February 8, 2012

Planning For a Steady Stream of Retirement Income

A few weeks ago a reader of satisfying retirement blog, using the name, KEL, left a comment that voiced the concerns of many. In part she said:


"My husband and I are very close to retiring, this year (2012) and we're finding the necessary downsizing quite difficult. Its good to have your encouraging words. My big question is, so you have this money saved up for retirement. Its all over the place, IRAs, Roth IRAs, investments, annuities, some real estate. How does one intelligently turn this into an income stream for the next 30 years? Its one big giant spreadsheet, I'll tell 'ya!


Also, we're having difficulty budgeting for retirement (subset of above difficulty.) Too many factors are just up in the air. So, I gnaw at this problem like a dog gnaws at a bone."


As I noted in my followup response, those are questions that all of us ask ourselves, both before and during retirement. I know I certainly did. In fact, almost 11 years into retirement, I just had a meeting with my financial advisor last week to ask the same first question: how is my income stream looking for the long haul? The answer was quite reassuring but that doesn't mean I won't ask him again in 12 months.

I make it quite clear I am not a financial expert. My satisfying retirement lifestyle has been the result of several factors that have worked out well for me. However my approach may not be right for you. Risk tolerance, overall income, how early you started saving, family situations...all these variables affect how you answer these two questions.

I can direct you to the following posts if you'd like to review what I did. One is a summary of the article in Money Magazine from last fall. The other three involve financial decisions I made or will face:

*Living Well on Less: Thank You Money Magazine
*Retirement Savings: Why is it So Hard?
*One Financial Decision That Could Change Your Life
*Retirement and Health Care Costs: Brick Wall Ahead


In addition to those, I found the following sites on the Internet that address the questions KEL asked. As a necessary disclaimer, I have no connection or relationship with any of these sites, nor does my listing them endorse what they say. However, I thought each presented some information in a way that you might find some direction.





Since we are all learning together, please comment with a site or two, a book, or seminar course that you have found particularly helpful to you in this regard. Trying to figure out how to not outlive our money while still enjoying a satisfying retirement is a constantly changing equation.


Thanks, KEL, for posing the questions.



I have set some aggressive goals for myself and this blog for 2012. One of them is to increase the number of new people leaving comments, and another is asking new folks to subscribe either by e-mail or reader. If either of these situations describe you I'd appreciate your help in reaching my goals.


If you are already a regular reader or commenter bless you! If you know someone who you think might enjoy this blog would consider asking them to try it for a week or two?


Simply click the appropriate link on the right sidebar just above the ad for the Social Security Retirement Guide. I appreciate it.

26 comments:

  1. And then there are all the unexpected expenses that pop up.....like $10,000 worth of dental work. Argh.

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    1. Which with today's dental charges could be an implant or two, or a few crowns. You are so right, Roberta. Why isn't dental insurance talked about more?

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    2. Hmm--maybe because some of us who grew up with unfloridated water now wear dentures? Not as good as real teeth, but not expensive either!

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  2. Actually, Roberta, that's an important part of this discussion topic. Some things you can (and may need to) plan for, as in new car or vacation. But some things just perch themselves on your doorstep (esp, health issues).

    As for the optional expenses, I lean toward rationally "splurging" sooner than later. A more reliable car, maybe. We just did our "thing" by converting our daughter's detached garage (far north in VT) into a small apartment, for both visiting, vacationing - and maybe even for living full time in the future. And even with that, we did it pretty economically.

    The key part of this is to do these things while we are healthy and mobile. My wife and I are sometimes at tenderhooks about whether to spend now for an active lifestyle or hold onto our funds for the times when we are truly old and less mobile. Fortunately, she is accepting my belief that we can do both in a rationally hedonistic (?) manner.

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    1. Steve, that debate about spending a bit more now when young and active enough to enjoy whatever "it" is happens rather frequently in our home. Doing what we want now, while still keeping the long term in mind, is our current direction.

      As Roberta notes and you reiterate, there will be unexpected emergencies that can't be budgeted for. So, just like during one's working life, an amount of money that can be tapped quickly has to be part of a successful retirement financial plan.

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  3. One of the fears many have in retirement is having a reliable income stream they can generate from their savings. Many are leery of annuities for good reasons - high fees, loss of principle upon death, bankruptcy of the issuing firm, and so on. You can put together your own annuity stream without paying someone else, and be more tax-advantaged at the same time (annuity income from regular sources is taxed at ordinary income tax rates, which could be high). It involves combining CDs with low cost index funds like the Vanguard. The same article has been written up in a variety of publications. You can go to Google and type in "Build your own annuity". Here is one website:

    http://www.cbsnews.com/8301-505123_162-37741879/build-your-own-annuity/

    Another alternative is to own dividend-paying stocks, but that means doing your research. If you are not willing to put the time and effort into it, go the route of CDs and index funds only.

