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Using up one's principal

Posted by sudiepav (My Page) on
Fri, Nov 9, 07 at 12:20

My husband and I discuss retirement more than anything. He's retiring in June, me June of '09. We have a pretty good nest egg and plan to live off the dividends and growth. Our financial planner has set up a schedule and by taking 4-5% out, we'll never outlast our money. But here's the question I posed to my husband. Why are we planning to leave 7 figures and an expensive house to our children? Both kids have great jobs and, although we'd like to help maybe with college (14 years off for the oldest grandchild) I propose to do some of the things I've always wanted to do, since we've lived frugally for 40 years. For instance, I said this morning that I'd like to have our huge deck (about 650 sq. ft. replaced with Trex. I'd like to travel, even more than we've planned for. I look at our parents' examples and they lived frugally until death and left estates that should (in my humble opinion) have been used for their enjoyment. Is my thinking flawed?


Follow-Up Postings:

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RE: Using up one's principal

My husband and I don't plan to purposely leave anything. We are doing exactly what we want to do w/o any thought of leaving an inheritance. Our mindset is that, by being able to care for ourselves financially until death, thereby relieving our 2 kids of any fianacial responsibility for us, we're giving them a BIG gift.


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RE: Using up one's principal

I don't believe your thinking is flawed. You should enjoy your life. You've worked hard and sounds like you and your husband have raised wonderful children that can support themselves. I am frugal myself and would love to travel. Replacing my deck would just be a nice to have, but I'm not sure if the cost is worth it. Just because you have the $$ doesn't mean you need to spend it. That's just how I feel about a deck. Its really up to you how you want to spend your $$.

The only thing that I would add, here it comes :) ,is that my husband earns a good living. We have 3 children. We are building a nice nest egg for retirement. We "probably" have enough for both college and retirement. My in-laws have accounts set up for each child (currently 200k each). We don't plan to use the $$ if we don't need to, but it sure alleviates stress about saving for their education. I am so thankful that they have set aside this $$ and that they still enjoy retirement and travel. My friends who have children are so worried about saving for college. Again, I am so thankful. I hope I am able to do the same with my grandchildren.

Just my opinion and thoughts. All the best with your retirement.


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RE: Using up one's principal

When I was about 7, (Sorry - error ... that was supposed to be "70") about the time that I retired from part-time employment, our national broadcaster, on a province-wide phone-in program had a financial advisor for discussion one day.

I said that, at age 70, I felt that I should fund my retirement till age 100, at least, which was 6 blocks of 5 years each.

That I should not plan to use anything like the full amount of the first 5-year block during my first 5 years, for each dollar of that block that I spent would no longer be there to earn through the remaining years of my retirement.

Same for the second 5-year block, and each one thereafter.

Which made me feel that I should not plan to use more than the first block during the first 10 years - or possibly longer.

For not only would each of those spent dollars not be earning any longer, even given my conditions of life remaining the same, I'd need more dollars to live on, each year as I aged, due to inflation forcing me to spend more dollars annually to keep living at the same pace.

Since I didn't plan to spend more than one-sixth of my asset (or less) during the first 10 retired years, it meant that just under 85% of the assets that I had at that time would still be unspent after 10 years.

My training and experience lead me to believe that I can invest substantially in equity-based assets where one's time horizon to leave that portion of the total alone was over 10 years, so I'd feel that I could carry something like 80% of my assets in equity-based goods.

This especially since the annual income that they produce in Canada is tax-advantaged ... and that tax advantage increased substantially last year.

Not only that, I defer tax liability on increased value of equity investments until I sell them. I like deferring tax liability when I can.

Furthermore, on liquidation of the asset, I need pay tax on only half of the capital gain. I like getting half of that capital gain tax-free.

A triple benefit. I like that.

And when my stocks enjoy substantial growth, I like that, as well.

Can't defer tax liability on what bonds/GICs produce: the only income that they produce, interest is produced now. And I must pay tax on the income they produce at the highest rate.

And the basic amount of that asset can't grow.

I don't like either end of that scenario.

The financial advisor on the radio said that he thought that my plan was a real good one, had no recommendations to suggest.

Now, nearing 80, as I live comfortably on my three pensions, I haven't needed to draw on my assets, except for the rather small relative amount that I must withdraw from my tax-deferred retirement fund annually, and can even save some of them.

I am carrying about 80% of my assets in equities: individual stocks, mutual funds, ETFs (much like mutual funds, but at much lower annual fees), and unit trusts. Only about 20% of it (possibly slightly more, given the recent stock market pull-back) in the "principal" that you're talking about using up.

Yes - I should be able to spend some of that asset.

But when I consider the cost of retirement residence when I become unable to continue independently ...

... and when I consider the cost of nursing home care, especially should I need fairly constant and close care, e.g. if I should suffer dementia or other incapacitating problem ...

... I find it difficult to come to even an educated estimate of how much asset I may need for such an eventuality.

Apart from the ravages that the rat of inflation may cause on each of those invested dollars each year.

So - how many dollar-chips of asset may I need before I cash in my life-chips and depart on my final journey (in this dimension of life, that is)?

We used to kid my old step-uncle, saying that we figured that he was trying to find ways to take his assets with him (two wives, over about 60 years, both predeceased him, with no offspring) ... but he survived in his own home till his late 80s, within less than a week of his death.

