I received the following e-mail from a regular satisfying retirement reader and commenter. Except for a little editing and name changes, I've left her message intact. After reading through her concerns, see if you can add anything to my thoughts.
"Bill and I are definitely taking the next step towards retirement and we're getting our business ready to put up for sale.. a big step. Bill is pretty nervous, I am calmer about it. A big leap but we are sooo. ready. The stresses of business and the challenges of staying up to date in an ever changing industry are wearing us out! We're ready to move on to the next phase of our lives.
Reading your blog helps us both to have the large view and not be too scared. We'd feel better if our savings were still making the 7% and the 5% even that they used to, in municipal bonds. (Wouldn't everyone!?) We're having to learn more about investing. "IF" the economy had not taken a slide we probably would have retired several years ago as we had originally planned.. but we're in the same boat as everyone, with interest rates what they are. LUCKILY we did not lose in the stock market dip ten years ago.
One thing we're going to do is sit down and remember what it is like to live on a stricter BUDGET. I wonder if you would address this issue in a blog post? How does one go from having a good bit of discretionary income to living on fixed income again? We certainly did this in our early years, but we have to relearn! Do you and Betty each get an "Allowance" monthly for personal spending? I don't spend much, monthly, but my husband does have a Home Depot habit.
We live frugally but well, but it is still a challenge to return to a stricter kind of budgeting so our retirement funds last..we are weighing that sense of FREEDOM and TIME we will gain (and better health, too, no doubt..) with the minor discomfort of having to watch pennies again. I read that the Frugal Girl and her spouse have a once a month budget meeting-- do you and Betty? Or do your retired readers?
One PLUS of doing this again in our lives (stricter budgeting) is that we are reviewing the importance and meaning of every expenditure, reviewing what kind of travel we REALLY enjoy and get our money's worth from, and just reviewing "meaning" in general-- a good thing!"
Besides writing most of this post for me (!), I seriously appreciate the thought Sue put into her questions and concerns. I'll take a stab at answering them. Like many, she is looking forward to retirement with a healthy mixture of edginess and excitement. With interest income still quite low, and the "normal" investments no longer the safe places we once thought them to be, she and Bill are refocusing on the need to choose how the monetary resources they have are best utilized.
Betty and I do not have a monthly budget meeting. We set our budget on January 1st for the coming year. It is based on last year's expenses, what we think we will need to spend, and what our income will be for the next 365 days. Also, we have a certain amount of money set aside for emergency expenses.
From then on it is my responsibility to keep things in balance. If we get some income we didn't plan on we discuss what we should do with it. If expenses are tracking higher than they should I make suggestions for cuts and adjustments and Betty gives her approval or suggests a modification here or there. I do record everything we spend in Quicken so I am never surprised by an out-of-whack expenses category. I can catch a problem very quickly.
Our total expenses have remained relatively steady over the past 17 years. How is that possible considering the effects of inflation and in areas like health care where costs have gone up a average of 10%-15% a year? The answer is simple: they had to because my income is relatively fixed.
When I retired in 2001 at the age of 52 I had a investment/savings account designed to carry us until I planned to start taking Social Security and withdrawing from my IRA at the age of 64. We have lived off that savings and investment account through boom and bust cycles. When those investments were making 10% we had extra cash flow. When our average return sunk to 3% or less, we were short. But, because we didn't spend more when times were good we had enough to carry through the tough times. A dozen years ago I had planned that the savings account would run out of money on my 64th birthday. I was one month off.
Over the years we have adjusted budget categories many times. In some years we decide it is time to replace some home furnishings, so another category must be cut. In another year, maybe we decide we would rather cut back our dining out budget so we can spend a bit more somewhere else. Cable TV and the land line phone went away several years ago ago when we realized they weren't worth the money to us.
My clothing budget is 85% less than it was when I was working and I still have money left unspent at the end of the year. I need jeans, a T-shirt, and gym shoes. Heavens, our dry cleaning expenses for last year for both Betty and me was $36....not a month, but for all of 2017. We simply don't buy or maintain clothes than cannot be laundered.
We each get a small sum of money each month (less than $100) that doesn't have to be accounted for. Betty tends to spend hers on the grandkids or the house. I spend mine on stuff for my blog, books and house.
This post is getting a little long, so let me summarize what I believe the key to our financial stability has been:
- We have no consumer debt, no mortgage, no credit card debt
- We adjust our expenses to fit within our income, not the other way around
- We constantly adjust to stay on track
- We have learned that it doesn't take much for us to be happy
OK, your turn. What hints or tips can you give to Sue and Bill and everyone else? After all, we are all in this together.
No tips. But, I just found out that my friend now makes over twice as much in retirement than his salary was at his retirement job (Sam's job). That is not surprising, but he also draws more than he did at his job as an engineer. Just after I found this out, he had to go to his financial planner. My friend only invests in things that are very secure and have less interest instead of going for big dividends that are risky. By the way, part of his success may be that he is 65 and has never been married and never had children. He is the most frugal person I know. I know this has nothing to do with your question.
