The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Retirement Income

06/23/2019

So, you have searched your soul, looking for the real reason you think you want to retire . . .
And, you have verbalized your thinking to a trusted loved one, giving airtime to both your thoughts and their thoughts . . .
And, you have prepared a budget for a good economy and another for a bad economy . . .
Now, you want to estimate your income during retirement?

If you are one of the fortunate few that is eligible for an old-fashioned pension plan (defined benefit), there are few decisions for you to make.  One is that most plans permit payouts over one life or two lives.  If payable over two lives, the payouts will naturally be smaller than if payable over one life.  If you are the employee’s spouse, you’ll prefer the pension be payable over the employee’s life, as well as your life, even though the monthly income is less.

Sign up for an estimate of your Social Security benefits at www.ssa.gov/my account.  When you are ready to receive your monthly check, you can do that online as well, but I recommend a brief visit to the local Social Security office, where you can pick up a lot of extra information.  Call for an appointment.  The biggest trick to Social Security is called “claiming strategy,” which is necessary when you and your spouse are both eligible for Social Security retirement benefits.  You should talk to your CPA or financial advisor for more details before making a decision on Social Security.  (Give them 24-hours to “bone-up” on the latest technical rules.)

Portfolio management or “Nest-egg management” is what really scares most potential retirees.  What if I run out of money?  You do want a real financial advisor to help with this.  The rule-of-thumb is that you should only receive/consume about 3 percent of your nest-egg each year.  Of course, the retiree can push for more income, but that comes with a trade-off.  The more income you take out of your nest-egg, the less growth you should expect.  In the past, financial advisors would buy bonds for income and stocks for growth.  In the current interest rate environment, buying bonds is not nearly as attractive as they were a few years ago.  (Remember:  when interest rates increase, the value of bonds decreases.)    Bonds pay interest and stocks pay dividends.  With most Blue-chip stocks paying dividends of only 2 percent or so, your financial advisor will find you some high-dividend stocks.  For example, you can put your entire nest-egg into AT&T stock and receive 5-6 percent dividends.  (Of course, you’d also be totally un-diversified.)

Some retirees opt to put their nest-egg into an annuity, which I do not recommend.  While an annuity pays a predictable amount each month, it also pays high fees to the advisor, is needlessly complex, and expensive to get rid of.  Retirees typically buy annuities because they are “guaranteed” which seems to help people sleep at night.  I see that as quite worrisome, because the guaranty is not diversified.  Your entire next-egg is dependent on the credit of ONE company, whose balance sheet is usually not understandable anyway.  Like Warren Buffett, I prefer buying a diversified portfolio of stocks, because I trust the American economy more than I trust any one company.  Why pay high fees to reduce diversification?  Guaranties are greatly over-rated!

One exception to this judgement on annuities is that some existing life insurance policies do permit “annuitization” of the cash value or converting that cash value into monthly income deposits.  That is usually preferable to buying a new annuity.  Check it out!

Until last year, I argued that the most over-looked source of income for retirees was reverse mortgages, where you could convert equity in your home into a tax-deferred deposit into your checking account each month.  Then, the Trump Administration greatly increased the front-end closing costs and decreased the amount available, effectively killing that market.  Today, I urge prospective retirees to consider a large home-equity line of credit and use it to write themselves a tax-deferred check each month.  For certain retirees, I recommend they fully utilize the line-of-credit before tapping their own nest-eggs.

It seems counter-intuitive to some retirees, but unemployment is only 3.6 percent and there are well over seven million open jobs right.  Both full-time and part-time jobs are plentiful, giving us excellent job opportunities.  With the minimum wage approaching $15/hour, working part-time can buy a lot of Christmas toys for the grandkids.  For example, I am always amazed at the number of wealthy women working in SteinMart, where part-timers are treated well, are offered a good way to meet other people, plus snag some real bargains before the public gets them.  There is no shame in work!

As always:  Be flexible – not fearful!  The road to retirement is not straight.  So, enjoy the journey!

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