Retirement Planning - One Fool's View

Hi all,

We’ve been retired for a little over a year now and thought I’d share this in hopes that it helps others. We are also debt free and have been for some time.

The Dream for Retirement

During our working years, my wife and I didn’t take a lot of travel vacations. We would occasionally, maybe once every other year or so. My job was stressful, and I had trouble enjoying myself on vacation knowing that work was piling up for me while I was away. Inevitably, after returning I’d need to work extra hours just to get caught back up. Taking a long vacation just wasn’t worth it, most of the time, and seemed counterproductive to me.

I dreamed of being retired and having the time to see this wonderful country at my leisure. So, as we approached my retirement date of age 61 years and 8 months, we purchased a new 40’ 5th Wheel and a used 2016 Ford F-350 diesel pickup to pull it. This rig enables us to see the country cost effectively. For the past year, we’ve been part-time RV’ers but are planning on going full-time soon. Our thinking is that it will likely take 3 to 5 years to see all the sites that we want to see maybe more.

The Original Goal and Reality

During the early years of our working careers (late 80’s early 90’s), I devoted a lot of spare time to all things financial, trying to learn all I could. I knew I wanted to retire as soon as I possibly could and the best way to do that was to save regularly and invest that money intelligently. I needed to learn how to do that. A subscription to Money magazine was where I began. Many other sources of financial information were added as time went on, including The Motley Fool. Learning about finances is really a never ending, lifelong endeavor. Having a working understanding of the tax code is essential too.

Savings were invested with both Vanguard and Fidelity mutual funds at first. I remember using a retirement planning CD that I got from Vanguard to map out our first retirement plan. I spent hours playing with inputs and observing the resulting outputs. Interestingly, the conclusion from that planning exercise was that we could retire at the ripe old age of 55 years, needing at least $1.3 million (age 55 dollars) in invested assets, and having those assets invested 90% in stocks and 10% in cash. No bonds. The reason was that bonds do not protect against inflation over a long period of time, like a 30-year working career or for 30 years, or more, of retirement. I could see this from the scenarios I explored then and have read nothing to sway my thinking otherwise since. The 10% in cash helps dampen stock market volatility on the overall portfolio value, without sacrificing much in the way of returns. The 10% cash was a baseline, and I strategized that taking advantage of stock market downturns by investing that cash into stocks opportunistically during a market swoon would work to my benefit.

Buy the way, those conclusions were based on Social Security not being available to me during retirement. At that time, there were serious questions about the solvency of the program and being young and wanting to be conservative in my plan assumptions is why I didn’t include it. Better safe than sorry.

That was the original plan. Then life happened. Among other things, my wife and I were blessed with 2 wonderful children. Occasionally, you’ll see reports of studies about how expensive children are. Hundreds of thousands of dollars. When reading I always shake my head yes. The bottom line is that as conservative as the original plan was, it didn’t account for everything and couldn’t really have been expected to. But it did provide a framework on which to base decisions we needed to make along the way. And, it goes without saying that we wouldn’t trade our children just for more years in retirement. That was unthinkable, really, so we adjusted.

As it ended up, we retired at age 62 and Social Security is a source of income as its future became more certain (for someone my age, anyway). If your young and planning for retirement now, I’d still urge you to not include Social Security in your plan. Washington cannot be relied upon.

The real takeaway here is that you need to save as much as possible as early in life as possible and along the way. Life will happen and adjustments will need to be made. But you’ll get there.

On Roth VS Traditional

At first, a traditional IRA was the only available option (Roth’s came into being in 1998, I think). During this time, we had no kids yet. And being DINKs (Dual Income, No Kids), we could easily max out our contributions. Along the way, my company offered a 401K with a company match and we took advantage of that too.

When Roth’s became available, I did not roll anything over, ever. The hit the port would take by paying the taxes on the money on top of our earned income just didn’t seem worth it. I rationalized that during our earning years that INCOME = LIVING EXPENSE + SAVINGS. During retirement, INCOME = LIVING EXPENSES ONLY (there doesn’t need to be any savings if retired) which is necessarily a smaller amount. So, whatever the tax rates are (no control), taxes would be less in retirement than during our earning years. So, no Roth.

Besides, when the kids came our finances became much tighter. Some years, there wasn’t enough money to make contributions without the help that the tax deduction for contributions gave us. We took advantage as best we could. But there were several years that we didn’t have any savings or any contributions. Other needs were more pressing.

Looking back on this, for us, I wouldn’t change that thinking. But, for someone starting out, I would suggest including a Roth at least partially. But remember, a bird in the hand is worth 2 in the bush and you don’t get 2 in the bush with a Roth during your earning years.

