Solving the Retirement Puzzle

The hardest part of being retired isn’t finding things to do.  It isn’t finding a way to stay engaged or to contribute to society. At least it isn’t for me. No, the hardest thing about retirement for me is making the shift from a lifetime of accumulating resources to 30 years of decumulating resources, shifting from saving to spending. And from what I am learning, that is the case for many.  It turns out that it doesn’t matter how many calculations one runs to reassure oneself that there is enough. The barrier is often more psychological than fiscal. 

How do I know this? I ask myself the simple question: If I had twice what I have now would I feel less anxious? The answer is clearly no. The stress has nothing to do with dollars in the bank and everything to do the changing direction of the cash flow.  

This feeling is even more acute if, like me and like 78 percent of Americans, you have no pension but will rely on just your savings and a small amount from social security to survive on for as long as you happen to live. If you have a partner, the next egg has to last for the lifetime of whomever lives longer.  

In addition, my research has led me to conclude that I should not begin collecting Social Security until age 70 (Social Security payments increase each year you wait to file for benefits after age 62 maxing out at age 70), so for the next 10 years I need to make sure I can live on my savings alone with no other income. The breakeven point is around age 78 so I have to live at least until then for the filing delay to pay off. 

Full disclosure, even though I have been retired for more than a year now, I actually haven’t made this mind shift because my wife is still working and we are able to live and even continue to save on her income alone. 

But although nothing completely removes the stress, there are some tools that you can use to crunch the numbers and get a sense of how much you will need and have to fund your life when you are no longer working. I have been looking at various tools. Some are simple and you can do them on the back of an envelope. Some are complicated and require you to have lots of numbers at your fingertips about your income, expenses, and how much is in your retirement accounts and other savings. Some are in between. 

If you are nearing (within 10 years of) traditional retirement age, or if you are younger and hoping to retire (or be financially independent early), it is a good idea to give yourself a checkup to get a sense if you are on track or if you need to make a course correction. 

Remember: Dieing at your desk (or wherever you do your job) is not a retirement strategy. If you love your work and are able to do it until you drop dead, that’s great! But my experience - and the numbers - say that after age 50 it becomes harder to hold on to a job (employers like to fire older workers and replace them with younger, cheaper ones) and if unemployed after that age, it is harder to find another job especially at the same income level. If you actively prepare for the possibility that you may have to leave the workforce sooner than you plan or want to, you will have more options if and when that day arrives. If you get to work exactly as long as you want to, you’ll be that much further ahead in the game. 

Here are three tools from simplest to most involved I have found that are helping me settle my jitters as I contemplate the Godzilla of financial life -- negative cash flow.  

Tool One: The Four Percent Rule – It’s Just You and the Back of an Envelope

The Four Percent Rule says that a person who is retired can withdraw four percent of their savings in the first year of retirement and then increase that number each year by the amount of inflation. For a portfolio invested 55%-80% in stock mutual funds there should be enough to last 30 years. 

Take the amount of your annual expenses for everything that you expect to continue into retirement (e.g. you don’t have to count tuition payments for your kid’s day school or college unless you still expect to be paying for those in retirement). Multiple that number by 25 (the inverse of .04 or 4%). That is the magic number you have to hit before you can retire. 

For example: Your annual expenses today are $65,000 per year including your housing, food, vacations, and everything else. Don’t forget income tax and property tax!

$65,000 X 25 = $1,625,000

That’s how much you need in today’s dollars to have the same standard of living in retirement. Again, other sources of income such as Social Security or a traditional pension can reduce the amount you need. But this formula ignores whether the funds will be taxed upon withdrawal of accounts like an IRA. Also, don’t forget, some expenses may be higher in retirement. You may want to travel or you might have higher medical expenses. 

This is obviously a ballpark figure. It takes nothing about your circumstances into account. It ignores Social Security or any other income you may have in retirement.  Also, interest rates are at historical lows which means that success may depend on putting a percentage in the stock market that is closer to 70% than 55%. Having said that, the 60/40 portfolio has shown to be very reliable over many decades of data. 

Doing this simple calculation is a start. If you want to be more cautious just increase the multiplier. For example, if you multiply by 28 instead of 25 you will get a number that will allow you the same withdrawal but at only a 3.5 percent rate leaving more money each year to earn and to grow. Whatever number you decide on, you can get a quick sense if you are approaching your target or if you need to accelerate your savings for the remainder of your working years. 

