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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.
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 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 never saved enough when young and at age 50, I got a job with a big company that had Fidelity 401K options, with about a $2-3K match on my money per year. I socked away about $24K/yr for 12 yrs from my salary, which of course grew, and I managed it myself with no load mutual funds. When I got laid off at age 62 and consulted several financial planners, -mostly free but 1 as a fee only CFP- the idea of living on 80% of my income was used as data to determine my expenses in retirement. My spouse and I were ALREADY living well below our means, with little travel, older cars, doing my own minor home maintenance jobs, minimal eating out, etc. So I argued against our expenses going down in retirement since we were living on $50K/ year without any debt…in a state with high and ever-increasing car and home insurance prices. So our post-retirement expenses were what we were already spending, plus adding costs for travel or hobbies, inflation, and my health insurance pre- Medicare eligibility to get the correct number for our expenses.
Great article illustrating the lack of financial sense that many have. I appreciate your writing that is straight to the point and doesn’t sugar-coat things!
Thank you Sir!
The philosophers of old had many teachings of looking at life and making it what we want.
One small idea is to take any situation and do with it the best you can. Then, be satisfied with the result because, you did what you could and didn’t be complacent.
For me, I did all the retirement investing I could, in my work retirement plans, with 2 IRAs and worked to get the max S.S. benefits. I also paid all bills down as far as I could and don’t have regrets.
I have plenty of money, and nothing to need to spend it on.
I believe overthinking things causes a big headache.
Translation: Sometimes, good enough can be good enough. I agree with Dick that optimizing SSA withdrawals, investment allocations, withdrawal rates, etc. can be complicated – and unnecessarily stressful to get perfect. I’m ok with having made reasonably good plans, letting them play out, and focusing my day on living my life. Put me firmly on Team Quinn.
All new members are welcome. My motto, be aware, but not afraid.
Dick, great article. Lot’s of good discussion of the decumulation phase and challenge.
With all the information and issues you and your readers mentioned/posted, I wasn’t surprised about the dearth of guidance on how best to fund a retirement that may or may not include Long Term Care.
Lots of material out there on LTC and more recently LTCi – including the great sources readers cited. Comparatively, here and elsewhere, there isn’t so much information on prioritizing savings to leverage tax preferences in order to optimize the outcome … after taxes.
Further, and most importantly, with all the media focus today on our “retirement crisis” (Biggs, Ghilarducci, Bernie, others in NY Times, USA Today, Bloomberg, Forbes, Congressional hearings), how half of Americans aren’t saving/preparing, etc., I remain surprised that there is NO discussion of America’s true “retirement coverage crisis” – funding health care and LTC in retirement.
Good points. Seems like it boils down to us stretching our lifetime warranty.
Keeping it simple is vital. If a financial vehicle is incomprehensible you’d best steer clear. Woody Guthrie was right, far more are robbed with a pen than a gun.
As Dick notes, automatic deductions are so important. Maximizing deductions into tax deferred retirement accounts is such a no brainer. And if the market takes a hit, just don’t at your numbers for a few months and take comfort that you’re buying shares at a discounted rate. When it invariably recovers you will be very happy, and your future self will thank you.
It’s a true tragedy that so many Americans focus solely on maximizing their take home pay. The stats on median and average savings in different age ranges are so disturbing.
My working life was spent designing and managing employee benefits including retirement benefits. I spent nearly a million dollars a year on education programs, various communication vehicles and more trying to get workers to pay attention and to take action for their own benefit…
I doubt even half ever gave the communications much attention.
Dick, perhaps $8 invested in a hammer (to gently tap them on the head!) could have provided an enormous return on investment. I’m sure there were times you contemplated it!
This is a wonderful article and some really outstanding comments. It’s weird that so many folks cannot take stock of their lives, situations, conditions, and resources to chart a course that will see them through to retirement. It does not require a spreadsheet, but one needs to put some thought into the process and future.
Yes, thought and setting as much as possible on automatic.
Right to the point article. Thank you.
I’d like to say that Americans are under educated on financial issues.
I fear that is an understatement.
Dick, nice article. Lots of good stuff to chew on. As Jonathan has written, immediate annuities make sense but are unpopular. I’m not sure people realize you can purchase versions where there is some return of investment in the ever if an early death. I’ve wonders if a fixed term annuity would make sense as a bridge to delaying SS. For married couples the strategy to delay the higher earners SS might make sense from a survivor perspective – ensuring the surviving spouse has the highest SS. My pension does not have a COLA, so maximizing a guaranteed income stream that is inflation adjusted makes sense. But, to your point, we have the resources to delay.
I always look forward to your insight and Richard’s. I hear a lot about annuities. Is there a simple, precise, easy to understand article that explains them ?
I have 100% replacement income as we go into retirement. Do I even need to consider an annuity ?
You might check out the site’s money guide, starting at this page:
https://humbledollar.com/money-guide/income-annuities/
I think life insurance has a place too and several advantages like income tax free and someone always getting the benefit.
I am currently reading Wade Pfau’s Retirement Planning Guidebook, second edition. I think all of the important topics in your article are also topics expanded upon in Dr. Pfau’s 488 page book. Good summary of many of the things we need to be thinking about.
488 pages vs HumbleDollar. Is there a real choice? 🤑. I’ve listened to his pod casts and it’s too much to take.
