Managing Your Money in Retirement


 

 


This afternoon I got into a conversation with a friend about money management in retirement.  He has the opportunity to take a pension as an annuity, or to take a lump sum and invest it himself and was wondering about which path was better.  He also has a couple of different 401k funds.  He was wondering if he should go to a financial planner, or just invest himself.

One thing about personal finance is that it is just that – personal.  The right answer for you depends on your financial situation, plans in retirement, and risk aversion.  If you are in great financial shape with way more money than you need, you can take more risk since you could take a big market drop without getting into trouble.  If you are planning to sit around the house in retirement and are scared of the prospect of losing any money, you might invest the money very conservatively and give up better returns in exchange for stability and predictability.  So there is no right answer for everyone.

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Personally, I have a great deal of experience and knowledge about investing, having invested for the last 30 plus years.  I was investing during the 1987 crash where the Dow Jones Industrial Average fell 25% in one day.  While it was quite a shock to see your stocks fall by 25%, or even get cut in half in a single day, I held on and saw prices recover to pre-crash levels within about a year.  I also was investing through the dot-com bust in 2000 (and shorting some dot-com stocks and oil refineries) and the housing bust in 2008 (and shorting some thrifts and housing lenders).

I’ve learned from this experience that things can go really badly in a short amount of time and that sometimes it seems like everything is going to zero.  I’ve also learned, however, that things usually turn out OK if you just hold on, at least if you hold onto a set of mutual funds or a whole basket of stocks.  Sometimes with individual stocks, they do go down and never go back up again.  These experiences have taught me both that volatility can be scary and that sometimes the best course of action is just to turn it all off and do other things since doing nothing is better than doing something.  They have also taught me that I do have strong nerves and can weather a downturn without freaking out and going into all cash.

 

 

Based on this experience, I will handle my own investing when I retire and use the markets to provide the income I need.  I know how to allocate the funding to provide the right amount of diversification and income at the right times.   I also plan to have way more in my retirement accounts than the minimum I need so that I can invest more aggressively without worrying about a big market drop affecting my lifestyle.

For other people, an annuity may make sense since it takes away the worry about finding needed income.  An annuity provides guaranteed income for a specified period of time.  The best types of annuities to buy are the plain-vanilla types where you give them a specified amount of money and they provide you with a specified income.  The other types where you can make additional returns based upon the performance of the stock market are just too complicated.  Realize that the returns you’ll receive will be far less than market returns since the insurance company needs to protect themselves for the years where the markets decline since they guarantee that you can’t lose money.  This means you’ll make 5% when the stock markets are providing 15% returns.  You’re better off just using an annuity for income and then investing some of your money in index funds for stock market participation.

The main issue with annuities is that they have a lot of fees attached, and those fees are often difficult to sort out.  Annuity salesmen are like whole life salesmen, using all sorts of jargon to sell you a really overpriced product.  This is why you want to keep it simple.  You’ll also want to ask three or four different providers how much monthly income you’ll get over a specified amount of time if you provide them a specified amount of money and compare the answers.  For example, if you have $500,000 to give them for an annuity that will start paying immediately and pay you until you die, ask each provider how much you’ll receive each month.  The one who will pay you the most per month, for the same amount invested and the same term, will be charging the lowest fees.  If they won’t give you a straight answer on what they’ll pay, move onto another provider.

                  

 

On the question of whether to invest yourself or hire a professional financial planner, I obviously plan to handle things myself since I know what I’m doing and really how little maintenance it takes to manage your money when you’re doing it right.  Really, less is more when it comes to investing.  I will still use other professionals like CPA’s, however, to help with the tax planning since that is an area that changes often.

Really, you could do very well on the investing side simply following three rules-of-thumb:

  1.  Invest your age minus 10% in bonds, and the rest in stocks.
  2. Invest in low-cost, diversified, index mutual funds.
  3. Take no more than 3% of the value of your portfolio out in any given year.

The first rule causes you to protect a portion of your portfolio from the wild ride that stocks can offer by tempering it with bonds.  As you get older and have less time to recover from a big stock market crash, you buy more bonds.  The second rule makes sure you spread out your money over the whole market (a total market stock and bond fund can be used to ensure this) and also to limit fees by investing in index funds.  The third rule makes sure you don’t take more out of your portfolio than it can replace while also keeping up with inflation.

 

For others, it makes sense to use a financial planner, but you need to be careful because there are a lot of bad financial planners out there.  Many simply take a short course on the products offered by their company and then spend their time selling you those products.  Even if you want to use a financial planner, it is better to at least have a basic knowledge of retirement investing before you go so that you can see if the person you’re dealing with knows what they’re doing or if they’re just trying to sell you something.  Buy and read a couple of books, and start to read articles in The WallStreet Journal and, of course, The Small Investor to learn what you’re doing.  You’ll also want to find a fee-only planner, who charges you by the visit or by the hour instead of charging you when you buy products from him/her.  You don’t want them to have an incentive to sell you things, other than knowledge.

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Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Ten Bottles of Wine Made for $10


Are you a drinker?  Do you like a nice bottle of wine with a good meal, or perhaps a glass of wine in the afternoon while you sit and contemplate your day?  Maybe you like to have a few drinks with friends after work.

