“Money death” is simply a shock-value way of saying that a retiree has run out of money so that his or her basic retirement income needs are no longer being met. The authors of the article that describes their proposed strategy also use the phrase “boomers behaving badly.” The referenced “bad behavior” is a failure to create and implement a plan that to support yourself when you retire. (More than likely, it is a failure to create any plan.)

The strategy is interesting to me and should have appeal to baby boomers who are (a) close to retirement and (b) have already have significant retirement investments in their nest egg, but not enough that they can survive on an ultra-conservative portfolio. What they may not have is (c) a plan to make their nest egg last.

The authors of the strategy note first that trying to survive a lifetime on a low risk retirement portfolio is probably not going to work for most retirees. This is particularly apparent in today’s low interest rate economic environment where Fed policy continues to punish savers in favor of spenders.

What is proposed, then, is this: First, boomers should create a retirement investment portfolio that is heavily weighted in dividend-paying stocks and high-yield corporate bonds. More important, rather than decreasing equity and corporate bond exposure as retirement approaches and begins, this portfolio should remain in place. This creates a reasonable possibility of achieving returns that will support your retirement income needs. This brings us to the second part of the plan: Buy a deferred fixed annuity now as “longevity insurance.” The deferred annuity functions as a safety net, in case the higher risk retirement portfolio crashes and burns (e.g., 2008 all over again.)

A key to the second step is purchasing the deferred annuity at least 20-30 years before you will need it, so that the cost-benefit ratio is quite low. For example, someone who is 60-65 could spend $100k now for an annuity that would pay $75k annually beginning at age 85. The authors caution that this part of the plan would only make sense if the cost of the annuity represented no more than 10% of your wealth. After all, once you spend that $100k, you won’t see any of it again even if you died way before age 85.

The big problem/risk I see with this plan is inflation. Let’s assume that at age 60 you purchase a deferred annuity that will pay you $100k annually beginning at age 85. With average annual inflation at only 3%, the spending power of that $100k will shrink to $48k when payouts start at age 85. If we experience a period of high inflation (certainly possible given recent government spending and borrowing), the picture looks even worse.

But, overall the plan is worth considering. What helps are recent rule changes announced by the federal government that will allow 401(k) funds to be used directly to purchase annuities, without a lot of red tape and immediate tax consequences.

Here is a link to an article that discusses the plan: Do You Face Money Death in Old Age?

If you are  a student of retirement planning like me, you will want to read the full plan article here.

Comments?

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1. Get a Lifetime Investment Income From Your Retirement Portfolio
2. Can there be a No Risk Retirement?

Finding a yoga studio was not difficult. There are two within 5 minutes of our Brentwood house and another just a 10 minute drive. One of the studios was primarily a “hot yoga” gym. I didn’t want to start my yoga experience in a high temperature room so I crossed that off the list. The other studio close by offered a variety of classes and programs, 7 days a week. They also had a “new student” special – unlimited classes for a month, all for $39.

Signing up was also easy. You pay for and register for classes online as well. First, I called the studio owner and explained my situation: A 61 year old guy who had never tried yoga before. She recommended their “deep and stretchy” class as being perfect for beginners. Everything is done in moderation, with long poses and slow transitions. Sounded good to me.

The “deep and stretchy” class is offered at least 6 days each week, by different instructors. I had my first class on Wednesday, starting at 11:30 AM.  (This is one of the advantages of having a job where I can mostly work whenever and wherever suits me best. I am very fortunate to be in this situation.)  There were only four of us in the class. This dude plus a woman about my age, a woman who looked to be in her 70′s, and 30-ish woman who appeared to be recovering from cancer therapy (a bald head with fuzzy re-growth.)  The instructor was a woman – maybe in her late 30′s – of Indian heritage.

As I settled in waiting for the class to start – a very strange thing happened. I became very emotional. It took everything I had to not openly shed tears. I think it was a combination of factors – the peaceful room, the quiet music, the vision of calm as my instructor prepared herself to teach, and just knowing why I was there – why we all were there:  To improve our minds and bodies.  It was as if my body was expressing relief in anticipation of what was to come.

What was to come was a real ass-kicking, although in a good way.

In a nutshell, we slowly learned different poses, each providing a different challenge to a body afflicted with years of in-grained inflexibility. The instructor was very helpful to me, as she understood that I was brand new to the practice of yoga. During each pose, she would gently talk about how the pose and our breathing could be used to improve both our minds and bodies. I tried very hard to follow her guidance.

