I’VE BEEN CHALLENGED—by Mr. Clements, no less. Jonathan didn’t actually say it, but his challenge was to defend my unorthodox views on investing and retirement, and the actions I’ve taken as a result.
Some of my decisions will seem illogical to others. Some don’t maximize investment returns. Some are very conservative, others not so much.
I don’t like math. I don’t like details. I haven’t used a spreadsheet in 30 years. I focus on the big picture and long-term goals. I want to feel financially secure and that I’ve achieved something. I try to cover every financial “what if” possible. Lately, I’ve been getting close to achieving my next net worth goal.
For Connie and me, our combined Social Security and my pension are our key sources of retirement income, not our investments, and that affects the investment decisions I make. Here are the five questions that Jonathan asked—and how I answered:
JC: You’ve written that you have 17% of your portfolio in one stock—your old employer’s shares—and that you continue to reinvest your dividends. Was it wise to put so much in one company’s shares, especially your employer’s stock? And is it wise to continually increase your stake by reinvesting your dividends?
RQ: Conventional wisdom says it isn’t wise. I won’t argue with that, nor would I recommend my strategy to others. But I didn’t buy the great majority of those shares. They were given to me as compensation—stock options, restricted stock and stock bonuses. When the chance arose, I could have taken cash rather than shares, but I liked the idea of receiving dividends and still do. The company has a 117-year record of paying dividends. I suspect I also have a bit of misplaced loyalty.
JC: You’ve mentioned taking Social Security at your full retirement age of 66, and you’ve suggested in your comments that readers do the same. But if folks want to get the most out of Social Security, while also ensuring a healthy survivor benefit for their spouse, the standard advice is to wait until age 70. Are you sure you made the right decision?
RQ: I’m confident we made the right decision. I don’t recall suggesting readers do the same, but if I did, I take it back. I certainly recommend that, if possible, folks don’t start Social Security before their full retirement age. I also think it’s irrelevant whether you get the most out of Social Security in terms of total lifetime benefits. People should take their benefit when they need the money the most.
As far as survivor benefits go, if I predecease Connie, she’ll receive 50% of my base pension, 75% of my non-qualified pension, my Social Security, life insurance equal to at least two years of expenses, and income from our portfolio’s interest and dividends. Connie’s financial security is a top priority for me.
JC: When you took Social Security at age 66, you put the proceeds in municipal bonds—and yet you’ve said in the comments section that buying munis wasn’t the best financial decision given your tax bracket. Moreover, the return from the munis would have been less than the gain you could have enjoyed by delaying Social Security. At this juncture, shouldn’t you at least reverse course, sell the munis and invest the proceeds elsewhere?
RQ: My comment that you reference was comparing the return on Treasurys and munis. In that regard, I may have lost a percentage point or so of return each year by opting for munis. Today, those munis generate more than $1,000 a month in tax-free income, which I continue to reinvest, plus the three muni funds I bought now have significant value. Had we delayed Social Security, our income today would be higher, but we wouldn’t have the lump sum that we’ve amassed with the munis.
JC: You’ve promoted index funds, and yet your IRA includes actively managed funds with relatively high expenses. Why do you hang on to these funds, when you could switch to index funds without triggering capital-gains taxes?
RQ: Good question, Jonathan. Just lazy, I suspect. I got into those funds when I moved all investments to Fidelity Investments, and we were trying to replicate holdings from my 401(k) and an IRA. The good news is, the active funds are a small percentage of the total account. I may take your advice on this one. I still say index funds are the way to go, and they constitute the bulk of our investments.
JC: You’ve repeatedly advocated that retirees aim for 100% income replacement, and yet many retired readers say they live comfortably on far less. Are you right to keep pushing 100% income replacement?
RQ: My conservative side is showing. Yes, I still think replacing 100% of base pay—as opposed to total income, which might include a year-end bonus—is desirable. I’m sure retirees can get by with less if they reduce spending, relocate and so on. But why set that as a goal? Why retire with the requirement to change lifestyle? If Social Security is included, reaching 100% of pretax income is doable for most people—though perhaps not if you retire before age 62, which I see as a greater risk.
I also believe saving regularly is still necessary once you’re retired. When you factor in discretionary spending and unpredictable events, your spending probably won’t decline significantly—if at all—when you retire. Mine sure hasn’t.
Then factor in inflation. My pension is based on average earnings over the five years ending July 2008—my final five years of full-time work. Since then, we’ve had 16 years of inflation, so my pension now has 30% less purchasing power. Where would I be if I started retirement with income equal to just 70% of my pre-retirement base salary?
Could I have made better financial decisions? I have no doubt. Could I have accumulated more than I have with better decisions? Very likely.
The way I look at it, I graduated high school in 1961 and got a job paying just above minimum wage. Between then and now, my wife and I put four children through college, purchased a vacation home, built a secure retirement, and amassed financial assets that put us in the top 10% of our age group, with the prospect of leaving behind a healthy legacy for our children.
What more could anyone ask?
Richard Quinn blogs at QuinnsCommentary.net. Before retiring, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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I always appreciate your thought provoking comments even though we disagree on many things. Below is a list of my reactions to this provocative article. Thanks to Jonathan and to you for making HD such a great forum for discussing financial issues.
Here you go:
yes, I could, but I know the company very well and as I said I have an illogical emotional attachment.
My short answer is life insurance and or an annuity plus remaining assets that I assume the couple was living on.
I still like the tax free income and as I said, that income can be part of survivor benefits.
Those funds are a small percentage of total investments, but I’m thinking of changing.
Individuals who can save 35% of income are not typical so not really a good example
A pension does not justify my 100% position, I say that is a desirable goal regardless of income sources. All spending, expense and inflation events will occur regardless. Hey, it’s a goal that provides a cushion, flexibility. I also think everyone should have annuity type income by the way and even 401k plans are starting to head that way.
The saving I suggest in retirement is primarily as an emergency, contingency fund and replenishing that as necessary, and to avoid taking excess from from retirement funds, to smooth over down markets or simply large expense desired spending. I presume people save while working other than just for retirement so why is retirement different.