ReplyDeleteIt relates in that he has obviously been a good steward of his money and its use. The lifestyle he has chosen certainly helps, but in his own way he does budget.
DeleteI commented about this post to him. He draws four times as much now as in his retirement job and over twice as much at his regular pre-retirement job. When he lost the second job he ever had due to being replaced by computers, he took savings and paid off his house and car. He said he knew that somehow he could pay for living expenses, but did not want his house or car in jeopardy.
DeleteI will admit that I haven't "budgeted" in more than a decade now. But thanks to Quicken I do keep track of where the dollars go and cut back when I see it is increasing. I think #4 says it all for me. I find that it doesn't take annual world cruises to make me happy. I live pretty frugally and live pretty happy because of it, not in spite of it.
ReplyDeleteIf you keep track of your expenses and adjust as needed you are budgeting, just after the fact instead of before. I don't think the order is important as long as income and outgo are in balance and changes are made as needed.
DeleteI have been using Quicken since 2002 and finds it perfect for my needs.
I want to emphasize how important it is to keep track of what you are spending so you can see if things are getting out of hand. It is also important to remember that relatively large unplanned expenses will happen be they car repairs, medical/dental copays, home repairs, etc. I'm thinking of the totally unexpected tooth implant my husband is in the process of getting. An emergency fund is very important if at all possible. Since the person who wrote hasn't yet sold their business and retired now is a good time to start living on what they expect their retirement budget to be and see how it goes.
ReplyDeleteI wonder how often a retirement is thrown into a tailspin because of the type of major, unplanned expenses you mention. Replacing a car, facing major medical expenses (and we tend to forget how expensive dental care can be), the roof needs replacing.....an emergency fund can be the thing that keeps things in balance.
DeleteKeeping that fund full is also very important. Once you have paid for the new roof, rebuild that account. The next deep pothole is coming!
Thanks, Juhli.
I set a monthly budget in January for the whole year. I have spending categories in budgets set in Mint.com but I mostly pay attention to the big monthly number. The main thing I do differently is when my spending under for the month (this is almost every month), I take the surplus and move that money into a savings account. The important thing is that savings account is NOT calculated into my net worth. So for me that money is considered spent. Then when I want to splurge, or have a month where I over spend, I can pull money to cover from this saving account.
ReplyDeleteThe other thing that helped me get used to living on a budget was to stop thinking of shopping as a past time. "What do you want to do this afternoon?" - "Oh, I don't know, let's go to the mall and walk around." Nope - don't do this. So no mall, no Home Depot unless there is something specific you need. And even then I tend to just buy it online. The less time I spend in stores the better. Find something else to do with your amazing new free time :)
Putting the extra money each each into a WAM (walking around money) account is a good idea. If you just roll into the next month it is likely to get spent because suddenly...look...all that money in the decorating or hobby fund! Keeping it for a splurge or a rough month works.
DeleteI am ordering every single thing I can online. It is so much more convenient, and as you note, keeps me away from splurge purchases in a store.
We don't do a line by line budget and personally I think it's a waste of time. I set a "hard line" to cover the bills that are essential -- taxes, water, power, heat and so on. After that spend your money on whatever it is that you want to. Bob makes a good point in that eliminating your mortgage and any other debt increases your ability to spend on enjoying your retirement.
ReplyDeletePersonally, I find that spending from one week or month to the next is variable enough that with a detailed line by line budget you'll end up "borrowing" from one to cover another. Keep it simple -- one pot for essentials and one pot for spending. When you have emptied the spending pot then stop spending until the next deposit. Simple and easy to keep track of. Retirement is not the time to be constantly worrying if you've spent too much in one budget category and too little in another.
No one that reads this blog regularly will be surprised I am saying this but one other caution: Don't be overly frugal early in your retirement.
While overall life expectancies have been steadily rising the stretch of life when we are healthy and free of disabilities has hardly changed. A 60-year-old woman today has a good chance of living to the age of 90, yet the disability-free life expectancy is roughly 70. This argues for enjoying your money while you can though it can be hard to spend down what you've spent decades saving.
Statistics show retirees are not spending their savings anywhere nearly as quickly as academics think they should. That is the conclusion of a study published earlier this year by the Employee Benefit Research Institute. The study compared the current assets of retirees with the assets they had at the time of retirement 18 years earlier.
Retirees in the study were divided into three groups based on their non-housing assets at retirement. The most affluent group were people who had retired with more than $500,000. Eighteen years later, their median level of savings had dropped a mere 11.4 per cent. In other words, they still had nearly 90 per cent of the money they started out with. This was only the median result; 35.5 per cent of the retirees in that group actually had more assets 18 years after retirement.
People in the second group started out with $200,000 to $500,000. They also managed to preserve most of their wealth with 36.8 per cent of them having more assets 18 years later.
