life" decision (assuming you have a spouse or significant other), we talked it over (and over). We agreed that extended travel was something we'd like to do as long as we were healthy enough, but there were other changes we'd like to make to our life style. We wanted to live in a University community where we would be exposed to a more diverse social experience and have the opportunity to further our education with classes that were free to "seniors". We also have the desire to give something back via volunteering in the community and university (Rick) and in wildlife rehabilitation (Rory). So we decided that our goal would be to travel up to 6 months each year (not necessarily all at once) and spend the rest of each year at home. We spent some time visiting university towns in the southeast, before selecting Columbia, SC. (See Why We Picked Columbia.) To summarize: figure out what it is that you (and your partner) want/like to do and take the steps necessary to make it a reality. If your life changes, change the plan. That's the "what" and the "where"; the rest of this is the "how"!

2. SOURCES OF INCOME -- FINANCING THE PLAN
Unless you are independently wealthy (in which case you probably don't have much need for what I have to say), the biggest hurdle to retiring is having enough money to last your lifetime, or as I like to say, "spending your last dollar with your last breath". (My friends "Billy and Akaisha Kaderli" claim that you'll need at least 25 times what you spend annually, to start.) With reasonable expectations of growth of your asset base and not spending more than 4% of your asset base annually, you should have enough to last your retirement years.

When I was around 10 or 11 years old, I remember asking my mother how much money she would like to have. Her answer: "$1 more than I need". I never thought to ask how to get there; and she probably wouldn't have been able to tell me anyway. You'll have to have enough to last maybe 30 or more years after you retire, depending on your health and whether or not you plan to work at all in retirement). The amount will depend on what you have, what you can add to it, how you spend it and how much of it gets eaten away by inflation. You may also have a desire to leave something to your heirs (kids, other family, friends, charities, etc.). Sorry, but neither I nor anyone else can tell you how much that is. I can tell you that if you haven't been saving and investing all along, you'll probably never be able to retire..... Your retirement income can come from your savings (stocks, bonds, mutual funds, cash reserve, and interest/dividends from these), retirement accounts (IRAs, Roth IRAs, 401(k)s and their equivalents), income from rental property and/or selling your house and renting. Your retirement income can be supplemented by income from an employer pension (if you're one of the lucky ones), inheritance (if you're really lucky), annuities you purchase, taking a reverse mortgage on your house, and/or social security (if you're really, really lucky). If you think you can supplement your income with Lottery money, you need a lot more help than I can give you.....

Assuming social security survives to your retirement, when you choose to begin collecting your monthly checks is also a factor. You can begin at age 62 (but forfeit 25% of your payment at full retirement age), at your specified full retirement age (66 for many of us), or wait until you're 70 or later and receive a premium over what your full retirement payment would be. You should be getting an annual statement from the Social Security Administration which tells you how much you can expect to receive at various ages. (If you aren't, contact the Social Security Administration.) The book "Retire Early? Make the Smart Choices" by Steven Silbiger contains the best discussion I've seen on when to begin collecting and why.

So, add up everything you have and develop a plan, taking into account your spending (see below) and your investment strategy. Again, conventional wisdom suggests that you withdraw no more than 4% of your assets per year in order to minimize your chances of running out of money. By the way, I was able to make my mom's wish come true. Before she was buried, I put a $1 bill in her coffin. (Should I have written a check?)

3. EXPENSE MANAGEMENT -- NO ONE LIKES BUDGETING, BUT IT'S ESSENTIAL

The first bold statement I'd like to make is: PAY OFF ALL DEBT before you retire. Yes--pay off the house, pay your credit card balances every month (you should be doing this anyway), keep that old car as long as you can (and buy its replacement, if you need one, with cash).

Despite what you hear from the financial community, the amount you'll need in retirement is NOT a function of what your income is today, it's a function of what your expenses will be tomorrow!! You'll read that if you earn $100K today, your lifestyle is such that you will need anywhere from $80K to $100K (or more) to maintain your current standard of living (and that doesn't take inflation into account). The obvious question is, "do you HAVE TO maintain your current lifestyle in retirement?" If the answer is yes and you can do it, you can skip most of the rest of this. But if the answer is "no", or you CAN'T maintain it, the simple answer is to REDUCE YOUR EXPENSES! There are many ways to do this, not all of which require massive amounts of self-discipline or denying yourself the ability to enjoy retirement. You could move to a less expensive part of the country, sell your house and buy a smaller one, buy used cars instead of new ones (or at least buy a new one every 10 years instead of every 3). All of these result in a reduction in fixed expenses (taxes, food, utility costs, insurance costs, maintenance costs, etc.) You could eat out less often; join Netflix instead of going to the movies every week; cut out the $5 lattes. My point is, it's your expenses and how you manage them that will enable a successful retirement and a lifestyle you will enjoy. In short you need to make a budget and stick to it by carefully controlling your expenses.

