Grant Clifford

Comments:

• Like many, my wife and I have discussed the question of ‘when to retire’ over the past few years. There are many things to consider and this subject is well documented on HD. One question which doesn’t seem to get much air time for a couple is “will both partners agree on the answer to the question?”. For my wife and I, one subject that required a meeting of the minds, was agreeing on financial plan for our future selves. I had developed a detailed plan and associated spreadsheets and developed this plan over several years. But any financial plan requires assumptions to be made. Our conservative plan assumed that our IRAs will grow annually on average at 5%, that the 5 years of cash/savings we have on hand will grow 2% annually, annual inflation for expenses growing at 2.5% and me taking SS at 70, my wife at 62. We have a detailed list of current expenditures and made allowance for plenty of margin for error, so that unknowns (e.g. inflation spiking) will not catch us off guard, we can maintain our current lifestyle and allow us to travel etc. All the analysis shows that our future selves will be just fine financially with some left over for the next generation. The big question for my wife, what if the 5% growth assumption in reality is 0% or less? While history has shown that the stock market grows over time, in the short term there are periods of drawdown and low or negative growth. What if the U.S.A. is the next Japan? What if Bonds get hammered (2022). What will that do to the plan? Me answering “stay the course, we will be fine” wasn’t a good enough answer for my wife to forego her bi-weekly pay check. Even though I believe I am conservative in my planning, my wife was quite rightly making a risk assessment and wanted a plan where she could also ‘buy in’ and sleep at night. This conversation was reaching a crescendo in the fall of 2023. At this time, long term 10 and 20 year US treasuries were delivering around 5% yield to maturity. My wife asked, if our financial plan assumes 5% return, and we can get that return for 10/20 years, will treasuries help our financial plan become more certain and reduce risk? Long story short, we compromised on purchasing 10 and 20 year treasuries which account for approximately 15 years of future expanses. The balance of retirement funds remaining in low cost stock index funds, so that we can also capture growth assuming the markets deliver long term growth. As an example, on October 20th, we were able to purchase 10 year 5% yield to maturity US Treasuries with 4.125% coupons via our Schwab account. The $100 treasuries were discounted to $93.74 to achieve the 5% yield. In addition to receiving the coupon every 6 months, as interest rates have fallen since October, the price of the same treasuries has risen ‘on paper’ to $102.72 (9.59% increase) as of the close on Friday. We have the option of reinvesting the coupon received in stocks or bonds, or using it as income in the future. If the Fed acts to reduce rates in the next year or so, we have the option of locking in the ‘on paper’ gains understanding that over time the price of each Treasury will migrate back to $100 the closer we get to maturity. If the Fed acts aggressively the ‘on paper’ returns could be significant. If the stock market corrects significantly we have the option of converting a portion of the Treasuries to stocks, provided the shift still meets our long term goals. I am not into ‘market timing’ but understand that every once in a while the stock market sells off significantly and provides an opportunity. Having ‘dry powder’ (US Treasuries) on the sidelines returning 5% in the meantime doesn’t hurt.

  Post: Question of Interest

  Link to comment from August 4, 2024

• Jonathan, Born in England and 61 years old this year are two things we have in common with you, but a financial guru I am not. The more I try to educate myself about finances and retirement, the less it seems I know. It was was easier to contribute to my 401k every month, rinse and repeat for three decades, than now trying to plan for retirement. But I’m not complaining. In my professional life I have always been a ‘problem solver’. To that end I understand that we can control some things, but not all. My personal preference is to try and distill ‘problems’ so they are easily explained, which your articles do very well, and understand that it is unlikely I will account for all the variables / eventualities. Risk is a complex subject, and simplistically for me comes down to: What I know (or think I know):

  • The markets go up and down, but historically have provided a healthy ROI when investments are held in the long term.
  • Being diversified and keeping investment costs low is a good thing (e.g. low cost index funds).
  • It is OK to have some speculative holdings, but for me not so large that if they fail they will impact my overall retirement plan. For me they keep me engaged and investing interesting.
  • Having access to medical insurance is necessary.
  • Understanding Medicare when I’m 65 is important. Right now I am not planning on signing up for Medicare Advantage.
  • Understanding and keeping up with other insurance needs is important. Your article reminded me I need to up my game on the liability side.
  • I am at a point in life where I am more conservative than I used to be from an investing perspective. Our retirement plan assumes a relatively low rate of return on our investments, a higher than the historic average percentage for inflation and me deferring SS until I’m 70.
  • My wife and I live happily within our means and therefore have the confidence to retire with a nest egg that that doesn’t have every eventuality accounted for.
  • We do not want our end of life to be a burden on next of kin and end of life will have a cost we should plan for.
  • Uncle Sam will always get his slice of the pie.
  • Someday I / we will leave this mortal coil.
  If you had asked me ‘what I know’ in this context a few years ago, before reading Humble Dollar, the above list would have been shorter. From a risk perspective our plans anticipate a lower rate of return from the market and we have sufficient funds in cash and fixed income to ride out a storm. If the storm goes on longer than most we will adjust our spending habits accordingly.  and what I don’t know:
  • When the next market crash will be.
  • If there will be a prolonged downturn in the US markets (similar to Japan)
  • Will there be other events that turn the US Economy on its head in a way that ruins most or all of our plans.
  • Is LTC insurance coverage worth it compared to investing the equivalent of the premiums and effectively self-insuring? Having gone through the process of getting quotes a year or two back it seemed to me cost of LTC insurance versus potential benefit received is a bit of a toss-up.
  • Is CCRC something we want to consider versus aging in place at home (we live in a condo that is on one floor, has good elevators etc. and wouldn’t take much to make more accessible)? I need to do more homework on CCRCs – the articles and Forum on HD help with this.
  • How much will end of life cost?
  • The time, place or cause of my death.
  From a risk perspective I am not going to lose sleep over the first three or the last one on the list as they are out of my control. Going through the process of thinking this through (writing this comment) it seems, from our vantage point, that real risks we need to address are:
  • Update our liability insurance (increase coverage)
  • Figure out whether or not to buy LTC coverage (if so what is an appropriate amount of coverage) or plan on self-funding?
  • Is CCRC something we want to consider?
  • Will we succeed in not being a burden to the next generation?
  • While risk management is an important part of our financial planning we should not forget to enjoy and make the most of the time we have left while we have the ability to do so.

  Post: The Risks We Miss

  Link to comment from July 15, 2024