Confusing Ourselves

Richard Quinn

I’VE OFTEN BEEN TOLD that I’m too direct. To me, “direct” means to focus on the facts, get to the point, eliminate the fluff, keep matters as simple as possible.

Guilty as charged.

Think of all the time wasted by fluff. After making something more complicated than necessary, somebody is ready to provide a solution to what may or may not be a problem. Fluff thrives on confusion. It can scare folks unnecessarily. Most Americans don’t know how to deal with financial fluff. A recent survey proclaimed that 43% don’t even know what a 401(k) is.

Retirement planning is too complicated. Did you run a financial analysis before getting married or having your first child? I suspect you made those major life decisions without a detailed budget or a professionally crafted spreadsheet, and—even if you were so obsessive—you likely ignored the depressing results and just went ahead.

Search the internet on the retirement topics below. You’ll find so many different opinions that it’s hard to know what the right answer is.

  • Can I retire on $1 million?
  • Is 4% the right withdrawal rate?
  • Which assets should I spend first in retirement?
  • Will I run out of money?
  • Do I need a budget?
  • How do I offset inflation’s impact?
  • What percentage of my working income do I need to replace in retirement?
  • When should I begin Social Security?
  • Will my expenses go down in retirement?

You can get answers to all of these if you make assumptions, but those assumptions will often turn out to be flawed. Facebook groups are full of posts by folks who can’t understand the results generated by retirement planning software.

Can a person retire comfortably with $1 million? Sure, but most don’t. You can find people demonstrating how it is indeed possible, but they often fail to ask about the retiree’s desired lifestyle. A recent article in USA Today says Americans think they need $1.47 million to retire. Based on what? Millennials apparently believe they need $1.65 million. A Schwab survey says $1.8 million. Meanwhile, less than 1% have $1 million in their 401(k). Want to know how long $1 million will last based on where you live? You can find the answer here.

If you earn $75,000 and feel you can live on 80% of that amount, your goal is $60,000. Social Security at full retirement age in 2024 is typically about $24,500, so that leaves you to generate $35,500. Using the 4% rule, you need to accumulate $890,000. Using Fidelity Investments’ annuity calculator, a 65-year-old man could generate that income with an investment of some $600,000, including a return of unused funds and 2% annual income increases. But is 80% the correct number?

And how about that 4% withdrawal rate? Again, it’s all about assumptions. The experts seem to know the right number is between 3% and 5%. But for a more precise answer, it helps to know at what age you’ll die and what type of investor you are.

On one of the Facebook groups I frequent, the fluff is rampant. Among the suggested withdrawal strategies: Use a fixed percentage, incorporate something called guard rails, just take what you need each year for expenses, only take required minimum distributions. Then there’s something called the Guyton-Klinger method, where you adjust annual withdrawals for inflation, but only in positive investment years and no more than 6%, plus a few more fluff rules. There are also portfolio management rules, including drain from overweighted assets, plus other complicated procedures. Suze Orman says just take the least amount possible. Now, that’s helpful.

Meanwhile, there’s no mention of buying an immediate fixed annuity.

Is there a right or wrong strategy? Probably not. But this fluff is way too complicated for the average person.

Will you run out of money? Monte Carlo calculations might show you’re good through age 95. Your portfolio might even grow. But doesn’t all this depend on the accuracy of your assumptions? There’s always the “cut back spending” strategy if Monte is wrong.

Do I need a budget? If a budget makes you happy rather than stressed, go for it. But I wonder: Is the withdrawal strategy built to match the budget, or is the budget determined by the amount that can be prudently withdrawn?

You need an understanding of how spending might change during retirement. When it comes to planning for health care spending, the big whammy always noted is long-term-care (LTC) costs. How real is the risk, and should we assume in-home care or institutional care?

Most LTC is provided in the home, often by family members. Only 2.3% of the elderly live in a nursing home, but many more require care at a facility for short periods. I’d encourage you to work through the fluff. For instance, rather than assuming that assets will be drained, calculate how much of your care might be paid with the income stream you’re already receiving—and keep in mind that, at that juncture, you won’t have travel costs, eating out and many other discretionary expenses.

Coping with inflation generates some creativity from those planning their retirement. One Facebook commenter suggested shopping at stores like Costco. Another said the secret was to move to Southeast Asia. One risk taker was inclined to simply invest more in stocks. My favorite comment: “When I retired, I was offered a $1,000-a-month pension with no cost-of-living adjustment. Instead, I took a lump sum payment and invested it in large-cap growth index funds. Has worked well so far.” I hope that “so far” continues.

What about the percentage of preretirement income needed once you’re retired? There’s no one answer. It all boils down to lifestyle, especially discretionary spending. Are you willing to retire, even if it means cutting back?

Discussions of when to begin Social Security seem endless. YouTube is full of suggested strategies. Lots of fluff here. Experts say delay to age 70. You maximize monthly benefits. But for most people, how practical is it to delay that long? My suggestion: Take your benefit when you need the income, and don’t worry about that breakeven fluff.

Will my spending go down in retirement? The experts say no, yes and then no. They call it the retirement spending smile. It parallels the go-go, slow-go and no-go retirement years.

Connie and I should be in our no-go years, but we’re fighting it. If our spending is declining, I need help finding out where. It sure isn’t our homeowner’s insurance, which just went up more than 20%. Our homeowner’s association fee and property taxes are also rising. I just bought some homemade candy. Two years ago, it was $18 a pound. This week, it was $30. No, I’m not cutting back.

My advice: Clear away the fluff. Keep things as simple as possible. Don’t plan on spending less during retirement. Build a steady, guaranteed income stream to sustain your lifestyle. Have a plan to deal with inflation and unexpected spending.

Richard Quinn blogs at Before retiring, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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