The study found that even individuals with less than US$200,000 in non-housing assets immediately after retirement still had 75 per cent of their cash assets 18 years later.
By the time it starts to become evident that people could afford to spend more, many are no longer inclined or able to do so. When most people reach their late 70s, travel becomes less alluring or may even be physically impossible. Expenditures on durable goods such as cars, appliances or furniture also drop off as do outings at restaurants and entertainment venues.
Basically, enjoy your savings in the early retirement years while you still have the good health to do so.
I understand your approach to the budgeting issue. It is easier and if it works well, than I am all for it. I just feel more comfortable with categories since I have been doing it that way forever. If we have more family dinners here in one month but then fewer the next it all evens out.
DeleteBy keeping track of each category I know where we are over or underspending and can adjust next year's budget figures accordingly.
For what it's worth in regard do ddavidsons comment (although it's not the specific topic here) I will chime in with the fact that I have read three different articles referring to (I think) two studies that make clear that most retirees who take early benefits have no regrets, for many of the reasons mentioned above.
DeleteI have a true fixed income, ie a pension and social security and continue to try and build up that so called sinking fund, usually by doing things like saving annual col increases and gifts. This year I'm eliminating my health plan and moving to a zero cost advantage plan and will add that to the pot.Like the comment above, I budget for fixed monthly costs and nothing else as such. Everything else goes into the monthly spending pot.not broken down by food, gas, entertainment or whatever. I do have a couple pages in my notebook for special monthly expenses like birthdays and other social expenses and annual costs. Other than that it's fairly simple and my philosophy is to spend as little as I can. I do on occasion create a travel fund as I now have, but other than that...
ReplyDeleteA "pot" for almost all discretionary spending works for you and others (like David above). Go for it!
DeleteAs the responses so far point out, each of us may approach the process a little differently, but no one is saying just spend and have a good time! Budgeting isn't a hard and fast process, but the end result is: being sure income and outgo have a nodding acquaintance with each other! How we get there is up to us.
I've read some similar studies that ddavidson references. My wife retires in a month and I am going to follow her early next year. We are now at the age Bob was at when he retired. Like many of the commentators, while working we have not been strict "budgetors" but have tracked our spending for several years in Personal Capital.
ReplyDeleteI believe the studies ddavidson references are probably correct, but it sure would be a hard adjustment to knowingly spending more than a small percentage of total invest-able assets. It may not end up being right by the academics, but my wife and I have already begun training ourselves to budget and will be following that practice at least for the 1st decade or so of retirement. Once we get to our sixties, if all goes well, perhaps then we will loosen the reins a bit and spend a bit more liberally.
Until then, we have spent our entire marriage living frugal yet fun filled lives that enabled us to early retire. I can see it will be hard to make an adjustment to not having that discretionary income but I still am ready for the change.
Thanks Bob for having such a good blog.
Tim
I hear you Tim. Life long habits of frugality and saving for the future are not easily broken. You are retiring much earlier than most so that's a wild card too.
DeleteMy point is that for most people if you retired at 62 then 18 years later you'd be 80 and to still have 90% or more of your investable assets means you really were free to spend more, quite a bit more it seems.
Saving is current consumption deferred for future consumption but if you die with it still in the bank then it's worth asking: What did you save it for? I suppose I see many people so worried about running out of money that they don't fully enjoy their retirement. From the study I quoted this unfortunately appears to be exactly what is happening.
Thanks, Tim, for the encouraging words.
DeleteWhat Betty and I are doing is increasing our drawdown rate while still healthy and interested in extra travel or activities. There will come a time when we might have to adjust what we withdraw each year, but by then we won't be as interested in the expensive extras. Of course, health care costs will increase, but that has been allowed for.
We have a strong desire to do for our daughters what my parents did for Betty and me: leave a decent estate, so that is part of our calculation.
I not only understand David's point but agree with him. Too many are too hesitant to enjoy a lifetime's worth of savings when retirement comes. For the first 15 years of our retirement we were rather tight with the outgo. But for the last few years and looking into the future 5-8 years, we will dig deeper than we were originally comfortable with. Our retirement accounts are like David describes them: still very solid even after 17 years.
I also count myself among those who do not have a formal budget. However, for many people, I think that creating a “retirement budget plan” can be a useful exercise to go through at least once.
ReplyDeleteInstead of budgeting, I do track my expenses, income and investment returns rigorously, on a weekly basis, using Quicken. I periodically review my income, expenses and net worth to look for any issues with over-spending. I use the “Lifetime Planner” in Quicken and the “Retirement Income Planner” from Fidelity Investments to look out into the future to see if there are potential problems later in life when medical expenses and senior living expenses may increase. I have refined those plans over many years to include as much detail as I could and to include some large unspecified expenses to make sure that my plan doesn’t fail if there are unforeseen expenses.
Unless you are lucky enough to have your retirement expenses covered by some combination of defined benefit plans (pension, social security, annuities) be sure to take into account two special cases of retirement risk: Longevity Risk and Sequence of Return Risk.
