The Independent Investor: How Much Is Too Much to Spend in Retirement?

More and more baby boomers retire each year. One of the questions that trouble them the most is whether they have enough savings to last their lifetime. The answer largely depends on how much they plan to spend each year.

The historical guideline that most financial planners use is a 4 percent drawdown of your retirement savings after taking account of social security and other non-portfolio sources of income, such as rentals or part-time work. That number has been shown to provide most retirees with a comfortable living over the course of a 30-year retirement.

However, I advise my clients to use the 4 percent rule of thumb as a starting place and adjust along the way. Times change and so do markets, so no single number will be appropriate for every situation. Take inflation, for example. Every year inflation climbs higher. Over the last five years, inflation has been fairly well contained but that doesn't mean it will always be so.

I suggest that above and beyond the yearly 4 percent savings drawdown, enough money should be withdrawn to account for the inflation rate. This year, for example, inflation should come in slightly above 2 percent. In which case, a retiree should plan on withdrawing 6 percent of his funds next year to accommodate for these higher costs.

For the last 30 years or so, conventional financial wisdom has dictated that retirement portfolios should be predominantly invested in bonds. Advisers argued that this was the safe, conservative approach for those who can no longer afford to play the volatility of the stock market. As a result, some planners are now arguing that the 4 percent guideline should be lowered given the historical low rates of returns in the fixed income markets. They are extrapolating that since rates are low now they will therefore continue to be low in the years ahead. I think that is nonsense.

First off, as I have written before, bonds are no longer a "safe and conservative" investment. I believe that bond prices in the future will fall considerably as interest rates rise. Why keep the lion's share of your retirement savings in a losing investment that will continue to decline over the next several years?

The state of the bond and stock markets will also impact that 4 percent rule. I suggest that you adjust your spending based on how the markets perform. If the stock market is declining, the economy stalling and/or interest rates are rising; you might want to pare back your spending and your withdrawals. If the opposite occurs, you may consider withdrawing more money, but within reason.

I have one client, a single woman age 82, with health issues, who has about $1.5 million invested fairly conservatively with us. Each year we have managed to generate enough returns to satisfy her 6percent withdrawal rate and make substantially more above that for her. The problem is that every year we do, she immediately withdraws those additional profits, leaving nothing for those "rainy day" years when the markets are down. I have my hands full convincing her to leave some of those profits alone. The point is that you must remain flexible while still planning for the future.

But not everyone need abide by the 4 percent rule. Actuaries will tell you that if you follow the 4 percent rule you have a 90 percent confidence level that your retirement savings should last your lifetime. But 90 percent is a high rate of probability, maybe too high for your liking. You may opt to spend more and reduce your probabilities to a more reasonable 75 percent that your money outlives you.

That lower confidence level might actually be more appropriate for your planning purposes. By now, you may realize that if you have not discussed this with an investor adviser it is never too late to start.

The Independent Investor: The Fed Turns Off the Spigot

The Independent Investor: Should You Pay Off Mortgage Before Retiring?

Many retirees, concerned with no longer having a steady paycheck, have asked me for advice on whether to pay off their mortgage early. There is no definitive answer but here are some variables to consider when making a decision.

Your monthly mortgage payment in retirement may represent a significant portion of your monthly income. If you only have social security as an income stream, then chances are that a mortgage payment will significantly reduce the amount you will need to meet your monthly expenses. If so, then pay off the mortgage. However, be careful you don't significantly reduce the amount of money you have available for emergencies, general expenses and discretionary spending. You don't want to end up house-rich but cash-poor.

By paying off your mortgage now, you reduce interest rate risk, especially in a rising rate environment. Naturally, there are several factors at play here. How long and how much debt remains on your mortgage will be a crucial factor. If you have an adjustable rate mortgage and rates double over the next five years then it makes sense to pay off the loan or at least convert to a fixed-rate mortgage.

On the other hand, if you took advantage of the low interest rate environment over the last few years and re-financed, you might now have a thirty-year fixed rate mortgage with an interest rate of 3-5 percent. In that case, it may make sense to keep the mortgage. Why?

If, as many predict, interest rates do rise substantially in the years to come, your borrowing cost on that fixed mortgage will look like a very good deal.

Retirees must also understand the opportunity costs of paying a large lump sum out of your retirement savings to be free of that mortgage. While being debt-free may feel good, could there be other investments that might provide a better return?

Let's go back to the retiree who refinanced and now has a 30-year fixed at 5 percent. If interest rates do rise from here sometime down the road, that retiree has the opportunity of taking advantage of those higher rates. Theoretically, he could invest that lump sum money into a safe U.S. Treasury bond yielding 6 or 7 percent, maybe more.

While he waits for rates to rise, there is always the stock market. Stocks have averaged a 7 percent return historically for well over the past 100 years. He could invest the money in a group of dividend stocks, which would not only generate him income but also price appreciation. In long-term bull markets like today's, the average return on equities has been much, much more.

Of course, each individual's situation is different. Paying off the last $100,000 of a mortgage out of a retirement nest egg of $1 million is much different from someone who only has saved $300,000. As always, the mortgage interest rate you are paying is critical to the equation. There are also alternatives. If there is no prepayment penalty, you can always pay down the principal faster or simply double your overall monthly payment.

But numbers aren't everything. For some people debt is, and always will be, a dirty word.