The issue with alcohol is that it’s expensive – ridiculously expensive.  If you’re trying to find money to fund a retirement fund, pay off student loans, or build up an emergency fund, paying for drinks makes that difficult.  A half-decent glass of wine can run you $9 or more at a bar nowadays.  A beer will cost $5 or more at a bar.  Even if you buy a bottle of wine and drink at home, you’ll pay $7 for the cheaper stuff and $15 or more  (lots more) for the better stuff.  Go out for a couple of drinks on Friday and Saturday nights, plus maybe a few during the week, and you’ll be spending more than $2500 per year on alcohol.  That’s enough to halfway fund an IRA and make yourself a millionaire by the time you’re sixty if you were to invest it religiously.

The Home Winemaker’s Companion: Secrets, Recipes, and Know-How for Making 115 Great-Tasting Wines

The thing is, alcohol itself really doesn’t cost that much to make.  It is the fact that the people who make the alcohol first get paid, then the distributor gets paid, then the grocery store or the bar gets paid that causes drinks to cost so much.  And if you’re buying drinks at a bar, you’re also paying the server in the form of a tip, which further adds to the cost.  Everyone who touches that bottle of beer or wine adds to the cost.

You can therefore greatly reduce the amount of money you spend on alcohol, yet still enjoy a drink with friends, if you make it yourself.  Unfortunately, you’ll still need to go to the bar or the liquor store for distilled drinks.  Those are tightly regulated since the government depends on the tax revenues from those. But you can still make beer or wine yourself, only paying the sales tax on the ingredients.

From what I understand, you can make some really great beer at home – far better than the industrial stuff you’re paying $5.00 each for at the bars.  I’ve never made beer, but understand it really isn’t all that hard and a great way to make some friends since there are a lot of passionate home brewers out there.  I’ve also sampled some of their products and it was as good as any microbrewery output I’ve tasted.

North Mountain Supply 1 Gallon Wine From Fruit Complete 30pc Kit – Only Fruit & Bottles Required

I did get into making wine at home after we received a gift certificate for a wine class.  We thought we were going to make a wine at the shop which would then be stored/aged/ and fermented in a big barrel at the shop.  Instead, we were sent home with a couple of 1-gallon carboys, some brewers’ yeast, some yeast nutrient, and some pectin enzyme.   We were also given a recipe that used frozen grape juice as the base.

Can I make a cabernet rivaling those produced by Napa Valley?  No.  But I can produce a couple of gallons of wine better than your average $10 chardonnay or white table wine for about $1.00 per bottle. I also understand that you can buy wine kits in the $50 range that can since you can get grape juice from the same regions as the big winemakers, so you could probably make a good red wine, but you then would need large containers and also would need to have barrels to age the wine in.  I’m just not that into winemaking, but some people are.  If you were, I think you could probably make a bottle that would rival a $25 bottle you could find in the store for maybe $1.50 to $2.00 per bottle using one of the kits.

Mr. Beer Premium Gold Edition 2 Gallon Homebrewing Craft Beer Making Kit with Two Beer Refills, Convenient 2 Gallon Fermenter, Bottles, Caps, Carbonation Drops, Sanitizer and Brewing Instructions

Using the same two one-gallon carboys, I can make about 10 bottles of wine every two to three months.  (The amount of time depends on how warm the house is, since ambient temperature affects the fermentation rate and the wine taste.)  Many people upgrade to five to ten-gallon containers after they get started.  A five-gallon container would produce 25 bottles of wine every two to three months for about the same amount of work.  (You can legally make up to 100 gallons, or 500 bottles of wine per year per adult in your household in most states, which seems like a whole lot.  We drink maybe a couple of bottles a month, so there is no reason for us to “go big.”)

So, there is no reason to trade your future retirement for a few drinks today.  People pay way too much for alcohol, and there is no reason to do so.  It might be worth the inflated price of a drink to enjoy the nightlife at a club or two, but you may find that it is nice to have an evening in with friends and a bottle of your own wine or homebrew some weekends too.

Questions?  Comments?  Let me know what’s on your mind by using the comment form below!

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Long Would It Take to Be A Millionaire


 

How long would it take you to becoming a millionaire?  Well, I used an investment calculator to determine at what age you would become a millionaire if you invested different amounts, from $200 per month to $1000 per month, starting at age 20.  Here’s the results:

Monthly Savings 10% Return 15% Return
$200.00 59 49
$500.00 50 43
$750.00 46 40
$1,000.00 43 38

So if you put $200 per month away ($2400 per year) into stocks and saw another period like the 1980’s and 1990’s, you would become a millionaire somewhere in your early 50’s.  If you put away $1,000 per month, or $12,000 per year, you would become a millionaire at age 43 even if you just got modest, average returns from the markets.  If you could get a 15% return, you’d be there are age 38, just 18 years later.

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Note that $12,000 per year for 18 years is $216,000, which is what you could easily pay at a private, four-year college.  If you then left the money invested, and were able to earn 12% annualized, you would have a cool $12M at retirement with no effort on your part.  On the other hand, if you earned $200,000 per year at a job because you went to an elite college from age 20 to age 65, you would earn only $9M over your working lifetime.  Just saying….

Be sure to check out this month’s book, The Bogleheads’ Guide to Investing.  

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.