If you are looking for conventional thinking and investment strategies, I don’t think it is here…but I don’t think I’m all wrong either.
I find that less stress over the intricate details of investing and the future results for me the better. I keep it simple.
We are blessed with pensions.
All of our retirement accounts are in two index funds. My wife took and I am taking S.S. at fra so she will be able to receive full appeal benefit.
Less stress leads me to peace and being able to enjoy life and focus on adjusting to retirement of which my wife is and I will be at the end of the year
Sounds like a plan. Less stress is the way to go IMO. Enjoy your retirement.
I hope readers realize the questions were actually prepared by Jonathan, I didn’t make them up for the article-just a cut and paste from his e-mail. 😇
Note to self, write an article rationalizing my financial decisions.
That is called an investment plan
I look forward to it.
No attempt to justify on my part, I’m already convinced and content with the results.
Per usual Richard, great article. Big index fan here…..among other reasons, like the simplicity (and low cost) of putting the public equity portion of the portfolio in just a few straightforward funds (with one firm). And gave up on active managers decades and decades ago. Wall Street, beaten in that regard, now seems to really be pushing private equity to capture the fees they now only dream about with public equity funds today. Always enjoy your articles.
👍
Always enjoy your writing. It goes to show that even the immutable laws of investing can be tweaked to follow your own innate
beliefs. As Charley Ellis would say, you’ve won the battle. You can navigate what makes you comfortable. Cheers!
Joe
✔️👍
Richard, you are one of a kind. Thanks for sharing your thoughts. My circumstances are completely different but I have enjoyed your articles. It’s good to get a little more background
I mean no disrespect but I expect that when I’m 80+ I will have far more interesting goals than thinking about “achieving my next net worth goal.” Often we all can tend to think too much about how much $$ we have – it’s borderline gross. I expect most readers will completely disagree with me!
Hello Guest, I was quite aggressive at gaining as much as possible, in my working years. Now, being jobless for 3 years I’ve made the mind shift to not thinking of getting even more. I like the idea of relaxing and just not caring about it.
I don’t want to ‘invest’ for investments sake. However, I do know a bank account with tens of thousands sitting in it does no good. At 71 I acquired another income property and pay 2 mortgage amounts monthly to help the accounts keep reasonable. The properties are of course for the next generation so I don’t see them as a personal investment, but a legacy.
Yes sir and I agree. I’m not saying to purposely not build additional wealth (I am very much a capitalist!), it’s about focusing on it at the expense of other later-life enjoyable pursuits. I don’t care about setting and hitting some random wealth target.
I only mentioned that in the context of incremental detailed goals versus high level goals and achieving them by seat of the pants.
I don’t know about more interesting goals, except my wife and I having more years of healthy lives together, seeing at least one grandchild graduate college.
The fact is I have achieved all the significant goals I set when I was 18, really.
Well almost, I’m still looking to have my golf score be closer to my age than my blood pressure.
Dick, would you agree that one of your main reasons for advising people to replace 100% of base pay is because people know their base pay but typically have no clue how much they spend and, if ventured to guess, would underestimate?
Knowing what you spend is inherently difficult since it occurs in many places: credit cards, checks, pay deductions (e.g., insurance premiums), ATM withdrawals, etc. And it can be lumpy, too, with home maintenance, car purchases, vacations, out of pocket healthcare, etc.
If a financially astute person were to analyze all their spending for the 12-24 months prior to retirement, add non-recurring expenditures, anticipate material spend changes (like for healthcare) and build in some cushion, and was able to cover this number with SS/pension/investment income, would you agree that this would be just as good as “replace 100% of base pay”?
Nope – only because I don’t think all those calculation, projections, estimates can be accurate over years into the future. Besides, isn’t aiming for the 100%?a lot easier?
How can someone not know their spending? It has to be net after tax income, less savings. Isn’t what’s left what a person spends? One caveat, not carrying credit card debt to enhance spending.
Because of that limiting factor I have never used a budget or paid credit card interest. If the money isn’t there, it is not spent and if there is an emergency – like a new water heater and AC repairs, the money comes from a contingency fund replenished from retirement income.
So, I say retirement is no different, my spending is always limited by my net income. if I enter retirement with 100% replacement do I need to know more?
I can only see an error on the plus side. Say the week before retiring the mortgage is paid off, they may create an excess, but health care coverage could offset a big chunk of that, especially if there was employer subsidized coverage. If not, sock it away for emergencies.
I’ll concede yours is a decent rule of thumb. Personally, I would not have been comfortable retiring without “running the numbers.” But, hey, I’m a numbers and detailed-oriented guy, not a big picture guy. And my financial situation is fairly different than yours If I hadn’t run the numbers, I would have stayed in a no longer enjoyable job and missed out on many early retirement pleasures such as time with young grandchildren. Priceless!
Thanks for the back-and-forth. You make me think.
I find it very easy to calculate my spending – I just look at my Quicken reports….
Month after month doesn’t your spending match your net income or perhaps be less?
Depends. I’m actually more interested in the annual report, but I refer you to my earlier article: https://humbledollar.com/2023/06/better-things-to-do/
I realize the concept of replacing some percentage of your working income is a simple way to determine whether you are financially able to retire. However for some of us its not a useful rule of thumb. Our expenses were never proportional to our income. We spent all we wanted to spend and put what was left over into investments. There was always a lot left over to invest. The last year I worked we only spent 25% of our gross income. If we only spent 100K to live a rich life when employed why would we need to replace an income of over $400k for retirement? We are still living a rich life right years into retirement still spending the same amount.
I suggest your experience is a tad atypical. Spending all you want and it only adding up to 25% of gross income indicates to me being quite a modest lifestyle and/ or a very large income to work with. Putting what is left over into saving is not how most people can reach retirement goals.
The assumption that people are going to spend every available penny or live excessively frugal lifestyles is incorrect. People who live modest but comfortable lifestyles often turn out to be millionaires – isn’t that the premise of “The Millionaire Next Door”? In any case the poster said his income was over $400,000.