Note: Your expenses before retirement tend to go up every year due to inflation and lifestyle creep. You should recalculate your number every year or so.  

Tool Two: FireCalc Online Retirement Calculator

The FireCalc website uses the Four Percent Rule and takes to the next level. You simply enter a few numbers on the main page and the calculator runs an analysis based on the past performance of various economic factors (mostly historic stock market performance) and gives you a likelihood of success (i.e., not running out of money during the defined period). The site is designed for people who want to retire early but it will work for anyone at any age. 

Let’s look at a 60-year-old retiree with $1,625,000 who needs $65,000 in annual income as above. They want the money to last 30 years. FireCalc runs 121 different scenarios based on what has happened in the past and found success 115 times and 6 failures for a success rate of 95%. FireCalc makes it easy to simply change a number such as the annual spending and see how that changes the result. Don’t want to have to work so long? Cut your expenses and see how that changes what you need to save. Want to get to 98% chance of success? Work longer.  

But FireCalc goes even further and has tabs for entering other sources of income such as Social Security or even to model different ways of investing your money to see the impact of those changes. This is a completely free tool that is very easy to use. It’s a big step up from just using the four percent rule alone and can help you see how small changes (saving more, spending less, or shifting five percent more into a stock fund) can increase the probability that you will still have enough left to buy the farm when the time comes.

One downside: there is no way to save your results with this website so each time you use the tool you have to enter your numbers from scratch. 

Tool Three: New Retirement Planner with Optional Fee Based Advisor

New Retirement is a tool I learned about a few weeks ago and am just starting to put through its paces but so far, I am impressed. 

In order to use it, you must create an account, but the basic level is free. At that level you put in actual numbers from your savings and retirement accounts (estimates are okay), your age, your partner’s age and info, and how much you expect from Social Security or other sources of income. 

If you want to go deeper into the numbers, you can upgrade to the paid level for free for 14 days. After that, if you don’t cancel, it is $96 per year. The paid level allows you to do more sophisticated models, go into details about expected expenses and even help you decide whether it makes sense to convert your traditional IRAs to a Roth in order to save on taxes. For an extra $150 an expert will help you set up your plan and plug in your numbers, and for $999 you can talk with a Certified Financial Planner (CFP) who can give you personalized financial advice. $999 sounds pricey but traditional financial advisors who charge one percent of assets under management (AUM) every year can often take far more and they take it year after year. If you have just $100,000 in savings they are taking $1,000 every year and the richer you become, the more they take.  Yet it really takes no more work to invest a million dollars than it does $1,000! (I am not a fan of advisors who charge a percentage of AUM, if you can’t tell.)

So far, I have been impressed with the free version of New Retirement but I think I may give the premium version a whirl. I heard the company founder Stephen Chen interviewed on a podcast and was impressed by his commitment to improving and adding features to the product. $96 per years seems like a fair price for this kind of software engineering and technology.  I went ahead and sprung for the premium version and I am impressed with what it can do so far. 

A few caveats to keep in mind on all this. 

•  I am not a financial advisor. I have no investment credentials whatsoever. Writing in his hilarious 2019 book Presto about his 100-pound weight-loss journey, Penn Jillette said, “If you take diet advice from a Las Vegas performer, you are a moron and deserve to die.” Likewise, if you take financial advice from an English major with an M.A. in Jewish Studies you deserve to go broke.

• Make your own evaluations and assessments and consult an advisor that you trust, if unlike me, you trust anyone but yourself. Find one whose compensation is not tied to what they sell you. 

• These tools are systems of modeling. The real world rarely behaves just like a model. You will do better or worse than the model predicts. 

• No one ever cried because they overshot their savings goals or because they found financial independence earlier than expected. If you are pessimistic about your returns and overestimate your expenses, you are more likely to find success. That said, don’t be so frugal and focus so much on saving that you forget to enjoy your life today

Giving your financial health some attention is like improving your diet and taking exercise. The sharper your focus on what you need to do, the better off you will be. 

Have these tools helped me to be more confident about what I can spend in retirement? Maybe a little. But attitudes and emotions about money are learned early and do not correlate well (if at all) with income or net worth. But one thing I am starting to understand is this: Although it might be a disaster to run out of funds before one dies, another more quiet type of disaster is to die with a lot of money in the bank and a list of experiences or even material things that one wanted to have but could never bring one’s self to spend the money on. As my Grandma Paula of blessed memory used to say quoting a popular song of her day, “Enjoy yourself, enjoy yourself, it’s later than you think.”

