Parameters/assumptions in a retirement plan: conservative enough?

celticmoonMay 6, 2007

I have a plan but wonder if my assumptions are reasonable. I'd hate to tell DH it is OK for him to retire in six months and then turn out to be wrong! I base our living expenses on a careful tracking of every penny spent in the last 10 years, so I am confident of the living expenses figure in the plan.

Do these other assumptions/parameters sound conservative enough?

1. Plan may need to cover us till we are 100 years old.

2. We will not earn another penny.

3. We will inherit nothing.

4. We will receive 70% of what appears in our annual Social Security estimate statements.

5. Inflation will average 3.5% over time.

6. Investments (balanced 60/40 equity/bond portfolio) will earn average 7% over time.

......(The above two translate to a 3.5% spread between inflation and investment earnings over time.)

7. The federal government pension system will not default.

8. The local civil service pension system will not default.

9. A sizeable untouched fund (3-4 years' living expenses) is sufficient for surprises/disasters.

  1. Paid for home and cash value life insurance can be tapped as a backup to above disaster fund if necessary.

I doubt *all* of the first 6 will fall out as stated, so together they seem conservative enough to give DH the green light. Any of these parameters jump out as being foolish or problematic???

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celtic moon,

Makes a lot of sense to me.

I wonder whether there may be cutbacks in the amount of payments from Social Security, for they don't have a lot of money in the till, and a higher percentage of our jobs are less secure and less well paid than in an earlier generation, which means less going into that till on an ongoing basis.

I personally am inclined to have a higher percentage of assets held in equities. I'm nearly 80 years of age and have about 80% of my assets in equity-based stuff - as I, like you, figure that I should plan financing to age 100 (at least). I prefer to be able to avoid eating turnips exclusively at age 101 (and at higher prices than currently, to boot). Should I make it that far.

If I don't - well, my kids can use the money!

Partly because I've been playing this game for over 40 years, have taken the course that stockbrokers take, plus 6 courses that lead one to a CFP designation (which the best mutual fund salespeople have, but not by any means all of them).

If the stock market gets into serious trouble, I may be hurting. But as it is, I am not only living on my 3 pensions, but putting some into investments, as well. So I do not expect to need to start liquidating investments soon.

Moreover, there are some advantages tax-wise to owning Canadian stocks, which I lose if I invest to earn interest.

And I defer incurring tax liability on stocks that I own until I choose to sell them ... then get taxed at an advantageious rate on the growth.

And when I put $10,000. into the bank ... I don't get any growth.

All that that invesment will ever earn is earned now. And taxed now. At top rate, here. And I must put some of it with the principal, in order to keep purchasing power intact.

I get to call real earnings, the amount that's left.

Which has recently been very little. If anything at all.

Not my idea of a good time.

It seems to me that as petroleum supplies diminish and prices rise, we'll have higher prices on most things that we buy, which means that current rates of inflation are lower than we'll be forced to cope with in a few years' time.

Remember the whining that we North Americans have been doing recently about gasoline prices? I've heard some of it here at THS.

The Europeans have been paying $5.00 per gallon for years.

Which means that they've sought alternative means of harvesting energy.

They're far ahead of us in terms of developing power effectively using solar and wind sources.

Good wishes to you and hubby as you make your plans ... and implement them.

ole joyful

    Bookmark   May 6, 2007 at 2:15PM
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We will receive 70% of what appears in our annual Social Security estimate statements.
What does this statement mean? Why won't you get 100% of your statement?

    Bookmark   May 6, 2007 at 6:33PM
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I think the one question I would have is your #5... 3.5% average inflation. I would think that the 3.5% average is compounded each year. This can make quite a difference and I'm not sure if this is how you have it figured or if my assumption is correct.

    Bookmark   May 6, 2007 at 8:15PM
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cmarlin, some of do not have faith that the coming generations will be able to deposit money into SS in large enough quantities to support us at the level we have been promised.

    Bookmark   May 6, 2007 at 10:48PM
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Joyful, thank you for your thoughts. I will consider the equities vs bonds balance. I fear I may not be as confident as you are in equities though.

Cmarlin, RE: Social Security, I am responding to the proported fact that the system will be only 70% funded at some point in my lifetime. Possibly means testing or some other development might impact what we get. Not something I anticipate, or would welcome, but one more thing I throw in just to crunch a worst case scenario.

