“Money death” is simply a shock-value way of saying that a retiree has run out of money so that his or her basic retirement income needs are no longer being met. The authors of the article that describes their proposed strategy also use the phrase “boomers behaving badly.” The referenced “bad behavior” is a failure to create and implement a plan that to support yourself when you retire. (More than likely, it is a failure to create any plan.)

The strategy is interesting to me and should have appeal to baby boomers who are (a) close to retirement and (b) have already have significant retirement investments in their nest egg, but not enough that they can survive on an ultra-conservative portfolio. What they may not have is (c) a plan to make their nest egg last.

The authors of the strategy note first that trying to survive a lifetime on a low risk retirement portfolio is probably not going to work for most retirees. This is particularly apparent in today’s low interest rate economic environment where Fed policy continues to punish savers in favor of spenders.

What is proposed, then, is this: First, boomers should create a retirement investment portfolio that is heavily weighted in dividend-paying stocks and high-yield corporate bonds. More important, rather than decreasing equity and corporate bond exposure as retirement approaches and begins, this portfolio should remain in place. This creates a reasonable possibility of achieving returns that will support your retirement income needs. This brings us to the second part of the plan: Buy a deferred fixed annuity now as “longevity insurance.” The deferred annuity functions as a safety net, in case the higher risk retirement portfolio crashes and burns (e.g., 2008 all over again.)

A key to the second step is purchasing the deferred annuity at least 20-30 years before you will need it, so that the cost-benefit ratio is quite low. For example, someone who is 60-65 could spend $100k now for an annuity that would pay $75k annually beginning at age 85. The authors caution that this part of the plan would only make sense if the cost of the annuity represented no more than 10% of your wealth. After all, once you spend that $100k, you won’t see any of it again even if you died way before age 85.

The big problem/risk I see with this plan is inflation. Let’s assume that at age 60 you purchase a deferred annuity that will pay you $100k annually beginning at age 85. With average annual inflation at only 3%, the spending power of that $100k will shrink to $48k when payouts start at age 85. If we experience a period of high inflation (certainly possible given recent government spending and borrowing), the picture looks even worse.

But, overall the plan is worth considering. What helps are recent rule changes announced by the federal government that will allow 401(k) funds to be used directly to purchase annuities, without a lot of red tape and immediate tax consequences.

Here is a link to an article that discusses the plan: Do You Face Money Death in Old Age?

If you are  a student of retirement planning like me, you will want to read the full plan article here.

Comments?

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1. Because women live longer than men but tend to earn less, husbands should begin their Social Security retirement by claiming a spousal benefit.

2. Therefore, the wife should claim benefits as soon as she can (age 62) on her own earnings record and continue claiming her own Social benefit until her husband dies.

3. The husband should claim a spousal benefit based on his wife’s earnings record when he reaches his full retirement age (e.g., age 66).

4. When the husband turns 70, and assuming he was the higher lifetime wage earner, he claim his own retirement benefit and stops the spousal benefit.

5. If the husband dies before the wife (statistically likely), the wife then switches to a survivor’s benefit based on her husband’s record.

This strategy should maximize the total Social Security benefits received by the couple over their combined lifetimes.

This should work OK for us.  I am four years older than my wife. When she turns 62, I will be 66 so she will claim her benefit, I will claim a spousal benefit (50% of her benefit) until I turn 70, at which time I will claim my own, maximized benefit .  I will have to run the numbers to compare this strategy to the “claim and suspend” strategy in which I claim my own benefit at age 66, she claims a spousal benefit, then I suspend my benefit until I turn 70 which will increase my benefit by more than 30%.

Lots to think about but you can read more about spousal benefit strategies here.

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During 2011, our net worth increased by 7.3%. This is acceptable under the circumstances because it reflects a real spendable wealth increase. In other words, the 2011 inflation rate was 3.4%. Therefore, if all of our net worth increase was converted to income producing assets, we achieved a real net wealth gain of 3.9%.