The peace of mind they receive from being debt-free may trump whatever opportunity they may have elsewhere. My only advice is to weigh all your options carefully before making that decision.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Unhappily Ever After

Over the next decade roughly 75 million Americans will retire. While most of us are well-aware of the need to plan, save and invest for that momentous moment, very few of us are actually prepared for the non-financial challenges of retirement itself.

Recently, as a result of one local company’s early retirement incentive plan, as well as the bankruptcy of a local hospital, I have had some firsthand experience in dealing with the expectations of retiring clients in this area. What I have found is that the majority of men are ill-prepared for retirement, more so than women. At the same time, their spouses are extremely worried — with good reason.

Studies show that men have a much harder time adjusting to retirement than do women and are far more naive in understanding what retirement does to one’s quality of life. Those who retire unexpectedly due to sickness, job loss, those who have become accustomed to working long hours or who bring their work home with them have the most difficulty in retirement.

It seems that most men tend to define themselves and their self-worth on the basis of their careers and the money they make. After 30 or 40 years of polishing their identities as providers, senior workers and/or producers, they find themselves at a loss when that ends. Many men are suddenly faced with an identity crisis they have not confronted since they were teenagers. The more of a workaholic they are, the less likely they will have developed other outside interests that could help define and transition them to a new identity and role.

Women, on the other hand, are much more likely to have several roles — worker, mother-caregiver, community activists, etc. — throughout their life, all of which aid in a transition to retirement. Women are much more likely to have had their working careers interrupted by child-rearing or by taking care of elderly parents than men.

I know my own wife, Barbara, the COO of our company, also maintains a successful career as a photographer, has a large network of friends and acquaintances and is a member of several community organizations and social groups. In general, I believe women tend to be more engaged with others and more connected to their communities in terms of social support and networking. Retirement, to them, may be just another change in a life that is full of changes.

Seventy-five percent of workers believed that their quality of life would improve once they retired, but only 40 percent of retirees found that it actually did. So if you are planning to retire, forget about your dreams of being perfectly happy walking on the beach every day or playing golf or minding the grandkids. None of that is guaranteed to fulfill you, or even hold your interest beyond the first couple of months. There is no free lunch in retirement.

The only sure thing in retirement is that at some point you will die. Your problems do not disappear, they just change in nature and many times, your problems actually grow in size and importance (since you have little to distract you).  Sure, you may live longer by retiring from a stressful job that was either physically or mentally taxing, but that doesn’t mean you will live healthier.  Your chances of becoming addicted to alcohol, narcotics or prescription pills actually increase.

Finally, the most important truth of all is that you will never be able to save enough money to retire happily ever after because money and happiness have nothing to do with each other. In my next column, I will give you some pointers on how to become one of those 40% of retirees who actually enjoy retired life. I’ll leave you with a big hint — it starts with your spouse.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: A Road to the Future

There is a growing national buzz among scientists and engineers over a driveway in Idaho. This green-hued stretch of hexagonal tiles of hardened glass in an Idaho suburb represents one prototype idea for revolutionizing the nation's highways. It could be a road to the future.

The concept of Scott Brusaw, a down-to-earth, electrical engineer who lives in a rural Idaho community, is to convert America's broken-down highway system into a nationwide network of solar panel highways. In doing so, this solar highway would generate three times the energy used in the U.S. each year while reducing greenhouse gas emissions by 75 percent.

These new roadways would consist of three layers of individual panels. The top layer would be manufactured of high-strength, textured glass. It would provide better traction for vehicles than concrete or blacktop and is strong enough to support trucks weighing three-to-four times the weight of the 18-wheelers that chew up our road system every day.

Embedded underneath that first layer would be an array of solar cells for gathering and generating energy, as well as a system of LED lights (powered by the sun) that would be able to function as road and warning signs. Finally, a base plate layer would distribute the power as well as provide heat to melt snow and ice on the roads and prevent seepage, a major cause of road destruction on today's highways.

Does this sound like pie in the sky? Right now, I would say so, but stranger things have become realities in this country. Prior to The Wright Brothers, flying was an unproved technology. So was Brainiac, before the U.S. government proved that computers were possible.

In this case, all of the technology involved in a solar highway process is proven and available.

Tempered glass is used in countless products and big companies are already working on creating even stronger glass technologies. Solar cells and panels exist and their costs are rapidly decreasing, while their efficiencies skyrocket. Energy storage and new battery technology is becoming an everyday occurrence and can be found in airplanes, autos and any number of other new products.

As a result, the rollout of such a new road system comes down to cost. In today's political climate, our highway system is lucky to be just limping along at the present level of funding (see my column "Potholes Take Center Stage"). Our politicians can't see beyond the cost of fixing a pothole or two. But that does not mean it will always be this way.

Right now estimates put the cost of one square foot of solar highway at $70, compared with anywhere from $3 to $15 for asphalt or cement, depending on the quality and strength of the road. Given that just in the lower 48 states, we have roughly 29,000 square miles of paved road, the cost of building a solar highway would be in the trillions of dollars. The cost of maintenance is unknown as well and detractors can come up with an array of reasons why solar roads won't work. But costs will come down over time and as they do, solar roads will look more and more possible, in my opinion.

Remember that 20 years ago, electric cars were considered impossible because the battery to power them would be twice as big as the car and three times as expensive. Fortunately, the federal government thinks the idea is worth investing $ 1 million or so to encourage more research and feasibility studies. They did the same thing 15 years ago to further oil and gas fracking technology and we all know how that turned out.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.