Longevity risk is just the risk that you won’t die on schedule. Too many people make the mistake of using “median life expectancy” in their planning, but by definition 50% of all people live longer than that….and many live much longer. Also, the longer you live, the longer you are likely to live. A person who is 60 may have a life expectancy of 80, but a person who is 80 doesn’t have a life expectancy of 0. So be realistic in setting the time horizon for how long your money needs to last.
Sequence of Return Risk means that if you are relying on returns from investments (Stocks, Bonds, CDs) for your retirement income, your success will depend, not on just your average return, but on the specific order in which the returns come. Low returns in the early stages of retirement are much worse for your plan than low returns in the late stages of retirement.
I retired in the fall of 2000, so I have lived through two major stock market events (the Dot Com bust-9/11 and the Great Recession) while in retirement. What I noticed during those downturns was that I didn’t have to make a formal decision to reduce spending. Since I was monitoring my income and net worth regularly, I could see that both were shrinking, and I automatically reduced my discretionary spending in response.
I would also echo some of the comments made by others:
Stay out of debt, particularly credit card debt; but all debt is bad.
Have an emergency fund. Preferably one that can cover a couple of years (or more) of living expenses. And remember, it is an emergency fund, don’t use it unless there is an EMERGENCY.
Review your financial plan regularly and if you see any signs of a problem, react accordingly…..and do so immediately, don’t wait.
Finally, if you have put together a solid retirement plan that works for the lifestyle you want, relax and enjoy it. You’ve earned it.
Solid advice and you are right, longevity risk is underappreciated. Still, many people take their social security benefits early and avoid annuities like the plague. They then worry about "running out of money" and so underspend their savings just in case they do live a long time (see the Employee Benefit Research Institute study I quoted above).
DeletePersonally I am deferring my government benefits until age 70 to generate the maximum guaranteed indexed income for as long as I live and transfer much of the longevity risk from my personal savings to the government. I also plan to buy an annuity around age 75 with some percentage of my savings that remain. If I die early then perhaps a different course of action might have been better but there's only so much you can control.
One factor in our case why budgeting has been important: Betty has been buying health insurance on the individual market. By carefully managing our reportable income (and expenses) we qualify for the government subsidy that cuts her monthly premium by 60%. If I didn't take steps to insure we stay below the threshold we would be spending almost $8,000 more per year for her health insurance.
DeleteShe can move to Medicare early next year. Then, we will have more wiggle room and will not have to be as concerned that we manage our income so closely.
Bob, I mean this in the kindest of kind. I've been reading and finding out that many retirees have manipulated their income specifically so they can qualify for medical subsidies. Do you consider what you are doing, ethical? You do realize that you are a millionaire and you are taking away a subsidy from someone who may desperately need it. You are also causing the government to borrow, heavily I might add, just to afford you your needless subsidy. I am not blaming you. It's more of the realization that Obamacare has caused many, many Americans to lie, cheat and make false claims. You are deliberatly downgrading your income (are you hiding cash in your children's names?) just so you can get a government subsidy. I don't blame you. I blame Obama. Hopefully in the very near future, the current administration will finally eliminate Obamacare and health insurance companies can compete ethically thus lower medical insurance premiums. For the time being, I would not indulge nor boast about this illegal practice you are involved in, nor would I encourage your other readers to follow your lead. There are many, many people out there who really do not earn a lot of money and desperatley need those subsidies in order to get medical health insurance.
DeleteThere is nothing illegal or unethical about taking a smaller distribution from an IRA account in order to be eligible for a medical subsidy. More than 50% of the medical subsidies are for middle income people. Bob is not depriving anyone of a subsidy. Many people who are eligible have not applied.
DeleteDonaa, I agree wholeheartedly. Nowhere did Bob say he was hiding cash, simply that he was lessening his distributions in order to qualify for a subsidy for someone who, by the way, has more than one health and pre-existing issue (as do I). Health insurance companies competing ethically is a contradiction in terms but that's an argument for another day.
DeleteLet me explain what we have been doing in more detail to maybe ease Anonymous's and anyone else's concerns:
Delete1. We live on a budget that allows us to qualify. Yes, we could afford to spend more, but it so happens we are happy living on less. We choose to spend less than we could because we want to lessen our negative impact on the environment by resisting the siren call of consumerism. The fact that we live on a lower-than-average income is by choice. That means we qualify for the subsidy based on rules set up by the government.
2. We aren't playing with the withdrawal or tax laws. I have yet to take any money from my IRA. Until I am forced to withdraw my RMD next year, we are living on Social Security and cash from investments that have already been taxed. Yes, I pay tax on a portion of Social Security and yes I pay taxes on investments that generate income. But, more than 50% of what we live on is money has already been taxed.
3. There is no limited amount of money the government allocates for subsidies. Whoever qualifies can request that benefit. We are not preventing anyone else from getting a similar benefit.