I rent this 2-br. home from the new owner, at much lower rent than I paid for a 2-br. townhouse in the city, but must carry water that I drink and use for cooking ... but I've done that before and it's no hardship. I figure that I can live there, several miles from services, until I can no longer drive my car.

I'd like to leave some for each of my two offspring ... as well as a substantial amount to charities ...

... but how much may I need to pay my keep until I leave?

And my daughter, executor of my estate, is too smart to sell off those equities in a hurry, especially if they should be at fire-sale prices shortly after the time of my departure: probably most just transfer title into their names.

Final word - I don't know. Can't even make an educated guess: frustrating.

Good wishes to you folks as you decide what path(s) you may want to follow.

ole joyful


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RE: Using up one's principal

I am enjoying what my husband and I worked so hard for. I am the only senior I know that is spending principle or is that principal? LOL My sisters are still living on their income, they can't seem to shift modes from saving to enjoying. They are almost 80. I have done several bus tours in the last year and will leave on a 12 day cruise next week. After that I will go back to the Peruvian Amazon Rain Forest for a week , then a week on a river boat cruise on the Amazon River. I am spending down to a set amount. My friend is losing more money on her investments than I am spending having fun.


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RE: Using up one's principal

Different strokes for different folks.

I didn't mention in that long treatise earlier, I think, that I don't have grandkids (and with my offspring being over 43, I'm not expecting major changes in that department).

But if I did, I'd want them to be as well prepared as possible for their future, including some flexibility with regard to potential career, as so many careers are dying on the vine, these days.

Those grandkids are in worldwide competition for work and we have developed expensive tastes when it comes to lifestyle.

Not only that, many of our youth have developed some of a feeling of entitlement: that they have a right to the good life (with not too much emphasis on the skills and effort needed to support it).

I think that we are in the twilight years of Western pre-eminence on the world scene.

So I think it important to leave some capital behind to see my offspring through difficult times, if necessary.

ole joyful


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RE: Using up one's principal

I think that this is a hard problem for most of us as we age. If we knew how old we would be when we died, and how much time we might have to spend in a nursing home or assisted living facility, it would be easier to plan. If you used up your money and then lived to 100+, do you want your children using their money to take care of you? However, most of my friends want their parents to enjoy the money that they have saved.

At 58, my husband is the longest lived male in 4 generations on his father's side. Of course, I think that he is much more like his maternal grandfather, who lived to 95. But, we don't know. I do know that we have just updated our wills and did all of the power of attorney/ living will/ etc. Our children are pleased that we have that taken care of all of that.

Enjoy your money. Take trips, replace the deck. With your assets, you will undoubtedly leave your children some assets when you die. Don't die having too many regrets.


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RE: Using up one's principal

I totally agree with londondi. Please enjoy your retirement while both of you are still able to be mobile. And enjoy each other--LOTS!

You can never know when health issues will force you to stay close to home and doctors you are comfortable with. My DH is mobile but has PAD so walking is pretty much out of the question. Even with his scooter, it limits the trips you can take. Thank goodness we had some wildly fun trips before the PAD.

I say go for your deck, sudiepav. If that makes you happy, you should have it. I think we all grew up frugal and it's hard to let go of the bucks sometimes, but that's a small thing in the big picture.


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RE: Using up one's principal

I would first be sure that you can easily afford what you plan to do. Get a second opinion. Something the financial planners don't always tell you is that how long your money lasts depends on how the market does during the FIRST years of your retirement. If you enter retirement during a bear market (like the one we may be getting now), your money will in the end not last as long as it would have if you entered retirement while the market was on an upswing.

Aside from that issue, what we do: Our son is doing well and does not need our help. But we give him money to help fund our grandchildren's college ed. And sometimes we kick in a little be more. As we age, we'll have a better idea of how long our money will last. We're starting with a yearly spend of less than 4% of principle. I think they say 4-5% is the max, according to the rule of thumb I have seen and heard. Of course, it also depends on your asset allocation. We're at 50-50 stocks and bonds, and nearly all in index funds, so expenses are low.

You're allowed to give children up to $12K per year without any tax consequences to them (or to you). It may be more than 12 now, because it gets adjusted each year for inflation. The advantage of giving is that estate taxes will eat up a lot of your money when your kids inherit it.

But by all means, renovate the deck. We just renovated our 2 bathrooms, put in a new roof, a new AC, etc, etc. Life is good.

One more thing. Don't forget long term care insurance. The guiding principle for that is, you need it if you're not rich enough to self-insure for the high cost of assisted living & nursing home care, or even care at home if that's possible and your choice when you grow frail and need help. Most Continuing Care Retirement Centers require that you have long term care insurance or demonstrate that you can self-insure. Without it, you run the risk of depleting your nestegg. AARP has a lot of good info on this issue.

Enjoy.


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RE: Using up one's principal

It's me again and have returned from my cruise. It was wonderful. I visited 8 new countries and went through the Panama Canal. And I have booked a Princess Alaskan Cruise and land tour in June. I picked up a good travel trip, probably better for younger people or at least young at heart. San Juan is an American Territory and it's beautiful. We stayed at the Marriott, right on the beach and in a cabana room. The pools were right outside the patio door, on the other side of the pools was the beautiful beach. I asked the price of my room and found out it was $335. a night. That sounds very high, but they rent them by the room, not by the person. So if 4 lady friends could bunk in 2 queen or king size beds and split the room cost that would be a very nice few days on the beach. Also the Marriott had tours and the Barcardi Rum tour was great, especially the "samples". LOL


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