Alaska

A few months ago I wrote a piece for my Big Picture blog about retiring in Alaska which you can read below. A part of the idea was that, in the interest of finding ways to supplement income, a retiree could live in Alaska to take advantage of the Permanent Fund dividend paid to residents out of the energy royalties the state takes in.

Today there is news of a new pipeline that will bring natural gas from Alaska to the lower 48. There are still a couple of obstacles, still a few years until it could be in operation and there was no mention in the WSJ piece about whether the pipeline will contribute to the Permanent Fund.

After a few years of decline in the dividend due in large part to poor stock market management, the dividend has a chance iof increasing substantially due to higher energy prices, this new pipeline and hopefully an improvement in portfolio management up to mediocre.

When I first ran the post, it was linked to in several places with some valid criticisms. One was the weather. To qualify for the dividend you only need to live there for six month out of the year. Although I may not have been clear, I was referring to the Juneau area. In December, January and February the average temperatures are 27.1 degrees, 24.2 degrees and 28.4 degrees respectively, according to CityRating.com. My original article posited that you only live there eight months a year, skipping those three months and either November or March which both average 32 degrees.

The other criticism made was about the cost of living. According to CityRating's cost of living calculator it would be 42% more expensive than in Arizona (where I live). A couple of things mitigate this, there is no state income tax and retirees get property tax breaks.

Intuitively, it is hard for me to imagine that Alaska is really 40% more expensive. If it really is that expensive, there are probably ways to reduce that spread, with a little ingenuity, some but perhaps not enough to make it worthwhile.

The more important thing to take from the following is the exploration of a new idea. Exploration like this can lead to other ideas that you can use, even if the Alaska idea does not make sense.

I have some wild ideas now and then and I write about them every so often because they amuse me.

This latest one I hatched is about way to retire for people that have not been lucky enough to accumulate a large enough nest egg for an ideal retirement. Several assumptions are made with this idea and I realize this.

Last summer my wife and I went to Juneau, Alaska. We loved the scenery, the hiking and the food. Alaska has a social program that I believe is unique. In 1982 the state of Alaska began to pay a dividend to residents out of something called the Permanent Fund. You can click here for details but the basics are the fund is funded with oil money which is then managed in the capital markets. The amount of the dividend can fluctuate. This year's dividend was payable in October and was $845 for qualified residents. The dividend has gone down for the last five years. The all time high payout was $1963 back in 2000. $845 is the lowest dividend since 1988. The reduced dividends of late were attributed to stock market losses.

I think this dividend could be incorporated into retirement planning in the right circumstance. Over the last ten years the average dividend has been $1396 per person. Relative to our fixed monthly expenses (no mortgage or car payments), $1396 in today's dollars is a lot of money. For a retired couple that only has to pay for insurance bills, utilities and groceries it is possible that $1396 could cover the month. Two people, two months covered. Two months out of twelve is significant. Clearly this is only for a modest lifestyle.

I should note that there is no state income tax in Alaska and the first $150,000 of assessed value is exempt from property tax for people 65 and older.

What about the winter someone might ask? Southeast Alaska (the area near Juneau) does not have as much snow or as much darkness (but there is still plenty of both) as the rest of the state. However, as I read the requirements you can be out of state up to 180 days per year. So three or four months in the desert or Florida or somewhere else and you avoid winter's bite.

Here is how some numbers might play out. A quick reminder is that is an idea, as I intended it, for people of modest means who don't spend a lot. Real estate in Alaska is cheaper than most parts of the country. I think it would be realistic to sell a home for $350,000 in many parts of the country, buy a modest house or condo in Alaska for $185,000- $200,000 and a condo in some parts of Florida or the desert with the balance. So maybe eight months in Alaska and four months in some place warmer. There are alternatives to buying a winter condo. For example, in Arizona, there are seasonal jobs in the tourism industry where accommodations are provided. I'm sure there are other similar opportunities too.

I think it might be reasonable to think that the type of person I have in mind for this, long career, decent income, diligent saver, might have $300,000 in a 401k account and maybe $50,000 liquid in a taxable account. These numbers are not run of the mill but they are not impossible either. Invested properly a 5% income need should not deplete an account. So $350,000 might generate $17,500. Of course, not buying a winter condo could leave a portfolio of $500,000 which could generate $25,000 a year.

There is more and more consensus that being retired no longer means not working at all. More and more retirees will work one way or another. There are numerous health and emotional benefits to working part time after traditional retirement. This could involve consulting, writing, eBay (or other internet venture) or just something you love (my wife's uncle was offered a job with the Los Angeles Angels of Anaheim working at the stadium for about $10 an hour which he almost took). It would not take much effort or time to make $500-1000 per month working 10-15 hours per week. If both partners in the couple do this, there is another $10,000-$20,000 per year.

So lets see where this couple stands now in relation to their expenses;
$2792 Permanent fund dividend
$17500 Portfolio Income
$15000 Income from part time work
$35392 Total

One other element might be social security. I don't think it makes sense to rely on social security as we now know it. I do not think it will ever disappear either, more likely might be a reduced benefit. Instead of each spouse getting $1000 per month perhaps it makes sense to think about $500 per month per spouse. That adds another $12000 annually which takes the income up to $47392. While the $1400 in monthly expense seems silly to me, $2500 (in today's dollars) plus a little money for traveling may not be. $30,000 in expenses compared to $47000 income seems comfortable to me.

In this example the Permanent Fund contribute close to 10% of a reasonable income need. It makes sense to me that the dividend could increase in the future because of higher oil prices and less volatility in the stock market.

There are some flaws here to be sure. The permanent fund could pay out more or less at any time. The fund could theoretically go bust. You'd have to love the great outdoors of Alaska which is not for most people. While we love it up there a friend recently visited Alaska and while he and his family had fun it was not the be all end all destination.

The point here is not that everyone should move to Alaska. The big picture here is that many of us may need to use some ingenuity to have a financially stable retirement. If stock market returns are below normal and social security is compromised and health costs go way up there will be less people able retire to the country club.

I do not think people can rely on planners or other professionals to think outside the lines on this sort of thing. This ties into one of the themes of this blog which is do-it-yourselfers being more empowered to make better decisions about investing and planning thanks to new investment products and access to different types of information thanks to the internet.

While you may or may not think this idea is insane, as the title to this post implies, it is outside the lines to be sure. If you have a unique idea along these lines I'd love to hear about it.