A Lot Of Retirement Mistakes

A few things from the last couple of days all with the theme of retirement planning mistakes to avoid.

First was a real head scratcher of an article from WSJ about a recommendation pertaining to the 4% rule made by Morningstar. The 4% rule of course refers to the percentage that can be safely withdrawn from portfolio assets for a sustainable retirement (not running out of money). It was derived by William Bengen in the 1990's. The specifics are you start at 4% in your first year of retirement and then increase that amount by the rate of inflation every year.

The 4% has always made sense to me as a frame of reference but I have repeatedly crapped all over the "increase that amount by the rate of inflation" for a couple of reasons. First is that over time, account values tend to go up with the stock market. Average annual returns will hopefully keep up with  4% withdrawal rate and maybe even exceed it some. Not every year of course but averaged out. The second is that it is very unrealistic for someone to sit down on Dec 31 and see that CPI or some other measure of price inflation, was up x.xx% and then raise their withdrawal rate by the same x.xx% starting January 1st. It just doesn't happen. More typically, people figure out what they need with 4-5% as a guide and then every so often, they'll need to nudge it up for a period before then starting to take less as spending tends to go down at some relatively older age.

My simpler approach has always been to start with "whatever you got, 4%" which more realistically is easier at 1% every calendar quarter. Great, if you can get away with less. Someone once made of that saying that at 1%/quarter, you'd never run out of money. Really though, it is about being able to absorb one-off, unbudgetable expenses that come up every so often. 

The weird part of the article was Morningstar going from believing 3.3% was the safe withdrawal rate for sustainability up to now 3.8% thanks to the increase in yields available from the bond market and better valuation in the stock market. The increase in bond yields is also a valuation call. Chasing a withdrawal rate every year is a recipe for a bad outcome. The article goes on to get more complicated. It can be quite simple. 1% per quarter has a great chance for success, all the better if you can get away with less or build one or two post-retirement income streams to tide you over for just a few years. Shortening the number of years a portfolio needs to last from 35 years to 30 could be a big difference maker which is why I write about that so frequently. 

A quick hit from Barron's about an important mistake to avoid. Our income at age 63 determines what our Medicare premium will be. The premium starts to go up at $91,000 for single filers, $182,000 for joint filers. If your pay is above those levels, well ok, that's where you are but the mistake to avoid is to not sell your house, or something else that is big during the year you turn 63 if your capital gain exceeds the exemption and the size of that gain would kick you above the income levels relevant to medicare. Although I have not looked at this closer, I take this as saying that for an age difference between spouses, no big sales during the year either one is 63. Ask your accountant for more details. 

Lastly is a list of retirement mistakes from Brett Arends. Number 6 on his list was "forgetting to factor in healthcare costs." He cited the famous Fidelity Investments number as being up to $315,000 that a couple would need to spend on healthcare in their retirement. We frequently look at ways to get that number, whatever it will be when you retire, down. In addition to blog references to it, I Tweet a lot about health related issues too. How much money do you think can be saved not having any prescriptions and just one visit a year to the doctor for an annual physical? Starting to lift weights today and cutting consumption of carbohydrates and seed oils found in processed foods starting today can reverse a lot of things, generally make you much healthier and improve quality of life. There is no downside to trying for a couple of months and seeing what happens. If you are a heavy carb eater, you'll very likely get significant results in a couple of weeks. 

Number 7 was "failing to understand income sources." That title isn't very clear but the content is on point. Make sure you understand, at least the basics of how Social Security works, that's one income source. Understand how portfolio withdrawals work as we talked about above and you can find as much content elsewhere as you could possibly want on that subject. And then I would add the idea of cultivating that third stream of income from a secondary career, passive income stream, monetizing a hobby or anything else you can think of. Start planning that early, like now. 

The last one I will mention from Brett is "relying too much on public benefits." I would tweak that to "relying too much on any single income source." This is about resiliency and flexibility. The time to figure this out is before you have a problem not after. Are they going to do something crazy with Social Security? I doubt it but what if they do? Will one of the decades you are retired turn out to have lousy returns? Who knows, but how much jeopardy would that cause for you if that turns out to be the case? 

There are a lot of potential mistakes that can be made with retirement planning, these are just a few of them.