Coolvt, I have inflation compounding annually. You are right it makes a huge difference. Really erodes the pensions severely decades from now. We will need to fill in more and more over time. If we live much past 100, that will get harder. Now if inflation averages 4 or 4.5 or higher, and returns don't bump comparably, that crunch will come a lot sooner. I *think* I'm OK with that risk.

Any other thoughts or concerns?

    Bookmark   May 6, 2007 at 10:50PM
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Long term nursing home or in home health attendant?

How is your pension affected if only one person survives past a certain age? Will you still get both pensions or only one?


Was your career as a financial advisor? What I am really asking is can anyone take those courses?

    Bookmark   May 7, 2007 at 1:36AM
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Saphire, both pensions are figured at the lower amounts that entail survivor benefits.

LTC insurance is such a complicating issue, isn't it? Like everyone, I would rather avoid living out my days in a nursing home. I have worked in public health my whole career, and my current work takes me into every kind of facility, group home and in home support setup for elderly that you can imagine. I am increasingly convinced that some assests can be worse than no assets at all. In my urban area, you are actually better off depleting assests entirely and becoming eligible for the Department on Aging Family Care program, a creative and flexible intervention system that is designed to avoid nursing home placement. There is so much developing in supportive resources that are nontraditional - and the cynic in me questions whether LTC insurance will end up covering these novel interventions anyway.

Our disaster fund can cover the statistically predictable stretch of a year or two in a NH for a physical rehab stint. One or both of us being total care for decades, well, that is another story. I should reexplore the kind of policy that kicks in way late in the game. To date, the typical LTC policy with earlier benefits, say after 3-6 months, and caps has not seemed worth it.

Best would be avoiding a NH entirely and we are trying. DH and I have promising genes in that elderly parents all stayed independent. And we both are far, far more fit and nutrition/health conscious than they ever were. Will that mean anything decades from now? Who knows.

We are hedging bets as best we can. Steps are not an issue in our current home (huge factor in NH rehab admissions) and as I do things to the house, e.g. floor coverings, bath renovation, I am making sure that the choices enhance handicap assessibility. Door handles are levers, halls and doorways are wide, etc. So the house itself won't be the problem. We are next door to a bank, grocer, medical buiding and shopping center - and city bus access - so transportation and retail access issues won't force us out either. We have a large extended family and social community and hopefully some will still be around to help problem solve.

I have no problem liquidating everything to pay for care when only one of us is left. After all that runs out, well, the key then is a perceptive, active and yes, even pushy guardian. There is good care out there, even when resources are depleted. I am not above bribing a younger relative: help us stay independent as long as possible, then monitor our care, and you can have the life insurance. It is not a bad deal.

So, those are my thoughts on LTC. Deluded? Maybe. Perhaps I will revisit the insurance offerings once more for peace of mind. Thanks, Sapphire, for prodding me to think this piece through again.

    Bookmark   May 7, 2007 at 11:31AM
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Comparing the future required equivalent of a dollar 20 years and 40 years from now @ 3.5% and 4.0% inflation gives:

After 20 years:

@3.5% = 1.9897

@4.0% = 2.1911

[2.1911 / 1.9897 = 1.10]
After 40 years:

@3.5% = 3.959

@4.0% = 4.801

[4.801 / 3.959 = 1.21]

    Bookmark   May 7, 2007 at 4:27PM
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I am alrady retired, living on investments. I like your thoughts on LTC, we do not have insurance. WE also have some of the same thoughts, will it even cover my "event". We've already decided to hire live in care and stay home til the end.
I may decide to my poor relatives my house, we don't have lif insurance!!
I'd rather have an employee than a relative do my care.

    Bookmark   May 7, 2007 at 6:46PM
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Good idea, cmarlin20. The house AND the life insurance. Surely some relation will step up for that! Not expecting anyone to care for me themeselves, just to see that I'm not too neglected or abused. DH has always been in the "shoot me rather than put me in a place like that" camp, but now he is saying if they have better music and cocktails, it might be OK. Virtual Harley riding and he'd be happy. Me, I'm most worried about the food. I like to eat well. I always ask about the food and people always say it is horrid. Nothing fresh. Yech.