The value of our retirement “nest egg”, i.e., those assets that are dedicated retirement investments, increased in value by 6.4%. This is based on a combination of investment returns and additional contributions. For 2011, our best performing core investment was VIPSX at +8.8%. We sold VEU and VTI because they hit their stop limit prices during a market decline.  Both were down for 2011 so I have no regrets about dumping them. We partially replaced VEU and VTI with LTPZ which was up over 20% in 2011 although much of that gain occurred before we bought it. I still like how LTPZ is non-correlated to most other market indices. (FYI – LTPZ is an exchange traded fund offered by PIMCO that captures the returns of longer maturity Treasury Inflation-Protected Securities (TIPS).)

A “what does it all mean” performance metric that I also like to track annually is the value of our retirement nest egg if it were to be 100% annuitized. To do this, I visit the Immediate Annuities website, enter our ages, then plug in the total current value of our retirement investments. The site will then generate the estimated monthly income we would expect to receive if we purchased an immediate annuity for that amount at that moment. I use the income number for a joint life annuity.

At December 31, 2011, the estimated annuity income from our nest egg increased 5.4% from 2010. This reflects a number of different variables, primarily the size of our nest egg (increase), our ages (increase), and the nominal returns offered by the insurance companies that sell immediate lifetime annuities (decrease). All of these factors are relevant to retirement planning. It is unfortunate that while our nest egg increased in value by 6.4%, and we aged a year, the larger nest egg would have purchased a lifetime income that was only 5.4% higher than 2010. Obviously the insurance companies are experiencing a more challenging investment environment (and may also be charging higher fees compared to 2010.)

Overall I am pleased with our progress for 2011 but there is more work to be done.

So have you done your own a financial check-up for 2011?

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First, I no longer trust big banks to be responsible with their fees or to offer the best account benefits for retirement savers. Thus, we fired Bank of America in 2010 and moved to a community  bank with a rewards (i.e. high interest) checking account.

I distrust financial advisers who make their money based on selling investment products or managing your investments.  Instead, I continue to educate myself on investing and retirement planning as a DIY financial planner.

I don’t trust the mediocre retirement options offered inside a conventional 401(k) plan.  The choices are limited and the expenses associated with them are too high.  I opted instead to use a self-managed brokerage account inside my plan.  This gives us more investment options to lower costs, increase diversification, and allow us to use stop limit orders to lower risk.

I don’t trust the stock market with our financial survival.  I also don’t trust the 4% withdrawal rate “rule of dumb.”  Instead, I am following a different path for providing a guaranteed retirement income.

I don’t trust our government leaders to act responsibly with our economy.  Therefore, I am protecting our nest egg against inflation by investing in I-Bonds, TIPS, and commodities.

I know this list can be expanded with other retirement planning concepts based on a distrust of financial institutions. At least on the financial side of retirement planning, a healthy dose of skepticism can be a positive attribute.

Do you agree?

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Let’s summarize the hard truth, in case we have forgotten or neglected to think about it recently:

• The S&P has lost an annualized 0.4 percent since 2000.  How pathetic this is compared with an average annual gain of 9.7 percent for the previous years going back to 1926.  If I hear Dave Ramsey tell a listener to buy a “good growth stock mutual fund” one more time, I might hit the radio with a hammer.
• Interest rates on savings and CDs are so low that savers are being punished almost as badly as individual stock investors  speculators. (Did you own Netflix?)
• A mere 23 percent of working Americans say they are “very confident” they will have enough money to cover basic living expenses in retirement, compared with 42 percent who said that last year. (This is why I’m on my own Failsafe Retirement System.)
• Today’s episodes of market volatility have undermined the rule of thumb that retirees may withdraw up to 4 percent of their nest eggs each year. If they want the certainty of never outliving their money, a lower withdrawal rate may be needed.

Extending your working life for five years beyond what you’d planned could add $10,000 to your annual income in retirement.

I’m less affected by the concept of a retirement “rethink” than some others. The reason is that before the economic collapse of 2008, I had not selected or targeted a certain retirement age or date. I still haven’t. Therefore, the idea that I might have to “work longer” was not very concrete to me.

Don’t get me wrong – I want Mrs. P and I to be financially prepared when I feel the time has come to stop working entirely. I just don’t know today when that will be, because I am quite content with my redesigned working life. A lot of other boomers do not have that contentment. I know that I am fortunate in that way.

