Pondering Money

Worried About Retirement

Rick Francis — Fri, 11 May 2012 15:50:32 +0000

On the Simple Dollar a reader Jim posted the following question:

“

I am 62 years old looking at retiring at 85 based on my status and what others say you need. Scared to death and running out of time. I am a teacher(11 years) as is my wife. I have a little savings less than 50K in IRA’s, myself a pension from the school system and penitence from a former employer, wife has a 401 with the private company she works for. Money is tight, we live check to check. Seems like we spend our money trying to still raise our children and not any additional money for savings let alone gas for our vehicles. 150 year old house we live requires maint Lawyers for a custody battle of grandson and bills from our son as he had a bad accident and getting himself established. We need to buy another car soon for my wife as hers has like 200K miles on it.

I didn’t plan earlier and I don’t really have a clear plan now. Late 30′s I had a little money, and some starting about 11 years ago. I was busy chasing carrots and didn’t catch any. I am thinking I will need to work past 66 a few years and file for SS to try help save a little more. Thinking I need to find a business but really fishing for ideas. I have some trade skills as a hearing aid specialist that could lead to some employment on the side. I am hoping to sell this house in about 7-10 years for bit of profit and downsize. We are tied to this area for awhile until our grandson gets older(15 more years)

I really go from positive to negative about my situation. I feel grateful for what I do have and where I am, but feel so frustrated that I didn’t do things different with regard to my career decisions but can’t go back so I have to work with where I am and what I have.”

I responded to his post but got stuck in moderation (seemingly forever), so I’m reposting my suggestion here:

Jim,

You can’t change the past, but you can change what you do from today forward.

>I didn’t plan earlier and I don’t really have a clear plan now.

You can change that by making a plan today. Here is what I would do – evaluate the situation realistically. It may be scary but facing reality today will be easier than putting it off longer. You mention a pension and some savings- that is at least a start. I would calculate what I would have to live on retiring at different ages.

The social security website http://www.ssa.gov/estimator/ estimates your SS payments and should be fairly accurate given your age. Call the manager for your pension and find out concrete benefit information. Total up your current savings- project your total savings using how much you are currently contributing. Get some quotes on how much income you could get from a single premium immediate annuity with that savings starting at different ages. This wouldn’t be a perfect calculation of your income at retirement but it should be a good first pass. If that number is bleak you have a few options- reduce expenses so that the amount is workable, save more to bring the income up, or work longer. Most likely some combination of all three will be your best answer.

>Seems like we spend our money trying to still raise our children

Maybe that is the key of your problem, how much of a difference would that money make to your retirement? Your children and grandchildren will eventually have to fend for themselves as you won’t be around forever. It sounds like you are giving to them at the expense of your retirement savings. Wouldn’t it be better for them to start taking care of their own finances sooner rather than later? Wouldn’t it also be better for them if you ease them into independence by decreasing the amount you give them over the next year instead of an abrupt adjustment when you are no longer able to help them out? Talk to your kids and tell them about your fears for your future, I suspect they will be willing to pull more of their own weight after they are aware of your situation.

-Rick Francis

What Will the Future You Think of Your Actions?

Rick Francis — Mon, 07 May 2012 14:27:47 +0000

Imagine yourself in twenty years, an older wiser self examining your retirement savings. Are you joyful or fearful? Are you praising your planning and forethought, or cursing your inaction?

There is a Chinese proverb that states “The best time to plant a tree was 20 years ago. The next best time is now.” This proverb also applies to saving for retirement, and the actions you take today will determine how your future self lives. If you haven’t been saving for your retirement sign up for a 401K plan and get payroll withholding or open up an IRA account and automatic transfer money to it each time you get paid. If money is very tight start with just a few percent- that is much better than nothing, but start today!

If you were saving, but are worried you aren’t saving enough- try increasing your savings 5%. It really shouldn’t make a noticeable difference in your quality of life now, but won’t your future self be much happier? The next time you get a raise or bonus- put some of it into savings immediately. A few percent more each year can quickly build up your savings. Before you know it that twenty years will have passed, and you can look back on today with pride.