OK, I know you don't want to do this--but IT'S A MUST!! You have to make and follow a budget, track your expenditures, and develop some spending discipline. If you don't already do this, you should start NOW, so you can see how you spend your money and determine where you need to cut back (if anywhere). By doing this and adjusting year to year, you'll develop the self-discipline to manage your money wisely. If you don't budget and manage your expenses, I can almost guarantee that you will run out of money in retirement. You will constantly worry that you don't have enough and that you will die a pauper. I can tell you that I have never worried one single minute since I retired about running out of money--but it all started with budgeting and expense management. The first step is to identify all your categories of spending (a personal "chart of accounts"). These may be very general such as mortgage, car, utilities, food, entertainment, medical, etc. Or you can break them down into more detail depending on how closely you want to monitor where your money goes. For example, you could break down entertainment into sub-categories such as dining out, movies, tickets, museum memberships, etc. However you do it, as the Nike ads say, "just do it!" Now that you have your list, keep track of everything you spend-- yes, every nickel!! If you don't keep close track, you're only kidding yourself. It isn't as hard as you think and there is plenty of software out there that takes the drudgery out of it (and provides nice reporting as well). We started with Quicken (which is more than adequate) although we changed to QuickBooks (because Rory is a QB guru). We enter all our expenditures and back up QB EVERY TIME!! Sometimes, several times a day. The next step is to develop a budget. It's easiest to do this at the end of the year for the following year and you should have at least 6 month's worth of detailed spending data (12 months is better), which means you start tracking expenses at least 6 months BEFORE you build your budget. You'll be surprised at how much you spend on those $5 lattes. Again, many software packages include a budgeting capability. We happen to use the Fidelity Retirement Income Planner. When you build your budget, you'll take into account how much you spent and on what, building an estimate for the new year, adjusting up or down. The software will track your expense entries to the year (& date) you enter them. You can increase or decrease budgeted amounts year to year as well as add and/or drop categories depending on how your life changes. Then compare your expenditures with your budget to see how you're doing. At the end of the first year of tracking/budgeting, we found we spent 12% more than we budgeted. (We did check month-to-month, so it didn't come as a total surprise.) What we realized was that we weren't the Federal Government. We couldn't print money to cover our overage. So we agreed to do a better job in year 2. At the end of the second year, we were 8% under budget and had gained confidence in the process and our ability to manage our money better. I know there are always unexpected expenses, but we solved that problem, by adding a category called "one-time expenses" and adding an estimate of what it might be. If we spent it, fine. If not, we'd be potentially under budget. By budgeting and tracking expenses we were able to determine where we could cut back if necessary, and how to fund our travel plans.

I can't emphasize enough how important this process is for a successful retirement. Once you know how much you have, how much you can add, (through pensions, social security, etc.) and how much you spend, you can begin to get comfortable that you won't run out of money. If at any time, things get a little out of control, you can cut back on discretionary expenses (like entertainment) or supplement your income with a part time job. It's really pretty simple.

