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June 11, 2014


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It looks like a good start in getting you thinking on how to SPEND your retirement. What I mean by that is properly withdraw money you have saved. I would look for the best way to minimize taxes.

FMF how are you going to handle RMD on money saved in 401k or other tax deferred investments as you stated in #7 in "Nope, Not going to draw down"?

Matt --

I will have to draw money out of retirement accounts, of course, no choice there. What I meant was that I'm not planning on spending the principal (not going to draw it down). I'll simply move the money from an IRA to a taxable account and put it to work generating income.

Hope this is clearer than I was originally. :)

Thanx for the clarification. I just was not sure if you knew something that you could do to avoid that.

My father has had to take RMD for the past 16 years and he has just rolled it over to a CD. He does not need the money either.

1) I retired in September 1992 and by year end by year end had moved my 401K from Lockheed into an IRA at Fidelity.

2) I also consolodiated several other investment accounts to Fidelity so that everything was under one roof.

3) I started with 3 accounts, my IRA, my wife's IRA, and a Joint Trust account. We used an attorney to set up our will and trust account and designate our beneficiaries, which are our 3 children, selecting one of them to be our executor.

We each retired with a pension. I was 58, my wife was 59. We were debt free, owned our home, a beachfront condo, with investments totalling $320K.

We also decided to each take Social Security at age 62 and consolidated accounts at various banks into each opening savings and checking accounts at the Lockheed Credit Union.

By then I was also active in the stockmarket and taking the Wall St. Journal and Investor's Business Daily. That's when I came across an intriguing article from a company that marketed a charting and analysis program along with a very comprehensive database of mutual funds that they kept up-to-date with dividend adjusted data. What intrigued me was the ability to make informed choices of mutual funds and also the ability to decide when it was a good idea to trade one fund for another using various techniques that they made available.

The Internet made its debut just as I was retiring and the amount of shares trading every day was miniscule compared with today. Thus with the charting & analysis software I was using I had a big advantage over most investors. Our 320K started growing fast, partly because the internet was having a huge effect upon a lot of companies. By the end of 1997 our portfolio was over $1M, by the end of 1999 it was over $2M and by the time the Internet Bubble had burst in March 2000 it was over $3M.

These days, at 79, I am in the slow lane and only interested in bonds and the bi-annual interest payments they provide. Our travelling days stopped in 2010 due to my wife's ambulatory problems and we now enjoy a quiet stress free life at home.

Curious, FMF, are you going to sell your investment real estate when you retire? I'd think that being a halfway decent landlord would be increasingly burdensome as you get older and creakier.

3. Consolidate income in a single account. (?) Most lawyers will tell you to separate Social Security income in a different account from other income. This protects it from creditors (except for the US Government) or others who mistakenly try to attach or freeze your assets. Certain forms of identity theft might put you in this situation and protecting your Social Security may keep you fed for awhile.

Sarah --

Nope. That's going to be a big source of my retirement income.

I use a management company, so I don't have most of the headaches other owners have.

Old Limey, since you are going to leave a nice estate, don't you feeel prudent - and to reduce asset class risk, to have 15-40% of your portfolio is equities?


I moved completely into bonds for two reasons.

1) Our income from bonds is now 5.4 times the income we had when we retired, and growing each year as we reinvest most of our investment income.

2) I found market volatility to be far too stressful, and since the income we get from bonds is so much greater than what we need it didn't make any sense to go into stocks in an attempt to make even more money. I also manage our children's money and they are already quite wealthy and will eventually be even more so when they inherit our investment portfolio as well as our real estate.

3) The two mantras that have guided me well for the last 21 years are:
..... a) Understand the power of compounding.
..... b) Don't lose money.

Compounding - A 10% loss on our portfolio today would amount to 24 times what it would have amounted to when we retired.

Understood Old Limey, and I won't argue with "sllep factors" of volitility..but, managing my own portfolio, and my parents, I'll never move COMPLETELY out of equities, mainly to diversify to the extreme. I, though much younger, am retired to and don't "need" any more growth but, I still maintain a 25-33% equity exposure for future growth, an inflation hedge, as well as "participation" in an asset class that always shows growth in 15~ years or longer. And, we learned a lot by living thru the bubble burst as well as the severe downturn of 2008-10....thanx! :)

One reason why I don't want to invest in equities is that I don't want Capital Gains because they would just increase our income taxes even more. I already have all the taxable income I need due to the large MRD withdrawals that we have to make each year.

When you get to our age, 79 and 81 respectively, your priorities become very different from people of our children's age. We like peace and quiet, enjoying our home and beautiful garden, and don't stray far from it these days other than the occasional healthcare appointment or a trip to COSTCO or a supermarket. Even though I check our accounts every day, money has lost all relevance in our life - it's just a "number" that I keep track of. I'll sign off now, it's time to go out and feed the many goldfinches that live in our garden.

I understand OLD LIMEY'S thought process. If you generate more than enough income with your assets--- and have no need for more-- why put it at risk? Risk is for those who must endure it as they hope to reach higher plateaus.

Once you finish the accumulation phase and begin living off your investments-- the math, the goals and the risks are different.

I have always looked at it as if my money has a job to do. While young it is all about accumulation and managing the risks of volatility associated with same. When you reach financial independence and/or you retire and start to use your savings to live on--- new risks like longevity risk, tax management, sequence risk and inflation etc... come into play.

At that point--the right question becomes how to obtain and maintain a sustainable cashflow/income amount. The wrong question in my humble opinion is "how much is enough"?