Bad Title but Great Idea

Rick Francis — Thu, 03 May 2012 18:13:07 +0000

I recently read this blog post on bargaineering.com: How to Prepare for the Death of Your Spouse. The title was misleading- it is really about organizing financial information so that the surviving spouse has an idea how to handle the financial obligations of the other spouse. Preparing a good overview for your spouse is a very loving thing do to- and will make a difficult time much better for them.

Is it Harder in America Today?

Rick Francis — Fri, 20 Apr 2012 21:09:11 +0000

A frequent commenter on FMF Old Limey wrote a the following comment on a reader profile of a young engineer PD where he commented how it seemed life is harder for a young engineer today then in was in the 60es. There was one paragraph that really struck me:

>It seems to me that my journey from being a young engineer, first to retirement, and now after 20 years of retirement has been a lot smoother and easier that comparable couples in current times.

>I thought that in America life kept getting better every year but lately that doesn’t seem to be holding true. What’s happened?

I think you are correct that the path isn’t as smooth today. There are some concrete reasons- the cost of higher education has been growing at far beyond inflation for many years. I found the following graph that shows that the cost of college education grew at 2.5X the inflation rate. I suspect PD would not have any student loans if his college costs were 50% lower.

Today he is competing with engineers from all over the world- both those that come to the US with a work visa and those companies may outsource to thus depressing his wages. I haven’t been able to find statistics on engineering salries between the sixties and today but my impression is that it isn’t readically different once you account for inflation.

Additionally our expectations have risen- according to this NPR article that “small” house PD is living in would have been considered normal size for a family with a few kids in the 60es as the average home size has more than doubled since the 1950s.

>I thought that in America life kept getting better every year but lately that doesn’t seem to be holding true. What’s happened?

I think things are getting better, but not for everyone. If you own a company the relatively lower wages and increased more competition for jobs is a great benefit. Companies don’t have to take the risk of provide a pension- they let the employee take the responsibility and risks with their 401K plan. With the advances in technology companies don’t need as many employees to do the same amount of work and can be more profitable. If these trends continue – it won’t make economic sense for people to be employees even for previously “good” jobs like engineers.

-Rick Francis

What Would I Do If my Home Was Underwater?

Rick Francis — Thu, 19 Apr 2012 20:26:21 +0000

There are still millions of homeowners with underwater mortgages due to the housing bubble, I am thankfully not in this situation but I recently heard from a friend that is and I got to thinking about what would it mean for me and what could I do about it if my home was underwater?

What are the implications of being underwater:

#1 My housing costs would be higher because of when I bought the house. If I had bought more home than I could afford I would be in danger of losing the home. The extra cost would make it harder to achieve other financial goals like retirement savings or college savings.

#2 Moving would be difficult because I would have to bring a lot of cash to closing, get the mortgage company accept a short sale, or rent out the property instead of selling.

#3 I couldn’t do a regular refinance because no lender will touch an underwater home. If I had a variable rate mortgage I would be facing the risk that a significant rate increase could make the mortgage payments unaffordable eventually leading to foreclosure. I would also lose the opportunity to lower costs by refinancing. Today yahoo lists 3.87% 30 year fixed and 3.11% 15 year fixed- that really is insanely low. In fact rates have fallen enough that it might be worthwhile to do another refinance.

The big question is to keep the house or not? The critical factor is how affordable is the mortgage payment? If I couldn’t make the payments without drawing from savings or incurring credit card debt then I couldn’t really afford that house and it would be lost without a major change like a new higher paying job. If I could make the payments but had nothing else left I might sell the house too. While I would hate to be forced to sell my house, I think it would be worse to keep the house by sacrificing retirement savings. I wouldn’t want to live in a nice house but have so little cash left over that I couldn’t enjoy life while I was living there. If I could afford to keep the house keep my financial goals and have a reasonable life I would keep the house and accept the fact I didn’t get the best price on it. It’s almost impossible to time buying a house perfectly so virtually everyone overpaid to some extent that isn’t a good reason to sell.