Also, it is very helpful to have regular taxable savings (money not in a retirement account) too. So, you want to save more than just your retirement contributions will allow if able.

On the Safe Withdrawal Rate

I’ve read reports suggesting that anywhere between 3% and 5% may be a safe withdrawal rate. Poppycock. Who wants to be the 90-year-old that runs out of savings during retirement? No one. You won’t know that you’re withdrawing too much at 66 years. You’ll only find out when you are 90 and run out of money. At 90, it’s too late.

So, the safe withdrawal rate is equal to the income that the invested assets can earn, with no draw down of principal/capital ever. And that’s what I based our planning on. Anything more than that and you risk being that 90-year-old that runs out before the end.

It gives me great comfort to know that if unexpected expenses arise during retirement that are “budget busters” in a big way, we could fall back on liquidating some assets to cover them and not be damaged too bad. So, there’s a built-in margin of safety associated with planning to spend your income only. And I think that’s essential to have.

IMHO, inflation is the biggest risk retirees face. That is why most of a retiree’s income needs to be able to grow at least as fast as inflation. Social Security benefits are indexed to one inflation gauge but not necessarily correlated to a retiree’s expenses. Benefits may fall behind over time. A well selected group of well-established dividend growth stocks should be able to keep pace with inflation long term. Bonds will not, there coupons are fixed.

How to Know That We Could Retire

A year or two before our retirement date (I knew we were close), I built a sophisticated Excel spreadsheet that enabled me to plan our Income in retirement, expenses, taxes due each year, and the various account balances up to age 72 (10 years of retirement and the point where RMD’s begin). Variables included inflation rates, rates of return on investments, and our actual estimated Social Security benefits and other variables. I even included different inflation rates (as inputs) for expenses and healthcare and for Social Security benefits. For most scenarios I took health care expense inflation rates at about 7%, minimum. For general living expenses I explored various rates between 2% and 7%. I usually took social security benefits inflation at half what I took our general living expenses, between 1 and 3.5%.

For any given scenario I could see what our net worth would be at age 72 and every year in-between, after all expenses including taxes.

Using this spreadsheet and postulating various scenarios and seeing where we’d be at age 72 gave me confidence that we were now ready. It also enabled me to answer when best to take Social Security and it forced me to dig deep into how we would pay for healthcare before Medicare would kick in.

One other thing I learned is that it is always best to minimize taxes paid in any given year.

It is helpful to think about your assets as being in different “buckets” from which living expenses are paid for. For us, these buckets are:

  • Cash
  • Taxable Brokerage Account (fully invested in dividend paying stocks of the dividend growth variety)
  • Traditional IRA/401K Account (fully invested in dividend paying stocks of the dividend growth variety)
  • Social Security

Others might have a Roth IRA/401k or a traditional pension too. We only have the 4 listed.

That said, retirement planning boils down to choosing which bucket(s) will be tapped to cover living expenses and taxes in any given year from those sources. Each source has its own unique tax consequences that must be accounted for in the planning process.

Simply, Cash has no tax and no income consequences (unless interest rates get meaningful). Dividends from the taxable brokerage account are taxable in the year received. For the Traditional IRA there is only tax if money is withdrawn, no withdrawal, no taxes.

Healthcare between 62 and Medicare

Paying for healthcare until Medicare kicks-in is huge for us. Easily $15K per year for premiums alone for the two of us.

Obamacare does offer generous subsidies if your income is low enough including fully paying for healthcare as a possibility. Using the Obamacare website, I could estimate our out-of-pocket premium costs (after the subsidy) for various income scenarios and included that in my planning spreadsheet.

The optimum income sources for this 3-year period before Medicare kicks-in ended up being: tap Social Security fully at 62, dividends from the taxable account (taxes on them must be paid in the year received) and then make up the shortfall from cash.

Key here was realizing that I needed enough in cash to carry us through the Obamacare years to cover our net expenses after Social Security and the taxable account’s dividends. So, before we retired, we made sure there was enough in Cash to do at least that.

We got our healthcare free this year, will pay a small amount in premiums in the next 2 years (hundreds of dollars for the year). In addition, we will pay no income tax for any of those 3 years. In fact, we may not need to tap all our dividend income from the Traditional IRAs until age 72 when RMD’s begin, depending on inflation and other variables beyond our control.

On Taking Social Security

Social security benefits have some unique characteristics when it comes to income taxes. If your “combined” income is low enough, there are no taxes on the benefits. And if the “combined” income is over a certain threshold, regardless of income level, only 85% of the benefits are taxable worst case. This is important to understand when the alternative is withdrawing from a traditional IRA as everything from it is taxable income.