75 minutes later, we were done. Even though every movement was slow and deliberate, I felt as though I had gone through a real workout. On the other hand, there was no residual soreness so apparently I hadn’t pushed myself too hard. Kudos to my yoga instructor for that.

My second class was yesterday morning at 9:30 AM. This was a much larger class, with a different instructor. The class was all female except for me and one other man who was older than me.

Many of the poses were different. Clearly, each instructor has a different approach, with the ultimate goal being the same. I liked her too. We held the poses longer and she talked us through the proper (and optional positions), with plenty of spiritual philosophy included.  I liked every bit of it, including learning again how little flexibility I have. But I am determined to change that.

My third class is tomorrow. I am hoping that my wife will join me. I will miss the first 45 minutes of the Super Bowl but my sons have assured me that I will not lose my man-card for that.

Do any of you have experience with yoga as a baby boomer?

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There are organizations that study spousal benefit strategies a lot more than I do. Based on their research and ever increasing lifespans, here is what is now considered to be an optimal “claim now, claim more later” Social Security strategy for many couples:

1. Because women live longer than men but tend to earn less, husbands should begin their Social Security retirement by claiming a spousal benefit.

2. Therefore, the wife should claim benefits as soon as she can (age 62) on her own earnings record and continue claiming her own Social benefit until her husband dies.

3. The husband should claim a spousal benefit based on his wife’s earnings record when he reaches his full retirement age (e.g., age 66).

4. When the husband turns 70, and assuming he was the higher lifetime wage earner, he claim his own retirement benefit and stops the spousal benefit.

5. If the husband dies before the wife (statistically likely), the wife then switches to a survivor’s benefit based on her husband’s record.

This strategy should maximize the total Social Security benefits received by the couple over their combined lifetimes.

This should work OK for us.  I am four years older than my wife. When she turns 62, I will be 66 so she will claim her benefit, I will claim a spousal benefit (50% of her benefit) until I turn 70, at which time I will claim my own, maximized benefit .  I will have to run the numbers to compare this strategy to the “claim and suspend” strategy in which I claim my own benefit at age 66, she claims a spousal benefit, then I suspend my benefit until I turn 70 which will increase my benefit by more than 30%.

Lots to think about but you can read more about spousal benefit strategies here.

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The reasons in a nutshell:

• Stocks are down
• Real estate is down
• Money market yields are non-existent
• Most stock trades (and therefore market movement) are run by computers
• Market volatility is ridiculously high

Who wants to invest for retirement under these conditions?

Oh – the article also suggests that financial advisers are worthless.

Here is the one “beat the market” strategy offered up by the author:   short shares of public companies that are poised to go bankrupt.

Doesn’t that sound fun and easy to do for a retirement investor?

Right now my primary goal is to maintain our retirement nest egg at survivable levels, taking into account the inflation rate.  Investing may be dead but survivor skills still exist.

Some folks are seeking refuge in variable annuities but I’m not even close to going there.

Here is the link to the full article.  Read it and weep: Five Reasons Why Investing is Dead

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The Top Retirements blog just released its latest list of the worst states to retire. I was not surprised that the list was dominated by states in the Northeast and Midwest. Retirees in those states are often burdened by lousy winter weather and high taxes.

To create the list, the editors used 5 factors:  Fiscal health, property taxes, income taxes, cost of living, and climate. An interesting feature, however, is that you can reorder the list yourself by eliminating criteria that are not important to you.

My personal belief is that each of the 5 criteria used are important to a happy retirement.

Two states had a numerical tie as the worst states in which to retire:  Connecticut and Illinois.

Although I think Chicago is quite livable for a large city, Illinois in general has terrible economic problems which it is trying to solve by increasing income taxes.  For example, work and investment earnings are taxed at a 5% flat rate.

Property taxes are killers in most of these states. It is miserable to think that you could pay off the mortgage on the home where you are living in retirement but still face a monthly property tax payment of $500-$1000. For example, in New Jersey just the median property tax bill is over $6500. Ouch.

Minnesota (#7 on the list) punishes retirees with bad winter weather and with no income tax exemptions for Social Security or pension income.

We are sticking with Tennessee and Kentucky, thank you!

Read the list for yourself here: Worst States to Retire 2012: Northeast and Midwest Come Up Losers.

