Money matters during retirement

melklimNovember 16, 2005

I plan to retire in another 18 months when I'm 55 after 30 years in the same profession. My wife (am I allowed to use DW?) will continue to teach and so our income will not take a big hit until she also decides to call it quit. I have read articles about preparing for retirement that deals with financial matters. We have started to move some of our retirement savings into more conservative income producing investments (CDs, bonds, etc) that will supplement our retirement income.

I have a question for those who have been retired for at least several years. Do you find you have more than enough money at the end of the month that you go back into more risk-oriented financial vehicles, such as stocks and mutual funds? Or do you just continue the course and put what is left at the end of the month into a saving account?

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In these days, everyone, retirees included, must cope with very small return on dollar-denominated assets (i.e. the bank guarantees that they'll return every dollar that they borrowed, but don't mention that they won't pay one dollar more, either, apart from the rent on the money).

As a personal financial advisor for a number of years, I've told many that there are two rats that eat your cheese - the income tax people want to talk to you annually about all of your current income (though here in Canada they tax different kinds at different rates).

If you have a substantial portion of your asset in bonds, etc. where the number of dollars in the asset can't shrink, so can't grow, either, you must take a portion of each year's earnings to add to the underlying asset in order to maintain the purchasing power of that asset.

For example, had you invested $10,000. in a 5-year guaranteed certificate at the bank 15 years ago, and renewed it twice - they'd now pay you precisely $10,000. Fifteen years ago that $10,000. would have bought a half decent car: not now.

So - the income tax rat chews away at part of your annual income and the inflation rat chews up part of the value of your underlying asset, each year.

You get to keep what's left.

Don't forget - the rats eat first.

Some time ago on a phone-in program dealing with money management, I told the advisor that, at age 70, I felt that I had six blocks of 5 years each to consider relative to my investments.

That I should plan to draw a good deal less than a sixth of my total asset during the first five year period, for each dollar that I spend isn't there to earn for me any more.

Same for the second five year period.

So, instead of eating up something like a third of my asset during the first two of those five-year periods, I think that it should be more like one sixth, and I'd feel uncomfortable with liquidating even that much - more like 10% would please me better.

For money that one plans to leave invested for more than ten years, many advisors suggest that a substantial portion of it may well be in stocks, higher quality ones as one ages and it becomes almost impossible to replace lost asset.

The advisor said that he thought that to be a good plan.

I like the high quality stocks that pay a good dividend, for there is stronger possibility that they will resist the drastic reduction in price that more volatile stocks suffer during turndowns in the market.

As, at age 76, I receive two government pensions (one a contractual one, that I paid into for a number of years) and a partial private pension, which more than adequately cover my current needs, I do not need to liquidate any assets annually, thus far.

Actually, I scarcely use any of the income that they produce annually, either.

Just some thoughts that may be of interest. Not sure whether my answer was on target to your question. If yoyu have further questions, ask.

ole joyful

    Bookmark   November 16, 2005 at 5:50PM
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We moved all of our money in to conservative investments...We felt a low risk at this point was in our best interest...We don't use any of our money (or havent as yet) just our SS income but we feel we have more than enough to see us through and don't see any need to risk what we have trying to earn money that we probably won't need anyway....

We do, however, make sure that we are getting the best dollar return that we can without serious risk....some of the interest rates being paid out there are getting better and we make sure we are taking advantage of them....

    Bookmark   November 29, 2005 at 4:51PM
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Inflation ...

... is ...

... a ...

... risk, also.

It shrinks the value of every dollar invested in investments where the amount invested has no possibility of growth. Annually.

A not inconsiderable, if less obvious, risk, in my vocabulary.

ole joyful

    Bookmark   December 1, 2005 at 3:39PM
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If you have all your money in bank deposits, or CDs, or money market funds, there's almost no risk at all. Instead, there is almost a guarantee that your money will be eaten away by inflation over time and you won't be able to keep up.

I am aware of only two ways around this problem: (1) Accumulate so much money that you don't care, or (2) include stocks in your investments. I guess there's also (3) win the lottery, but my experience with lotteries is that you get better odds by not playing :-)

    Bookmark   December 18, 2006 at 11:13AM
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I made a post a few days ago over on "Household finances" relating to lotteries.

