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My Retirement Plan

Dennis Friedman

I RECEIVED A LETTER from the Social Security Administration telling me I need to apply for benefits immediately. I turn age 70 this year and there’s no advantage to delaying my benefits any longer.

How does reaching 70 feel? I know I get cold easily and don’t move as fast when I’m exercising. I’m also not as sharp mentally. But I’m actually looking forward to my 70s. It will be a decade more about living and with less thinking about money.

My Social Security will be the last significant piece in my financial puzzle. Maybe I’ll do a few more Roth conversions and tweak my asset allocation as I grow older. But there’s really no major money decision that’ll fundamentally change my finances going forward.

My wife and I will rely on our investment portfolio of 35% stocks, 60% bonds and 5% cash, as well as Social Security, Medicare Part A and Part B for basic health insurance, United Healthcare Medicare Supplemental Insurance Plan G and United Healthcare Medicare Prescription Drug Plan.

This is our blue-collar financial and health care retirement plan built on sweat, sacrifices, endurance and hard work. There was no knockout punch, such as a hot stock or a large financial windfall. Instead, it came down to a steady stream of jabs, in the form of regular automatic investments over many years, primarily into low-cost broad market index funds.

Here are five questions I asked myself while creating our retirement plan:

1. Why not buy annuities for additional income? The one thing I’ve learned is that bad things happen and they can’t always be prevented. For instance, chronic health issues can be very costly. According to a 2020 survey by Genworth, the median annual cost of a private nursing home room is $105,852, while a semi-private room is $93,072.

The problem with buying an annuity is that it takes away the flexibility to respond to these types of changes in your retirement plan. With an annuity, you hand over control of your money to an insurance company in an exchange for guaranteed income. I’d rather hang on to the lump sum in case there’s an expensive unexpected event, especially in the earlier phase of our retirement.

2. How am I going to create income? We’ll use a total return approach, focusing on generating both income and capital gains. We’ll spend the interest, capital gains, dividends and fund distributions generated by our stocks, bonds and cash holdings. We’ll also have our Social Security, with my benefits as of age 70 and my wife’s as of her full retirement age. We feel confident we have sufficient savings that, if necessary, we can spend down part of our investment portfolio and not run out of money, no matter how long we live.

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3. Why not choose a Medicare Advantage plan, with its lower premium? I chose federal-run Medicare over Medicare Advantage, the private insurance alternative that can have different rules for how you get medical services. For instance, under Medicare Advantage, you usually need a referral to see a specialist and for certain medical procedures. I didn’t want to be limited to a network of doctors and I wanted to make sure I can get immediate medical coverage anywhere in the U.S. I wanted more control over my health care and was willing to pay for it.

4. Why not buy a long-term-care insurance policy? The inability to forecast the true cost of a long-term-care policy over a long time horizon was a major concern for me. Policyholders have faced steep rate hikes over the years. It probably comes down to a lack of trust: I worry that an insurance company would try to price us out of coverage we’d bought years earlier.

I’ve also heard stories of insurers denying coverage to policyholders who felt they met the eligibility requirements. Eligibility is usually based on whether you need assistance in performing two of the six activities of daily living, such as bathing, dressing, eating, transferring (moving from bed to chair) and toileting. I was also aware the best time to buy long-term-care insurance is before your 60th birthday, because rates are lower, and felt it was probably too late to purchase coverage, even if I thought it was a good idea.

5. Will we run out of money? I believe the biggest threat to our retirement is our health. Large out-of-pocket health care expenses can deplete even a well-funded investment portfolio. Since we didn’t buy long-term-care insurance, the best way for us to guard against this financial threat is by protecting our mind and body. My wife and I try to live a healthy lifestyle by exercising, eating a healthy diet and getting enough sleep.

I’m the first to admit my decisions about our retirement plan haven’t always been based on sound financial principles. Instead, those decisions were sometimes predicated on experience. For instance, I remember a late friend—who was battling hepatitis—once telling me he was denied a medical procedure by his insurance carrier that he felt was vital for his well-being. As a last resort, he sat down on the floor in the lobby of that medical provider and refused to move until his request was granted. That image will always be etched in my brain. I can’t help but think of him when I make decisions about our health care in retirement.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.

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Mel Langer
Mel Langer
6 months ago

To the issue of annuities folks. Try not to be so gullible. 80% of the people who buy them will never live long enough to get back anything other than THEIR OWN MONEY.You have to really understand the product, and the vast majority of people do not. Ditto for the the folks selling them.