Related posts:

1. Ranking the 50 States for Retirement 2011
2. Deciding Where to Retire: Spousal Conflicts

During 2011, our net worth increased by 7.3%. This is acceptable under the circumstances because it reflects a real spendable wealth increase. In other words, the 2011 inflation rate was 3.4%. Therefore, if all of our net worth increase was converted to income producing assets, we achieved a real net wealth gain of 3.9%.

The value of our retirement “nest egg”, i.e., those assets that are dedicated retirement investments, increased in value by 6.4%. This is based on a combination of investment returns and additional contributions. For 2011, our best performing core investment was VIPSX at +8.8%. We sold VEU and VTI because they hit their stop limit prices during a market decline.  Both were down for 2011 so I have no regrets about dumping them. We partially replaced VEU and VTI with LTPZ which was up over 20% in 2011 although much of that gain occurred before we bought it. I still like how LTPZ is non-correlated to most other market indices. (FYI – LTPZ is an exchange traded fund offered by PIMCO that captures the returns of longer maturity Treasury Inflation-Protected Securities (TIPS).)

A “what does it all mean” performance metric that I also like to track annually is the value of our retirement nest egg if it were to be 100% annuitized. To do this, I visit the Immediate Annuities website, enter our ages, then plug in the total current value of our retirement investments. The site will then generate the estimated monthly income we would expect to receive if we purchased an immediate annuity for that amount at that moment. I use the income number for a joint life annuity.

At December 31, 2011, the estimated annuity income from our nest egg increased 5.4% from 2010. This reflects a number of different variables, primarily the size of our nest egg (increase), our ages (increase), and the nominal returns offered by the insurance companies that sell immediate lifetime annuities (decrease). All of these factors are relevant to retirement planning. It is unfortunate that while our nest egg increased in value by 6.4%, and we aged a year, the larger nest egg would have purchased a lifetime income that was only 5.4% higher than 2010. Obviously the insurance companies are experiencing a more challenging investment environment (and may also be charging higher fees compared to 2010.)

Overall I am pleased with our progress for 2011 but there is more work to be done.

So have you done your own a financial check-up for 2011?

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No matter the what is happening in world political and economic affairs, you can generally find optimists and doomsday predictors competing for attention among investors. The optimists are usually mainstream investment gurus who make money when people are optimistic and buying stocks. The doomsday category is occupied by gold bugs, conspiracy theorists, and forecasting experts who rely on historical trends. I tend to read the latter types. Sometimes its merely entertaining. Other times I learn something helpful.

Paul Farrell at Market Watch is usually a good source of doomsday predictions, as he was today. He poses this question to readers like us:

Are you going to keep betting your future on winning 10%, hoping USA Today’s short-term thinking “strategists” are guessing right? Or will a “historic world-changing event” crush the American economy, markets … and your retirement?

Farrell goes on to list ten different “triggers” for a potential doomsday meltdown of the economy. Some sound plausible, others not so much.

But this is how I look at it:  Am I willing to risk a collapse of our financial assets and retirement plans if one or more of these triggering events occurs? If not, am I willing to surrender an opportunity to fully participate in a 10% or more increase in the market?

My answers are no, I am not taking that risk and and yes, I will accept lower market returns to protect our assets.

But I won’t take all of our money out of the market because (a) we won’t need all of that money in near term and (b) the risk of financial catastrophe is not that high.

I encourage you to read the Farrell article (linked below) then ask yourself these same questions.

2012: Stocks up 10% — or Doomsday scenario? 

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First, I no longer trust big banks to be responsible with their fees or to offer the best account benefits for retirement savers. Thus, we fired Bank of America in 2010 and moved to a community  bank with a rewards (i.e. high interest) checking account.

I distrust financial advisers who make their money based on selling investment products or managing your investments.  Instead, I continue to educate myself on investing and retirement planning as a DIY financial planner.

I don’t trust the mediocre retirement options offered inside a conventional 401(k) plan.  The choices are limited and the expenses associated with them are too high.  I opted instead to use a self-managed brokerage account inside my plan.  This gives us more investment options to lower costs, increase diversification, and allow us to use stop limit orders to lower risk.

I don’t trust the stock market with our financial survival.  I also don’t trust the 4% withdrawal rate “rule of dumb.”  Instead, I am following a different path for providing a guaranteed retirement income.

I don’t trust our government leaders to act responsibly with our economy.  Therefore, I am protecting our nest egg against inflation by investing in I-Bonds, TIPS, and commodities.