Inflation is exactly my concern, mxyplx. That 1/2 per cent does change everything! It is a pet peeve of mine that so many advice articles and programs suggest 3% for an inflation figure. The only way to come up with 3% historically is to include the great Depression years. Maybe 4 is more realistic than 3.5... But then maybe 7.5 is more realistic than 7 for earnings. Comes down to the 3.5 spread and whether that is OK.

I do appreciate your time and thoughts.

    Bookmark   May 7, 2007 at 7:59PM
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I'm not sure if you are in the US or Canada. One thing that you haven't mentioned, but maybe you have covered is health insurance/costs. This is the fastest growing expense in the US. When I look at my annual exposure including health insurance premiums and deductibles, I am looking at a possible $30,000 per year. I have an average BC/BS policy and have to pay my own premiums.

    Bookmark   May 8, 2007 at 9:34AM
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Coolvt, health costs scare me so much I have it covered twice. My civil service retirement plan includes a benefit of free health insurance for me and DH. (The main reason I gutted out a terrible job for so long). But since the local goverment is having money trouble, I got to thinking that that "free" insurance might end up morphing into a $10,000 annual deductable some day. So some years ago, I had DH start paying for health insurance for us through his federal job (even though we were both insured under my job), and he's now done that long enough to become vested. The perk is eligibility to continue to purchase health insurance for life - at the federal employee copay rate (under $200 a month for Blue Cross/Blue Shield for us both).

I agree with you health costs are a huge monkey wrench. I'm hoping we have that covered with the two separate policy options. And believe me I am grateful for both, I realize most people have no options other than self pay.

    Bookmark   May 8, 2007 at 9:59AM
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>>9. A sizeable untouched fund (3-4 years' living expenses) is sufficient for surprises/disasters.This concept is intreeging (?).

About 4 years ago we concluded to keep 1 year's living cash in our local bank (@0.5% interest). Same idea, readily availabe, etc etc.

Well I finally brought it down to a few thousand because various higher return securities/accounts can be liquified to cash and at the local bank in 1-5 days. Unless parts of the US of A get vaporized a few strokes on the computer gets that done.

Unless I go first. Ahhhh. Sacre Blu! De Rub. De Fly. De Ointment. De Wife! De Computer. She cannot do! I try to teach her turn it on. Now what you tink? She will not touch dat awful ting. I inseest! She sic on me de dog. Jeeeeezzzz...........

    Bookmark   May 9, 2007 at 5:18PM
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LOL, mxplyx, DH is the same way!

I keep taking him to the file cabinet and showing him the folder where all is clear. He still can't handle it. Can manage only the brick and mortar joint next door. I'll leave enough there to hold him over until he finds a guru to show him the way.

    Bookmark   May 9, 2007 at 11:18PM
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Thank you so much for the plan outline. I have been thinking along these lines but never really put it on paper and crunched the numbers. I think your plan is as good as you can possibly make it with out a crystal ball. You are right about the unknown. How much will they reduce SS based on income? And how much we will have to pay for Medicare again based on income.

We will have to use Medicare and buy a supplement. After all the research I did for my parents I have a pretty good idea how much it would cost today buy who knows what will happen in between now and the 3 or 4 when DH retires or in the future. I agree LTC insurance is to iffy at this point and would rather save that money than take a chance on it.

If we live to be 100 one of the issues may be every day living expenses. We all have watched the price of food and most utilities double in the last 10 years. It still blows my mind to pay $4.00 for a loaf of bread or $5 something a pound for a tomato. We could also see our property tax skyrocket here in California. Some politicians would love to get rid of our Prop 13 that keeps property taxes from going up and up.

After Joyful referred to my DH as being stupid for not paying attention to household finance in another post, he didn't know the whole story, I got to thinking about it so last month I told DH the bills were ready to be paid, money needing transferred, ect and ask him to do it. I had in the past told him I did most of it on the computer and showed him how to find passwords but really didn't think he paid attention.

Guess what it took him all of about 20 minutes to do everything. He then said if I wanted him to do this every month I had better give him a key to our post office box. LOL Never even thought about it but in the 20+ years we have lived in the mountains he has never ever stepped foot in the post office. He now knows where the extra key is. So thanks Joyful for making me think.