Mel Langer
Mel Langer
6 months ago

Dennis is posting his views on a myriad of topics, which any person with a modicum of common sense will find enlightening. He NEVER said what he’s doing, or did, is for everyone.His rationale is very logical.So I’m hard pressed to understand the myopic response from reader Ellen. Reprehensible!

Rich
Rich
6 months ago

Dennis; great article and it really got my attention because I’m exactly 1 year away from where you are and agree on all 5 points you made. Because I’m living my dream job in retirement my wife and I have delayed Social “insecurity” ‘til we turn 70(for me.) We are financially secure, no debt and still saving toward the day we do retire…(the only home I’m moving into after that is the funeral home!) The point on LTC is also right on. My aged mother is home bound, requires in-home care and hopes to stay there as long as possible but we’ve fought with her insurance company for 2-3 years over claims that her policy says is covered yet they continue to deny them and our appeals. An attorney told us it will cost more to go to court than we would collect and the companies know that. Not to mention the friends I’ve known whose policies were abruptly cancelled after paying for many years…good call on that one. Thanks much.

Ellen
Ellen
6 months ago

I don’t recall Mr. Friedman and his wife asking for opinions regarding his retirement plan/portfolio, etc. Not everyone – I include myself here – welcomes nor appreciates unsolicited advice! Still, everyone certainly has his/her opinions and clearly, folks are not shy in expressing them! I trust Mr. Friedman and his wife to know their own minds. I suppose, however, that, when one puts oneself ‘out there,’ unsolicited opinions are to be expected. Sigh…

Peter Blanchette
Peter Blanchette
6 months ago

Given your allocation to bonds, it makes no sense to not devote a small portion of that bond allocation to annuities. Bonds do not return what they used to as everyone is aware. What is the downside to earning a little above bond market rates usually not available to small investors? If a senior ends up in a nursing home and is without LTC insurance a few thousand $ spent on an annuity in the past is not going to be the factor that causes financial insolvency. A side benefit to annuities is that they allow the investor to take less investment risk if they are already so inclined while maintaining necessary income.

mytimetotravel
mytimetotravel
6 months ago

I passed on long term care insurance. Instead, I’m on the wait list to move into a CCRC. There are different types, this one guarantees not to throw me out even if I run out of money (it’s a non-profit that’s been in business, and offering that guarantee, for 30 years). Part of the fees are tax deductible as medical expenses. This way I will be able to move from Independent Living to Assisted Living to Skilled Nursing on the same campus, indeed, in the same building for Assisted Living.

Will
Will
6 months ago

Roth Conversion: I am 71 and ran the numbers for myself 10 years ago—converting broke even at best, and paying the taxes was certain. So I didn’t

OBX9397
OBX9397
6 months ago
Reply to  Will

Will, thank you for sharing your results. I ran some numbers in late 2019, and have been curious to see what conclusions other people reached.

For what it is worth, the following is what I discovered.

(First, a little up-front explanation. I ended up with nine variables that I used to test different scenarios. (I am certain this number could easily be increased.) The variables allowed me to play with different inflation rates, investment return rates, and income tax rates. Most of these variables concerned Federal and State tax rates. I used different tax rates for different time periods:  the next 5 years, the later years of my life, and the 10 years during which my children would inherit either an IRA or a Roth IRA and have to fully distribute them. I mention all this, because the results can vary substantially based on the variables keyed in.)

I was expecting the results to heavily favor conversions to Roth. The results disappointed me, like your results apparently did for you.

The total tax savings could run into fairly large numbers; about 12% of the ending value of the assets. However, the Present Value of those tax savings was more like 6%.

Over the last two years, I have been converting part of my IRA to my Roth IRA. The hassles of figuring out how much to convert each year to avoid bumping up to a high tax bracket and the hassles (a better term is “disgust”) of writing quarterly tax payments, has me now wondering if the effort is worth avoiding those taxes, which would be spread over the next 3 to 4 decades.

Again, for what it is worth.

Roboticus Aquarius
Roboticus Aquarius
6 months ago

Thanks for sharing your plan. I found the Medicare comments interesting. There are just so many variables in constructing a retirement.

parkslope
parkslope
6 months ago

I’m sure he knows the conventional wisdom about investment allocations. IMO it is impossible to advise him without knowing the size of his nest egg and his tolerance for risk. As an extreme example, a billionaire who is losing sleep with only 10% in equities might be better off avoiding equities altogether.

