Retire Early? Work Forever? Both Are Wildly Unrealistic

Writing for Barron's, Sarah Green Carmichael interviewed Teresa Ghildarducci, the Irene and Bernard L. Schwartz Chair in economic policy analysis in the economics department at the New School, and the author of How to Retire with Enough Money: And How to Know What Enough Is.

Regarding the FIRE (financial independence retire early) movement, Ghildarducci said: 

"The person who says, 'I want to retire early,' should probably talk to a therapist, because behind that is probably an uncertainty about what they want to do with their life, or they don’t like their job. But just financially, it doesn’t make sense unless you’re very, very rich, and if you’re very, very rich, you probably have expensive taste. For most people to quit work for 40 or 50 years, it’s just not a plan that can be sustained for anybody, except for people on TV."

What about the people who say, “Oh, I’m never going to retire. I’m just going to work until I’m 90”?
"There’s two kinds of people who say that. There’s the rare pediatrician who loves their work and wants to see a couple of kids a couple of times a week until they’re 90. That’s rare; that’s why you see them in the newspaper"
"The second group are people who are engaged in what’s called cognitive dissonance. They know they don’t have enough money, and so they engage in another kind of fantasy, which is, 'I can work until I die. My employer will want me.' We find in our research that there’s a [level of] enormous age discrimination and that there are a lot of jobs that are so fast-paced in terms of technology skills required that an older worker will just not be able to keep up." There is also the physical requirements of some jobs that cannot be sustained into advanced age.

Research shows: "Most people will stop work before 65 and collect Social Security before 65."
"They were pushed out, or they were laid off, or they had to take care of their spouse or had to attend to their own illness. Most people do not retire when they want to. They retire earlier."

So what is a realistic goal and game plan for retirement planning?
"Here are some rules of thumb. If you’re 30, you should be out of debt, and you should have about half of your salary in the bank. By the time you’re 40, you should have a little more than your annual income in the bank sequestered for your retirement in either a 401(k) or an IRA. By the time you’re 45, you should have two times your annual salary. By the time you’re 50, you should have three.
By the time you’re 65 or so, 63, you should have about eight times your annual salary, if your annual salary is about what you want to live on...."

Read the interview at: https://www.barrons.com/articles/retire-early-or-work-forever-51556397683?shareToken=st1b1d6680257d4fb7ab3787524708bd0c&reflink=smartbrief

 

Single Premium Immediate Annuity vs. "Safe Withdrawal" Strategy

"Economist and mathematician Michael Edesess compares a "safe withdrawal" strategy from a 60/40 stock-and-bond retirement portfolio with a single premium immediate annuity of the same value. He found the SPIA offers retirees a bigger monthly payout and decreases their chances of running out of money."

Author/researcher Michael Edesess explains:
"A safe withdrawal rate is the percentage of your assets you can withdraw each year without danger of running out of money, no matter how long you live. The seminal work on the subject was written by financial planner William P. Bengen and published in the Journal of Financial Planning in October 1994."
Bengen asked the question, with a portfolio of 60% stocks and 40% bonds, “What percentage of your starting assets can you withdraw yearly for the rest of your life without fear that you will run out?”
"His answer, based on simulations using past history, was that you can withdraw 4% a year (adjusted for inflation)."

"But in recent years, stock and bond market conditions have changed. Interest rates are historically low. This has caused some researchers to argue that 4% is not a safe withdrawal rate anymore.
In 2013, three researchers found, using their revised stock and bond market parameters, that as low as a 3% withdrawal rate would still mean a 10% chance of running out of money — too big a chance for comfort."

Edesess compared the "safe withdrawal rate" strategy to buying a Single Premium Immediate Annuity (SPIA):  A SPIA "is a financial instrument that guarantees you a consistent monthly income as long as you live."  Don't confuse a SPIA with the "more complicated, expensive, and much less useful annuities with other names, such as variable annuities or fixed-income annuities."