4. The government's deficit is, in part, from tax cuts for the wealthy and a yearly military budget greater than the next 25 countries combined. Obambacare actually is saving the government money by lessening the number of people forced to go to emergency rooms or seek care with no way to pay for it.
Rest assured that our decisions cheat no one and do not skirt or "play" with the law in any way. We are lucky enough to have saved a lot of money, some of which was already taxed. That is what we are living on. Qualifying for the subsidy for my wife, who has so many health problems that I'd need a a dozen pages to list them all is the first break she has had most of her life. Until Obamacare we were spending 33% of our income for decades on medical care and insurance for her.
I hope this further explanation is helpful.
I keep this very simple as far as budgeting. I have a spreadsheet that I printed off from Vanguard that tends to capture all the major expense categories, that I also add a pretty good chunk of "Miscellaneous Expenses" to to be careful, and I update it once per year. It shows me which things are going well and which might be getting out of hand. To be honest our expenses are trending downward as I pay off a zero interest motorcycle loan and a HELOC I took out to prepay future vacation expenses (a fancy way of saying we bought a lot of timeshare points that we enjoy immensely), and due especially to the economy of the last few years our investments are rising at the same time.
ReplyDeleteBetween Deb's pension and SS check she is doing as well if not better than when she was working (she has her money/accounts that she uses for all her expenses, things she does for our daughter and others, some of our meals out, etc) while I pay all the bills associated with the house and travel, major expenses, etc. Our income was dramatically different when we worked which is why the disparity. It works so neither of us has ever been on allowances or the like.
My key is that as long as I need well under 4% of our assets each year to be all in on expenses after my SS (currently I use a little over 2.5% while it tends to drop even more each year) we are good to go. This is just one couples approach; there are many others that can be just as if not more successful.
I wish everyone the best on their financial retirement journey.
A 2.5% withdrawal rate is quite something. IRA RMD withdrawals will force us to take a certain amount each year starting next year. With that plus my SS and Betty's spousal benefits we will not have to withdraw much else, except for extra travel that we want to accomplish while we are still relatively young.
DeleteIt's interesting that just before reading your post today I went over my spending for the past several months. I do that on a regular basis to ensure I'm staying within my budget and so far so good. For me the keys to living on less in retirement are being debt free including my mortgage, my needs have been drastically reduced and my desires or what makes me happy seem to be so much simpler. I use less of almost everything including makeup, hair products, gas and convenience products to name a few. I make a budget the first of every year in Excel and track it throughout the year. It's simple but it works for me.
ReplyDeleteA lady after my own heart...budgeting!
DeleteAs the comments prove, each of us have our own way to make things work for us. Your system is simple for you and it works. That is a combination to stick with.
Lots of good comments above, many of which I would echo. We are also not detailed budgeters, and I tend to fall more on the side of the idea that retirement should ideally not be about having a 100 line spreadsheet for tracking expenses. Our financial or budgeting goal upon my retirement was more big picture - to not spend more than we bring in with our various pensions, if possible. I monitor that in general terms on a monthly basis, and December 1 will mark one year of living solely on that retirement income. We will take a more detailed look then, but I suspect that we will not have met our goal.
ReplyDeleteIf that is the case, we will have a decision to make. Do we try to cut spending to meet income, or do we dip into savings and investments to make up the difference. We do want to enjoy ourselves while we are young and able, so option 1 may be difficult. On the other hand, I really do get the apprehension that comes from shifting to a mentality of spending that money we have saved even though we saved it for exactly this purpose.
We also live relatively frugally. Our retirement lifestyle involves what I call the "minor finer things in life". We don't need a cottage on the lake, a Porsche or a six month tour around the world. Give us a nice dinner out each week, the occasional bottle of scotch and a 10 day vacation a couple of times a year and we'll be happy.
One thing I must admit I don't really understand is this idea of the 4% (or some other similar number) rule. As I understand it, this is the idea that if you are living solely off investments and savings in retirement, you should be able to withdraw that percentage and not run out of money. It would seem to me that, even in low interest times, your investments will likely be earning that much in interest and therefore you should be able to withdraw that percentage and never even touch the principle, let alone run out of money. I am sure I am missing something and would be happy to be educated.
You are right, with at least 4% returns the 4% rule is pretty much for people who never want to break into their capital and in many scenarios your savings will grow rather than be depleted. I believe the rule also builds in annual increases to maintain purchasing power over your lifetime which means the rule assumes level spending needs over your lifetime. In truth most people spend less as they age into their late 70s and beyond, which is to your point: "We do want to enjoy ourselves while we are young and able".
DeleteYou'll need to figure out what is right for you but I think there’s a balance between spending it all now or dying with a nest egg destined to cheer up some combination of your heirs and the IRS.
Sometimes I feel like a radical saying this but I figure my retirement savings are for enjoying retirement, especially in the early healthy years. There are other ways to ensure you don't run out of money besides sitting on your savings until it's too late (see my posts above).