For our situation, my spreadsheet told me that it was best to tap social security immediately once we retired. Delaying just wasn’t worth it even though the annual payout would be roughly 8% more each year. (You can get a very good estimate for your situation on the benefits you’ll receive from the SS website). Delaying SS meant that more money needed to be withdrawn from the Traditional IRA resulting in both sources being taxed and over time, it never caught up.

I often read Fool articles that seem to suggest that the best course is to delay tapping SS as long as possible to maximize the benefit. But that’s not really the goal when someone is close to retiring. The goal is to retire and soon! Right? What this thinking doesn’t appreciate, either is the unique taxable income characteristics of SS benefits and that the choice of delaying SS would force a retiree to tap their stock holdings in a larger way, sooner, and reduce their best inflation fighting assets in the process. That was something I simply did not want to do. I wanted to retire as soon as I was financially able, and I wanted to guard against inflation eroding my purchasing power over time in the strongest way possible. That all adds up to tapping SS at retirement and preserving the equity investments for longer. And I think that’s why most people elect to take SS benefits at 62, when they retire, and that they are right to do so.

Taking Stock Market Fluctuations Out of the Equation

Since retiring, I’ve been asked on at least 2 occasions if I made a mistake or was worried because the stock market has tanked some 20 or 25% as I write this. They’ve seen the damage done to their investments and were concerned. I answered confidently that no, all is well.

Being fully invested in dividend stocks where dividends are sufficient to cover all expenses after Social Security and then some, means that for the foreseeable future there will be a portion of that dividend stream available to reinvest in even more dividend paying stocks, increasing the dividend stream going forward. So, I cheer the market going down! Because it enables me to buy the same stocks at cheaper prices and a higher current yield.

I really want the market to go down, not up. That is the beauty of being invested in dividend paying stocks and not the Go-Go growth stocks when retired. Those Go-Go growth stocks makes one fully dependent on the market to cooperate when considering sales and withdrawals. As recent history shows, the market isn’t always cooperative. Best to take market fluctuations out of the equation entirely with dividend paying stocks and having an adequate retirement plan that allows you to take advantage of market swoons.

RMD’s

Required Minimum Distributions will kick in for us when we are 72 based on the current rules. Unfortunately, that’s when the tax bill I’ve been delaying all my life will begin to catch up to me. But, still only gradually over time. My port yields 3% currently and the first years RMD is something like 4 or 4.5%. So, only 1 or 1.5% of the port will need to be liquidated. And, if all goes as planned that 1 or 1.5% would be reinvested, after taxes, back into the taxable brokerage account. It should not be detrimental to our retirement. We’ll likely die long before the account balance is reduced significantly because of RMD’s and that will pass to our children and Uncle Sam will be out the difference. I can live with that.

We Are Fortunate and Grateful

I really think we are in a very strong financial position for our retirement years, and we feel fortunate and very grateful to all that have helped us along the way. In some small way, I hope this will help you as you plan for your retirement. Why not start today? Thank you all.

Rich

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On the 3 or 4% safe spending rate, when your investments earn 8% per year and your expenses are 4% per year, your net assets increase every year. You can figure out early if you are getting behind.

In a good year you can easily do better than 8% on equities. And that can overcome some bad years. Of course those with heavy bond positions in the days of low interest rates may be challenged.

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Hi Rich.
I greatly enjoyed your retirement plan and it came me some ideas for my own. Out of curiosity, what are some if your top dividend stocks?
Thanks,
Ursula

Just a comment. As you indicated, keeping your income low from 62-65 will maximize your ACA subsidies. So I would try to avoid dividend paying stocks during that time. They are ordinary income, and could bump you out of some subsidies. You should be able to get by on the cash cushion, and maybe sell a few shares here and there. Plus you can tap into your 401K/IRA at 59.5. IMO, dividends are just another source of taxable income that will whack your ACA subsidies.

Also, if you keep your ordinary income low enough, your cap gains are tax free. (topic 409)

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Thank you so much for sharing! Really appreciate it!

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That’s super conservative to be sure. But is it reasonable that over a 30 year or some such timeline the principle doesn’t increase at all?

Hi RetiredRich62,

This totally depends on your requirement for cash.

If you do not need cash, you can transfer shares directly to your taxable account to satisfy the RMD. Use the cash to pay the tax using the brokerage withholding option. Just calculate the stock amount and cash withdrawal for tax to equal your RMD amount or higher. Best to err on the high side.

If you do a sell/buy scenario, you have to wait for settlement to transfer the cash and you may have to wait to invest the cash once it transfers.

No sale, no wait.