I’m thinking it is all relative. How do we define “modest but comfortable?” for example?
I could afford a Lexus, but I drive a Camry. I could have afforded a bigger house, but I thought three bedrooms plenty for one person. I could afford more expensive wine but I think $15 – $20/bottle is a good range (except for port). I wear costume jewelry instead of diamonds. When I traveled I preferred B&Bs and pensions to luxury hotels (much more fun). Etc.
On the other hand, the CCRC I entered in October is not cheap – but that’s what the nest egg is for.
What role does luck play in retirement? Some say you make your own luck with hard work and good decisions. I would say as I enter retirement I’ve had some favorable bounces. I worked for GE for 16 years, earned a small pension, but I rode the stock price up until I left in 1999. My 401k and stock options were tied to the tremendous growth in the stock price, but I cashed out the options and sold all my shares before I rolled the 401k. I had listened to some IBM retirees complain about all the money they lost carrying over company stock into retirement. GE stock tanked a few years later and is not back to where I jumped off. My next employer was another public company and via ESPP, options and grants I had a fair amount tied up in company stock. I left after 3 years and sold every share. Not a huge gain but a few years later they were purchased by Berkshire Hathaway where many employees became wealthy. Missed on that one. Afterwards, I worked in a series of private equity owned businesses. A big portion of my comp was always in company stock. Some of these deals did not pan out. Several turned out very well.
i always tried to manage the risk that was manageable. Invested in index funds starting around 2002, listened to Mr Clement’s advice. I was worried about how my wife would manage the wealth we had created if I pass first. I engaged with a financial planner to oversee my process and provide feedback. He was also prepared to step in if I couldn’t do the work anymore. We negotiated a reduced fee structure that seems fair to both sides. I’m heading to SS at 70 and doing some Roth conversions along the way.
I would say we both have had some luck along the way. Continued good luck to all.
I agree with you, Harold Tynes on the topic of luck. Luck may be “good” or “bad” or both. One could define good luck as the relative absence of bad luck. Scientific or mathematical minds may prefer the term random probabilities. While some may improve their odds by making good decisions, there remains a definite unpredictable randomness I don’t know how to avoid. Regardless of terminology, I consider the fact that I was never stricken as a young man with a wife and young boys on the cusp of a career by any of the numerous devastating neurological diseases I used to diagnose and treat to be very good luck indeed! Spending considerable time with these wonderful patients every week and failing to appreciate that fact would have been an extraordinary oversight on my part. And good luck to you and everyone else writing and commenting on this article. Jonathan, what is the record number of comments on an article?
Not sure what the record is, but we’re definitely up there with this one.
I don’t acknowledge luck, but I certainly do the absence of misfortune in my life. That was significant. We have been very fortunate in many ways and grateful for that. On the other hand, my wife and I have always worked in a partnership with near zero controversy and perhaps most important, not doing things to get us in financial trouble and living within our means.
Great comment, Harold, and luck is a factor frequently overlooked. My own retirement nest egg is in no small measure a product of great good luck following three terrible decisions — to invest my entire small nest egg in one stock, to marry the wrong woman, and to please her by buying a house that was clearly beyond my means.
For the down payment on the house, I sold the stock (Cisco) at its historic peak, which it has never again approached. My fiancee being technically not of legal immigration status, I bought the house in my name alone just before the wedding, which saved it from the eventual divorce decree. And the house ultimately doubled in value before I sold it. So here I am… with a happy second marriage and some nice retirement security. My stupidity paid off handsomely — out of sheer luck.
Richard,
I strongly agree with your plan to replace 100% of your income. I have been retired 7 years and for various reasons our out of pocket expenses have stayed the same or gone up compared to what we were spending before I retired, the boogeyman of inflation is also part of this. I also agree that you should not have to “shrink” your lifestyle when you retire.
Your comments to JC are a good example of how rules of thumb are good to look at and think about but are not necessarily correct for everyone.
Thanks
Bill
Thank you Bill, at least I now know I am not alone in the desert. Stuff happens in retirement just as it does before. I am amazed that many people seem to feel they can plan every expense, every spending plus inflation over the next 20-30 years and then trim their living down to 70% of pre retirement levels. Seems like cutting it close to me.
Sir Richard, Thank you for opening this discussion. I agree, to try to match work income after retirement. In fact I’ve cautioned folks I know to have more. I have 5 lifetime post job incomes, 4 are static. Ol inflation marches on!
Also, on the flip side, it’s good to get the hek out of debt so the retirement dollars go farther.
It is so easy to save, once there’s no credit type payments to be made from the retirement accounts.
Richard’s response resonates with me. My portfolio is a varied collection of investments resulting from choices I’ve made over my lifetime. Though I think it is on balance quite good, it is decidedly not highly focused and surgically designed. And I have more stock investment than is recommended for someone my age.
I keep some of what I have so I don’t have to pay taxes on the big stock fund gainers and my kids will hopefully get a step-up in basis. I keep some of it because it fulfills that guilt-induced itch to diversify a bit across stocks/bonds, growth/income, large/medium/small caps, and a tiny bit of international (for which I have little regard and that I will leave to my American companies who do business around the globe.) I keep some of it because I have beliefs that have not quite panned out, but in which I retain some faith they will eventually deliver. I keep some for reasons I can’t quite express – like loyalty to one fund I’ve had forever, and that still delivers a decent return. And I have a big core of “wise” choices (mostly indexes) that I will probably never touch.
I took Social Security a little early, at 68, mainly because I didn’t want to tap into other assets in a market where those assets were still appreciating rapidly. That was worth it.
I know what I could do in order to increase my gains a bit more, but when I do the math, I often conclude that the differences really are so small that I’d be doing a lot of work for a minuscule gain after taxes. I’m old. I don’t need to use my time that way. I feel entitled to coast a bit now, though I always keep my eye on the road (and my fiscal speedometer.)
Coasting is good, I enjoy that too. The fewer decisions needed the better I say. I hope that holds true this year as my wife is planning to redo our kitchen and I know I will be asked to make decisions – which invariably will be the wrong one.
