Free Ebook.


Enter your email address:

Delivered by FeedBurner

« Top Five Ways Stars Lose All Their Money | Main | Size: The Second Factor of Investing »

April 18, 2012

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Social security is not going away, it will still be there when you retire. Yes there will need to be some combination of decreased benefits or increasing the tax or income level cap.

I also plan like I will be getting nothing, mainly because I want to be financially independent well before I would be eligible for SS, and plan to treat whatever I get as a bonus, but to act like it will just vanish is illogical.

I misread part of your post and re-read mine, and yes, I agree who knows what will happen to the "rich", or as I prefer to call, the "responsible", as we just chose to save part of our incomes over our lives rather than spending everything and then some. Hopefully they don't punish us too much for that and sorry if I my post came across as more critical/harsh than I intended.

Our annual income breakdown is:
Investments ---- 82.5%
Pensions ------- 10.5%
Social Security - 7.0%

Observations I have noticed comparing myself with Hi-Tech wage earners I know that are 25 years my junior is this.

1) They now totally spoil their children, sending them away from home to expensive private schools, buy them cars, don't expect them to work while in college, and fly them back home several times/year.

2) My home was built in 1972 and we love it but it doesn't compare with the recently built homes in prestigious neighborhoods that require much longer commutes to work. We raised three kids in a 2400 sf 4br,3ba home, now the people I know with similar jobs have far greater expectations and they don't seem to have long range plans. I call them the "Want It All Now" generation. Their homes are typically 4500 sf, 5br,5ba with home entertainment centers.

Unfortunately for them the real estate bubble burst, we are still in the greatest recession ever, unemployment is still very high, lots of highly paid professionals have lost their jobs, and homes in the $2M range are almost impossible to unload and still dropping.

Old Limey - have you effectively 'pensionized' any of your investments? (e.g. immediate lifetime annuity, etc.) given how little of your income % is in pensions/ss.

70% of my parents income is from s.s./pensions, so that makes the ups and downs of their stock/bond investments easy for them to stomach.

Just curious as I always appreciate your insight and it seems to fit in the topic here.

@Steve,

I doubt he has and why would he need to? Annuities are important if you think you might outlive your assets so you guarantee you will get income as long as you live. Limey has no chance of outliving his stash so there is no reason for him to annuitize it.

Like Old Limey, I'm so happy that I didn't sink all my $ into a McMansion! I just have a paid-for, reasonably priced middle class home that should be fairly easy to sell--in fact, the house across the street sold for a good price to someone who moved in last month.

I used to really want to live in a big fancy house, but after a couple decades of homeownership, and after seeing how my kids will only be at home for another few years or so, I've realized that houses are a lot of work and I won't need all that space in the future. I'm looking at luxury townhome developments--less space but more amenities and no being tied down by yardwork.

I don't want to speak for limey but this is my opinion / perception :

My understanding is that Limey's assets are pretty large (multi-million) so his investment income is likely >$100k level. He probably doesn't really need to worry about the upds/downs of the market too much. Plus at this point I believe he's said his investments are 100% in safer fixed income asssets like bonds and CDs so he's got fairly stable and relatively low volatile investments. I also bet that he and his wife could probably live OK on just the SS & pension.
Its not that Limeys pension & SS are low, but that his investments are quite high. In his case buying an annuity isn't really necessary.

I'm betting Limey's income is more like $150k investments & $30k for SS&pension. (or more).
If on the other hand he had just a $300 SS check, $400 pension and a $3500 IRA withdrawal as his monthly income then it might make more sense to convert a chunk of the IRA money to an annuity.

To my understanding, 401(k) is a form of pension. The different between 401(k) or "pensions" you refer to is that 401(k) is defined contribution- employers set how much money money they put in, and "pension" is defined benefit- employers set how much money we will receive.
So most likely, you have a pension, just you don't feel like it.

Nicole, Yes 401k are technically a 'pension'.

But when most people say 'pension' colloquially they mean the traditional defined benefit version of a pension.

@Nicole,

There are two differences between a pension and a 401-k. You touched on one which was defined benefit versus defined contribution. But pensions offer a payment for life (unless you take a lump sum distribution if that is offered). That is the annuity part which a 401-k does not have. If you draw the 401-k down faster than the gains it will eventually run out. A pension or annuity will never run out.

Jim – I remember a comment a few months back where Old Limey mentioned him investment income was about 340K a year actually. He has also mentioned several times that nearly all his investments are in municipal bonds – he transitioned his equity positions to municipal bonds several years ago as the need for appreciation of his investment capital decreased and the need for capital preservation was his primary goal. I also believe he mentioned that he and his wife life off their SS and pension checks (they both have pensions) – they essentially reinvest the entire investment income (again >340K) each year (minus required distributions).

I understand your definition of "pension", and the reason I bring it up is that I am not sure where you categorize 401(k). To me, 401(k) is more like a pension than an asset. It is a fixed amount of money you receive from (former) employers for your retirement. I seek the different between 401(k) and other assets:bonds, treasury notes, IRAs, certificates of deposit, and interest-bearing savings and checking accounts is that your employer(s) is/are involved. It is interesting that we categorize differently, so I decide to write down that we can have better understanding.

Nicole, I classify a 401k as a retirement account.

Its not like a pile of stock exactly due to rules and tax implication and its not like a traditional pension either. 401k's are tax deferred retirement savings accounts. Other assets held outside retirement accounts are taxed differently.
When you pull money from a 401k you owe income taxes on all of it. When you sell bonds / stock you only owe capital gains on the increase. For CDs or savings you only owe taxes on the interest income.
401k's however are like stocks or bonds since you own an asset within the 401k which is subject to gains and losses. Plus when you die the money persists.
Whereas with a pension its a fixed guaranteed payment and you owe no asset in your name. But when you die the pension is gone with no leftover money.