I do have a goal of delaying Social Security benefits until age 70. That will affect my planning and may be considered a partial “rethink.”

So do you consider yourself to be part of the “great retirement rethink?”

Here is a link to the full article: The Great Retirement Rethink.

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I am fed up with most large (as in “to big to fail”) financial institutions. You should be too. Do not let yourselves be burdened with more monthly financial overhead.

Yes, I understand that the average consumer checking account is not a profit-maker for the mega-banks. In that sense, you can reasonably conclude that the new fees are intended to drive you away.

So let it work.

The obvious course of action is to find a bank that does not (yet) charge fees for a checking account. Some folks are not making this move because they believe that after they change banks, their new bank will also add fees. That’s probable, if you choose another large bank. But there are plenty of options in smaller banks.

The  big bank account  fees are being imposed because of new federal banking regulations that limit fees (“interchange fees”) that can be charged by the banks to retailers for debit card transactions. Those regulations exempt banks that have less than $10 billion in assets.  Thus, the smaller banks (if you consider $10 billion small) do not feel the pressure to increase fees. I am sure you can find plenty of those in your community and online. We did.

A good place to start looking is to read my earlier post on rewards checking accounts.  I updated this post based on our one year experience with our community bank.

Don’t procrastinate. Moving to a smaller bank can be a win-win proposition, with no fees and higher earnings on your deposits. Good hunting!

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From what I read, the generation above us was much more interested in leaving money to their children. I’m not sure why that is, unless they feel that their children were deprived before they became adults. These folks insist that funding an inheritance be part of their financial and retirement plans, even if it means depriving themselves. Even more extreme and financially risky is giving adult children an “advance” on their theoretical inheritance while the parents are still alive.

I don’t fully understand this “I must leave money to my children” attitude. Do you?

Another possibility is that some retirees have become aware of how incompetent and careless their adult children are with money. They feel bad – and maybe even partially responsible for this –  as if the parents had not properly instructed their kids in how to handle money. Their solution is to give their adult children money while they are alive and then even more when the parents die.

My position: The parents’ job is to give their children a solid foundation in all aspects of life. This has been our goal, including providing our three sons with an education without debt. After that, it is up to your children (and ours) to construct their own lives on top of that foundation. I can imagine that some adult children – believing that their parents will leave them money – will become less responsible with their own money.

That is why we are taking a hybrid approach. We want to leave a family legacy but not necessarily in cash. Unless there are radical changes in circumstances, our lake home will pass on to our sons, in a trust for their mutual ongoing benefit. We want this to be an asset that will bond them and their families together, just as it has become an important gathering place for our nuclear family and for our parents, siblings, cousins, and their families for the past 8 years.

Our retirement plan does not require any inheritance beyond that. If our expenses remain manageable and our investments do well, there likely will be money left over when we pass on. But no one – including us – should assume that or plan for that. We have done our jobs. Our boys (men now) must do theirs.

The link to the LA Times article is below. What are your plans for leaving an inheritance? Please leave a comment for all to share!! If you are reading this by email, please click back to leave a comment as well. Thanks!

Many baby boomers dont plan to leave their children an inheritance

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The historical annualized gain for stocks dating back to 1926 is approximately 9.9%. (This would include dividends.) Bonds returned 5.4% annually on average during the same period. If you use these two numbers in a hypothetical portfolio of 60% stocks and 40% bonds (a ratio often proposed by financial advisers), the overall portfolio return would be approximately 8%. This is the expected return that many retirement calculators (and so-called advisers) default to.

The problem is that bond yields are far below historical numbers. So are dividend yields, which in the past have contributed as much as 50% of the annualized gains achieved by stocks. Accordingly, many experts say that expectations for future market returns should be downgraded to 5% annually or less. If you believe as I do that a retirement investor needs to be more conservative and realistic, the important question becomes:

Is your retirement calculator or adviser using unrealistically high market returns when analyzing YOUR situation?