I couldn’t have less in common with you, Dick. I don’t have a pension, or children, or the slightest interest in a vacation home, a legacy, or replacing my highly erratic income (I’m still consulting, making money and enjoying it). And I don’t usually read your articles — something about your writing style rubs me the wrong way. (No idea why.)
Nonetheless, I hugely enjoyed this piece, and your willingness to take on the challenge from Jonathan. You have reached the one great truth of investing for retirement, which is that it doesn’t matter how you get there as long as you get there.
I don’t think your views are unorthodox just because they run counter to the conventional expert advice for the “average” investor. I strongly believe that the best guide is your own gut. Follow your instincts on what’s right for you, and most of the time it’ll work out. You did, and it has. Bravo.
I’m doing the same. I too took Social Security at my retirement age, in fact a few months early, just because my priority was peace of mind now rather than a bigger payment later. I never have to pay attention to the bills for my mortgage, property tax, homeowners insurance or utilities, because my Social Security payment covers all that precisely. I love that. And in the here and now, that sense of relaxation is what matters most.
As they say in English soccer, well in, sir.
Sorry about the writing style. Jonathan has mentioned that personality flaw in me a few times as well, but at my age I am afraid i’m a lost cause. I tend to question everything I read, I have little tolerance for what I call fluff. That used to get me in trouble while working too.
A new PhD came on the job with theoretical ideas for changing the workforce. She made presentations to senior management and reported great acceptance and that they all agreed to make the changes she suggested. I laughed during the staff meeting, not nice, but sometimes the real word slaps you in the face. I used to get along better with union leaders and members who tended to better face reality.
Man, Rich, you are my kina guy.
I say keep it up…Kudos!
You know Richard, most union guys would like to kill, freeze, and run the HR guy’s body through the chipper on a barge in the middle of Lake Erie. JUST KIDDING… Having said that, you aren’t the stereotypical HR guy, and I’ve enjoyed your sense of humor and your sometimes biting remarks.
I’ve gleaned some darned good information from your articles.
Thanks. When I first got involved in labor negotiations I couldn’t believe what was happening and the way management treated the union and intentionally baited them.
I sought to change that. When my mother died years later one union sent the largest flower piece I ever saw to the funeral parlor.
Your comment Connie’s financial security is a top priority for me resonates with me on the uncertainty of life choices when I think about my spouse. Regardless of how well, or poorly, we plan and provide financially those actions are only part of the actions we need to take to improve or maintain our health span so we will be present and able to be there for each other.
I continue to work on my financial decisions and actions in my seventy’s but I am even more focused on my health choices, exercise, weight, and the appropriate amount of sleep.
Your sometimes differing financial viewpoints are welcome if for no other reason than to make each of us reconsider the why of our own life decisions. For that, please accept my thanks for your continued commentary.
Thank you, my point is not to convince others of my views necessarily but to just throw out some non-conventional – sometimes – ideas for consideration.
My wife and I started out with pretty much zero other than low level jobs, no college education until I was 35 with four children. We were blessed with good fortune and just never gave up.
Interesting answers. Regarding replacing 100% of one’s base pay, that seems to me to be an outdated idea premised on receiving a pension on top of social security.
Now that pensions are no longer common among private sector employees, saving for retirement is now the mechanism by which people who are working can ensure that they can continue living in retirement at the standard they had when they were working.
By definition the amount of income needed in retirement will therefore have to be less than their base pay was when they were working, given that they had to have been saving a significant portion of their pay the entire time they were earning.
Sorry on this one I disagree. Pensions were never common actually.
If you consider Social Security – especially for a couple – I think reaching 100% is quite doable. For most people combined Social Security will easily replace 40%. So the target is 60 to 70% self funded.
Yes, significant saving (and wise investing) is necessary and an employer match helps too.
However, we can all look around at how Americans spend their money and how they set lifestyle priorities and it’s pretty clear there is room for most people to save more. What’s all that stuff crowding garages and forgotten about in storage units? Yes, I am being a bit simplistic, but with a good element of truth IMO.
Actually, pensions were pretty common according to CNN Money, which asked and answered the question, Just how common are defined benefit pensions?
Answer:
https://money.cnn.com/retirement/guide/pensions_basics.moneymag/index7.htm
Point being, retirees have had to make a significant shift in their thinking over the last decade or two as more and more workers started to realize that their retirements no longer came with any sort of guaranteed income beyond Social Security.
I never saw a figure as high as 60%, but then again you can get different answers to the same question quite easily.
https://www.bls.gov/opub/mlr/2006/03/art4full.pdf
Those with a traditional pension were concentrated in large companies and certain industries with generally strong unionization.
¯\_(ツ)_/¯
Richard, did you use the NUA rule for your company stock?
NUA Background
The federal tax laws contain a little-known NUA rule that applies to certain distributions of company stock from the company’s qualified plan. Under this rule, only the cost basis of the shares is subject to tax (and potentially an early withdrawal penalty) at the time of the distribution. In simple terms, the cost basis is what a person pays for the stock. The difference between the cost basis and the stock’s current price is called the net unrealized appreciation, or NUA. The NUA is not subject to tax until the company stock is sold and will never be subject to an early withdrawal penalty. When the stock is sold, the NUA is subject to tax at capital gains rates — not ordinary income tax rates, which can be much higher. Additionally, the NUA is not subject to the 3.8% Medicare surtax on net investment income.* The favorable tax treatment for the NUA portion of company stock distributions is what we call the NUA rule.
None of my stock is in a qualified plan
You were not eligible anyway.
NUA rules per the IRS-
Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. The amount treated as capital gain is
taxed at a 20% rate. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.
It’s always good to find something you are to young for, even at 80.