If I were going to keep the home I would make efforts to stabilize and lower costs. I would review all of the government programs to help underwater home owners- but I won’t expect to get the best rates either. This article on HARP states banks are not giving great rates. It might be worth the peace of mind to get out of a variable rate mortgage, especially if there is not cap on the variable rate as I doubt today’s low rates will be here forever.

I would simultaneously try to build up a large emergency fund but I wouldn’t make any extra payments toward the mortgage until I accumulated enough bring the mortgage above water. If I did have to resort to a short sale all the extra repayments would be lost. Having some extra liquidity could be the difference between keeping the home or losing it in the future.

If I was going to try to get rid of my home I would look into doing a short sale and I would work to get the best sale price I could.

A short sale would hurt my credit but a foreclosure would pretty much ruin my credit score for seven years. That would be it very hard to get another mortgage in that time frame without paying a much higher rate. In some states lenders could get a legal judgement against me for the difference between the sale price and the mortgage balance. Normally the IRS treats forgiven debt as taxable income, causing a huge tax bill but the government changed the rules for 2007-2012 . I would research the legal and tax implications for my state to find out all of the details before I did anything else. I would also have a place to move to before I did the sale as a bad credit score will make it harder to get another rental or mortgage. It should go without saying that I would need to move to a lower cost home/apartment, something that I really could afford.

What do you Really Want?

Rick Francis — Tue, 17 Apr 2012 22:46:50 +0000

Last month I was having trouble coming up with a list of what I wanted for my birthday, much to my wife’s dismay. When I was a kid I had a list five miles long of things I wanted, but now it’s not as easy. That got me to thinking about what is it that I really want? All of my needs are covered and enough of my wants are covered that there are relatively few things I really want that I don’t already have.

I already have so much of many categories of things that there just isn’t time to enjoy more. For example I already have more books that I would like to read but not enough time to read them. I also have more video games then I have time to play. I could get newer/better versions of things I already have- but I don’t think it would make that big of a difference in my life.

I have a lot of 2^nd hand wants from my kids or my wife but they aren’t really things I want. After a fair amount of thought I did come up with a big one- time. I would like to have more time. The most practical way to get that would be to accumulate enough wealth that I can stop working. Of course that would be an insane birthday gift… I’m going to have to work for myself and it will take a number of years more. However, I’m slowly getting there. If I can just keep going I know I will get there.

In the mean time I asked for some more video games and books- I just hope that I can finish them before next year so that I can come up another list.

Getting Better Value with a Budget Range

Rick Francis — Mon, 16 Apr 2012 14:31:23 +0000

I read this article Why a Budget Could Cause You to Spend More, and while I didn’t like how it was written I did think there was a good idea point buried in it. The premise of the article is that a new study suggests that when consumers have a budget they focus purchases on the top end of their budget limit not looking for better values. From the comments a lot of readers hated this article assuming it was bashing budgeting. The more insightful comments suggested two important points:

· Budgets are to keep your spending within your means not to minimize spending

· You may get more value by buying a more expensive item you can afford.

I think that the study is probably correct- when you have a pre-budgeted amount you are likely to look at items near that amount and buy one. If you don’t look at lower cost alternatives you certainly won’t buy one.

I think a better tactic is to have a budget range rather than a single number. Then when you shop start by looking at the low end of your budget range. Once you know what the lower price range has to offer compare it with the higher range within your budget. Knowing the differences in features and prices- ask how much more are the extra features worth? If the additional features are worth it then buy the more expensive item, if they aren’t buy the lower priced item. I’ve applied this method to a car, dishwasher, and refrigerator purchases and I found that I was happiest with the basic models from reliable manufacturers because I didn’t really value the extra features in their higher end models even though I could have afforded them. At the same token I didn’t want to buy the absolute cheapest items as I was willing to pay more for a model that I expect will be more reliable.

What Makes Index Funds Really Great?

