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June 5, 2017
You get the best retirement advice from retirees who really know something! Retirement advice and how it is implemented can have a profound impact on your retirement lifestyle and the estate you might leave behind.
Here Henry K. “Bud” Hebeler outlines concepts that helped him not only achieve a secure retirement but also be better off than when he first retired. Get more from Bud at Analyze Now. The following is advice straight from Bud.
Like, many older people, I am spending some time working on revising our wills. Many find that what they thought would be left to heirs has been depleted and now they are financially distressed. A smaller number find that they have more than projected in plans made much earlier. We are one of the latter.
Looking back, it’s hard to believe that over these 27 years of retirement we’ve given away more than the savings we started with in retirement, bought all of our high cost goods with savings, and still have more than twice as much left.
Einstein was right: One of the great miracles is the power of compounding from saving. But we also have been really lucky to have done the right things at the right times, both during most of our working and retirement years.
Here is some of my retirement advice — 8 things we did right.
Being brought up in the Great Depression followed by the war years where national savings rates were almost five times current levels taught us to live below our means — something that seems to have escaped many today. Younger generations are truly living beyond their means by relying on debt to finance almost everything they buy in hopes that future wages will be able to cover the debt costs.
I give large credit to the professional retirement advice I had when still working with regard to investments, specifically to buy low-cost index stock funds and actual bonds, not bond funds, for our fixed-income allocations — and make a financial plan to determine how much we should save.
One of the odd things I did that was consistent with the professional retirement advice, but not specifically recommended, was to buy savings bonds for much of the bond portion. Back then, savings bonds were paying around 2% to 3% coupon plus whatever was the annual inflation rate. And unlike other bonds, they benefited from both deferred taxes and inflation adjustments.
After I converted my company’s 401(k) to a Roth IRA, I bought laddered Treasury Inflation-Protected (TIPS) bonds so that our bonds would not have any tax, and the laddering was such that a bond matured every year of our retirement, as do our savings bonds.
I chose to modify the common stock allocation rule when I was young. Years ago, it was common to use a formula of 100 minus your age as the recommended percentage to hold in equities (stock and investment real estate). It was recommended that the rest be in fixed-income (bonds, CDs and money markets).
I chose to modify the common stock allocation rule when I was young. Instead, I used a target allocation percentage each year for our stock fund allocation of 105, not the then traditional 100, less my wife’s age because she is younger. In the year when she was 40, our stock allocation target was 65% while at 70 was 35%.
I also decided not do any reallocation unless the allocation got more than 5% off target. This really helped in the stock boom years and did not hurt me badly when prices fell. Another plus was that I only had to rebalance about every other year. I spend very little time working with investments.
Now that we are in our 80s, our allocation rule has changed to a constant target of 30% plus or minus 5%.
We still need to be conservative because my wife could live 20 more years considering that she is in good health and has long-lived ancestors. Further, either of us could face expensive long-term-care. I’m not optimistic about the economic future the U.S. faces considering the exponential growth of government debt exacerbated by the aging of our population with proportionately fewer workers to pay the growing health care costs of the elderly on welfare.
Although the majority of our fixed-income has inflation-adjustments, I still expect that in the long run, stocks should produce better returns than bonds in an inflationary environment, and although dividends will be subject to ordinary income tax rates for the funds in taxable accounts, the growth will benefit from lower capital gains rates. Better yet, on death their cost basis will be marked up to the values at death so there will be no capital gains tax.
At the same time our investments were growing due to compounding and lower tax rates, inflation was compounding too, so our investments are worth only half as much now as they were in the year I retired if measured in dollar values at retirement.
Mom and Pop retirement planning over the kitchen table often fails to recognize that inflation compounds and severely restricts spending capability when you’re in your golden years — a time when dental and medical bills grow much larger.
I strongly urge people to do serious retirement financial planning with conservative inputs. The future will not turn out the way we may expect because we don’t know how long we will live much less what the rates will be for taxes, returns and inflation, but the ability to be financially stress free in retirement may turn out one of the biggest blessings you can have.
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