An excellant article. I value your style and perspective. I too have a clump of employer stock accumulated from options I received as part of my past salary and now appreciate the dividends until I begin receiving social security between my full retirement age and 70. I too have a timeframe picked specific to my circumstances. I also have too many other disparate investments thru the years. Property, savings bonds, Individual dividend stocks, some municipal bonds, severalVanguard and Schwab ETF’s…and a large holding of bank CDs showing how conservative our investing is. They’ve done what i needed — having ‘enough’ (in a Bogle sense) but now. created the additional challenges or managing IRMA, and tax management as I’ve read other Humble Dollar readers mention. My focus next thru years will be simplifying for my wife and those after her, along with how and where to best donate and give some of what we’ve accumulated away. I learn from most of the articles from this site new and fresh approach. Thank you to you and the other writers, and to Jonathon (who I’ve read most of what he’s written since his WSJ days) for this valuable resource. It is appreciated.
Thank you for your kind words. I gave up on IRMAA from day one. Simplifying for your wife is important, but I gave up on that too – no interest so instead I will rely on a detailed final instructions letter for her and our children. Started using QCDs last year. It seems efficient and simple- I like simple.
Dick, thanks for the thought-provoking article. My interpretation is you worked long and hard, you were very successful in your career, and built a financial plan with a significant margin of safety. You should be proud. I’m a big believer in margin of safety,as I’ve written about previously. It allows you to reduce risks and not have to worry about making perfect choices.
I had a couple of thoughts. If you are willing to share, what % of your pre-retirement income does your pension cover? I’m also lucky to have a traditional pension. Unfortunately it was frozen 5 years before I stopped working. MY pension is equivalent to about 35% of my pre-retirement income (actually the average of my last 3 years). Losing those last 5 years knocked about 10% off my pension – I’m still grateful to have one.
Second, have you considered what your choices would have been if you did not have a pension? As you have written, and commented below, most folks don’t have one. Having a pension allowed me to switch from full-time work to part-time consulting at 60. Actually, it allowed us not to have to move to ensure an additional 4 or 5 years of gainful employment.
With only retirement savings and a SS benefit, I feel the claiming decision becomes more challenging, especially if you have a spouse that does not have his or her own significant earnings record.
Rick, Chris Cagel asked the same question about living and not having a pension. You can see my response below. I’d like to read your reaction.
My pension is about 91% of my working base pay, but keep in mind that my base pay was 65% of total cash compensation and my pension is calculated on base pay and some of my cash bonus pay. My pension is less than 50% of my total cash and non cash compensation.
Dick, sorry – somehow I missed his question. I very much appreciate your honest answer. I spoken with a number of colleagues, who were considering the lump sum pension option, about the mental benefit of a steady income stream. I usually comment that if they take a lump sum, they are responsible for figuring out how to turn that into an income stream.
I’m with you, without a pension I’m sure I would have kept working full time for a longer stretch. 91% of base pay sounds like a great replacement. In my experience that is similar to what teachers get. I think for many people, base pay is all they have, so having to replace 100% of their income seems daunting.
One other thing to keep in mind: SS taxes, Medicare taxes, and in many cases, state and local taxes are not deducted from pensions. For me, my pension has 12% more purchasing power than an equivalent earned income.
I can relate a few horror stories about people taking lump sums.
Keep in mind that most people are on their own for about 60% as Social Security does the rest.
Dick,
I’d suspect your input here is as important in balancing conventional thinking as nisprisus input is on the bogleheads site. Thats a complementary comparison.(imo)
Recently the last decades combination of life’s unknown unknowns, the pandemic and its inflationary effects, will plague all going forward. Not to mention A.I.’s inception. Theres no telling the future, and those that do are mis-led.
I suspect you are an individual of his era, as are we all, individually. I recognize USAs history being both recognized and rewritten as we speak. Figuratively speaking. Columbus was not the first one here in 1492(thx!), adapt we must, that or perish. I was not inferring you were a dinosaur Dick. Just like all here influenced by your era and upbringing, and imo ahead of your era. I know a primary engineer retired from BOS big dig project many decades back. He delegated computer learning to others.You’ve embraced it, although he is your elder :wink:. Best wishes to all.
Evan, that’s 1492.
But you are right, I am a dinosaur, I even kept a giant blow up one in my office to remind myself. Nothing is close to the same as when I was working. On the other hand, let’s not forget that only about 50% of Americans ever had a pension and of that number many did not have job tenure to make the pension worthwhile.
In that sense most Americans have a better chance of saving for their future than previous generations.
Good questions, good answers, even if I disagree with some of them. I’m glad it worked out so well for you, and you were able to work as long as you wanted.
I still disagree about needing 100% of income (base or otherwise). What counts is your expenditure. Spend more than your income and you shouldn’t be thinking about retirement at all. Spend a good bit less, as I did, and you can retire early (53). I was not skimping in order to retire early, I simply earned more than I needed to live comfortably. Of course, I wasn’t buying a second house or putting kids through college, but the point is the same. Replace your expenditure, not your income.
I also disagree about the age for taking Social Security. My pension has no COLA, so I wanted the biggest base I could get for SS, which does have a COLA. (I am totally uninterested in whether I “break even”.)
There is also the question of what your savings are for. If you have been saving to create a legacy, then you will be less inclined to spend them. Leaving a legacy is not high on my list of priorities and I will finally start drawing on my portfolio this year at 76, however we both have pensions as well as SS, going forward that will be unusual.
It seems to me that anyone who is able to retire at 53 and live as they desire is a great success.
There is no COLA on my pension either, but I have built my own COLA so to speak and when necessary we will draw on interest and dividends as income.
Having a pension these days is not only unusually, but rare, we are dinosaurs in that regard.
Dick you summed it up in your last two paragraphs. You’ve won the game and did it your way. It’s like asking a football coach after he’s blown out the opponent if he would have called a different third down play when he was stopped short of a first down earlier in the game. Well done.
Dick: I am in complete agreement with you regarding the 100% replacement of income at the time of retirement. I didn’t retire until I was 69 as I was still working on getting children through college. As pointed out by at least one other commenter, my “number” for retirement was 100% because I knew that inflation never subsides.
The way I see it shoot for the 100%. If that proves too much it is a much better problem than 70-80% ending up too little. The idea of entering retirement with a backup plan of cutting expense as the years go buy doesn’t sound appealing.