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    1. Good thoughts, Chuck. I discussed annuities with my advisor a week or so ago and we came to the same conclusion, at least as it regards a large chunk of my portfolio.

      He suggested one option is to buy an annuity now for say $200,000 that doesn't start paying out for 10 years. The build up over that time will produce a greater income than a similar amount that is an immediate annuity since annuities do offer a better interest rate than CD's or many instruments now.

      Also, one of this blog's sponosrs has a link on the right sidebar that provides a good overview of how annuities work. Disclaimer: I get paid for that link.

      I'll take a look at the web link. Thanks.

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  4. I hate to sound like a shill for a company, but I've been a customer of Fidelity for probably 25 years. As I'm preparing to jump to retirement (leap?) I'm probably pathologically conservative and concerned that we can maintain our lifestyle over thirty years or so. I've looked at many, many calculators and the one Fidelity has (I think it's available from their website whether you're a customer or not) strikes me as way better than any I've seen. It's very easy if you have all your accounts with them as it loads them in, otherwise you have to load each of yours in. You can load what/when your social security would be, any pensions, and then it does Monte Carlo simulations based on market performances of the types of investments you hold or intend to accumulate. If anything it is very conservative in my opinion, generating results based on success 9 out of 10 simulations (but you can see results for other scenarios). You can change all sorts of assumptions to test impact of changes you might make. I've used it extensively to develop a comfort level for assumptions going forward.

    As I said, sorry if it sounds like I'm promoting Fidelity, but the "retirement income planning" program they have is better than anything else I've seen....

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    1. Actually, Fidelity is one of the sponsors of this blog. Their calculator is available by clicking the green Fidelity logo on the right sidebar. So, brag away and from now on, click from the blog..sponsors like that!

      I have used the calculator and find it quite helpful. Thanks, Allan!

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  5. We keep our emergency savings for events like Roberta's.
    We used Fidelity to save for the purchase of our first house- in cash.

    What we had to look for information about shifting retirement money. DO we continue to place money in an iRA? What are the real tax advantages of that if we feel that we will actually use the money for our care? What is the order of withdrawing savings? I called USAA and found a financial planner there to chat with. Laying out the cards (showing we are clearly middle class) the suggestion was: always keep emergency money in the savings account, drain the traditional IRA, drain the joint brokerage and accounts and last drain the Roth IRA's. That is the long run. Everything indicates that we will be fine for the long run...as long as our health care does not disappear.

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    1. Sounds very much like the plan I discussed with my planner last week. We agreed to turn down the risk a bit and stay with higher quality corporate bonds and preferred stocks. We will sell the lower yielding stuff first. As you noted, Janette, the elephant in the room is health concerns and costs.

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  6. You are all so right about health care costs.I work in health care 1) insurance company over 10 yrs 2)area hospital over 30 yrs. when my husband and I leave our jobs no one will be covering our health care except us! crazy huh? Not many companies send you away with coverage any more and those would did are finding they are not able to continue it.

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    1. That is depressing...working in health care and having no health care upon retirement. Plus, on your jobs I am sure you have seen the devastation that can occur when people can't afford proper care.

      I think health care is the biggest problem facing this country, because it effects every single part of our lives and economy.

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  7. Steve in Los AngelesThu Feb 09, 01:48:00 PM MST

    Bob,

    A book I purchased in 1982, when I was just age 26, and read MANY times since then, "How You Can Quit Work and Have the Money to Do It", by Donald E Olson, got me started on planning my retirement. Imagine that I was only age 26 when I started to plan for my retirement! At that time, I was not even in school yet to begin my engineering studies and I already was thinking about retirement!

    It is amazing that 25 years later, at age 51, I actually did retire. I did an excellent job with saving my money and building my retirement assets, which include two variable annuities with lifetime income riders. I have an excellent financial adviser, who is affiliated with my credit union. Although I currently am living quite frugally, I live frugally only out of choice so that I can pay of the mortgage on my residence shortly after I celebrate my 61th birthday.

    I also have a very healthy lifestyle. I have a very healthy diet and do a lot of aerobic exercising, which consists of walking at least four miles a day at least five days a week. If you saw me in person, you may have a hard time believing that I will be celebrating my 56th birthday later this month. I also have excellent medical, dental, and vision insurance, which keep my health care costs down. I spend less than $2,000 a year on health care (including insurance costs). At the rate I am going, there is a very good chance that I will be around to celebrate my 100th birthday.

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    1. Less than $2,000 a year on health care? You will have many readers envying your situation. WE spend over $11,000 and even that is low compared to some of the folks who post comments here.