While I agree with FMF that it would be a dream come true to simply live off the income and never touch principal, that is not realistic for most folks. But I would love to join the ranks if possible.

Lets see-- If I want to spend $50K per year and if I can get 5% on my money guaranteed (not feasible right now...) I will "only" need to have $1 Million. They say $1 Million is not what it used to be--- but its still an awful lot of money-- and a number most folks will never see on their bank statement.

Check out this link on the subject by one of the best financial blogs I know of:

You have it exactly right and explained it perfectly.

When I make the MRD withdrawals every December from our two IRA accounts I have Fidelity withold our estimated State & Federal taxes. The balance then goes into our Trust account to be invested by buying more municipal bonds. We actually live comfortably off the monthly pension and social security deposits into our Credit Union.

The net result is that our trust account continues to grow as a result of the MRD additions as well as the reinvestment of all the bond interest received. With no debts to service we will still be adding to our investments right to the very end rather than burning through them as many people are forced to do.

Unfortunately a great many companies, including the one I used to work for, no longer provide pensions to their retirees.

Hi Old Limey

I am glad it all made sense to you.

Retirement risk has shifted. The burden is now squarely on the shoulders of the retiree. This is a huge change IMO and it has dramatically altered the retirement landscape.

It used to be that employers/companies had the burden of providing pensions and lifetime income to their employees. Often these benefits included company guaranteed inflation adjustments and covered retirees medical as well. Amazingly, the amount was not based on how much the company had been able to set aside or how the employer pension investments had performed-- but was based upon a percentage of the employees salary. So grandpa was entitled to receive maybe 75% of his last years salary, with inflation bumps annually for the rest of his life. These were called Defined BENEFIT plans ( because they are based upon the benefit retirees received and not the amount contributed by the employee or employer)

On top of that-- social security kicked in at age 65 (62 if you took it early) and added to the retirees guaranteed lifetime income ( also with inflationary increases)

If the retiree was not able to sock a bit of savings aside as well---- things were still ok for retirees.

Fast forward to today:

* No pensions are typically available

* any pension that is still available has most likely been changed to a defined CONTRIBUTION plan-- so that the benefit is no longer a percentage of your salary but based solely on what is in the account on the day you retire (subject to the whims of the market and the investing prowess of whoever picks the investments)

*social security is in trouble financially and it looks likely that the age for benefits will be increased, the amount of contributions required from employees will be increased, and possibly means based testing ( like with medicare) to determine who might be ineligible.

* Despite the shift of the burden to the retiree--The savings rate for USA is dismal and most folks do not have anywhere near enough savings to take care of themselves as they age.

SO pensions are mostly gone ( and if around, no longer guaranteed and do NOT cover medical). Not a good change. Social security has been mismanaged and going forward the benefits received will be reduced ( most likely), the age of eligibility will continue to rise, and the costs out of our paychecks ( the tax) will also be increased ( most likely) --all to shore up the program.

My question: Companies that used to professionally handle the pension investments ultimately could not handle the burden. Many accounts were/ are underfunded and many went bust or bankrupt the companies--- so how is the individual retiree/ employee supposed to do better?

No Pensions + no more paid medical coverage + reduced social security + skyrocketing medical costs + dismal savings = a very big problem for the USA.

JNEW, just some points on pensions to make clear they weren't the panacea in the past folks may think they were.

1. Historically not all companies provided pensions. If I recall correctly only some 50% of people were ever in jobs covered by pensions as a historical maximum.

2. The majority of pensions people receive today are not huge amounts. I saw a recent article that stated for "affluent" 60-79 year olds (based on retirement account balances) the median pension was $20K.

3. Most pensions required a definitive amount from the employee, typically something like 7-10% of salary. To put it in perspective, consider that 7-10% plus a 3-5% employer match into a 401K for 30+ years and what that could net them.

4. The "75% of grandpa's final salary" you mentioned would have usually meant 40-42 years with the same employer! Just because someone is "eligible" to retire doesn't mean it nets them the maximum pension benefit. Typically the 30 year eligible means no deduction and 50-55% of the average of your high three salaires with each year adding some pension percentage of 1-3% to some max (e.g. 80%).

5. Many of the older (and some today) pay systems that included pensions of the type that would pay 50-80% of salary did not deduct for Social Security, i.e. you don't get SS, ever. If you do work pre or post retirement and get SS credits and try to collect SS, it most often reduces the pension amount and it creates a wash or incrimental increase so SS isn't a real benefit. (yes I know there are exceptions for certain jobs and there are people who game(d) the system, but the large majority of folks just get their pension and those that work do so for extra income, not SS credits or future income).

Don't get me wrong, in the end the pensions for most employees was a good deal and for some it was a great deal. But because it was a good deal for employees I have to take your statement of "Companies that used to professionally handle the pension investments ultimately could not handle the burden." with a large grain of salt. They could handle it IMHO, it just became more cost effective to shift both the risk and the management cost to the employee. The 401K creation was always more for the company's benefit than the employees, or they never would have implemented it so universally. I never recall employees or unions demanding it in lieu of a pension system.


We are on the same page. When I said "they couldn't handle it" --I really meant that it was a burden and an expense they did not want to handle for the most part. In some cases, however, the pensions have become underfunded, mismanaged etc... and are hurting the bottom line of the company. That is what put Detroit into bankruptcy if I am remembering correctly.

And as you said-- the change to 401k's was always about shifting the risk away from the company and onto the individual.

Thanks for chiming in.

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