Personal Finance Round Up

First up is another article stating that Gen-X is doomed for retirement. Another article I saw today (sorry no link) said that something like 1/3 of Gen-Xers have less than $10,000 saved for retirement. The article I linked to for this post has various sentiment stats about how few think they will have enough to retire and how many expect to work after they "retire." 

It's a fine article, a little salesy maybe but there is one point made that is wildly counterproductive. "Social Security was only intended to cover about 40% of retirement needs." Your Social Security amount is what it is. You should know what it is, understand where the numbers come from, balance out delaying or taking it early but the amount you get is what you get. It's an income stream. How much of your expenses will your payout cover? Do you need other income streams? If so, where will they come from, how much will they pay, can you cobble enough together to cover your lifestyle? If not, what can you do about it realizing something might have to give?

More trouble for Gen-X, we're the sandwich generation helping pay for our parents needs and our kids. I'm on the older edge of Gen-X. First, there's no way this is a new phenomenon. The article is right in making a "harsh" point. There is a balance to be struck between helping others and making sure your financial needs are covered or at least closed to covered. Getting 80% of what you need while taking care of family doesn't seem like a catastrophe to me but being one of the many (apparently?) of Gen-Xers with less than $10,000 is a pretty big hole to dig out from.

Anonymous Twitter account Ivan the K made an interesting point. Thinking beyond the narrow portion of the population that reads investment blogs, it's a legit criticism that the move from defined benefit (pensions) to defined contribution (401ks) has not worked out for a meaningful chunk of the population. Balances are low and we collectively have a problem with financial literacy. More harshness from me; maybe 401ks were a bad idea for some but they are what the majority of us have. It is up to us to solve our own problems. As a starting point, on some level, everyone knows they need to save money. That simple fact can be a starting point. 

Finally the Wall Street Journal had pretty comprehensive article, even if it too might have been salesy, about Qualified Longevity Annuity Contracts (QLACs). I am not licensed to sell annuities, I've never sold an annuity and I never will. My curiosity here is simply as an investor trying to figure out what my financial situation will look like much further down the road.

The comments have plenty of naysayers on QLACs, they are worth reading. I'll stipulate every negative point about annuities. I've long said that many people I've known who have had annuities love them, warts and all. QLACs came about in 2014. Basically, you can take the lesser of either 25% or $200,000 from an IRA account to buy a QLAC. The money used to buy the QLAC is not subject to RMDs which for Gen-X will start at 73. It then will start to pay out at 85 and tax will be owed at that time. 

The Journal works through some numbers. There was an anecdote about someone who bought one at 79 and will get $16,000/yr starting at 85. Another example of buying one at 65 to start taking at 85 paying $11,000/mo seems like it was incorrect. A commenter called a provider and got a lower payout number.

Like anything, there are pros and cons. The cons I already stipulated. For positives, you are reducing your RMDs but of course not everyone needs that. A way to think of this, creating a payout for later in life,is that you are diversifying your income streams. To Ivan's point, you're putting the burden on someone else. You're paying for that privilege of course.

Some commenters pointed out that they could invest the money and do better themselves. Yes, maybe they could. If you think you could do better, you'd have that shot with the vast majority of your money, you'd be diversifying your manager risk by giving the insurance company a portion to manage for you. For a little sizing context, my wife and I have an HSA, we each have Roths, traditional IRAs and we have a joint account. A quarter of my IRA would be about 15% of our overall pie.

Part of the consideration for this needs to be a potentially harsh assessment of how long you might live. Anything can happen to any one at any time but if you've been exercising for a long time, your height to weight ratio is good and your blood chemistry is good then you probably need to plan on being around for a while and deferring withdrawals until 85 becomes a reasonable bet. A QLAC could become a safety net for portfolio mistakes a confident individual might make.

The catalyst for my interest in this is the RMD benefit. 3.6% to maybe 5% per year not taken on maybe $100,000-$200,000 for 12 years would add up. There's value in that even if paying for an annuity isn't worth it. 

Personally I have a long time to keep learning about this. I can't seen giving my money to the insurance company as soon as 65 but waiting until 79 probably isn't optimal either for anyone so inclined. There's no downside to learning about these. The positives are compelling and the negatives can probably all be summed up with yeah, but it's an annuity. That's fair game. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Got My Feet Wet

This past week I worked for three and half days on Type 3 Incident Management Team (IMT) as a liaison trainee on a wildfire here in Yavapai County. This is an opportunity I have been cultivating as a Plan B or Plan C for many years and this week it all came into place and the scenario couldn't have been better for getting started on something new or maybe learning it wasn't for me. 

I got called onto the fire by someone connected with our department. The fire community being very small sometimes I knew a lot of people working on the incident and my functioning as a liaison, I ended up helping people I've known for many years. One part of being a liaison is relaying information to officials from, in this case, the State of Arizona, the Forest Service and County Sheriff. I know two of those three very well and had met the third several times. While I knew many in the group, I was a little more local than others on the team which helped.