Not All Those Who Wander Have a Dead Mobile Phone Battery

How often are you getting lost these days?

If your experience is like mine, on-phone or in-car GPS has just about eliminated the chance of getting lost or even taking a wrong turn. 

I have a horrible sense of direction. I used to get lost a lot. One very memorable time, I was in my early teens and hiking with my dad and I stepped off the trail to answer nature’s call. Just 15 meters off the trail in the densely forested Adirondacks, I became so turned around, I had to yell to find my father. Luckily, he was still within shouting distance. It was an important lesson about staying oriented in the wilderness, for which I fortunately did not have to pay a high price. 

On another occasion In the German Alps in 1980, my friend Steve and I (foolishly) decided to climb up a 3,000-meter mountain with no compass, no map, and without following a trail. Nothing can compare to the relief I felt when, after bushwhacking through brush for a few hours, we stumbled on a path running from town to the summit. 

Before GPS, I routinely went miles out of my way in a car before I noticed that the sun seemed to be setting in the east on that particular day. I also happened upon a number of wonderful sights that I would have missed if I had stayed exactly on course.

Those kinds of misadventures rarely happen anymore.

Last fall, my wife and I were hiking in Arches National Park and the trail we were following kinda disappeared. The map on my phone that showed exactly where we were and where the car was. It was easy to head right for it. 

How will we find our way, if we always know where we are? 

When was the last time you lost something? That still happens to me from time to time. But thanks to Tile trackers and Apple AirTags, I don’t lose my keys, my manbag, or umbrella. My Apple Watch can ping my phone to help me find where I set it down, and my phone notes the location of my car each time I park it. No more wandering around in parking lots looking at the license plates of dozens of gray Honda Civics. The ‘Find My’ app means I can keep track of not only my computer, my phone, and my iPad, but also my wife, my kids, and my parents! (with their permission, of course). 

Yes, I misplaced my ear buds last week. I put them down in a place I never normally put them and had no memory of doing so. When they showed up a day later, I popped an AirTag in the case. I probably won’t lose them again. Anything with significant monetary or sentimental value can be tracked this way including people and pets!

Losing things can be irritating. It can be inconvenient. If they never turn up, it can be expensive replacing the lost items. But the annoyance of misplacing things might encourage one to be more careful about putting things away where they belong or at least mindful about where you are setting things down. 

What will we keep safe, when there is nothing we can lose?

Getting lost can be scary. It can even be dangerous in the woods or at sea. At the very least it can be a waste of time and resources. But the possibility of getting lost requires one to be prepared, and actually getting lost may force one to call on resources you didn’t know you had. Or find a beautiful spot you didn’t know existed. Or stumble into adventure  

In the 1970s when I was hiking with my dad at the end of a long day, I imagined a magic map that would show my position on it and how much further it was to get back to camp. Now I have such a magic map and it’s with me all the time.  When I think about the miracles of modern life, GPS mappers and trackers are right up there with microwave ovens and plant-based burgers. 

At the same time, my instincts tell me that these miracles of modernity can be double edged. Just as the convenience of the microwave has contributed to a general decline in the ability to prepare healthy homemade meals, so are the outdoor magazines and newspapers filled with stories about those who wander off into the wilderness with nothing but a cell phone for guidance, only to find that a lack of signal or a dead battery spells grave danger. 

An obvious downside of these devices is that they rely on batteries and on cell signal - both of which can be unreliable. However, the seductiveness of these devices mean fewer hikers are carrying the tried and true map and compass. Fewer still know how to use them. 

But beyond the risk of a dead battery at an inopportune time, I wonder if there isn’t an even more insidious danger to our technology.

When I moved to Rochester, N.Y. in 2015, GPS meant that I didn’t need a mental map of the city in my head. Five years later, I still didn’t know my way around as well as I should have. 

Our culture has already to a large extent forgotten how to grow or catch our own food. We often live too far from a market to be able to even purchase food without a motor vehicle. We don’t know how to repair our bicycles, sharpen our knives, sew up tears in our clothing, or bake our own bread. We are reliant on technology to supply every need that we would once have had skills to provide for ourselves. If you found yourself on an Island like Tom Hanks character in Castaway, would you be able to start a fire? I’m pretty sure I couldn’t.  And now we can no longer get from point A to point B unless Siri tells us each turn. 

What will we fail to discover when we can’t get lost?

