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How am I doing...

Posted by tlbb (My Page) on
Fri, Aug 10, 07 at 20:00

I've been reading these retirement forums for a while. I'm about 20 years away from retirement but have been thinking about it a lot lately and would like some opinions if you wouldn't mind. Here's where we are so far:

Me: Approximately 200K in retirement profit sharing plan
Me: Defined pension plan at work, but not very good.
Spouse: 10K in 401K (new job, currently contributing 12% of gross)
Spouse: Pension from old job of 2,500/month full retirement age of 65 (much less if taken early of course)
Me and Spouse: Social Security???
Current savings: About 10K

We still have 24 years left on our mortgage and pay some extra every month. We would like to each open an IRA, but it's a little tough to come up with the extra money.

So. Any comments or suggestions? For those who are retired or about to be, would you have done anything differently? I guess I've reached the age where retirement is really something to think seriously about. Wish I had done it sooner. Thanks for taking the time.

tlbb


Follow-Up Postings:

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RE: How am I doing...

I'd work up more on your defined pension plan. Investing tax deferred money is a great way to grow money. Does your employeer offer any matching funds? Tom


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RE: How am I doing...

Thanks for the response. I don't know what you mean when you say to "work up more on your defined pension plan". It's a regular pension plan into which my employer makes the contributions. Same for the profit sharing. I don't contribute to either of them. The only matching funds are from my spouse's 401k, which he is currently contributing the max amount.


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RE: How am I doing...

"work up more on your defined pension plan"

I don't get that either and I'm an actuary.


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RE: How am I doing...

Your plan looks to me to be in good shape.

I think that many who have little savings would look at your picture with eyes really green with envy.

Especially since you are over 20 years from retirement. And might choose to retire early? Which will almost certainly be an option for you, which is not available to many. Though you might be uninterested in such an option now, should you suffer chronic health problems in future, that might cause at least one of you to change your tune.

That is one of those situations which help you to have more options, more strings on your violin, so to speak ... which is much more interesting than having only one string.

I know next to nothing of the advantages or operation of U.S. tax-deferred instruments.

A large majority of personal financial advisors in Canada say that everyone should use our tax-deferred retirement plan, but some of us disagree, as it results in us losing a couple of major advantages which investors outside of the registered plans can use when investing in Canadian stocks.

If you have some stocks or mutual funds outside of tax-deferred account and choose to hold the certificates (usually at no service fee for mutual funds, but may cost $35. - 50. for each stock, so would usually be done only for issues where one has a substantial holding), there may be some advantages to doing so.

When I have stocks' or mutual funds' certificates to lodge as collateral for a loan or line of credit at the credit union or bank, that makes the loan fully secured, so I can get the lowest interest rate on loans which I make.

When I have an emergency, I may pay for the cost initially using a credit card, then set up a line of credit to pay the credit card balance off completely before it begins accruing those heavy duty interest rates.

Which means that I don't have to carry a bank account, money market investment, etc. at low interest rate income, which here is taxed at top rate, to be immediately available in case of emergency.

The downside is that for most emergencies the interest rate that I pay isn't deductible.

Should I choose to use the proceeds of the loan to purchase an investment that's supposed to produce income or growth, our income tax peple allow us to deduct that interest cost.

And some of us claim that, using a fully secured loan that requires low interest rate, and investing in quality stocks that pay a decent dividend, allows us to borrow to invest at minimal, even no, net cost.

Do you have prospects of helping offspring fund post-secondary education?

Good wishes to you as you pursue wider and more sophisticated financial concepts.

ole joyful


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RE: How am I doing...

Ole Joyful, I was hoping you'd chime in! I would really like to start investing in stocks, but it's a little intimidating for me.

Also, I should have mentioned that I do have one child and would like to fully fund her college education. We plan on using whatever we can from savings (we have about 9 more years until she graduates high school) and then sort of paying as she goes.

I love the idea of retirement but must admit to being scared of running out of money. I want to be able to do things ... vacation home ... travel ... help the kids. How do you really know how much you need?