Being close to home meant I could sleep at home. Usually these assignments involve getting a hotel room when you're away from home but in a remote enough area, you could be sleeping in a tent. Getting a normal night of sleep made tackling something new a little easier. 

I spent most of my time in an office like setting doing work on my computer which of course meant I was not disconnected from my day job which is my priority. I was able to put a trade together for clients and handle an unexpected withdrawal need that a client had. There was one morning where we went out to make contact with a ranch owner and get some site information for law enforcement. We drove to one of the many areas nearby where you'd say to yourself I had no idea this place existed. It was about a three hour round trip drive because of how rough the road was but even here signal was coming and going enough that I wasn't really disconnected from anything. 

The learning curve in some aspects of the job was pretty steep while other parts were either just like the training class or inline with the impression created of what liaisons do in the times I have been a customer of the liaison shop (when Walker has been threatened). I was challenged with some things, had to do a little detective work to track things down, talk to people outside of the emergency services realm and did a lot of documentation. 

From the viewpoint of just getting started but having observed IMTs for many years, I know there is way to fit in better and ways to make fitting in harder to do. One observation is that it can be difficult for people who have been successful in other walks of life to come into an IMT or other structure that has a chain of command where they are not the top dog. Our department has had people do this sort of work and really struggle to fit in. Fitting in is important if you want to succeed. Being able to make relationships is important if you want to succeed. The State of Arizona official I mentioned above, was one of my instructors when I took my first firefighting class back in 2003, I worked with him one way or another more times than I can remember. The law enforcement official I dealt with, I've known for 10 years, he was on the call the one time I used Narcan on a patient. When I talk about taking a long lead time to a Plan B or post retirement gig, I am not kidding.

For my first incident I was hoping to start my position task book (qualification process that documents training progress for evaluation) and hope my work would leave the door open to do more with the team on future assignments. The first one, yes, I got a lot of "ink in my task book." On the second, it appears that was a success. I got to know the people who would make the decision and I feel like they went out of their way to encourage me versus "yeah, put in for it and we'll see what happens." From this standpoint, this went better than I could have hoped for.

A secondary element to my interest here is being able to reciprocate the times that Walker Fire and I have been helped by a liaison. Some people will be out 100 days doing IMT work, that's potentially 100 days away from home. That not something I want to do with respect to my home life, my day job or what I perceive as my obligations to Walker Fire related to being available to respond to calls for service here at home. 

In the system where you indicate your availability to go out, there are different statuses as I am learning including "available local." If something happens in Yavapai County, I very much want to be part of the solution. I can see taking one national assignment if I get the chance which could be a two week gig out of state which I equate to taking a vacation to go build houses somewhere. I'd still spend much of my time connected to the internet but that would be more of a grind especially if we were out in the middle of nowhere and it was two weeks in a tent.

Looking forward, this turned out to be something I enjoy doing and I want to keep the door open to the sort of engagement I described above. If I understand correctly about being available for local incident, it is a good bet I would get called every so often for incidents that weren't local. Helping out on one of those occasionally if they are having trouble finding people feels like the right thing to do but I have no intention of being out for months on assignments, a lot would have to go wrong for me to end up doing that but cultivating the opportunity in case I ever need it is exactly the type of retirement-aged risk management I write about all the time.  

To be crystal clear on one point, this was my first assignment and I only worked three and half days, three and a quarter really. I have a ton to learn about every facet of this. I have a first impression and I hope I made a good impression but that's it so far. Using the baseball inning analogy, I just took batting practice. 

I did get some cool pictures though.

Want/Need To Retire Early? Avoid This Crucial Mistake

Marketwatch posted an advice type of column where a reader asked about his retirement readiness as he just got laid off and now would like to be done with working. He is 61, no mention of his wife's age or whether she is still working. They have a combined $350,000 in qualified retirement accounts and $200,000 in taxable accounts. He said his Social Security will be $2035 at 62 and his wife's will be "way less." At a minimum, her SS will be half the $2035 or $1017.50 but it seems to me that knowing whether she can take that next year when he takes is $2035 is crucial information. He said their monthly expenses are $2700/mo.

Brett Arends from the Marketwatch staff took this on. He was very optimistic for these people saying

 ...if you want to hang it up, you’ve got so many options it’s hard to know where to start.

I wouldn't go that far but to be clear, these people are not up a creek. They don't quite have as many options as I think Brett is implying in his first reaction though.

The first thing I'll say is if these peoples' situation is anywhere close to you or where you might be between now and when you plan to retire, look at your expenses closely. I don't mean in the context of cutting them although maybe that's a good idea, but making sure you have an accurate picture. I seriously doubt the $2700 aka $32,400 is accurate.