The 4% Rule was originally popularized by William Bengen in the 1990’s as being the maximum amount that you could initially withdraw from a mixed (stocks/bonds) portfolio (with increases for inflation added to later withdrawals) and be confident that the portfolio would support a 30 year retirement. His initial calculations back tested the rule using actual market returns for the years 1926 through 1976 and subsequent updates add additional years. There are two potential flaws with this reasoning that other financial planners have noted. First, some people spend more than 30 years in retirement. Second, the rule was not tested over all possible outcomes. It was only tested over the actual outcomes that occurred from 1926. There is no guarantee that future outcomes will all remain in the same range that was studied. As a result, some planners have modified their recommendations to be 3.5%, 3.0% or to adjust the percentage up or down depending on the prior year’s market returns.
DeleteYou mentioned that you should be able to withdraw at least 4% each year and not touch the core portfolio because “even in low interest times your investments will likely be earning that much in interest”. Unfortunately, this is not correct. While historically the stock market moves up over long periods of time, in any given year, or series of years, the markets can go down. If you look at the S&P500 index, you will see it reached 1500 in March of 2000, but then fell bottoming out at 800 in September 2002. It took until the second half of 2007 for the index to push back through 1500 again. At that point it started falling again, dropping back below 700 in March of 2009. It did not return to the 1500 level until early 2013. The index took a full 13 years to recover. So, for someone who had the remarkably bad timing to retire in 2000 (that would be me), there were no 4% returns. In fact, what a person who retired in 2000 experienced were negative returns. And during all of that time while your portfolio is losing value, you will be further depleting its value with withdrawals. This is the Sequence of Returns Risk that I mentioned in an earlier comment to this post.
I would recommend caution when considering withdrawal rates that go above 4% unless you are willing to also take less than 4% during market downturns.
Thanks to both of you for taking the time to reply and provide those clarifications. I was referring to low growth times, but I clearly didn't take into account those zero (or worse) times.
DeleteRick, I guess you should have locked in those 6.5% annuity rates back in 2000 rather than ride the market (I am kidding you of course). With hindsight it might have been a good idea and I do think that annuities are underutilized as a risk reduction strategy but who was to know what the next 13 years would bring? We can only make our best call at the time and hope it works out.
DeleteBeing a self-admitted non-financial expert, I am happy that several of the comments are from folks who are well versed in this subject. I have 17 years of OJT experience, a disciplined approach to investments and spendings, and luckily, a well paying career before retiring in 2001 (about like you, Dave). Things are working out well so far, but the detailed insight this post is generating is quite welcome.
Deleteddavidson5647, yes, that is so true about wishing I had locked in those yields with an annuity or treasuries. I worked in the semiconductor industry and many of my early investments were in technology companies listed on the Nasdaq. A 6.5% yield didn’t look so great to me in 1999, as I was preparing for retirement. The Nasdaq had been earning returns between 21% and 40% from 1995-1998 and then powered through 1999 with an 85% return….so who would waste their money in something earning less than 10%....certainly not me.
DeleteBut those 6% yields looked really nice in 2000, 2001 and 2002 when the Nasdaq returned -39%, -21% and -31% respectively.
My saving grace during that time was that I had sold a significant amount of stock in the company where I worked, in part to create an emergency fund and in part to have cash available for further investing. When the market dropped, it all became my emergency fund and allowed me to hold on and not sell stocks during the worst of the downturn. My hindsight is 20/20, but my foresight is fuzzy most of the time.
B and I married late in life, and so we keep our own finances. My only budget involves spending less per month than I have coming in. (SS + small withdrawal from savings account + occasional infusions of funds from part-time work). As long as my checking account doesn't go to zero, I figure I'm alright. So far, so good.
ReplyDeleteSo far, so good, is right. Life has a habit of throwing a curve or a knuckleball to the head every now and then. If so, we try to duck and adjust.
DeleteThis has absolutely nothing to do with budgeting but I noticed in the About section of your blog that you were a consultant to radio stations. My late husband was a programmer. His first and favorite job was working for a company that wrote software for radio stations He traveled all over to install and train the program at stations. On road trips he would always say station (and then the call letters) is here. He would have loved talking to you about radio.
ReplyDeleteAbsolutely. Radio was great fun. I started as a Top 40 DJ, then moved into programming and eventually research and consulting.
DeleteDid he happen to work for RCS? They sold software (called Selector) that allowed radio stations to program their music by computer. I could sit in my home office and program the music for stations all over the country using that program.
I would have enjoyed the chat.
The program was called Digital DJ. The company was called the Management and was owned by Pete Charlton. It was probably similar. Pete eventually sold the program but it was after my husband had left the company.
DeleteYes, he would have enjoyed chatting with you.
Just throwing in my own two cents. I, personally, have a budget that plans every dollar. I've always done that. I like careful planning. Of course in any given month some categories might be under spent and others over spent.