Last edited 6 months ago by parkslope
AKROGER SHOPPER
AKROGER SHOPPER
6 months ago

Dennis hit the nail on the head in with nursing home costs and insurance. Our phone has been ringing off the hook with insurance agents as the magic number has been reached. Bottom line is health is wealth, and no amount of funds can bring back health once its lost.

Danielle
Danielle
6 months ago

I agree. I urge people to keep no more than 50% in bonds–the withdrawal rate studies on survival cite at least 50% in stock funds as a minimum.

Danielle
Danielle
6 months ago

I think the consideration for long term care insurance is a bit more nuanced than what you say. Yes indeed it gets more expensive after 60, but actuarily it should be the same–because if you get it before 60, you’ll have been paying the premium all those extra years. I do understand that premiums have gone up dramatically for some people, but I’ve had the same charge for now the 14 years I’ve had my own policy. I fully expect an increase and probably a big one one of these years–that’s what my HSA is for! An increase in premiums can be part of a financial plan, just like any other anticipated rising cost.

Finally, I advise clients to get a plan before 60 not because of the purported cheaper price, but because after 60 many, many people develop health conditions that preclude them from even qualifying, no matter the price they’re willing to pay.

It’s just crazy to balk at paying $3,000 a year for coverage that could be worth $500,000 in costs to a portfolio. Even if you pay for 30 years, it’s about 1 year in a nursing home or continuous home care (even more expensive). Think you’ll never use it (hah!)–buy a hybrid policy that pays off as life insurance so that money won’t be “wasted”. But it’s not wasted–I tell clients–do you expect your house to burn down? Do you still carry homeowners’ insurance? In both cases, you’re paying to prevent catastrophe. Sure, there’s a point where you might have so much wealth (in either case) that you could pay out of pocket, but most middle class to affluent middle class aren’t there.

The biggest problem is wrestling with the insurer over the two tasks of daily living–lots of people need assisted living but only have one issue.

R Quinn
R Quinn
6 months ago
Reply to  Danielle

Last year my premium for coverage I purchased 32 years ago jumped 47% with notice of another increase this year.

dl777
dl777
6 months ago

Great article. 60% bonds seems very risky these days as short terms yield nothing and longer term have seemingly the same risk of capital loss that stocks have. I am 61 and don’t know where to put my money anymore. It seems we now have to put our money into companies with long track records and deep moats that are paying adequate dividends (~2.5-4%). SPYD (S&P High Dividend Stock ETF) lost 38% of it’s value last March. That does not seem to be a place where anyone wants to be who is just entering or is in retirement. Everyone says diversification but diversify into what? It seems the new model is 80% in dividend aristocrats and 20% cash. Seems like a lot of risk that way too. 🙂

Danielle
Danielle
6 months ago
Reply to  dl777

I don’t think dividend funds are the answer. Companies who pay high dividends are concerning–they might have no growth potential so have nothing else to do with their money, or in a highly regulated industry that holds down profits/growth, or turkeys that can only attract investors by a huge payout to the unwary. A company that pays out 5% in dividends but whose share price drops 30% is no bargain.

I’d look at 60/40 portfolio recommendations–lots of places have specific portfolios recommended–Bogleheads, Christina Benz at Morningstar, or maybe consult with a fee-only financial planner (full disclosure, yes I am one) for your specific situation.

Roboticus Aquarius
Roboticus Aquarius
6 months ago
Reply to  Danielle

I think it’s fair to generalize about the risks of replacing bonds with high dividend stocks. Based on history, this will increase portfolio volatility.

Every kind of stock is suspect. 70% of them fail to break even every year. 80% of them have below average returns. That’s another reason why we use index funds.
———————————————————————————————————
Bonds are a conundrum. I plan on leaning heavily on my stable value fund, but not everyone is lucky enough to have a good one in their 401k plan.

Gold isn’t a terrible long term alternative, though I’m not a fan.

I’ve lost any faith I had in low and min volatility stocks – not that I ever thought they could replace bonds, but I hoped they could help around the edges. March 2020 made me question that notion (even though nothing works as expected all the time, at least bonds will always limit your volatility.)

Guest
Guest
6 months ago
Reply to  Danielle

Rarely is it wise to generalize. Your suggestion to avoid dividend funds makes absolutely no sense based on history.

Ormode
Ormode
6 months ago

It is a good idea to wait until age 70 to take SS if you are afraid not having sufficient funds in the later stages of retirement.
However, if your income might be too high, then one strategy is to take SS early.

R Quinn
R Quinn
6 months ago

Based on your investment mix, how can you be sure it will throw off sufficient income if you are only using dividends, interest and capital gains distributions?

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