Category: Retirement

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Stretching Your Income to Meet Expenses

Coin stacksIf you just retired, congratulations. You’ve received the gold watch, relished the looks of co-workers who envy your new freedom, and begun to plan that long-awaited European tour you had always hoped to take. Life is good, but you do have concerns – mainly, whether your future income can sufficiently cover your basic living expenses, plus those little extras that make retirement special.
 
Financial experts generally calculate that you need between 70% and 85% of your pre-retirement income to maintain your lifestyle. Even if you were diligent about saving during your working years, it’s likely that your investment portfolio has not yet fully recovered from the recession, and returns are still lower than you expected them to be. How do you ensure that your nest egg is big enough to meet ongoing expenses?

Significant Future Income Increases Are Unlikely

Your future income will be a combination of Social Security benefits and the systematic liquidation and withdrawal of your retirement assets over the remaining years of your life. At age 65, you can expect to live, on average, another 19.1 years, according to the Centers for Disease Control and Prevention (CDC). If you are genetically gifted, however, you may live to 100 or longer – the number of centenarians in the U.S. rose to 53,345 in 2010, a 65.8% increase from 1980.
 
Your initial retirement calculations were probably based upon an annual withdrawal rate of 4% of asset value, a figure most financial planners had generally agreed would provide a stable income for 30 years. Nowadays, however, that percentage is considered by some to be too liberal. Recent studies have suggested that in the current economic environment, withdrawing income at a 4% rate could increase the risk of depleting your assets during your lifetime. Since the level of your future income is uncertain and may be lower than originally anticipated, it would be prudent to reduce your living expenses where possible so that less income is needed to provide the same quality retirement for your remaining years, however long that may be.
 
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Four Investment Principles for Retirement Savings

retirement11While there are a variety of investment options available to everyone, an astute investor must practice good fundamentals to control risks and optimize potential returns, including taking the time to be informed. As stated by Peter Lynch, renowned manager of the Fidelity Magellan Fund from 1977 to 1990 who beat the S&P 500 index 11 of 13 years, “Investing without research is like playing stud poker without looking at the cards.”
 
As you build your portfolio for retirement, it is crucial to keep several principles in mind:

1. Manage Your Risks

Warren Buffett, the “Sage of Omaha” often credited as the “Greatest Investor of All Time,” supposedly had two rules: “Rule number one: Never lose money. Rule number two: Never forget rule number one.”
 
It has been generally accepted that investments with higher returns generally involve the assumption of greater risk. Logically, you want to balance risk and reward. Unless you are a diehard gambler, you probably do not want a portfolio that is all or nothing (all assets in the high-risk, high-reward category) or, even worse, assets that have high risk, but low potential reward.
 
Fortunately, stock market analysts and theorists have conducted numerous studies to better understand the correlation between risk and reward in attempts to minimize risks and maximize returns within portfolios. As you select your investments, be aware of the beta and R-squared values, two measures that compare the investment to a commonly accepted market index (T-bills for bonds; S&P 500 for equities) and can help you better balance risk.
 
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My interview with Savvy Investor James Molet

Rendezvous With RetirementA friend of mine and fellow financial blogger,James Molet, recently interviewed me for his blog RetirementSavvy. James provides good information and advice over his blog. He is also the author of Rendezvous With Retirement. Here is a portion of the Interview:
 

What was the catalyst that started you on the road to fiscal fitness?

As the beneficiary of an industrial engineering degree and a unique 2-year training program on Wall Street, I was able to grasp the importance of financial matters early in my career. By age 35, I had founded several publicly traded companies, primarily in the oil & gas industry, providing me with a high 6-figure income and a net worth in excess of $10 million. In the oil bust of the early 1980s, I lost everything, declaring personal bankruptcy as a consequence.
 
Realizing that the acquisition (or loss) of wealth was a consequence of luck as well as effort and intelligence, I determined that knowing when to sell was just as important as the decision to buy, especially if you dealt in volatile investments. As Kenny Rogers sang in his song The Gambler, “You got to know when to hold ‘em and know when to fold ‘em.”
 
Those experiences forced me to examine my investment practices and realize that there are no guarantees in life or investments. It is, as Warren Buffett famously claims, the first Rule of Investing: Don’t Lose Money. Today, I always analyze the downside possibilities before I consider an investment.
 

What is the one personal finance concept you believe someone seeking financial freedom should understand and practice?

While a cliché, every investor should realize that the path to financial freedom is a marathon, not a sprint. Chasing immediate rewards requires assuming inordinate risks and increases the possibility and probability of loss. Wealth is built by the constant application of tested financial principles: consistent savings, diversification, tax minimization, and expense control.
 
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Too Much Stuff – 6 Tips to a Happier, Sustainable Life

electronic-waste1Malcolm Forbes is credited with the phrase, “He who has the most toys wins the game.” According to a People magazine article written at the time of his death, his hobbies included the acquisition of wealth and “flaunting what it could buy.”
 
His memorial service featured displays of his vast collection of art, including antique model boats, toy soldiers, and manuscripts. Forbes owned eight homes around the world including a private island, 2,200 paintings, a 151-foot yacht, and a Boeing 727. He also owned more Russian Imperial Faberge eggs than the Russian government. Since his death, Mr. Forbes’ philosophy has been attacked by both preachers and pundits, some of whom cited the Bible’s question: “What good will it be for a man if he gains the whole world, yet forfeits his soul?”

The Impact of Accumulating Stuff

Ironically, studies suggest that the pursuit of material possession makes us happier than its actual acquisition. Dr. Marsha L. Richins, a professor of marketing at the University of Missouri, says that materialistic consumers derive more pleasure from desiring products than from actually owning them. In his book “Stumbling on Happiness,” psychologist Daniel Gilbert says that satisfaction and joy from owning an object quickly wanes, an effect psychologists call habituation and economists call “declining marginal utility.”

Materialism – Socially Destructive and Self-Destructive

A series of studies published in the journal Motivation and Emotion in July 2013 indicates that as people acquire more, their sense of well-being diminishes. As they acquire less, it rises. Another study published in the December 2013 issue of the Journal of Consumer Research states that materialism fosters social isolation, and vice versa. The relationship creates a vicious cycle – the more lonely you feel, the more likely you are to seek possessions, even as a greater amount of possessions crowds out your relationships.
 
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