Rebounding

Just last week, I took the metro into downtown DC for the first time since March of 2020 and then on Monday I rode the train to New York City. No particular reason. I just felt like taking a trip and seeing how the city was faring in the wake of COVID. I also wanted to see some New York friends I hadn’t seen for more than a year. New York has always been a city that fascinated me and I particularly like the gritty parts. I especially love the subway, that fine example of early 20th century industrial design that costs little to use, goes everywhere, and (I don’t care what you say) works incredible well all things considered. 

I took the local commuter train right from my town to Union Station. I was shocked to see the state of DC’s train station. Virtually all of the retail in once gleaming Beaux Arts showplace, was shuttered. Only Starbucks and McDonalds seemed to be doing a thriving business. Downstairs in the food court, only the large chain restaurants seem to have survived.  

In New York I checked into my old standby, The New Yorker. The New Yorker is an old hotel (1929) but is kept up pretty well by the Wyndham chain that owns it. It was also the cheapest thing I could find in its class and super convenient being right across the street from the train station.

I found the city quieter than it was on my last visit. Here too, much of the retail, at least in Manhattan was vacant. However, the restaurants that survived the pandemic were busy. The diners and coffee shops seemed to be doing a decent business. Of course, there are no international tourists yet and that is keeping hotel prices down and making even mid-town feel quiet. 

Once out of midtown, things get really chill. Usually in Manhattan you don’t even consider jaywalking but some streets were completely empty of traffic. The sidewalks felt uncluttered. Again, many businesses were shuttered. Some business had signs on the door that masks were required, others didn’t. There was no discernible pattern. 

Part of the quiet was, no doubt, that it was insanely hot this week. Wednesday’s high was 36 C (97 F). The heat was brutal. But what I love to do in New York is walk and so with my water bottle I braved the heat until I could take no more finding refuge in a diner and lingering over a salad and iced tea. But those who live there and lucky enough to have AC in their homes or office perhaps wisely stayed indoors. 

I came away from my visit with a better understanding of how we are emerging from Covid and like most human journeys  there is no clear consensus for what we should be doing. Some people are still wearing masks even while walking alone in an open park. Others aren’t wearing them even where required by law such as public transportation or ignoring signs a business has on the door saying they are required. In all fairness sometimes it is not clear whether the business still wants you to wear a mask or just hasn’t taken down the sign. The CDC says vaccinated people don’t need to wear masks in most situations but the delta variant is causing some authorities to rethink this though there seems to be little or no evidence that it poses a significant risk to those who are vaccinated.

Some restaurants are still only offering takeaway while others are packed with unmasked patrons. Many restaurants have clear plastic barriers installed between tables and booths that I suspect will never come down. Some wait staff are masked and others are not. 

In other words, what one should be doing from moment to moment is confusing and all over the place. 

While I was away, express transit was installed at every subway turnstile allowing paying with your phone or smartwatch at every entrance. No more waiting in line to buy or refill a Metro card. (The DC metro has added this too). I always felt that the old tokens worked better than the metro cards but I have to admit, I like just tapping my watch to enter the subway. The subway felt clean and safe as always. 

There is a new waiting area for Amtrak trains in New York. The Daniel Patrick Moynihan Hall was built in the old post office building that is across the street from the horror that is Pennsylvania Station and Madison Square Garden. (Madison Square Garden is like the Holy Roman Empire. It’s not on Madison, it’s not square but round, and it’s not a garden.).

Although the new train hall doesn’t make up for the travesty of the demolishing of the first Penn Station in 1965, it is nonetheless beautiful, light and spacious. It is worthy of being a transport hub for one of the world’s great cities. The old new underground Penn Station has largely been relegated to the departure of Long Island Railroad Trains. 

As hot as it was Central Park is an amazing gift. It was cooler in the park and it was full of runners, bikers and parents/nannies with strollers. Many people only work in New York but a lot of people still live here. I spent a good hour on a bench watching the midday world at play. 

Heading home as the holiday weekend approached, the train to DC was packed and a cooling rain was falling as the heat wave broke. My town just announced that it will resume the annual outdoor 4 July costume contest, parade, and celebration and then there is a family gathering for a long-postponed family wedding. 

So we lurch forward but not toward what was. Any remaining illusions that there is a ‘normal’ to return to are pretty well dispelled at this point. At every turn we are called upon to adapt, to learn, and (ouch) to change. Some of what we lost is gone forever. Some of what we’ve gained will alter things in profound ways. We know that. We just don’t know anything else.