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RE: How am I doing...

OK, I didn't make it clear at all. I understood your point of Defined pension plan at work, but not very good to mean you weren't very good at contribuiting much to it. So that's why I commented "work up more on your defined pension plan". Rereading your post perhaps you meant that it isn't a very good program. Tom


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RE: How am I doing...

>>How do you really know how much you need? <<

It's always a guess as to how much you'll need. Everybody has different priorities; however, look at it in terms of todays prices. Very few people (only about 25%, according to AARP) find they are spending less in retirement than when they were working. 50% are spending the same and 25% are spending MORE.

The greatest expenditures were for medical (and remember, most of these people have Medicare coverage), housing, and travel expenses.

Lets look at a basic budget: youll have categories for housing/utilities/taxes, insurance, food, entertainment, medical, entertainment/travel, hobbies (I put this separate because people tend to GROSSLY underestimate how much they spend on their hobbies), clothing, gifts. Also, remember youll owe at least some income taxes, federal and/or state, as well.

In the last year, or even the last two years so you can get a more meaningful average, how much did you spend in each of those categories? Total it up, and theres your basic budget. If you want to travel, be realistic a lot of small trips can equal the cost of one big budget-buster 4-star cruise, plus youll need to double that cost because you have to assume therell be two of you traveling. Youre also using todays housing costs because even if you sell your house, downsize or rent, you will still have to pay something. Even with the mortgage paid off, there is still insurance, property taxes, and maintenance and the older your house is, the bigger the maintenance hit becomes.

So, assume you came up with a figure of $50,000 a year (remember, were using current year costs to make this easier). Well pretend youre 65 and get your pension and Social Security. This means youve got about $3600 coming in, or $43,200/yr.

Now, although it looks like youre only $7K short, here is where inflation comes in. Its well known that Social Security COLA increases fall short of the everyday reality of inflationary prices. Even if youre 65, you will still have some 25-30 years in which your money must last.

Even assuming average inflation, prices of everyday items will have doubled in 30 years. Your buying power is dropping every year, chipped away little by little.

And of course, were making a huge assumption that (a) Social Security benefits wont need to be cut back, and (b) Medicare (which is much worse shape than SS, and the Medicare D drug benefit has worsened things dramatically) will still be paying for the majority of your senior healthcare expenses.

There are also a sizable number of people who have discovered the pensions they thought they were going to get, either were cut back or disappeared for one reason or another.

Knowing these things, you decide you want to be conservative. You aim for enough savings to provide at least $35,000/yr (in todays terms). You have educated yourself, and know that most financial advisors recommend no more than a 4-5% drawdown on a portfolio (your total retirement savings). On a properly invested, diversified portfolio, this allows you to continue to build principal so you dont run out of money.

A 5% drawdown of $35,000 would mean a portfolio of $700K in liquid assets.

Because you have 20 years to retirement, you dont need to save the entire $700K although of course, wed all love to have MORE than the minimum. But we have to start somewhere, so this is our lowest goal were aiming for.

Because of compounding, a moderate rate of return should allow you to have to personally contribute only about 60% of that amount, or $420K. Divide that by 20 yrs, and you need about $21K/annually in retirement savings.

Now, you already have $200K, so youve got a big leg up on your MINIMUM retirement portfolio. But obviously, youre aiming to have the financial freedom to do more in retirement than you are currently doing, so youre going to want to build the biggest amount of liquid assets you possibly can. That "extra" $200K is still only another $10K annually, assuming the 5% drawdown -- so although its a nice little extra amount, its not even $1K/mo BEFORE taxes.

Hope this helps make it clearer for you. I just wish someone had explained this to us before we passed our 50s, LOL!


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RE: How am I doing...

Whew! Thank you for such a clear and concise response! I completely agree with you about having this explained to us earlier! But how much would we have listened when we were in our 20's? Retirement was not even on the distant horizon. I for sure will try to impress upon our kids the importance of saving when you're young.


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