Info: RMD’s starting at 72 for most people is now 3.65%. It increases every year.

SS at 62

I started my SS at 62. I did it to reduce the drain on our portfolio.

My benefit reduction from 66 to 62 was 25%. From 67, I believe it is 30%.

I figured by letting the money in our portfolio grow at a rate faster than the 6-some% that my benefit would grow, we would be money ahead and it proved to be correct. Quite correct! Our current XIRR over the 17 years and 5 months we have been retired at 20.46%. So is an 8% annual increase better than a 20% increase? Not in my book.

All the articles from the financial planning experts always talk about the " substantial reductions in monthly benefits" by claiming early and about the “magic cross-over point” when you would get “more money in monthly benefits” by waiting to start benefits.

It only works if the person doesn’t retire until they start SS. It does not take into consideration if a person retires at 62 and has to support themselves fully until they start SS.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
https://community.fool.com/u/gdett2/activity (Click Expand)

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Hi Paul,

True enough. However, if you look at 10-year rolling returns, there have been periods where the returns have been negative.

But the real reason I like the income approach is for years like this one. My psychie couldn’t handle selling shares to cover expenses when the market is down 20 - 25% like it is. I want to be a buyer at these prices.

Rich

1 Like

Hi Ursula,

Here is a list of the stocks I currently own (2 are ETF’s). Some were purchased many years ago. Some are more recent. Please do your own DD.

Most
Current Recent Dividend Interest Payout
Ticker Name Yield Increase 5 Yr. CAGR Coverage Ratio
ABBV AbbVie Inc. 3.93% 8.5% 17.1% 8.3 42%
ADP Automatic Data Proc. 1.74% 11.8% 12.8% 47.1 58%
AFL AFLAC Inc. 2.68% 21.2% 13.2% 24.5 25%
AGM Federal Agricultural Mortgage Corp Class C 3.64% 8.0% 21.4% - -
AMGN Amgen Inc. 3.32% 10.2% 11.0% 7.9 41%
AVGO Broadcom 3.38% 13.9% 32.1% 7.3 47%
BK Bank of New York Mellon Corp. 3.58% 8.8% 9.0% - 33%
BLK BlackRock Inc. 3.35% 18.2% 14.3% 36.1 47%
CAG Conagra Brands, Inc. 3.91% 5.6% 9.2% 4.5 53%
CLX Clorox Company 3.58% 1.7% 7.0% 6.8 113%
CMS CMS Energy Corp. 3.14% 5.7% 6.7% 2.7 65%
DTE DTE Energy Company 3.05% 7.3% 4.7% 2.5 58%
DTM DT Midstream, Inc. 4.66% 6.7% 1.3% 3.6 82%
FAF First American Financial Corporation 4.23% 2.0% 6.5% 16.4 27%
FAST Fastenal Company 2.58% 10.7% 14.1% 140.3 66%
FNF Fidelity National Financial, Inc. 4.50% 22.2% 19.5% 23.8 23%
GD General Dynamics 2.22% 5.9% 8.4% 11.2 41%
GLW Corning Inc. 3.45% 12.5% 11.7% 7.8 46%
HPQ HP Inc. 3.73% 29.0% 13.5% 19.5 23%
ITW Illinois Tool Works 2.72% 7.4% 10.9% 18.3 58%
JNJ Johnson & Johnson 2.74% 6.6% 6.1% 197.0 43%
JPM JPMorgan Chase & Co. 3.62% 0.0% 12.3% - 33%
LMT Lockheed Martin 2.98% 7.1% 8.4% 10.6 41%
MCD McDonald’s Corp. 2.31% 7.0% 8.0% 8.7 55%
MRK Merck & Company 3.12% 6.2% 9.0% 22.5 35%
NJR New Jersey Resources 3.85% 7.6% 7.4% 4.1 70%
PAYX Paychex Inc. 2.76% 19.7% 11.4% 51.9 74%
PEP PepsiCo Inc. 2.77% 7.0% 7.4% 6.4 68%
PFE Pfizer Inc. 3.63% 2.6% 4.6% 30.7 26%
SBUX Starbucks Corp. 2.35% 8.2% 12.1% 9.9 62%
SCHD Schwab US Dividend ETF 3.65% 10.9% 12.3% - -
STT State Street Corp. 3.85% 10.5% 8.4% - 30%
TROW T. Rowe Price Group 4.30% 11.1% 16.1% - 42%
TXN Texas Instruments 2.96% 7.8% 14.9% 52.7 48%
UPS United Parcel Service Inc. 3.62% 49.0% 12.9% 19.6 40%
VFC VF Corp. 6.27% 2.0% 4.8% 12.0 66%
VYM Vanguard High Dividend Yield ETF 3.06% 2.4% 2.7% - -
WEC WEC Energy Group Inc. 3.21% 7.4% 6.9% 4.1 65%
WSO Watsco Inc. 3.21% 12.8% 15.9% 361.4 60%

Rich

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Hi syke6,

According to my baseline spreadsheet projection, our net worth will increase siginificantly over the 10 year period ending at age 72. So, yes, very conservative.