There’s a fine line between second-guessing oneself and fixing one’s correctable mistakes. Dick made a reasoned decision about taking Social Security at FRA and executed on his plan in a thoughtful way (his muni bond stash). There’s nothing to do about it now, and he’s entitled to deference for that. But even he grudgingly accepts that he could simplify / optimize his finances (high-cost funds) moving forward.
I’m in the process of leaving a long-term job to launch a new business. I spent 45 minutes this week with a terrific HR person to go over the process and the decision-making (job benefits, etc.) of resigning my position. It’s tough to think through these personal decisions with the right amount of foresight. I hope my choies pan out as well as Dick’s – and that I can look back on them without regret.
Good luck in your new endeavor. I hope that HR person gave you all the right scoop. Roll that 401k over🤑
Thank you for your honest answers! One additional question (that I feel is lacking on many of the retirement groups I follow:) how have you planned for long term care, in case of physical or cognitive inability to care for yourselves? I personally feel that my own plan is inadequate in this regard.
We both have long term care insurance purchased nearly forty years ago. It will be modest help but something. Other than that I think we can generate sufficient income from investments and using SS to cover most of the cost. What people sometimes forget that is if LTC is needed other spending will probably decline to some extent – transportation,, discretionary activities, perhaps even food and other basic expenses no longer required.
My hubby and I bought LTC insurance three years ago. We worked with a very capable consultant who helped us better define what makes sense for our situation, with the assets we have. The premium is reasonable, so far. No one can predict what it will do but we have that peace of mind.
What a great article, especially the format. I don’t like math either. Always found it intimidating until I started reading Jonathan’s article in the Wall Street Journal and now Humble Dollar.
Congratulations on a retirement well-lived.
Ah, Sonja … that’s being lived 😃
So when I left WMT early in my career, I had almost all my savings in WMT stock. I sold it because “no one should have all their $ in one stock”. Well today that stock would be worth over twice what I have saved for retirement. Just saying…..
I enjoyed this article, and I have an idea for another. You are fortunate to have both Social Security and what sounds like a considerable pension. What would you do differently if you only had Social Security and your IRA for retirement income, which is the case for most retirees? Would your decisions align with what Jonathan espouses, or would you stick with your current approach?
Great question. I have thought about that many times and frankly that prospect always scares me just thinking about it. Everything in my life would be different. I would not have a vacation home, The children’s college would have been handled differently and I probably would be in therapy at every dip in the market. I may would have not retired when I did.
I am not a big risk taker, I like to have every contingency taken care of- to the extent possible. Today I see what my children are dealing with essentially funding their own retirement, much higher health care costs and trying to figure out college for their children . That’s why I am nearly obsessed with leaving a legacy. .
While working we lived on my base salary and invested all other income, but my 401k contributions didn’t exceed 10%. That alone would not have made our retirement so it would have had to be much higher.
I don’t know exactly how my investing would have been different, Chris, but thanks for a sleepless night as I ponder that. 🤔
PS I like to think I would have purchased an immediate annuity though.
Sorry, I didn’t mean to cause you any sleep loss, but welcome to my world. Hardly a week goes by that I don’t seriously consider purchasing an immediate income annuity, especially now that I am in my 70s and LT interest rates are higher—payouts are up considerably. But up to now, I haven’t been able to get up enough courage to pull the trigger. I’ve read Jonathan’s articles about his retirement plans and how annuities fit in them and have definitely found some help and encouragement there. I even promote them in certain situations on my blog. But still no annuity.
Great question by Chris, well answered.
Many of these points resonate with me. I’ve never used a spreadsheet. My investment in two stocks that outperformed the market by a significant margin allowed me to retire early. I started SS @ 63. The return on my portfolio, along with SS benefits, is greater than my expenses, so I’m still in saving/investing mode in retirement. Thanks for posting this article!
Yup, there is more than one route to success.
I’m just glad I found HD..I get so much great information and much of it comes from Dick and JC…The big item in investing that we will continue to see tremendous growth are active ETF’s.
I would add Adam Grossman your list.
I think having one’s priorities straight, and doing what needs to be done to achieve them are critical, and you and I share that. I knew nothing about investing and my wife and I didn’t begin until we reached age 35, wand had two young sons. My office 401-k was actively managed by a firm and each of us owned a slice, all with the same allocations despite our varying ages. We didn’t get that fixed until I was about 45 or so, and I chose Vanguard index funds. I also started buying Berkshire B shares held in a taxable brokerage account when they became available in mid 1990s. Today they make up 75% of my equities, despite donations and some sales, six years into retirement. Although I’ve read nearly everything written by Buffett, Bogle, Bernstein, Clements and many others, I violated the rules and went with my gut. I think there are a large number of paths to take, no doubt some better than others, but as Clements and others have said, the best plan is one you can actually stick with. By the way, I always enjoy your articles.
Thank you. We never get it all right all the time, but we should keep trying in a way works – hopefully- for us. I cringe when I read how some people seem to base their furniture financial lives on predictions and assumptions controlled by a software program.
On the last point, 100% income replacement, I’d offer a friendly amendment. Many HD readers, I’m sure, lived below their means while working to save aggressively for retirement. In other words, they earned more than they needed to live on, so they don’t need 100% of their pay when they retire, either.
As we plan our retirement budget, I’m roughly looking at our income now minus what we save (i.e., our disposable income). I’m not talking about an emergency fund—I agree retirees should still have that—but disposable income beyond that.
I can never come out well on Jonathan’s Two-Minute Checkup because at this moment in our working lives, we make more money than we need, so it looks like we have a lot of income to “replace.”
Good points Dr. Lefty. Many years ago, I followed a suggestion made by Jane Bryant Quinn, or at least this is what I gleaned from her. Total up all expenditures from the preceding 90 days and extrapolate to a year. It was eye opening to me how much we were spending in some areas, and how little in others. From our annual income, I estimated how much cash was needed to live on (which included funding medium and short term savings held in cash to meet future expenses like replacement autos, home repairs, college savings), to pay taxes, and to save for retirement. My self-imposed rule was to not cheat and tap our retirement investments nor incur any new debt.