ReplyDeleteAlso, even in our leanest first-married days my husband and I each had an allowance. It started out around $10 per week and now is $50. There really isn't any particular reason for it anymore as neither of us is an over spender but it just feels good that we each have some WAM (walking around money) that we can throw around any way we want. He spends his on his hobby and lunches out with friends. I throw mine away on books and clothes, I'm a bit of a clothes horse, and lunches with friends.
We could, of course, take those expenditures directly out of the budget, but it feels good to have guilt-free money of our own. We even "save" our allowances for particular things we want.
Betty and I have a monthly WAM amount that is ours to spend (or not spend) as we see fit. My hobbies tend to be expensive (like vintage radios) so I will save for several months at a time. The little bit of income from this blog also goes into my WAM, but tends to go out just as quickly for the photos and software I use for the blog and my books!
DeleteI have never had a budget. I do keep track of my spending. I'm just naturally frugal. I do agree that you should enjoy your life and travel when you are younger. However, it's a very good thing to have a large amount of money for your later years. It could be that you are disabled and need to hire staff to assist you. Everyone likes to think that they will always be able to take care of themselves but I had the experience of not being able to do so after an injury. I recovered but it opened my eyes to that possibility. Even if you always planned to age in place you might want to move to an assisted living residence. And some of them are very expensive. If you have a spouse you might want to consider if they will need additional money if you die first. A lot to think about.
ReplyDeleteYes, there is a lot to consider and much of it is out of our control. Being good stewards of our resources is our responsibility. Enjoying life and what we saved is important, but so is preparing for the future care of our spouse if that becomes necessary. Also, we will do everything possible to not become any type of financial or caring burden to our kids.
DeleteFirst of all, Bob, kudos to you for budgeting your savings/retirement account out 12 years and ending up only off by one single month. That speaks to a detailed thoroughness in your planning, as well as to the ongoing support and communication between you and Betty. I'm very impressed.
ReplyDeleteAlan and I handle budgeting much the way you and Betty do, setting our budget at the beginning of the year and then monitoring income and expenses along the way. We currently are not claiming any Social Security or pension benefits and the income and expenses coming off our rental properties tend to be variable, so it's a little like hitting a moving target. Fortunately and by design, we do have funds in place to cover those fluctuations and any emergencies.
There are such great comments on this post and I can think of only one thing to add: When budgeting for health care (our biggest line item since neither Alan nor I are eligible for Medicare), keep in mind not just premiums but deductibles and out-of-pocket maximums, as well. A major illness or accident can easily run up medical expenses in the tens of thousands these days and I believe it's critical to be aware of your medical expense exposure for any given year. Having a solid understanding of your health insurance plan will go a long way toward crafting an effective budget. That's one thing I do miss about life in the working world - our health insurance was fabulous and the costs minimal compared to what we're paying now.
Betty and I were in the individual insurance market for all our married life. It is an expensive and terrifying place to be when you have multiple problems like Betty. Medicare has been a blessing for me but even more so for her when she qualifies early next year. You are so right about expenses. Even with Medicare there are costs for gap and drug coverage. Advantage programs can cut those costs, but after being in the grip of private companies with limited networks and an incentive to say "no" whenever possible, we have zero interest in allowing them back into our lives.
DeleteI will admit, I am amazed that my 12 year plan worked as well as it did. I give a lot of credit to strict budgeting and a lack of interest in keeping up with the Joneses.
Great topic and comments. Like you, Bob, I've used Quicken for years, so I can tell very quickly which categories are out of whack when we overspend. So far, we're doing OK and I'm not too worried about money most days.
ReplyDeleteI'm also noticing as we age that it takes more energy to travel than it used to, so I can really see the wisdom of going where we want to go before we don't want to or can't. A friend's financial advisor told her to think of it this way: In your 70's it's GO GO. In your 80's it's SLOW GO. It's your 90's it's NO GO. We're in different decades (I'm 60's, DH is now early 70's, and I can see the slow down happening.) We haven't regretted any savings we've spent on travel so far, so I intend to keep going while we can. :-)
Actually, I have a post about go-go, slow-go, and no-go coming up soon! Betty and I are adopting that philosophy in our planning.
DeleteThey probably don't want to know this, but I am still using Quicken 2002 software. It should have stopped working somewhere around Windows XP, but is going just fine with Win 10. Everytime I think about getting a newer version it is either too complicated for my needs, or the company wants an annual license fee for the same software.
Wow! I had no idea you could use Quicken that long without upgrading. So I'm guessing you're not using any online links as part of your record keeping? I've been been less than happy with them since they were sold off by Intuit, and they seem to have ongoing issues with links to download credit card transaction. Very hit or miss. Their upgrades are generally pretty buggy and the online complaints are legion. Still, I have tried other options and none work as well IMO.
DeleteYou are correct, I do not use any of the Internet connection options. I manually enter them into the appropriate category.
DeleteWindows has a setting that allows for limited backwards compatibility. That is what keeps this 16 year old program still working!