4. INVESTING -- You can do it yourself!!
I am not a stock broker nor am I a licensed financial planner, but I have used both. I am not qualified to make investment recommendations or advise you on estate planning. I can only tell you about my experiences and what we have done to assure that we won't outlive our assets. I am not a fan of life insurance except for cheap term policies and only to protect a young family from your unexpected demise. I am not a fan of annuities, as I believe proper planning can provide you the same benefits and doesn't cost you anything. I am a fan of keeping investment expenses, fees, commissions, trading costs, and taxes to an absolute minimum. I have written two articles that might help you. The first is "How We Got from a Full Service Broker to Doing it Ourselves" in which I review our experiences with both brokers and financial planners and how to choose the latter, if you're so inclined. Our current strategy mirrors The Coffee House Investor guidelines with a couple of minor variations. This includes investing exclusively in a diversified mix of index mutual funds that cover several asset classes. We own no individual stocks or bonds. The second of the two articles: "Investments & Golf Clubs: It's All Marketing" explains why. How you invest and what you invest in, is up to you. But you must invest heavily in equities when you're younger, gradually less so as you grow closer to retirement. A conservative rule of thumb: the percentage of your investment in equities should be 100% minus your age. So, if you're 50, you should have a minimum of 50% of your investments in equities (the remaining % in bonds). My current allocation is 60% equities and 40% bonds, even though I am well past my 60th birthday. Systematic contributions is the key, investing a constant % of your income every month and leaving it to compound over time. When raises, promotions, or other increases in income come along, bump up your savings by at least the same percentage as the increase. The earlier you start, the better. Here's why? If you started at age 23 and invested a fixed amount every month ($1000, $5,000, or whatever) for 10 years, let it compound, and then stopped investing, you would have more money at age 65 than if you had waited until you were 33 and then invested the same amount every month UNTIL YOU TURNED 65. Such is the combined power of compounding over time and dollar cost averaging. You should not be thinking about market timing, day trading, or constantly churning your portfolio to react to financial conditions as they occur or to dive into the latest "hot stock". You are investing for the long haul; you can let the market work its magic. Don't get discouraged during down times or overly confident in up markets; don't constantly change your strategy or churn your holdings. No one can "predict the future". It's a sure fire way to buy high and sell low!!

Once I had gained the confidence to develop my own investment strategy, I stopped worrying about it and whether I'd outlive my money. Sure, I check the market regularly, but only to keep myself informed and because I'm interested. I track my closing positions monthly in a spreadsheet, mostly because I'm a bit anal and like knowing how I'm doing month-to-month and year-to-year. The only time we do any buying/selling is at the beginning of the year when we fund our budgeted expenses. The second article (above) describes how we do this. What I find interesting is that I'm starting to see books and articles in financial magazines that advocate the investment strategy I've adopted.

5. HEALTH CARE and LONG TERM CARE

Unfortunately, the cost of medical care in this country is out of control. It is the single biggest concern for people who have retired or are about to. How much is this going to cost me? Can I afford it and still do all the things I hope to do in retirement? My answer is: Beats me! If you have medical coverage from an employer, especially as a retiree, consider yourself lucky. If you're old enough for Medicare, this will help control your out of pocket costs--and you can budget for them based on the coverages you select. Your only other alternatives are to buy private insurance, go (permanently or temporarily) where care can be obtained cheaper than in the US (there are plenty of places and often the care is superior to what is offered here--don't get me started on this, thank you), or pay as you go, negotiating with providers if you can. Here is a way to combine dental/surgical procedures with a vacation at a fraction of the cost for the same thing in the US.

We use several means: we're covered by a former employer for medical and some prescription drugs. We pay as we go for dental and vision services because the employer offerings are too costly. Rick will began Medicare in late 2009 and Rory will be covered by Rick's old employer plan until she reaches 65. We have friends who do not have health insurance. They pay as they go and, if a costly procedure is needed, negotiate directly with the hospital to keep costs down. Yes, you can do this. Hospitals charge everyone the same rate for everything regardless of how much you use or need. They have a substantial markup over their costs, just like retail establishments, car dealers, and the like. You can negotiate a payment (for cash) that is much closer to what they cost than what they would otherwise bill you for. You should have at least one line item in your budget for medical. To what detail you break that down is up to you. We always budget for the maximum out of pocket that our plans might charge. We'll probably never spend that much, but it's an easy way to stay under our total budget. (Of course, we do have to fund that level.)

Sorry, I don't have the magic answer to medical costs. Long term care is another animal altogether, and the only insurance policies (not counting car, and home owners) that we have. Most people buy LTC insurance to help protect assets, preserve their independence and receive quality care. I have read that LTC protection makes sense for people whose net worth ranges from $100K to $5M. Those with less will exhaust their assets and qualify for Medicaid; those with more can fund their own care. I don't know about that. We bought long term care insurance because we did not want a catastrophic situation to force us to deplete our assets. The earlier you buy this, the cheaper it is. If you do decide to buy it, definitely do so before the older of you or your spouse reaches 60 years of age. Also you will want to buy from a company with a history of not raising their premiums. (John Hancock was our choice.) We wanted to make sure that if one of us survives the other, that the survivor could continue their retirement lifestyle without financial worries.

