These came from Barry's linkfest.
The WSJ had a post that I think I also saw on Marketwatch called Retirement Lies We Tell Ourselves (free access). There is one lie noted that comes up one way or another that I don't quite agree with. There is an adage that you should plan on needing 75%-80% of your income in retirement. The article says this is a myth and you will need more.
I think there is an argument to be made that you need far less. The way this can be possible is if you live below your means, something I preach to anyone who will listen. I concede I am a freakish outlier in this regard but I do believe that a normal person with a $150,000 income can live a $100,000 lifestyle and be quite happy. In what I think is realistic example, if the mortgage goes away at retirement might the $100,000 lifestyle only then need $80,000 in today's dollars?
Either way what needs to be replaced is what is spent not what is earned. If you spend every nickel you earn you will have a tougher time covering your needs in retirement or more likely you would need to make some very difficult choices.
Another benefit to this as I see it is by living below your means you will save more and you will be better able to endure some of the variables the WSJ article touches on like healthcare expenses and planning to work in retirement but not being able to which are both big issues.
This slide show from Fortune called 10 Rules For Building Wealth has some important ideas that you have probably heard before but are important nonetheless.
Number three was keeping your stock market investing simple. The word simple is subjective. I think of the portfolios I manage as being simple but someone who just started investing a couple of years ago may not. I know I have seen portfolios from new clients that looked very complicated to me. While I do not necessarily agree that the ideal portfolio for everyone is a few index funds it is the right idea for a lot of people. My take on this is that you should think your portfolio is simple, if you are doing it yourself.
The other good one was don't try to beat the market. This can be especially true for people that are saving properly and/or living below their means. If you can save 20% per year and your plan only needs to you to save 10% a year your portfolio does not need to work as hard. You still need growth, don't get me wrong but the lengths to which you go to get growth do not need to be as great.
Lastly Tom in Indy asks for my take on some commentary that if the Fed cuts in Q1 the ten year will go to 4% but if they wait until Q2 or Q3 the ten year will go to 5%.
Save for an external shock I don't think there is anyway the Fed can cut in Q1. This would pull the rug out from their own credibility. A normal pause between hiking and easing is nine months which would be March at the earliest and I just don't think they will cut that soon but maybe the meeting after March but my hunch is June.
The 4% number for the ten year strikes me as an assumed reaction of fear that the Fed is afraid of having gone too far. The 5% number still seems like it is lower than normal for a ten year bond. I would expect that when the curve normalizes that something closer to 6% in the ten year is possible only because it is well within normal for that kind of maturity.
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15 comments:
Re the Fortune slides, I believe rule #7 is too often ignored - Go heavy on stocks. I know many people in their 20's and 30's who have 20%-40% or more in bonds or cash. I blame much of this on the financial industry and media - i.e. references to 60% stocks/40% bonds as some sort of ideal asset allocation. I don't know why anyone who has 30+ years to retirement would have any bonds in their portfolio.
there is a stale concept of subtracting your age from 100 but I read something from T Rowe Price that suggested substracting your age from 120 instead. not perfect but better.
I listened to a few podcasts over the weekend put out by Index Fund Advisors (IFA). There are four interviews I found interesting, two with Eugene Fama and two with Kenneth French. In one interview with Kenneth French he touched on DFA's philosophy and methods regarding how they operate index funds without incurring a lot of turnover expenses. DFA is unique (I think) in that their funds aren't beholden to any particular index, but they're not actively managed either.
French also mentioned he believes the momentum anomaly is real and DFA actual takes steps to mitigate the effects of momentum. If you have iTunes you should check it out.
Roger,
I think the magic number for retirement is somewhat subjective. Going from 150k to 100k I don't have a real problem with in my case, since I am much lower to begin with. Unfortunately I was forced to stop working because of health reason about 16 years before retirement age and my wife about 35 years before retirement. We have and are missing many years of 401k matching and growth. We do max out IRA contributions but the house taxes on our modest home is about the same as a year of one year of IRA contributitions. Our kid's college education has been paid for thank goodness. But the way I figure it since I am living pretty much a the lower end of my means I will need about 120% of todays income at retirement to barely make it. Most of the increase is health care costs. I hope things change but can't plan on it.
Thanks, Concerned
I think that the problem some "seasoned citizens" have managing their income is that upon retiring they proceed to upgrade their lifestyle (move to a coast or other more expensive area), buy a luxury car and other bling-bling gadgets and proceed to give more money and goodies to their extended family (the children figure their parents are retired and rich...why not ask for more?).
I am in total agreement that retirees can live on 50-70% of their final income, so long as they practice prudent habits and a reasonable lifestyle.Why go nuts?