Actually, I made what I consider to be a fairly good offer ...

... but there have been no takers, so far, at least.

Have a week that pleases you and yours mightily, especially as you lead up to Christmas (if that celebration is important to you).

ole joyful

    Bookmark   December 18, 2006 at 5:57PM
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In a couple of years, I'll be 80 years of age, should I survive that long.

Many financial gurus suggest that one should subtract one's age from 100, and keep about that percentage of his/her assets in equities and other assets whose value fluctuates.

For example, at age 30, have about 70% of one's asset in equities, and at age 60, about 40%.

Sorry - I disagree. At age close to 80, I carry about 80% of my assets in equities.

The interest that CDs, guaranteed ceritficates, bonds, etc. pay me these days is peanuts, and as the asset's value can't grow apart from that, relative to this year, that's the only income that it'll ever make relative to this year.

And, here in Canada, that interest is taxed at top rate.

If I'd put $10,000. into the bank 15 years ago, they'd have paid me rent on the money as agreed in the years between.

If I needed it now - I make use of their guarantee that they'll return every dollar that they borrowed: I get $10,000.00.

And - the other side of the guarantee works, as well - they won't pay me one Dollar more, either: I don't get $10,001.00 or more.

Plus - the value of each of those dollars has shrunk every one of those years (since the Great Depression of the '30s, at least).

So I must reinvest much of those current earnings with the basic asset so that I keep purchasing power intact.

I can keep what's left - which frequently is ...

... nothing.

Not my idea of a good cup of tea.

Which is the major reason that, since I live on my pensions and don't require income from my assets currently, or probably more than a small amount during the next few years, I feel comfortable in having about 80% of my assets in equities.

That and the fact that I've been learning about how money works for about 70 years, since I grew up on the farm, though I haven't lived there for nearly 60 years.

Farmers look at money entirely differently than almost all city people do.

ole joyful

    Bookmark   February 17, 2007 at 1:13AM
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I retired at 55 in December of 2000. Although I loved my work, the office comraderie, and all the perks, etc., when walking out for the last time I never looked back. Have never had a "should have, could have, would have" moment.

From the onset, I contributed the maximum to my 401k which had a company match and I had both conservative and high risk holdings. On good advice I moved everything to conservative and fixed just before the downturn in the late 90's really got underway so my financial hit was small. Since then I've been quite comfortable staying on the conservative side.

Not seemingly too popular with folks on these forums, I'm a fan of the 2 year Treasury Notes and have been buying them three or four times a year for the past ten years. I also have stocks and tax free municipal bonds.

With my mother in a nursing home now for the past few months, my in-home care giving duties are over and I'm the presumptive heir of the long since paid for family home. Myself and the house do well on my pension, interest, and dividends with discretionary money remaining for any other type of investing I might choose. At this stage, it's doubtful I'll be going for much of anything with too high a risk since I think I've found my comfort zone. As for the inflation factor...might be easier to overcome a gradual erosion than a catastrophic high risk loss.

    Bookmark   February 18, 2007 at 1:12AM
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I head Brinker on the radio today saying that on
Tuesday or Wednesday there will be an auction of the 2 year Treasury Notes.

I don't understand it but it sounded good!!

    Bookmark   February 18, 2007 at 10:14PM
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minnie: don't know why they're called "auctions" as you're not competitively bidding. But the auction for the 2 year note is held every month on the 3rd. Wednesday. What I like about them is that they're no fuss, no muss; the government does all the paperwork, sends easy to understand and very detailed statements, direct deposits interest twice a year, notifies you 6 weeks in advance when your note is coming due, sends a 1099 for taxes, and you can deal through your regional Federal Reserve bank which for me is in Minneapolis. (Dallas for Texans). I just find it a good place to park extra cash.

Treasury Direct has a good website"

    Bookmark   February 19, 2007 at 6:50PM
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I also retired early due to some really good advise given to me back in 1982.

An older co-worker introduced me to the stock market and I jumped right in when the DOW was about 850. You may be thinking to yourself it was all about luck and timing as the DOW was at rock bottom at that point.

Even though the DOW was at rock bottom at that time, it was NOT the gambling investments that really paid off. I traded back and forth but never made a killing. It was investing in the "old-timer" utility stocks that made it all possible. My former co-worker was a stock market veteran and he advised me to buy a few utilities and NEVER take the dividends but reinvest the money. That advise was golden.