Understanding long term care is not that difficult. Things to consider include the daily benefit the policy provides, the waiting period from the time you qualify for care until the time you can begin collecting benefits (called the "elimination period"), whether to include inflation protection, and a few other options. No matter who you buy a policy from, the cost will be the same for the same options--there is no price competition. Initially, I went to a website www.LTCQ.net. It is a good reference for Long Term Care as is the AARP site. You can receive up to three quotes from different providers. There is also the option to call an 800 number for help. CALL IT!! When I got my three quotes, I called the number and was referred to a local agent. He came out to the house and reviewed all our options, explained how the rates would be determined, asked us about our medical history, recommended several providers and gave us personalized quotes based on everything we discussed. I highly recommend doing it this way. Our agent also helped us get "preferred" rates based on our medical history. We recently read where John Hancock will be raising rates on many of their older policies. This does not apply to us.

Of course, another way to keep medical costs and long term care costs to a minimum is to eat right and get plenty of exercise--the "healthy life style" formula. Easier said than done.

6. LEGAL STUFF, LIKE WILLS

There is no excuse not to have current versions of the following documents for both you and your spouse/partner:

- Will
- Durable Power of Attorney
- Living Will and Health Care Surrogate

The will protects your assets and assures they are distributed the way you want after you die. If you don't have a will, your assets may be distributed otherwise (best case) or go to the state (worst case). Listen to me, have wills (and the other documents mentioned here) prepared by a professional in your state of residence.

The Power of Attorney designates a person to act on your behalf if you become unable (physically or mentally) to act for yourself. The durable power of attorney gives your designee the power to conduct legal matters on your behalf.

The living will and health care surrogate provides a mechanism to make your wishes known regarding medical treatment you are to receive or not receive if you are unable to communicate your wishes due to mental or physical incapacity. These may include direction to discontinue life support, consent to have treatment performed, instructions for organ donation and the like. If you don't want your life sustained by artificial means, the living will may be the only way to have your wishes honored (as opposed to those of whatever doctor is treating you). The health care surrogate is the person you designate to assure that your wishes and instructions are carried out regarding medical treatment.

You should insure that all your retirement accounts (IRAs Roth IRAs, etc.) have a named beneficiary(s). Your non-retirement accounts should be designated as "Transfer on Death" (TOD) with a beneficiary designated as well. This is important because without the TOD designation, the cost basis of the account is determined by the cost of the assets therein on the dates you acquired them. With the TOD designation, the cost basis of the assets is determined on the date of transfer to the named beneficiary. This could result in substantial tax savings to the beneficiary. The named beneficiary may differ from heirs named in your will.

You should obtain copies of all these documents--keep them in a safe place, but DO NOT PUT THEM IN A SAFE DEPOSIT BOX. Make sure your power of attorney designee and health care surrogate have a copy of the appropriate document. They may be a private individuals (relative, friend) or a law firm or financial institution of your choice. The Executor of your estate should be named in your will and have copies of all documents.

I made a master document of all account numbers (financial, credit card, etc.), policy numbers, and a list of contacts for all of these, as well as passwords/user IDS for online access to accounts and services such as cable TV, utilities, etc. Anything to make life easier for the executor of your estate. I made copies of this document and distributed them as I felt appropriate. (NOTE: should you relocate to another state, you'll need to have these documents redone so they conform to local legal idiosyncrasies. The last thing you want is to have your documents invalidated because you no longer reside in the state for which they were produced.)

7. THE FUN PART
When you've reached this point, you've completed everything you need to assure a happy and worry-free retirement. Now it's time to execute your plan relax, and enjoy the rest of your life. As I said at the beginning, it took three years for us to get it all done, BEFORE we retired. So far, things are going as planned: we travel extensively and love it. We relocated to a university town. We are very active in both our neighborhood and university communities. We've made lots of new friends (of all ages). Rick is well into his university experience having completed seven acting classes and two other courses at the University of South Carolina (USC) and also takes drum lessons. He is a past President of our home owners association, serves on the executive council of our neighborhood association, and occasionally teaches a class on "personal finance" at the university. Rory retired when we relocated to SC, has volunteered at the Riverbanks Zoo and currently serves on the board of directors of our homeowners association, and on the Board of Directors of the Friends of the USC School of Music. We have established both undergraduate and graduate scholarships at USC as well.

We wish you every success in your retirement planning. We'd be happy to answer any questions you may have. Contact us at RickandRory@ AckTwo.com (Here are two books I highly recommend: "The Smartest Retirement Book You'll Ever Read" and "The Smartest Investment Book You'll Ever Read". Both are by Daniel R. Solin and are easy reads.)