Rick Francis — Fri, 13 Apr 2012 17:34:33 +0000

#1 You can get the market return with no effort. It is VERY hard to consistently beat the market. Read A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing to get an appreciation for how hard it is, and how many professional money managers fail to beat the market. What about picking individual stocks? Even if you are the next Warren Buffett you need ½ million to invest to make it worth your time.

#2 Index Funds make investing simple- they remove the guess work of which stock to buy or which managed fund will beat the market this year. You decide on an asset allocation and then buy the lowest cost funds to give you that allocation.

#3 Index funds have very low costs. Managing an index is pretty easy- just buy all the stocks in the index. No reach department or stock analysts required. Vanguard has funds with expense ratios as low as 0.07%. Actively managed funds have higher expenses, usually 1% or more. That might not seem like much, but the higher costs drain away a lot of your investment returns because 1% is a huge difference when compounding over many years.

#4 Easy Diversification, you can buy virtually the entire stock market when you buy a share of VTI. This ensures you will never lose 95% of your investment due to a bad pick- it would take the end of the world for that to happen to the entire market.

#5 You don’t have to watch index funds like a hawk, index funds will always match their index. Actively managed funds could change drastically- especially if they change fund managers.

#6 Tax efficiency- Because the index won’t change much year after year index funds typically don’t need to sell much of their holdings. That means less realized taxable income – which is important if you are holding an index funds outside of a tax sheltered account.

Worst Retirment Advice Ever?

Rick Francis — Tue, 03 Apr 2012 21:52:55 +0000

I read this article on yahoo which really bothered me. The writer asks if great grandpa didn’t retire why should I? He talks about how more elderly are retiring in the red and 20% of bankruptcies are made by retirees. Then mentions rising health care costs, stagnant markets, and low savings levels may mean retirement is a thing of the past for most. His solution- He plans to work the rest of his life, literally dying before retiring. I thought of a lot of horrible disasters his “plan” could run into but let’s just consider one: What happens if you are no longer able to work due to poor health?

However, what really bothered me about this article is that the writer worked as a financial adviser, and instead of suggesting solutions, he has decided that saving for retirement is too hard so he is going to give up and work forever. That is the worst advice I’ve ever seen on retirement. Can we even call it advice?! Why not suggest a plan that might actually work? With just a bit of thought I came up with the following:

· Lower your expenses to save more now and need less in retirement. I’ve done this and I’m saving over 30% of my income for retirement. Even now most of my expenses are really wants, not needs. If I had to I could cut back further, but I want to balance my current quality of life with my future quality of life.

· Cut Investment Costs- you can’t control what the market does, but you can pick funds with lower fees to decrease how much of your investments go to the fund managers.

· Invest in your health by eating better and exercising more; since health care is expensive do your best to be healthy.

· Use insurance to prevent misfortune from running your plans. Specifically disability and term life insurance to replace income.

· Work a bit longer, retiring closer to 70 than 62 to get the largest social security payment possible.

I’m sure my plan isn’t perfect but at least it IS a plan, even if it didn’t give you an ideal retirement I promise it is a lot better than working until you drop dead.

Which is Worth More a Lottery Ticket or an Apple?

Rick Francis — Fri, 30 Mar 2012 16:02:50 +0000

Today the mega millions jackpot is up to $540 million, so I decided to pick up a ticket. I also bought a bag of apples at the same time. Given the phenomenally bad changes of winning (1 in 175,711,536) even one of those apples is almost certainly worth more than that lottery ticket. I’m basically throwing away a dollar, why did I do something so irrational?

Because is exciting to dream about winning an enormous jackpot, and know I could potentially win… However at the same time I know dreams aren’t a viable plan for the future. The last time I played the lottery was in college when I bought a ticket for a jackpot of around a hundred million. I didn’t win that one so that makes $2 over twenty years. In contrast last month I invested about $2000 in stocks, bonds, real estate (via a REIT). I think that is a reasonable ratio. I dream a bit but invest a lot so that eventually I’ll build my own millions even if I’m not lucky enough to win millions.