Love your blog but I'm more of a lurker. Question from an non-US citizen: when you talk about qualifying for Medicare, is that solely based on your age? Or is it income related also?
ReplyDeleteSolely based on the magic age of 65. Unlike Social Security you must sign up at 65 or risk paying higher premiums for life if you sign up at an older age. Why, I have no idea!
DeleteRob and I each manage our money separately. Neither of us has a budget. He has a substantial company pension plus his Canadian government pensions (CPP and OAS). He spends what comes in, avoids debt, but does not save. I have a small pension, and rely on my investments and savings for the balance of my income. This combination yields an annual retirement income about the same as Rob’s. We share or alternate between paying the big expenses. He monitors his accounts to make sure he doesn’t go into debt. I worked with a financial advisor to develop a financial plan before I retired. The plan set an annual withdrawal amount, and so far I have been withdrawing less than that. I monitor my financial situation monthly to make sure I am on track. Since moving to our retirement home, there have been some large unexpected expenses that have created some anxiety. But, on the other hand, I have as much equity as I had a year and a half ago when I retired, despite the recent market downturn.
ReplyDeleteJude
Because we have never done it that way, I am always interested when couples report maintaining two financial tracks, parallel but separate. Deciding who pays what and how it all fits together requires a solid, trusting relationship, I would imagine.
DeleteOne obvious benefit: both of you are well-versed in financial issues so one won't be let in the dark if the other is unable to continue managing his or her share of the resources.
Some people don't have a good idea about where their money is actually going. If they were well off in their working years and had discretionary income, it probably didn't matter. But I think most of us rest easier as we adjust to living on a fixed income if we have a good sense of our spending patterns. Some people might find it useful to track their spending in detail for the first year of retirement (or even just for the first few months). I use a spreadsheet for doing this, but there are also lots of online tools available. Like you and Betty, I sit down and go over my spending for the past year on Jan. 1 and then set up my budget for the coming year; it's become a New Year's ritual for me.
ReplyDeleteOn January 1st I finalize the new budget and pack away the previous year's receipts. It always feels good to start fresh.
DeleteBecause we have always tracked our money we know where it goes. This has been useful over the last 18 years to buy and pay off our home, save and invest for financial indepedence. I am 54 and will retire 7 months, my husband is already retired. We've put ourselves on our planned retirement budget for the last 2 years (while I still have a job) as a practice run to make sure we have planned adequately. Seems to work.
ReplyDeleteA "practice run" with a projected retirement budget is always a great idea, if you can do so. One of the tremendous side benefits is it proves to you you are financially ready.
DeleteI retired at age 61 last December after my employer of 42 years went belly-up. Recently found your blog and podcasts very helpful. My wife will retire at 62 in June after 26 years with a school district in PA. We have basically lived on one salary since our 2 boys were in college 15-20 years ago using one of those salaries to help pay for college so they didn’t end up with too much college debt. After their college days we continued to live on one salary saving the rest so retirement income should not be a problem especially with zero debt and no mortgage. We’ll have 5 income streams those being both SS, my 401k & her pension plus 403b. Currently we only keep track of the major bills coming in each month on a homemade paper spreadsheet which has served us well as to when bills are due but we are now considering a budgeting software program to give us a better heads up. Like Donna, we’re naturally frugal but torn between budgeting/tracking every penny like some folks wrote about but don’t want for it to become a waste of time like ddavidson writes. We’ll likely only need a very simple program for our purposes. Any suggestions?
ReplyDeleteOn a side note, I’m a ham radio operator and have been a short wave listener since I was 12 and I also collect some vintage radios as well.
K7UNL is my call sign. Because of a high noise floor in my area, I am only active on 220 and 2 meters and Echolink. HF has become unusable for me, I'm afraid.
DeleteI don't track every penny. If the bill is paid by the bank, like electric or health insurance premium I do enter the exact amount in the software program. But, if I pay cash for something, I round up or down to the nearest dollar. I have a budget category labeled, Miscellaneous. At the end of the year I charge $150 to it to make up for these rounding choices and the spare change stuff that I don't record at all.
I am using Quicken 2002. I have no idea why it still works, but it does. Now, Quicken charges a yearly fee to keep using newer software...not interested. I would think a Google Docs spreadsheet would work just fine for you. It is free. If you have Microsoft then Excel can perform the same function.
I know some folks who like Mint, also free, and is Internet based.
Thanks for the information, Bob. It sounds like maybe Mint would be the way to go as I believe our oldest son uses it. We could ask him questions if they come up.
DeleteI'm only on 2 meters as well. My father was a WW2 Navy radio operator. Later on he became very HF active as KA3SCV but became a silent key 10 years ago. I'm N3YND and my sons are N3YNE & N3YTU.
I'm afraid all the electronic devices in our lives means moving to a rural area and putting up a 40 foot tower with a beam would be the only satisfactory way to get back on HF.
Delete