Rich

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Hi Gene,

I agree with everything you said. We are on the same wave length.

Great minds think alike! :slight_smile:

Thanks,

Rich

@RetiredRich62 - Thank you for sharing this great educational post! I’m happy to see that folks are still contributing here instead of complaining about the new boards and/or packing up and heading out of Dodge!!

One of the other elements of retirement and especially when to consider taking your SS is the length of your projected lifetime. I think this is another important consideration which I don’t believe that you mentioned in your post.

For those that are in great health and have a genetic disposition to a longer life, then delaying SS is probably a good thing to consider. Those that have a shorter projected lifespan may consider taking SS at 62 or FRA.

I was a cigarette smoker for 40 years - quit 12 years ago - but my projected lifespan is 10 years less than DW’s - I would say mostly because I smoked and she didn’t. I started my SS at 62 at the advice of our financial advisor - I’d rather start to get the money that I put in, instead of waiting and potentially dying before I am able to get all of the contributions I made to SS.

I think I’ve seen this trade-off mentioned on TMF in the past and agree that it should be a consideration as to when to take SS.

Thanks again for a great post!
'38Packard

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Might it be that your financial advisor has an interest in you NOT spending down savings from age 62 to age 70? I’m not saying that taking SS at age 62 was a wrong decision; just noting that the person on whom you relied for advice might have a conflict of interest with regard to your decision

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Hi @Daryll44,

Great observation. Our financial advisor does not manage our investments nor get commissions from any of our investments. He works on a fee only (hourly) basis so I don’t think that he has in interest in us NOT spending down our savings.

Good point though, as many financial advisors are looking to line their own pockets instead of having the fiduciary duty that they are responsible for having.

'38Packard

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Not being pedantic but clarifying for other readers (what few of us are left!), net assets will not increase every year as the 8% figure is an average and of course there will be years like this year where the market is down but over 8%.

Hawkwin
Who loves that he can now type a reply, while still scrolling down to read the rest of the posts to see if his response is redundant before submitting.

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And I love being able to edit a post. Before once you sent it, it was posted forever!

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Thank you so much Rich for sharing your stocks!

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Thanks for the post. I plan to retire from my government job at the end of the year. The pension isn’t large (I only had about 20 yrs of service with them) like some government folks although it is COLA.

What I’ve been doing is look at money each year from 60 to 70. Adding in estimates when we take social security, a couple of other non-COLA very small pensions and what money we need from savings/investments. If social security isn’t cut seriously then I think I’m ok. Right now I may work 6-12 months after retiring from the job and basically double dip while working reduced hours.

With the higher treasury and other fixed income rates I’m going to try and lock in some money for the next 5-10 years to cover the period until social security will be collected. I’m hopeful inflation will end up settling under the 4% rates you can get on fixed income easily now.

Personally I’m not sold on dividend stocks and they certainly took a huge tumble back in 2008 with not only prices tumbling but dividends either cut or completely terminated for a period of time.

I’m trying to follow my uncle’s comment about having a stream of income to cover your essentials. In my case besides the pension, it will come from treasuries, CDs, or other fixed income.

As to inflation worries, some believe you can cover that with TIPs. In theory they should match inflation and you retain your purchasing power. Personally I don’t have much money here, partly because I don’t think inflation will be a problem 5+ years down the road.

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As for me, I don’t want to be the 90-year-old who can afford a world cruise but lacks the stamina to do so.
And if I have some terrible medical condition that is limiting me, it’s already too late too.
I’m not looking for a better grade of pablum in my 90’s. Just the minimum will be all I need.

I don’t intend to have more capital at 90 than I do at 72. What’s the point other than leaving it to family members or charity?

If I don’t fly first-class, my son will. And he’s got his own lifetime to get there.

I will keep an eye on capital and make sure there’s enough for Neurospouse to continue in our current lifestyle, but we plan to take whatever we feel like from our investments when we want to do something.

However, everyone has their own threshold for safety.

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Yeah, the editor is better. But the organization of the site is a mess. It’s very difficult to find things. I am not convinced that I am seeing everything on my marked boards. In fact, I’m sure of it because I will see “new” stuff that is tagged from 3 days ago, but I didn’t see it 3 days ago.

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