I know this list can be expanded with other retirement planning concepts based on a distrust of financial institutions. At least on the financial side of retirement planning, a healthy dose of skepticism can be a positive attribute.

Do you agree?

Related posts:

1. Lack of Income Plan Leads to Early Retirement Failure
2. Annual Retirement Financial Performance Review for 2011

A blogger named Jacob has for a number of years built up quite a following at his Early Retirement Extreme blog. I haven’t read a lot of his stuff because he takes a more extreme philosophical approach to frugal living (or at least he did) than I care to emulate. In a nutshell, he swore off consumerism, lived in an RV, used a bike for transportation, and saved like crazy so that he could leave the workforce at age 33. He used an extreme lifestyle to retire early.

Until this past week.

Now Jacob is unretiring. If you read his goodbye post, he uses many words to describe his need to solve a complex problem. He is filling that need by becoming a “quant trader/researcher. ”  (I guess he won’t be saving the world with that work but he still has plenty of time for that.)

I could have written that part for him in one brief sentence: “I’m bored.”

Some folks might criticize his decision as hypocrisy. I won’t be so harsh. I think that at age 33, he was not as self-aware as he thought he was.  He thought that retirement – as in no work needed – was the goal. Now he understands better that financial independence is the goal, so that money needs do not dictate other lifestyle choices.

Being bored is no fun, whether you are an old or a young retiree. Being able to afford a non-working lifestyle won’t solve a boredom problem.

Maybe Jacob’s extreme frugality did not give him the financial freedom to explore other interests. Or maybe his interests were most readily available to him in an employment situation.  So he went back to work to kill the boredom. There is nothing wrong with that.

But those choices are not available to everyone. Jacob is still a young man, not subject to the cruelties of age discrimination. He does not suffer from age-related health problems.  Not all baby boomers can decide that they are bored and therefore  just go back to work. There may not be any work for them to do.

Where I am headed with this is that if you are afraid that for you, retirement = boredom, you may be right. So start solving that problem before you leave the workforce. Experiment, try new things, learn new things, all in an effort to fill your eventual non-working life with challenges that will keep you mentally and emotionally engaged.

That’s what I have been exploring for the past few years. It’s a work in progress but I am getting there.

How about you? What will keep you from becoming a bored retiree?

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The guaranteed lifetime benefit feature gives the annuity owner the right to a lifetime payout this is percentage of a “total withdrawal base” amount.

The big investment companies see the guaranteed lifetime benefit riders as a way to increase the appeal of their own variable annuity products. They already offer variable annuities so they typically partner up with an insurance company to provide the rider.\

Vanguard has now done this with Monumental Life Insurance Company to offer its version of guaranteed lifetime retirement income to variable annuity owners. The marketing approach is that the annuity purchaser can withdraw a fixed percentage of a”total withdrawal base” during his or her lifetime, even if markets are bad or the annuity’s principal runs out. They also say that the “total withdrawal base” can increase if the market performs well. The withdrawal percentage is based on the age of the first withdrawal which can be as early as age 59.

To make this product more attractive to a married couple, the purchaser can choose a joint life option. This extend the lifetime income benefit to the spouse, although at a lower annual withdrawal percentage compared to a single life benefit.

Vanguard is currently charging a rider fee of 0.95% of the annuity’s total withdrawal base each year. I would certainly investigate whether this fee is locked or can increase. Keep in mind that 0.95% is a significant cost over time, particularly given the low investment returns now being offered. You are allowed to drop the rider and the fee any time.

Here is one example of how the guaranteed lifetime retirement income benefit works, as provided by Vanguard:

The annuitant of a variable annuity with a total withdrawal base of $150,000 elects to purchase the GLWB rider when he’s 65, and he immediately begins taking withdrawals at a 5% withdrawal rate. He could then be assured of annual withdrawals totaling at least $7,500 per year for life, based on the value of his designated investments when he elected the benefit. Even if the total value of the investments falls because of poor market performance, the $7,500 of withdrawals could continue.

One feature of the variable annuity product compared to a fixed annuity product is that in many cases, you are allowed to withdraw more than your guaranteed annual withdrawal amount, if you need the money and are willing to accept lower future benefits.

Vanguard is known as an investment company with low costs. That’s what interests me about its entry into this guaranteed lifetime income space.

Here is a link to the Vanguard brochure on this new product. (And no, I receive no benefit from Vanguard.)

Have any of you considered a variable annuity with a guaranteed lifetime income benefit?

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