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MY WIFE CALLS HER 99-year-old mother every morning. One morning, her mother asked, “Are you making big things happen?” After Rachel reminds her mother that she’s retired, her mother asked, “How do you make money?”
Although I chuckled when I heard the conversation, those two questions are probably on most folks’ minds as they prepare for retirement. First, how are they going to generate enough income to fund their retirement? Second, how are they going to stay busy doing meaningful activities?
Funding our retirement. When I retired, I was eligible for a pension. But I took a lump-sum payout instead of the annuity, rolling the money into an IRA. One of the reasons I took the lump sum: I was single at the time. I was concerned that, if I eventually got married, my future wife wouldn’t receive any money if I took the annuity. There would be no survivor benefit upon my death. It turned out to be the right choice. In 2020, Rachel and I got married.
As a result, our retirement income comes from two sources: Social Security and retirement account withdrawals. I believe this is a viable strategy for folks like us who want to remain in their home, self-fund their long-term-care needs, and not run out of money.
In 2024, when I turn age 73, I’ll need to start taking required minimum distributions, or RMDs, from my retirement accounts. Rachel is six years younger, so that milestone is still a handful of years away for her. Each year, our RMDs will be determined by dividing our tax-deferred retirement account balances as of Dec. 31 by a life expectancy factor. That means that, as we grow older and our life expectancy shortens, we withdraw a larger percentage of our retirement funds each year. Relying on RMDs to guide our spending will lead us to spend less in the early years of retirement, while increasing spending in our later years when health care costs may be higher.
Since I didn’t take my pension as an annuity, I thought about buying an immediate-fixed annuity after I retired. But I was never convinced that was the right move for us. I always thought having the lump sum rather than an additional income stream might be more valuable as we age. I know that runs contrary to the idea that having guaranteed lifetime income reduces the risk that you’ll run out of money.
My thinking: In retirement, health care costs can come rapidly and in large chunks. For instance, the annual cost for a private room in a nursing home is approximately $108,405. The average stay in a nursing home is about two years, though it could be far longer, of course. In California, where we live, a home health aide costs an average $29 per hour. Having a lump sum might be more valuable in covering these types of spikes in health care costs, especially if your health fails you early in retirement. At that juncture, the additional lifetime income might not be that useful.
I do believe it’s important to have an annuity, and we have that with our two Social Security checks. These are the two best annuities we could buy. Compared to annuities sold by insurance companies, Social Security offers inflation protection, it’s taxed less heavily and there’s less credit risk.
When I start RMDs next year, our Social Security benefits will probably be about 45% of our total income. That 45% is more than enough to cover our low fixed living costs, allowing us to ride out the ups and downs of the stock market without selling shares at depressed prices.
Relying on the safety net offered by Social Security works best if at least one of the spouses—preferably the one with the higher lifetime earnings—delays his or her benefit until age 70. With any luck, that will ensure the surviving spouse will have sufficient predictable income to cover fixed living expenses. If one of your Social Security checks does that, I don’t think there’s a pressing need for an immediate-fixed annuity.
Staying busy in retirement. When I retired, my father said to me, “Don’t worry about staying busy in retirement. Your doctor’s appointments will keep you busy.” He was almost right. It was my dad’s doctor’s appointments that kept me busy. Shortly after I retired, my dad was diagnosed with lymphoma. The next three years, my mother and I helped him fight his battle against cancer.
Being a caregiver for both my parents for the first 10 years of my retirement wasn’t something I planned for. You find out there’s a lot of things that can happen in retirement that aren’t planned. This doesn’t mean you shouldn’t have a retirement plan. Rather, it means your plan should be flexible.
My initial plan was to stay busy by taking cooking classes. I got the bug from watching cooking shows. Seeing those chefs make mouth-watering dishes motivated me to buy new cooking utensils, knives, and pots and pans.
When I wasn’t taking cooking lessons, I thought I’d get a part-time job. I didn’t want a job that was stressful. I had one of those. I wanted a job that allowed me to be around a lot of people, so I wouldn’t get lonely. My first choice was Trader Joe’s. There was one a few miles from my home. No long commutes to ruin my day. Plenty of people to mingle with, young and old.
In my spare time, I would travel. Maybe a cross-country trip in the Volkswagen van that I always wanted. Better yet, how about a trip to Europe?
But none of that happened. My parents needed help, and they came first. Luckily, my retirement plan wasn’t carved in stone. I could easily drop everything I planned and take care of my parents. I hadn’t made any major financial commitments. For instance, I didn’t plow money into a second home in another part of the country, where I’d spend part of my retirement.
These days, I devote some of my free time to writing. I started keeping a journal to record my experiences, ideas and feelings. I believe a journal will help me achieve my goals by tracking my progress. I also hope the journal will improve my memory. When you write something down, you tend to remember it better. Lately, I’ve been recording my dreams when I wake up. I dream a lot, and I’d like to find some meaning behind those dreams.
The real inspiration behind keeping a journal was to improve my writing skill. I thought that the more I write, the more my writing will improve. Of course, I still plan on writing for HumbleDollar when I have something worthwhile to say.
When I’m not writing, I spend my time reading, exercising, gardening and traveling. I’d be remiss if I didn’t mention those doctor’s appointments. My dad was right. They can keep you busy as you grow older.
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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You mention health care costs coming rapidly and in large chunks in retirement- I think I would label them long term care costs which are mostly custodial. I assume if you are on Medicare that your medical/health care costs are fairly well capped.
You are correct, except for some people aggregate premiums can be much higher than active employer coverage. Also, at present but changing, Rx costs can be quite high. LTC while a risk possibly a big risk, is generally overstated in terms of risk given about 5% of seniors are in a nursing home. In home care is far more common but less financial risk and then more like 40-50 % at high ages.
In home care IS long term care. LTC is not just nursing home care. LTC insurance for the 50% hopefully is at home.
I have never thought that my RMDs have anything to do with my spending. The government requires me to move a certain amount of money from my tax sheltered accounts to taxable each year. I have been doing that for several years but I have yet to spend any of the transferred funds.
Those of us who do t spend RMDs are the lucky ones. People who follow the 4% rule effectively are using RMDs as the percentage is very close. I started using much of my RMD for QCDs.
I do do QCDs, but since I may well need the money at some point (no COLA on my pension), it is a small percentage.
I try to give what i would have paid in taxes anyway so no loss.
I wonder if Social Security is actually taxed less than an immediate annuity. Some pay no income tax, most pay tax on half their SS and a relatively few pay tax on 85%.
Individuals pay roughly 50% of their benefit in payroll taxes – in theory, but in the aggregate seniors have paid for only 15% of their benefits in taxes.
On the other hand, if one buys an annuity with after tax dollars they pay income taxes only on the gains from the annuity regardless of their total income.
Just a thought.
I hope everyone heeds your warning. I have a few doctor appointments myself. But it is my mom’s appointments that keep me busy.
I’ve known so many folks who fail to anticipate their parent’s needs. They retire to another state or even another country. 2 years later their parents need them.
Critical time is lost when the good parent delays asking for help. They are aware of the logistical strain of long-distance assistance.
Very good point. Logistical strain is a good way to put it.