      I have not heard of that book, but will check it out right now!

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    2. Steve in Los AngelesFri Feb 10, 05:33:00 PM MST

      Bob,

      I came back home a little while ago from an eighteen-mile walk which I started early this morning. One reason I spend so little for my health care and am in excellent health is that I am in great shape. I am in great shape, because I do a LOT of walking. I have to admit that it is not easy to get out of bed at 4:30 am. However, once I get out of bed, get myself ready for the day, and eat breakfast, I am all set for a VERY active day.

      I hope you were able to find the book. I read that book numerous times. No other book transformed my life more than that book.

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    3. 18 mile walk..That is impressive. Walking is the simplest and best overall exercise there is.

      My library doesn't have it. Amazon has a few of its merchants offering used copies, so I gather it is no longer in print. I've put it on my list of books to purchase at some point.

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    4. Steve in Los AngelesFri Feb 10, 10:39:00 PM MST

      Bob,

      After I wrote my message above, I had an errand to run. I walked an additional eight miles. Therefore, I walked a total of 26 miles today.

      With regard to the book, there is another web site, www.alibris.com , which includes the book. (The specific web site is as follows: http://www.alibris.com/search/books/qwork/3034214/used/How%20You%20Can%20Quit%20Work%20and%20Have%20the%20Money%20to%20Do%20It ) It may be true that the book no longer is in print. If you get the book, I hope you find it interesting. The book really changed my life.

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    5. Maybe I need to write a post about "Steve, The Walking Machine!" Thanks for the link for the book. I'll check it out.

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    6. Steve in Los AngelesSat Feb 11, 01:25:00 PM MST

      Bob,

      You are very welcome for the link. With extremely low investment interest rates now, some of the investment information in the book may be somewhat out-of-date. (However, that is not the fault of the book. Back in 1982, investment interest rates were much higher than they are now.) What really makes the book shine, including now, are the chapters in the book that discuss personal finance philosophy. The book covers making a budget, saving a specific amount of money each month, and living below one's means. It is almost 30 years since I purchased the book. My positive experiences for almost the last 30 years are proof that the ideas suggested in the book really do work.

      You are correct about my walking. I definitely am "The Walking Machine". From the time I started walking home from school back in September 1965 (when I started 4th grade) through now, I must have walked many thousands of miles. The miles I have walked do not include the many thousands of miles I rode my various bicycles, including my current bicycle, which I have had for about ten years.

      I am very disciplined with regard to my finances, exercise, and health. I am doing quite well, especially since I am getting close to celebrating my 56th birthday. Good health and finances rarely occur accidentally. Both items usually require proper planning and appropriate action.

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  8. Bob, I agree with no more to say. Healthcare is the Problem.

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  9. Hi, Bob. KEL here, and my name is Kathy. Thanks for your kind and detailed reply. I went to every link.

    It still seems to me like a great leap over a yawning chasm to try to figure out how to make the right amount of money show up in one's bank account when nobody is working. How, exactly, does one "pay" oneself? And I have no clear idea of how to calculate the overall return on our "portfolio" such as it is.

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    1. I'm glad to learn your name, Kathy, and very pleased you found this follow up post.

      I "pay myself" by developing a budget. I look at what I must spend and what I'd like to spend on discretionary stuff. Then, I look at the income generated by my investments, the ability to cash in investments to fund the coming year (at roughly 4% of the total account), and any other random sources of income. I project how long the IRA will last based on the current withdrawl and growth rate before committing to the draw down.

      The total income becomes what the budget must fit. Spending is adjusted to match the income.

      Calculating your overall return is a job for a professional. My planner gave me very encouraging figures when we last met, using several different scenarios based on possible rates of return.

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    2. Steve in Los AngelesSat Feb 11, 01:47:00 PM MST

      Bob,

      Thank you. Having a budget, clearly, is extremely important and necessary.

      You are absolutely correct when you wrote, "Calculating your overall return is a job for a professional." I completely agree with you. With the two annuities I have, my adviser informed me of the conservative dollar amounts I will be able to draw each year for the rest of my life once I begin taking withdrawals. For one of the annuities, I will begin taking annual distributions in April 2017 (two months after my 61st birthday). For the other annuity, I will begin taking annual distributions in March 2021 (one month after my 65th birthday).

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  10. Sometimes it's easy to see where we're going, and sometimes not. Health Care is such an issue. In the long run, which you seem to focus on a lot, such a plan as we favor is possible. But we won't get there in a straight path, however much we'd like that.

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    1. "We won't get there in a straight line" is absolutely true. Making rigid plans for your future will only lead to problems. Success comes from flexibility.

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