The problem is, age does not equal wisdom.Retirees will make financial blunders as will many others,regardless of their age/income brackets.
The difference is, the retiree will not have the luxury of time to dig out of the financial hole they dug for themselves.
concerned, there is of course a mix of all sorts of personal experienes that make the average all anyone can do is what they can do and make good decisions.
Good decisions ties into T's comment. People with a track record for poor decisons may not get "smarter" as they get older. Learning from your own mistakes and the mistakes of others.
Here is "concerned" again.
Thanks for the comments, but I think my main points were missed: 1) Poor health is not a decision; 2) Being not able to work and participate in great 401k programs is not a decision; 3) Required health care cost in the future are not a decision. New cars, new boats, taking up golf or other expensive hobbies, moving south to a nice retiremenet community are not even decisions(maybe wild dreams but far from reasistic). My real concern with a general statement of being able to live post retirement on 80 percenet of preretirement income may not be a decision or a reality based almost on health care costs alone. Think of a person who has had to live on a fixed income(not a decision) for 20 years(not a decision) just before retirement. I may be different than a lot of people but I think there are a fair number of people in my same situation. How many people have really considered how are they going to realistically cover health care costs post retirement?
Thanks
maybe a poor transition on my part. certain circumstances do not result from decisions made, agreed. But per both comments you are doing what you can and are smart enough to have explored some great questions.
Of the folks in similar circumstances all must play the hand they are dealt. Some will be smart and some will be not so smart which eventually circles to T's point, IMO.
sorry for the lack of clarity.
Roger,
I echo and agree with your reasoning. Living a lifestyle below your income is what I preach as well. But let me add some background on the 70%-80% 'myth". The widely quoted number comes from a study done by the Georgia State University Center for Risk Management & Insurance Research. They periodically attempt to estimate replacement ratios for retirees. The report merely tries to estimate the costs of working. When you retire, these go away, or are replaced by other costs, and the net effect is that you need only 70-80% of your working gross income when you retire. The actual range of the ratios is wider. Check it out.
http://www.rmi.gsu.edu/special/Retire%20Project%20-%20old/Retirep.htm
Russ, do you know if the Georgia State study assumes retirees will be making monthly mortgage payments...or not?
One more attempt. If one spends their discretionary income(where the assumed fixed costs are minimized) on contributing to IRAs and visiting out of town children twice a year. The "fixed" costs at retirement go up. The point I am trying to make is that if at retirement fixed costs go up and discretionary income is already minimal, how can one live on less then their pre retirement income. In a "Planning Nuggets" discussion would it not be prudent to point out some potenial pitfalls to the ratioal that:
"I am in total agreement that retirees can live on 50-70% of their final income, so long as they practice prudent habits and a reasonable lifestyle.Why go nuts?
"
is not totally usiversally true.
I realize my point is not totally investment oriented but more planning oriented and I am trying to get people thinking that how much of what we expect to accumulate may be depleated due to causes not considered. I guess I am aiming at a point that is very concerning due to my particular situation. With that I will just encourage each to question their assumptions.
Good night.
One more attempt. If one spends their discretionary income(where the assumed fixed costs are minimized) on contributing to IRAs and visiting out of town children twice a year. The "fixed" costs at retirement go up(ie insurance premiums because I would not want only medicare). The point I am trying to make is that if at retirement fixed costs go up and discretionary income is already minimal, how can one live on less then their pre retirement income. In a "Planning Nuggets" discussion would it not be prudent to point out some potenial pitfalls to the ratioal that:
"I am in total agreement that retirees can live on 50-70% of their final income, so long as they practice prudent habits and a reasonable lifestyle.Why go nuts?
"
is not totally usiversally true.
I realize my point is not totally investment oriented but more planning oriented and I am trying to get people thinking that how much of what we expect to accumulate may be depleated due to causes not considered. I guess I am aiming at a point that is very concerning due to my particular situation. With that I will just encourage each to question their assumptions and whether 50%-70% of income is really a good assumption.
Good night.
I am sorry about the double post. I wasn't trying to double my impact.
:-)
Hi Roger,
What are your thoughts on capitalization weighting versus fundamental investment weighting in index funds? This morningstar article presents two sides:
http://news.morningstar.com/article/article.asp?id=180936
Do you think PRF and DVY have the edge over their capital weighting ETF brothren?
Thanks,
- Ryan
Tom K,
It has been a while since I learned of the GSU study while in grad school there, but my recollection is that the create several (8-20?) examples of various income and expenditure situations. I would expect that some of those situations would include having to make mortgage payments in retirement.
Russ
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