So all of you out there keep the questions and ideas coming. I can use all the help I can get in trying to think this through. At this point about the only thing I can think of that hasn't been brought up, not really a retirement issue but related, is pre paid funeral arrangements. Not terribly expensive but a great gift to the ones left who have to settle your affairs.

    Bookmark   May 10, 2007 at 4:43PM
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Chemocurl zn5b/6a Indiana

It still blows my mind to pay $4.00 for a loaf of bread

53 cents here for a loaf of day old 'white' stuff. The loaf I bought today has an expiration date of the 21st. The many wheat, potato, and rye breads are $1.29 I think.

$5 something a pound for a tomato
I hope to grow and put up lots of them again this season.
Where might I ask do you live, partst, that prices are that high?

I think you have thought things out very well. My thoughts on SS are that those who are already on it will be grandfathered, and in the future those looking at retirement and SS will be cut back...thus delaying some from retiring until later, thus having them pay into the pool longer, and draw from it less time.


    Bookmark   May 10, 2007 at 7:16PM
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A thought on inflation: The famous book "Your Money or Your Life" (which I imagine many have read) has a section on not fearing inflation. Inflation estimates assume that everyone buys the same things no matter what the inflation. Dominguez and Robin note that we have choices: if tomatoes are $5/lb, we can buy something else. Many things are less expensive (technology, clothing etc) than 20 yrs ago.
Unfortunately, the things that have gone up MORE than inflation are the things that matter most: health care/insurance (not too problematical if you are covered by employer plan); higher education (don't get me started on this!).
But reading the chapter in "Your Money..." on inflation provides a useful contrarian view.

    Bookmark   May 10, 2007 at 7:48PM
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Ah, Amoretti, Your Money or Your Life is one of the more influential books I've read on finance. The Joy of not Working is the other. I think both helped me think outside the box and rearrange spending to prioritize an early retirement.

    Bookmark   May 10, 2007 at 10:42PM
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Ironically we located 60 or so miles from the San Joaquin Valley where about 25% of the US agriculture is produced. We live in a very small resort town, population 1300, on the Kern River. We have one small grocery store that caters to the tourist population. A good loaf of bread is $3.79 to $4.29 and tomatoes, well I rarely buy them. Just yesterday I paid $1.79 a pound for onions that just a few months ago they were 3 or 4 pounds for a dollar. Onions are grown straight down the canyon from us. You can smell them when they harvest just driving into Bakersfield.

We do have a Von's market about 16 miles away but lately with the price of gas, $3.55 a gallon for regular today, I only go if I really have to. Plus that Von's is 20 to 30% higher that the rest of Ca. because it's in a resort area. I usually go to Bakersfield twice a month, 120 round trip, for a shopping marathon. The prices are not much better but I can shop the sales and buy tomatoes at around $1.99 pound. Stock up at Costco. We laugh about it but you really don't want to run out of TP and have to buy it here in town.

DH works in Bakersfield and known quite a number of farmer. In the last several years more and more have sold to developers. Where produce was once grown is now housing. This is happening up and down the San Joaquin Valley. To make matters worse most of the quality crops are sold overseas. Many crops get plowed under because the cost to harvest is more than they could sell for. Water is always an issue in Ca. and certainly will be this year.

This is my concern for trying to figure out what our day to day expense will be in our retirement years. It scare me when I think about how much a salad will cost to make 15 years from now. Will it be safe to eat is whole other conversation.

Moving is not an option we love it here and belive it or not home prices are about 2/3 below the rest of Ca. in our valley. It's a good place to live, hot summers, some snow in the winter, any kind of outdoor recreation you could ask for and it's just really beautiful

    Bookmark   May 11, 2007 at 2:31AM
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At this point about the only thing I can think of that hasn't been brought up, not really a retirement issue but related, is pre paid funeral arrangements. Not terribly expensive but a great gift to the ones left who have to settle your affairs.

It sure is! When my MIL passed, DH and his brother went to the funeral home and discovered that she had already selected and paid for a coffin! They knew that her plot was already paid for. Arrangements were made in less than an hour and the cost was about $500.

Because of her thoughtfulness, they were not faced with difficult and expensive decisions at a time when they were just emotionally overwhelmed.

    Bookmark   May 11, 2007 at 3:04PM
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