These folks live in Massachusetts and own their home outright. Brett, in sizing up their situation notes the average home value in Mass is $600,000. According to SmartAsset.com, a $600,000 house would have a property tax bill of $6720. So are they really spending $25,680 ex-property tax? That seems unlikely.  

I maintain our budget on a spreadsheet. There a column off to the right of the various monthlies where I track things that are not monthly but maybe annual or twice per year. Examples of this type of expense include $450 for tax prep, $500 for firewood, $2000 for homeowners insurance and so on. This list starts the year at about $9000 including $2000 for property tax. If I were in the position of the advice seeker I would add this $9000 into the total of our monthlies to get a better picture of our true expenses. But there's more as we talk about all the time. What number should you budget, maybe based on previous experience, for unexpected one-off expenses? Look back and make an educated guess, $1000/mo? More? Less? For example then, our monthlies add up to $46,000/yr but figuring one-offs we can budget for and $1000 more per month for ones we can't gets us up to $68,000. That's not every penny but is a much better picture than just thinking in terms of fixed monthly expenses. 

Do they ever want to take any sort of trip? Even just a long weekend down the Cape or in Vermont would cost some money. One small hack for this could be to spend any money from last year's budget for unexpected one-off expenses. Budget $10,000 for last year, only use $7000? Great, $3000 for traveling this year. 

This is a worthwhile exercise to do to create context for yourself in case, like the advice seeker, your hand is forced at work.

Brett then goes on to discuss applying the 4% rule to their $550,000. A straight 4% works out to $22,000 in year one, when he is 62. Not mentioned is the potential income tax to be paid depending on where the money is taken from, taxable accounts or IRAs. At low incomes like we're talking about, taxation can be quite reasonable but not mentioned by Brett is advice to ask an accountant how much tax would be owed. If they don't take Social Security right away, taking their $22,000 from IRAs could be tax free for falling under the standard deduction. If instead of being 61, this person was 58, then there is a potential penalty for taking from IRAs. I say potential because there is a way to avoid the penalty which would be worth learning about if you are in the advice seeker's situation and younger than 59 1/2.

But any tax owed is yet another expense to contend with. 

In terms of my opinion on what they should do, knowing the wife's age is important and we don't know whether she is still working. If she is close in age, two years younger or less and not working, I would encourage him to wait until she is 62 before he takes Social Security. Again this presumes they are close in age. With relatively low expenses, I think he needs to try to find some sort of income stream to tide them over for, in our current example, the next couple of years or maybe just one year for a one year difference in age between them. 

A 62 year old waiting a year or two is a whole different thing than waiting until 70. He clearly does not want to wait that long. If he can hold out for a year or two in this way, his SS will go up 8% (plus any COLA) each year. $2035 becomes $2197 a year later and becomes $2373 two years later and now his wife is getting $1017.50. While I simply don't believe $2700 in expenses is comprehensive, the scenario of waiting just a little bit gets them to $3400/mo which clearly goes much further. The increase in SS by the brief wait also takes a little burden off the portfolio.

As far as what to do with the money, Brett gives reasonably vague advice about a 50/50 mix of a very broad equity index fund and a TIPS fund. It's reasonably vague based on how much more an actual information an advisor working with these people would need to know. 

The chart shows how the two funds suggested did in 2022. The equity fund assumes sequence of return risk and the TIPS fund assumes interest rate risk. These people, implementing this portfolio in December of 2021 might have freaked out and sold. Certainly it would have been a stressful period for them and while equities have made good progress clawing back, the TIPS fund has not. 

Going forward, from here if implemented today, what are the risks to this 50/50 portfolio suggested by Brett? The risks are the same, risk the equities go down a lot and risk that interest rates take another big leg higher. Neither is a guess or attempt to predict anything. Those are the risks. Does it make sense to try to mitigate those risks? That is up to the end user but I would want to. Either way, this is a great example for all those posts here exploring sequence of return risk. Implemented at an unlucky time and these people are down 19% or so, more if they still took out $22000 for expenses. 

At the start of this post I said the advice seeker and his wife are not up a creek but they are vulnerable, based on their incomplete particulars, they have no margin for error, or at least very little margin for error. 

A heuristic for this that we have been throwing around for years here is that something's gotta give in this example. Each of them having some sort of income stream, worked on their desired terms that they hopefully started to cultivate years before seems like a good fit here. And again, for all we know she is still gainfully employed, making enough to cover a meaningful chunk of their expenses. In a different scenario where he hadn't been laid off, instead he was working and wanted to retire from that work, a good fit for that scenario if something's gotta give is to work another year or two. 

This was a fun post to explore some thoroughness issues, it provided a good example of sequence of return risk and reiterated the need for flexibility in how we commence our retirement. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.