Bloomberg recently published an article on this very topic and, among other warnings, had this to say:

More sober return realities aren’t reflected in all of the online retirement calculators. Some, such as ones offered by Principal Group and Yahoo! Finance, use 8 percent as the default rate. Others, including the AARP and Bloomberg calculators, default to 6 percent. The Labor Dept.’s calculator plugs in 5 percent. Vanguard’s gives savers a slider to play with that’s initially set at 5 percent. It labels 5 percent “conservative” and describes a return anywhere from 6 percent to 9 percent as “moderate.” That’s a mighty wide range.

A calculator that uses Monte Carlo analysis can help eliminate a bias toward unrealistic past returns. The calculator that I use most (Financial Engines) employs a Monte Carlo system. However, even this system has its faults, as the Bloomberg article points out. For that reason, I like to cross-check my expectations using other calculators that let you plug in your own, more conservative expected returns and compare.

I believe the best advice here is that when you are using a retirement calculator yourself or relying on advice from an adviser, make sure you know what is being assumed to be the expected market returns for your portfolio. If you see or hear something in the range of 8%, ask to see the results for 5% or less.

Here is a link to the Bloomberg article: That Retirement Calculator May Be Lying to You.

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According to a recent article from the Wall Street Journal, 40% of households headed by a person aged 60-64 have a first mortgage. This is an increase from just over 20% of similar households in 1974. Although the percentages have flattened out since 2008, that’s of little consolation for those who are getting older but not less in debt.

But the bad news about pre-retirees and mortgage debt doesn’t end there. The average balances on the mortgages owed by older boomers has also increased over the years. Amazingly, 20% of these same folks had second mortgages or home equity loans with balances!

What is going on?

The personal anecdotes reported in the story are revealing. One couple is sacrificing their retirement saving so that they can continue to live in the same expensive neighborhood. In fact, when they could no longer rent the home they were in, they bought another one instead! At the same time, they almost completely stopped contributing to their retirement plans. Supposedly, they are doing this for their son. I suspect that a stubborn refusal to accept reality is also a factor. I wonder what the son will think when Mom and Dad are 70 – and broke.

There are ways other than negative cash flow to get trapped by a mortgage. Loss of freedom to move or downsize can occur if that mortgage balance exceeds the value of your home. This is an all too common occurrence in today’s economy. You can no longer assume that the home you bought in 2005 will be worth more in 2015.

People really struggle to break free from the debt-driven consumption habits they were taught by banks, retailers, and credit card companies over the past three decades. At age 60, reason needs to take over. Don’t you think?

Here is a link to the WSJ article. You may need to be a subscriber to read the entire piece. (I read it in paper form.)

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This morning, I came across an article that does a very good job of summarizing the  pros and cons associated with the use of a reverse mortgage in retirement. In fact, reading just this quote can give you a good feel for the reverse mortgage industry:

Reverse mortgages are full of pitfalls and they are very expensive — but they are very valuable to the people for whom they work. If you are sitting on a mortgage and you can afford to make payments on it, and have home equity and other assets, this is probably not a good idea. But if you are 85 years old and have $250 a month in income and a $500,000 house, it’s a great idea no matter how much it costs, because the lender will give you money you don’t otherwise have.

For those retirees who might fit into that last sentence, there is probably a better approach but it requires foresight and advance planning. That approach is to sell that $500,000 house before you become 85 and broke, move into something more affordable (or rent), and use the equity to generate income. Heck, at age 85 you don’t need to generate income. Just put the cash in some CDs and spend it as needed.

The article makes another important point. Many seniors are tempted by sales pitches that tell them to use a reverse mortgage as a source of cash to buy cars and take vacations. That is a bad idea, again because of the cost. Your $5,000 vacation could cost you $10,000 in lost equity and fees.

A final thought and warning, again from the article: A reverse mortgage becomes payable in full if the retiree fails to pay property taxes and homeowners insurance, or neglects needed repairs on the house. According to the National Consumer Law Center, those scenarios are becoming more common. This means it is extremely important that the retiree have income and cash reserves available to take care of all the other financial obligations of home ownership before considering a reverse mortgage.

Here is the link to the full article: Reverse Mortgages: Do the Benefits Outweigh the Risks?

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