According to Edesess, "My own calculations show that for an investor to be 95% certain of not running out of money with a safe withdrawal strategy from a 60%/40% stock-bond portfolio, the strategy would be to withdraw 3.5% of the initial investment in real (inflation-adjusted) dollars each year."
"If the portfolio started with $500,000, for example, the average annual lifetime income would be $23,000. With the SPIA, the average annual lifetime income would be $33,500, and the certainty of achieving it is greater than 95%."
"Thus, both the certainty of not running out of money, and the lifetime income, are much greater with the SPIA than with the 'safe withdrawal' strategy."

By purchasing a SPIA you are creating your own pension. 

Read the full article at: https://www.marketwatch.com/story/this-one-investment-move-can-give-you-lifetime-yearly-income-in-retirement-2019-04-29

Consumer Financial Protection Bureau head more interested in helping corporations than protecting consumers

"Kathy Kraninger gave her first speech as director of the Consumer Financial Protection Bureau (CFPB) at the Bipartisan Policy Center in Washington, D.C., in April. We were alarmed to hear Kraninger voice an overall vision for the CFPB that appeared antithetical to its core function of “enforcing federal consumer financial laws.” Kraninger stated that she was concerned with the CFPBs’ role in creating a “regulatory burden” for the companies under its supervision. She conveyed her intent to focus the Bureau on “prevention of harm” through consumer education, while limiting its powerful examination and enforcement tools to “purposeful” uses.

“Given Director Kraninger’s announced focus on education over consumer protection, consumer advocates are determined to educate the new director about the need for robust Bureau oversight and enforcement to hold financial companies accountable for harmful practices,” Consumer Action’s Deputy Director for National Priorities Ruth Susswein said." Source: Consumer Action
https://www.consumer-action.org/news/articles/consumer-action-insider-may-2019/?eType=EmailBlastContent&eId=c4ee986f-51de-4c8a-a008-0d1eaef48ad2#Topic_08

Another example of the value of government regulation: The Card Act of 2009

Beside the obvious everyday advantages of vehicle safety regulations like requiring seat belts and air bags in vehicles, many federal laws protect consumer privacy and financial transactions.

"May 22 is the 10th anniversary of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. The game-changing CARD Act, which was passed by Congress during the Obama Administration and has since been enforced by the Consumer Financial Protection Bureau, has saved consumers billions of dollars in credit card fees and predatory “penalty rates,” despite industry predictions that it would kill the credit card market. Sadly, nearly half (47%) of consumers surveyed by CompareCards, a Lending Tree company, said they’d never heard of the CARD Act. Now’s your chance to learn more about what the CARD Act has done (and continues to do) to protect consumers like you." source: Consumer Action Insider.

Here's a reminder about how banks and credit card companies used to take advantage of consumers and how the world changed for the better 10 years ago.

What the Credit CARD Act of 2009 Means for You

You might not know it, but the Credit CARD Act of 2009 changed your life in a powerful way.

By Beverly Harzog , Credit Card Expert |Feb. 20, 2019,
https://creditcards.usnews.com/articles/what-the-credit-card-act-of-2009-means-for-you?eType=EmailBlastContent&eId=c4ee986f-51de-4c8a-a008-0d1eaef48ad2

Income annuities increase income while reducing stress for retirees

"Incorporating an income annuity into a retirement portfolio increases income, cuts retirement stress and boosts retirees' confidence, according to a study by researchers Michael Finke and Wade Pfau from The American College. Income annuities lower the risk of outliving savings in retirement without lowering overall income, compared with an investment-only approach, the study found." Retirement Security SmartBrief, April 24, 2019.
"new research including 10,000 simulations show income annuities really do improve retirement outcomes compared to investments alone."
This is according a study commissioned by Principal Financial Group and conducted by Michael Finke, Ph.D., CFP, and Wade Pfau, Ph.D., CFP, nationally renowned researchers from The American College (who are not affiliated with Principal). Check out: https://401kspecialistmag.com/study-by-finke-pfau-shows-annuities-improve-retirement-outcomes/
To learn more about annuities, use the search function in this blog.

