I had heard somebody say something about too much month at the end of the money. It’s very easy to relate to it. Well, of course, there is a country music song by Marty Stuart with the same title. Here’s the link to it: https://www.youtube.com/watch?v=9kbGstXXSbw
In a similar vein, I applied this to retirement income planning. I talk with people about having a retirement income that lasts as long as you do. I always say, getting old sucks, being old and broke really sucks. Thus, the name of this article, Too Much Life at the End of the Money. With that idea in mind, how can you avoid this unfortunate situation?
Retirement Income Game Plan
There are so many variables to having a retirement income that lasts your entire life, it is obviously too much for one blog post. So, I thought we could talk about a few ideas that at least can give you some ideas to consider.
The first thing is to figure out exactly what you have. Take an inventory of your assets and your sources of income. By the time most of my clients are getting towards retirement age, they have some kind of company retirement plan, taxable investments like a brokerage account or mutual funds, maybe an annuity or two, income from Social Security, rental properties, perhaps and occasionally some kind of pension. The point is to first figure out exactly what you have, where it is located and how much income these assets can generate.
Next you need to come up with some type of a budget. I talk a lot about using the budgeting program called YNAB, You Need A Budget. There are a lot of different way to do a budget of course, but if you are essentially on some type of fixed income, it is super important to give each dollar a job and make sure you are staying on track.
There are basically two types of expenses, fixed expenses like house payments, utilities, health insurance, etc. These expenses don’t change too much from month to month. The other type of expenses are variable expenses like travel, gifts, car and home repairs and others. Even though these types of expenses change from month to month, over time, you can budget for them using a budgeting program like YNAB. The way most people deal with unexpected expenses is to put them on a credit card, then pay the card back over time. When you do that, you’re adding insult to injury. Not only are dealing with an unexpected expense, but you also have to pay additional money to pay the outrageous interest rate on the credit card.
In YNAB, they have a category called, “things I forgot to budget for”. You don’t know what is going to come up but you know something is going to come up so you might as well set a goal for that category. Then, when something does arise like you go to the tire store or an unexpected medical event comes up, you have the money in your budget versus using the credit card. Or you can use the credit card to pay the bill but immediately pay the card off with the money you have set aside in your budget!
Cover Fixed Expenses with Guaranteed Income
One recommendation I see when it comes to retirement income planning is to cover your fixed expenses with guaranteed income. What does that mean? What is guaranteed income? For most people, their main source of guaranteed income is Social Security. Because it is so important to most people’s retirement income planning, it is essential to maximize your benefits.
There are other sources of guaranteed income as well. Some people still receive some sort of a pension. Almost every person who works for the city, state or federal government is going to receive a pension. Most teachers in public school will get one as well. I often meet people who worked for a company in the past and will receive a pension at age 65. In fact, I am one of those people.
Another source of guaranteed income can be an income annuity. An income annuity is a contract with an insurance company where you invest your money with the insurance company and the company guarantees you a lifetime income. I’m not going to talk about all of the variations of annuities here, but with an annuity, you have an opportunity to cover your fixed expenses with guaranteed income.
Retirement Lasts a Long Time
The average retirement age in the United States is age 64 for men and age 62 for women. The joint life expectancy for a couple aged 65 is age 89. When you're trying to have your money last as long as you do, you’re talking about needing your retirement income to last 25-30 years. Because it lasts so long, one of the things you have to consider is inflation and purchasing power.
If you have your fixed expenses covered with guaranteed income, it takes a lot of pressure off you. It also allows you to invest a little bit more aggressively. Most people look at their retirement age as the end of the game, when in fact you have 30 years left. Back in the old days when CDs paid 8% interest, a retired person could take their investments, put it in the bank and live off the interest. Those days are long gone. Today, most CDs, no matter the term pay less than 1% interest. If you put $500,000 into the bank, you would get less than $5000.00 per year in income. That’s tough to live on.
However; with your fixed expenses covered with guaranteed income you have to opportunity to be a little more creative than putting your hard earned money into a CD paying less than 1% interest. For example, a portfolio consisting of 60% stocks and 40% bonds returned an average of 10.2% per year from 1980 – 2018. During those 39 years, a portfolio like that had 5 down years. As always, past performance is not a predictor of future results.
American Funds used to have a piece called the Boones and the Klausens. The Boones put $200,000 into a CD or a 20 year United States Treasury bond and would receive a fixed amount of income each year and at the end of the 20 years, they would get their money back. When the Boones retired in 1999, they were getting over 6% interest on their 20 year bond so their annual income was a little over $13,000 and at the end of 20 years they got their original $200,000 back.
The Klausens would invest their money in a 60/40 portfolio and start taking 4% of the value of the portfolio at the end of each year. In addition, they increased their withdrawal by 3% each year to keep up with inflation. In the latest example, they started with $500,000, received $537,000 in income over the 20 years and their portfolio was worth $537,000 at the end of the period.
In today’s super low interest rate environment, the Boones strategy doesn’t have a chance. The point of this is to encourage you to think long term and don’t get too conservative with your investments even though you are retired. 30 years is a long time. While the stock market goes up and down, you can dampen the volatility by diversifying with fixed income, asset allocation and rebalancing.
Retirement income planning is a huge subject and I can’t cover everything in one blog post. I’ll write more about this in the future, but I hope these ideas give at least a couple of things to consider. 65 used to be old but now it’s more like the 3rd quarter of your life. Financial planning isn’t a one and done exercise and retirement income planning isn’t either.
If you have any questions about this, feel free to contact me using the Get In Touch button at the top of my website. As always, thanks for reading! KB