I'll give one example. I bought 200 shares of Southern company at 16 2/3 per share and made one $300 extra payment in 1984. I had to check my paper records twice because I could not believe I made what I did.

That $3500 investment in 1984 turned into $55,000 worth of Southern and about $12,000 worth of Mirant for a total of $67,000 on just ONE utility. It wasn't a fluke stock..You could have picked any 8 top utilities and got about the same results.

Even though I am only 55, you have to constantly be fighting taxes and inflation so I continue to invest in high dividend utility/exploration stocks that are medium to low risk and reinvest the dividends. If I didn't I would totally burn all my savings if I lived to 95.

One more thing, be aware that there are still ticking time bomb (stocks) out there meaning WorldComs and Enrons. That Oxley/Sarbaines (SP) legislation is all cr@p. Talking to a few college kids that have gone into accounting has convinced me that we will repeat our past mistakes. The fear of posting "bad numbers" is still out there.

To protect yourself, it pays to invest in companies that are growing and are making cash payments in some form or another. It is much harder to "cook the books".

One other thing I learned, is that the Fund Managers have a hard time beating the Indexes. Nothing like the safety of investing in the DOW or S&P.

    Bookmark   April 3, 2007 at 12:26AM
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Do you figure that such companies as Johnson & Johnson, or Exxon, or Bank of America may be about to die (or get deathly sick) any time soon?

ole joyful

    Bookmark   April 5, 2007 at 2:23PM
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Nothing is for sure in this world. The auditors are only looking at ink.

Bank of America is now "Bank of Amigo" as this institution is letting illegals without Social Security numbers do business with them which is a potential time bomb. Thank God for the Federal Deposit Insurance Company.

J&J and Exxon have been around a while and pay dividends, so they are fairly safe.

    Bookmark   April 6, 2007 at 5:23PM
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Those were just some examples off of the top of my head.

There are many strong, stable U.S.companies.

And we have a few up here.

Mainly resource companies ... and oil and gas, metals and minerals prices are due to rise. Including nuclear if that interests you (and can't someone please teach Mr. Bush how to pronounce that word correctly?)

And there are others in various parts of the world.

Several of whose currencies' values have increased relative to the value of the U.S. Dollar in recent years - and will probably continue to do so.

If you'd bought Canadian dollars and invested here a few years ago, in addition to the return that you'd have returned on the investment, you'd have gained about 25% in exchange rate - a few years ago, a Canadian Dollar would buy about 66 cents U.S., and recently it was over 90 cents, now about 87 cents, I think - checked a couple of recent papers, no rates shown.

Check a financial site if interested, e.g. Yahoo Finance.

Good wishes for skillful use of your assets and income.

ole joyful

    Bookmark   April 8, 2007 at 6:57AM
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Start by withdrawing 4%. Then adjust for inflation each year, for 30 years.

    Bookmark   April 25, 2007 at 6:19PM
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There are two huge misconceptions about investments:

1. Stocks are a risk class to avoid;
2. Bonds are riskless.

Every retiree should have some portion of their assets in stocks through stocks, funds or ETF's. The percentage should be tailored to your individual risk profile. Stocks offer growth and inflation protection.

The value of bonds vary with the bond market and this characteristic increases proportionately with the term. Sure, you can buy CD's but you are likely barely covering inflation.

    Bookmark   October 12, 2007 at 2:27PM
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My friend has her savings in the stock market, she is worried about it and wants it out. She says she can't get out without losing half or more of her money. I don't understand this. I thought you paid taxes on the income every year, nothing on the principal that you orig invested when you cash it in. When she asked for money to buy a new car, her broker tried to talk her out of buying one. She got very angry at him and told him, something like "you're not my husband, I don't have to ask or beg for money anymore." She got her money pretty quick.

    Bookmark   October 15, 2007 at 6:07PM
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Every investor needs to determine their appetite for risk and design their portfolio accordingly. But risk wears many costumes. What will she do with her money when she sells her stocks?

As for taxes, you pay tax on capital gains in the year in which the gain is experienced which is generally the year you sell a stock.

    Bookmark   October 20, 2007 at 3:49PM
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