In the five years or so before retiring at age 65, I knew exactly how much after tax cash flow we’d need to continue living the same lifestyle. And, I also took into account the value of perks I would no longer receive once retired. I was aware that our future medical expenditures would likely grow and perhaps we’d spend less on some other items.
I never offer financial advice to others. I merely mention what I did and what worked out well for me. And as a physician I earned a high income, so that made my task much easier than for probably 95% of others. One of the greatest pieces of advice I got was from my senior partner. I was just out of residency making good money, and partnership was four years away. We bought a decent but nice and affordable home in a nice neighborhood, assuming we’d trade up to something “fancier” in five years. He said “Don’t buy a big house”. And then further explained why this would likely lead to a higher cost of living. Our sons are grown and married, but live less than 30 minutes away, and my wife and I are in the same house. I won’t ruin the story by divulging how much we have spent on remodeling and upgrades though!
I can appreciate why Jonathan and many other experts who address a large and diverse audience need to offer sound general principles to consider, but the actual nuts and bolts may benefit from individual fine tuning. For planning purposes, I found that knowing exactly how much cash was needed to maintain my lifestyle in retirement was superior to aiming for some specified percent of annual employment income. Using a pencil, paper, calculator, and tax tables it wasn’t difficult to calculate the “number”, so that the after-tax value of distributions (following Bernstein’s suggestion to use a bit less than 3% rather than 4%) and social security benefits would provide what I needed. For my kids, and many others, I have gifted them books by Bernstein and Bogle, and told them to read Humble Dollar. And to “not buy a big house”.
Dr. Hannam,
I certainly can relate to everything you are saying. I’m also a retired physician (primary care so I likely didn’t have as much to work with), and I also got the same advice regarding a home many years ago. We’ve been in the same moderately sized home in a nice neighborhood for 33 years now. This one and a modest vacation home have been mortgage free for years now, and I can’t put a price tag on the peace of mind that provided. My wife is also fiscally conservative and being on the same financial page with the spouse (and staying married) cannot be overestimated.
I also share your approach to withdrawal rate. Ours is 2.6%, and the current plan is wait another 3 1/2 years for SS-I see no reason to start earlier. A major stock market correction would be the only thing that might alter that.
I definitely understand Richard’s mindset and understanding that there may be a valid argument to make a few tweaks, but in the big scheme if it ain’t broke don’t fix it. Other priorities (time with friends and family, Silver Sneakers appointments,etc.) can certainly distract from making financial changes but that’s not always bad.
But it’s a huge blessing to not have to obsess over every detail. Our professional lives were amply stressful, so I treasure the ability to keep things relatively simple.
Well said, Dr. Fred.
Yes, that’s possible, but many of my views are not directly related to higher income, financially literate people, but more average Americans, not too many who make more than they need.
The higher one’s income and greater discretionary spending while working will make it easier to live below 100% I suspect, but again, not typical.
Remember, I refer to base pay replacement, not total income which may include bonuses and OT in some cases.
Necessity or discretionary spending plus inflation after 14 in retirement I’m still waiting for spending to decline.
Well I’m in great shape then, since my base pay has averaged around $30k/year! It’s nice to know ;-).
Great points Doctor! At my peak earning years, I had 4 kids to get through college, 6 cars in the driveway, still putting money away in IRAs and 529s, and over $800 a month for car insurance….With kids all grown and off the payroll, it’s easier now even though I’m retired.
Dick, no one questions that you have found a path to financial security for you and your family. You can take great pride in your achievements. To enjoy all you have and be in good health; well, as you so aptly put it—what more can anyone ask for?
your answer, however, is not in keeping with the challenge posed. Time and again you have argued vehemently for taking social security at full retirement age, as you did, instead of waiting until age 70–almost as though you needed to validate your decision.
I have all due respect for you, Dick. Respect does not come naturally. It is something we learn. It means we respect someone even when Their ideas are different than ours. I hope
you have taken my comments in the respectful tone they are intended.
You have indeed made it possible for your family to live a lifestyle others might hope to emulate and that is something to be proud of.
I used https://opensocialsecurity.com/ to evaluate our SSA claiming options. If you graph the total lifetime return based on various claiming dates, you may find the resulting curve is u-shaped, with maximizing benefits occurring with both early and late claiming dates, and showing a distinct dip in the middle.
I can claim when I’m 65 and will achieve 95% of the theoretical maximum lifetime SSA payment value, while having 5 years of additional income coming at me during a time when I am most physically active. Psychologically this is very comforting, even if a little bit sub-optimal financially. I’ll take it.
I don’t recall arguing to take SS at FRA, but I sure don’t see the value waiting until age 70. I keep researching that argument and still don’t find a compelling reason to delay.
Higher benefits later in retirement, and larger surviving spouse benefits seem to be the main reasons. For each there is a cost – using other assets to live on in the interim, adjusting to a lower lifestyle and the risk of early death come to mind. For each there is an alternative which I think I have demonstrated.
The way SS is viewed is we add to our benefits by delaying, but the reality is FRA is actually 70 and our benefit is reduced less the longer we delay the start. SS is actuarially equivalent- not considering race and other variables – so at any age there will be winners and losers. On average nobody beats the system.
if nothing else at least I have shown there are alternatives to reach financial goals and I suspect there is no one right way. My conservative views on this are likely tainted by decades managing retirement plans and seeing what can happen when people don’t select survivor options, cancel life insurance, take lump sum distributions or blow their 401k on a massive RV upon retirement.
Dick, I am reminded of Dale Carnegie’s reply to someone in his audience who doubted he was really Dale Carnegie. Now he knew that he could easily produce a photo ID —but he also knew even that would cause another argument and so he merely said…you could be right”.
Dale Carnegie was the author of
“How to Win Friends and Influence People”.
My point: whenever you catch yourself arguing with someone-ask yourself where the argument may lead. What is the payoff? You probably won’t succeed in changing the opinion of most people, regardless of how relevant your facts are, and how well you argue your case.
if you must make a point, make it and leave it at that.
I know you’re right, Dick, because I am a math “nerd” of sorts and I did the calculations, including whether it would pay to declare more self-employment earnings in order to get greater benefits later. (That also is about a break even.)