Where to put your "safe" money when interest rates are low

Low interest rates are great when you are borrowing money but frustrating for savers, especially retirees who seek to keep up with inflation but want to avoid risk. Of course, the best way to keep up with or beat inflation, at least before taxes, is to invest in stocks. But you don't want all your money in stocks due to the high risk of losses in the short run.
So where can you put your savings today?
Look for higher rates at online banks, money market accounts, certificates of deposit (18 months is the sweet spot today). Consider building a ladder of 18 month CDs.
Buy highly rated corporate bonds in bond funds. Avoid "high yield" junk bond funds which are risky and could lose value quickly.
Vanguard Short-Term Corporate Bond (VCSH) is an investment grade ETF (exchange-traded fund) charges only 0.07% expense ratio and is very highly rated by Morningstar.The fund is currently yielding 3%.
Source: "Investment strategies in a time of low rates" by Michael A. Polluck writing in The Wall Street Journal, April 22, 2019.

Medicare Part B cost going up

According to The Wall Street Journal (4/23/19) the cost of Medicare part B premiums for 2020 will likely increase $8.80/month from $135.50 to $144.30. The previous increase was from $134 in 2018.
While Medicare part A that covers hospitalization is usually free for most Americnas 65 and older, Part B charges a monthly premium that ranges from $135.50 to $460.50 depending on income.
Most retirees also purchase private supplemental policies or Medicare Advantage Plans (that charge premiums, co-payments and deductibles) to cover expenses not included in Medicare.
So retirees and soon-to-be retired persons need to plan for rapidly increasing health care costs in retirement.

Don't make your family guess your health care wishes

Writing in The Salt Lake Tribune (4/15/19), Chad Bittner, MD explains the need for an Advance Health Care Directive. April 15-19 is national health Care Decisions Week.
It is very important to have conversations with family about end of life wishes and now is the time; not tomorrow, next week, or sometime.... Fewer than 30% of Americans have tackled this task.

• Discuss
• Decide 
• Document

Choose an advocate who can speak for you and express your wishes for care when you are unable to do so.
Talk with your advocate and doctor about your wishes.
Write it down.
Give copies of your health care directive to your advocate, doctor and family members.
Great tools are available at https://ucoa.utah.edu/directives/:

Utah Advance Health Care Directive Forms and Instructions

Get Help With Advance Directives at www.LEAVING-WELL.org

A Guide to Student Loan Forgiveness

Consumer Reports offers A Guide to Student Loan Forgiveness
Recent news suggests it is almost impossible to get one's student loans forgiven, especially under the current administration and Education Secretary Betsy DeVoss. However, it may be worth a try with the help of Consumer Reports.

"The 12-year-old federal Public Service Loan Forgiveness program (PSLF) is one of the bigger programs. Under PSLF you can wipe out your remaining student debt after making 10 years' worth of on-time payments if you work in a qualifying public-sector job."

"About 35 million American workers are employed in the public sector and could be eligible for the federal Public Service Loan Forgiveness program alone, according to an estimate from the Consumer Financial Protection Bureau. Yet less than one million people have applied for PSLF so far. To help students find these programs, TISLA created a database that lists more than 100 loan-forgiveness programs."
Check the website of The Institute of Student Loan Advisors (TISLA), "a nonprofit that provides free one-on-one counseling for student loan borrowers."  http://freestudentloanadvice.org/

"First the caveats. Most loan-forgiveness programs have very specific requirements. Of the ones open to all borrowers, most apply to those suffering financial hardship. Typically, forgiveness programs are only for federal loans, though some are awarded based on where you live and cover private loans, too. In some situations the amount forgiven is considered income, so you could owe a big tax bill."

Get the details:

https://www.consumerreports.org/student-loans/guide-to-getting-student-loans-forgiven/?EXTKEY=EE941IBAC&utm_source=acxiom&utm_medium=email&utm_campaign=20190409_cromc_engagewkly

Utah State Treasurer has $370 million in Unclaimed Property

OK... This is NOT a scam. Every state has unclaimed property awaiting claim by owners or their rightful descendants. What is unclaimed property? Examples include forgotten utility deposits, life insurance payouts, health insurance reimbursements for overpayments, and contents of safe deposit boxes.
When my parents died I checked with the appropriate authorities in New York state. After filling out a couple forms, I received a few hundred dollars (related to health insurance claims that were overpaid).
For Utah, visit; mycash.utah.gov or call 801-715-3300.
Thanks to The Salt Lake Tribune, April 9, 2019.