As always, your articles are a very enjoyable read with a lot of good information. However, I must point out what I believe is a shortcoming in your article. Your handling of the need for senior care, and in particular the simplistic statistic provided, is woefully lacking and, I fear, misleading. The reference you cite is only for people living in senior care at a moment in time. Further, it doesn’t include people who need such care but simply can’t afford it. You do correctly point out that most such care is provided by family members, but I suspect many do so only because they have no other option. In these cases, I suspect (but don’t actually know) that many of both the care providers and care recipients would prefer some other situation. For more realistic numbers on long term care needs, I’d suggest the government site longtermcare.gov How Much Care Will You Need? | ACL Administration for Community Living
For those who need it, it can be a burden for sure, but my point was to be realistic in the probability and the cost. I did note a larger percentage of seniors need institutional care for shorter periods.
True. Plus you also mentioned many folks get care from family members, which I’m sure is also true. But my main point (which I probably failed to articulate well) is that the percentage of people in care, as compared to the total population of seniors doesn’t realistically represent one’s likelihood of needing care for a substantial time. But I must admit it’s tough to find all the data to really make a good assessment.
This is an excellent article on long term care that can help decide what, if any, insurance they should get. https://www.morningstar.com/personal-finance/100-must-know-statistics-about-long-term-care-2023-edition
This is a murky area with no clear right or wrong answer, at least IMO.
Thanks! That’s an excellent article with much more information and statistics than typically found in similar articles on long term care.
The amount of financial fluff headlines in my google news is crazy. It’s about advertising, it’s about writers struggling to make a living by sensationalizing, and it’s not unlike the way news in general is reported. Much is written by people who don’t even work in the field; as a tax preparer I sometimes have to laugh about nonsense I see written about taxes.
“…nonsense I see written about taxes.” I also see articles written about retirement planning that completely ignore taxes, and there are still people out there that believe Social Security payments are not taxed.
I have an example of the reverse. I know someone who told me he is three years from retiring and has 20k in credit card debt. He says he is all set because his tax preparer has him maximizing his 401k contributions to minimize his taxes and a plan to pay off the debt in three years. I briefly tried to explain he would be better off investing only to the point of his match and using the balance to pay off the 14% CC debt, but he wouldn’t consider it. He was happy that he was minimizing his taxes. Meanwhile he just built a porch on his house, and is planning on buying an above ground pool. A perfect example on not having a wholistic financial plan, but listening to a professional who has a myopic view of “finance”.
Part of one’s SS may be taxable, but still not have to pay any taxes on it because the taxable portion is less than the standard deduction. Plus many states do not tax SS.
I SMH when people don’t include taxes as one of their expenses.
Dick, Another great and thought provoking article! Of course, you just raised my anxiety level 3-fold as I realized many of your presented complexities I had previously considered as viable schemes for supporting my retirement plans. 😉
By the way, my nickname as a child was “Fluffy”, thankfully replaced with other monikers as a teen.
I work with someone that I see poring over lists of expenses—I think to figure out how to cover the monthly bills. I suspect much of the worried retirement planning is done by those who are coming up short, or don’t yet have a clear picture. Or are planners by nature.
And then there are the sellers of fluff, which seem to be abundant in all industries these days.
I’m with you Richard. Adapting some of the best rationales from a variety of sources after sorting out the fluff yields useable guidelines. The best ideas usually come from the middle of the strategic road and are adapted to one’s specific needs.
I’m all for thoughtful financial planning and it shouldn’t be so intensely complicated. Clarity and simplicity win the day, and thank you for a down to earth view.
But really Dick—do you need that candy?
Ah, the old needs vs want conundrum. But Majorie, it’s so good. There is a little shop in Chatham, Cape Cod, the Candy Manor, that we have gone to for over fifty years. They make all the candy there, even candy canes at Christmas.
See, what replacing 100% of working base pay gets you? Designer candy 😃
Ok now that’s a reason 🙂
Found it ironic that you buy “homemade” candy instead of make it at home.
Actually, my wife makes dark chocolate bark. Melts dark chocolate wafers, adds pecans and either raisins or cranberries, spreads it out on trays and it sits until hardened. Delish and not $30 a pound.
I get it. For me it’s Swint’s . So delicious.
For us it’s Brandini toffee.
We went to visit Joshua Tree National Park and stayed with friends in Palm Springs.
We’ll never forgive them for introducing us to that toffee. 🤪
I need to try Swint’s. I grew up favoring Mackinac Island Fudge. https://originalmackinacislandfudge.com/
Hard to resist, looks like something for any sweet tooth: https://candymanor.com/
In retirement if your investments are keeping you up at night you have too mucn in the stock market. Interest rates are quite good at this time. Remember we have seen 50% losses this century. Black Swan events are inevitable. The goal is not maximizing but not to outlive your money.
GREAT WEBSITE
Remember when inflation was 18%?
It boggles my mind so many can live life to retirement age without learning that a plan without room for surprises is not achievable unless you’re struck-by-lightning lucky. Simple plans are the best, but I’d sacrifice some simplicity for a retirement filled with good options and worry-free sleep, through thick and thin.
The biggest problem is not having the money. Planning to have money begins early and also requires a huge amount of luck.
Me too.