Nate, seems your memory is better on the specifics. I knew Limey's $$ numbers were high, but I didn't remember the details.

I will never be in Old Limey's class of retirement but then again I don't live in expensive California either. I admire greatly what he has accomplished.

I am taking early retirement in 9 days at 59 years old. My wife already draws a very nice federal pension and carries inexpensive federal health insurance for both of us. I will draw minimum SS in 2 1/2 yrs. On top of that, annually we will need only 2% draw (3% if taking big trip) from low-risk investments that should earn 4 - 6%. Inflation is the HUGE X factor so have to stay very conservative with draw-downs but we should be OK.

Thanks Apex for the "Limey has no chance of outliving his stash", I dont think I realized his income outpaced his expenses by so much he could live off of just the ss and pensions. Its hard for me to conceive of being in that good a shape ;-) .....

I have built my plan with several arms that could each individually cover my retirement needs. This gives me comfort that if one of the arms falls short, the other arms cover the needs. Excess funds at retirement will just towards charitable giving. Here is an overview:

Social Security - Like FMF, I am not factoring Social Security into my retirement as I expect it to be cut back.

Pension - I am fortunate to have a very good pension. The current projections have it covering more than my expected retirement expenses. In addition, I will have retirement health benefits that helps to cover what would be a potentially difficult expense to project.

Mutual fund investments - I have a 70/30 mix of stock and bonds that is invested in Index funds. The bonds and some of the stock allocation is in my 401k and the remainder is in my taxable accounts. When calculating the eventual retirement balance and then factoring a 3 to 4% withdrawal rate at retirement, these funds will provide a similar income to the projected pension income.

Income generation investments - I am building a portfolio of dividend stocks that will also provide an income stream. The goal is like the other categories in what I look for the income to cover retirement expenses on its own. I am looking at other options as well, such as real estate investments and investments in a few small businesses.

A standing joke with a friend at work who's wife is also a teacher was we were going to intoduce our wives to each other as "Holly I would like you to me my pension, I mean my wife who is also a teacher".

The tradional pension is dieing a slow death.

I am not sure why this is even on the list.

Interesting post and lively discussion! My retirement savings is currently in a 401k. I plan to grow it aggressively in the next few years as I feel that I am behind for my age.

Nate has it right on my investments, both in the size and in the type. They are all in CDs, and Municipal and Corporate bonds which will be held to maturity. I had a pleasant surprise about a week ago, I found out that the State of California doesn't tax the interest paid on municipal bonds issued by Puerto Rico so I just filed an amended return for 2011 to get about $2,200 back in state taxes I had already paid.
In order to take care of my annual IRA distributions I do accumulate some of the interest I receive into a bond mutual fund so that in December I can sell what I need to pay the MRDs and also take care of Federal and State tax witholdings.

One of the major problems that has affected people that are still quite a way from retirement has been the Lost Decade (actually 11 years and 4 months). For comparison purposes I am using Vanguard's S&P500 fund (VFINX) because it includes dividends.

VFINX from 2/11/1999 to 07/01/2010 the total gain was -0.66%, the APR was -0.06%.
My portfolio for this period the total gain was +301.35%, the APR was +13.01%.

I don't consider my performance to be luck. I was using analytical methods to move in and out of different actively managed funds most of that period and didn't move into bond investments until late in 2007. Part of my reason at the time was the running daily summations of (New Highs-New Lows) and (Advancing Volume-Declining Volume) for both the NYSE and the NASDAQ were showing a clear and ominous descending pattern of lower highs and lower lows for all four parameters. This was later proven right by what happened in 2008 and the first 2 months of 2009.

My comparison with VFINX is to show the big difference between active fund selection and passive Buy & Hold of a popular index fund used by many. Many people believe active fund selection doesn't work but it has worked very well for me since retiring in September 1992. However it's not for everyone, it requires the use of a proprietary database of funds, ranking and analysis software linked to the database, the knowledge of how to use them, and daily attention to the market and your portfolio.

Old Limey, so the Cliff's Notes version: is this a time where one should be outta the S&P 500?

For us, retirement is a little less than 20 years away, if we retire at 55. That's when my wife will be eligible to retire from her career in education and start drawing her state pension.

1. Social Security - Like so many others, we're not factoring that in. Whatever we get (if anything) will be extra.

2. My wife's pension - This should be more than enough to cover our retirement expenses all on its own.

3. Assets - I have a small 403(b), my wife has a larger one, we both have Roth IRAs that we fully fund every year, plus some investments in normal/non-retirement accounts. In the past few years we've started investing in real estate, renting out a couple of houses and a couple of apartments. We figure we'll have these paid off by the time we retire, at which time they'll be a nice additional stream of income, even if we starting paying someone else to manage them. We'll probably end up acquiring more along the way. And in the end, we can pass along the rental properties and Roth IRAs to kids, grandkids, etc, pretty easily.

4. I'm sure we'll both keep working at something or other, but it might not be the kind of work that includes paychecks. We'll see.

All told, we should be fine, so long as there are no major medical issues between now and then.

@Mark
The four indicators I look at for the NYSE and the Nasdaq look OK at this time.

Thanks Old Limey. Never convinced that a purely "buy-n-hold" technique is best; I am definitely not a market timer either, but wish I was better.

The comments to this entry are closed.

Start a Blog


Disclaimer


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.

Stats