And, like buying a house, investing the money instead only works if we actually invest the money, and we often don’t, so on average buying a house is much better, as most of us do pay our mortgages quite faithfully.
I remember quite clearly telling a close relation not to take any lump sum at retirement knowing that they had great trouble managing regular income much less a lump sum. One of the great benefits of a regular income is that each month one gets the benefit of looking back at the last month for informed advice about how different spending choices might work out this month.
I think your ideas are somewhat “tainted” by the fact that you appear to have earned very generous pensions that the majority, of at least new retirees, do not enjoy. I think most only have two sources of income that being Social Security and their own retirement accounts, so delaying Social Security claiming is their best means of having a reliable inflation adjusted income.
You’re right about what you say as far as pension income goes, but I don’t think that always leads to delaying SS. In fact, for many people it says they can’t afford to delay. Your SS is adjust for inflation even if you haven’t started the benefit.
Jonathan – great question; Richard – another great article.
Many bemoan conservatism, but in Richard’s case, it’s provided a wide margin of safety.
Regarding not buying those employer shares, you bought them, with your time – the most valuable resource of all!
Keep up the great work guys.
Valid point Bob.
My partner received Microsoft shares as part of her divorce settlement years ago. Keeping that has been quite profitable. She is selling some of that now that the stock has risen so high, but will be keeping some Microsoft shares indefinitely.
Planning for 100% income replacement isn’t a bad idea particularly in the early stages of retirement when travel expenses will be higher. That can be adjusted down later.
I think how money is spent in retirement is sometimes misunderstood when I talk about income replacement. My goal was not to change my lifestyle upon retirement so I worked longer than most people desire.
That lifestyle is continued travel, maintaining two homes, not having to relocate, contributing to grandchildren’s 529s, saving to an emergency fund each month, keeping up with inflation and not going to bed with money concerns.
Those who can accomplish their lifestyle goals in retirement on 70% replacement and retire in their early 60s or before have my respect.
If you’re fortunate enough to pay taxes in a higher bracket while working, odds are you’ll spend retirement in lower tax brackets. The boost you get from paying lower taxes makes a goal of 100% net take-home base pay more achievable than some might think.
In the long run does it really matter what Mr Quinn does with his investments? From reading his previous articles if his Social Security and pension income combined covers all his expenses and he is also able to save some of it as well, doesn’t that mean that he has won the game? Aren’t his investments essentially just play money? Very impressive job Dick. I’m sure you don’t have any trouble sleeping at night worrying about your and Connie’s financial future.
We don’t, at these ages 80 and 84 my one money concern is the risk of LTC. We have some LTC insurance, but I would be very upset if LTC expenses devoured what we hope to leave to our children.
Richard – I am not concerned about leaving an estate to our two sons. Our estate to them was expensive and mostly paid for educations while they were growing up, in college, and in grad school. They both finished grad school with minor debt relative to their incomes. I’m fine with leaving our intact estates to them if we don’t require nursing home care. If we do require that care our estate to them will be that they didn’t have to support our nursing home stays. We’ve already given one year of college costs at a State University to each of our four grandchildren.
My wife and I were both raised in Lutheran parsonages so we both know how to live modestly and save money. Neither one of us have figured out how to spend it. We’re happy with our modest and comfortable lives as they are. Other people choose to aspire and live differently and we pass no judgement on their choices. You, and Jonathan are both good guys and it is a pleasure to read and learn from you.
LTC expenses are my biggest fear. We are not wealthy enough to be able to pay the exorbitant premiums for a policy, but not poor enough to qualify for Medicaid without spending all of our hard earned money on warehousing one of us until we die. The middle class gets screwed as usual 😞
I was in my 50’s when I learned about LTC insurance and could not afford the premiums at the time. I had better cash flow in my 60’s but had a few maladies that underwriting couldn’t ignore. Now at age 71 I’m totally in your boat, hoping that LTC doesn’t sink me.
Interesting piece, Dick. I share the company stock ‘sin’, although in my case it’s only 3% of my 401(k). So what if you “could have accumulated more” with better decisions? What difference does it make at this point? You and your family are in great shape regardless of whether you ever hit your “next net worth goal.”
That’s the way I look at it.
I commented here recently to a writer with an investment style that differs from the HD orthodoxy not to “run with the crowd “ after decades of marching to his own drumbeat. I entreat you to do the same, if it gives you a feeling of “financial security and achievement.”
He claimed to be ancient, however, and suggested his first article might well be his last. I can’t imagine that you would entertain the thought of retiring your prolific pen.
Here’s my suggestion to you: think of the rich treasure trove of new material you could mine from shaping your finances to conform to “JC’s” ideas of sound money management. By your own admission, you’d be better off financially, and the readers would gain from your writing.
I suspect you won’t, but I hope you do keep informing and entertaining us in your own inimitable style for decades more.
Thanks Ed. You’re right, it’s too late for me to change. I plan to keep writing as long as Jonathan will have me. HD is my morning therapy.
Excellent! “The way I look at it, I graduated high school in 1961 and got a job paying just above minimum wage. Between then and now, my wife and I put four children through college, purchased a vacation home, built a secure retirement, and amassed financial assets that put us in the top 10% of our age group, with the prospect of leaving behind a healthy legacy for our children.
What more could anyone ask?”
Indeed!
Some are simply wedded to the notion of “maximizing” their Social Security take; not me. I agree heartily with “I also think it’s irrelevant whether you get the most out of Social Security in terms of total lifetime benefits. People should take their benefit when they need the money the most.” Absolutely.
Great piece.
This brings to mind a podcast episode by Morgan Housel, “Play Your Own Game”, which really resonated with me. 19 mins.
Apple: https://podcasts.apple.com/us/podcast/the-morgan-housel-podcast/id1675310669?i=1000607768018
Spotify:
https://open.spotify.com/episode/1Zd4j7b8JncomJIhWTnsw5?si=tz5bpzswRHa-OvLt93h06w
Great stuff. Thanks for sharing.