Retirement Optionality

There were a couple of interesting retirement-related articles over the weekend, one from Yahoo and the other from the Wall Street Journal. 

The Yahoo article tried to refute some basic rules of thumb with Jean Chatzky. Most of what she said are things we've been saying here forever. She said rules of thumb like replacing 80% of your income and the 4% withdrawal rule are good starting points but that you need to "understand the math" behind them which is literally what I've said before. 

She also said that one expense that will go down for sure is the amount you save for retirement or as I've said it, you don't need to save for retirement after you've retired. Another expense that will disappear is the 7.5% you're paying into Social Security which is kind of a big number.

Chatzky also talks about doing the actual spreadsheet work, another point we make here frequently, to understand what your regular expenses will actually be. She said "if the math doesn’t work, you may need to adjust your cash flow" or as we say that here, something will have to give. I'm not saying she borrowed anything from our conversation, she is making obvious points. Maybe, taking in obvious points from various sources can help better drive these messages home. 

The WSJ profiled four people who waited until at least 75 to retire most of them still have an income stream beyond their investment portfolios and Social Security. One of them gets a small income from having sold her business with a balloon payment coming in a couple of years for example. 

Yahoo talked about mapping out your expenses and the things you want to do in retirement. Want to do included family, travel and home remodels and you probably have some of your own. There are some basics where there really is nothing to give and if the math doesn't work for those then the easiest choices I can think of would be to keep working or figure out how to downsize in such a way that you end up cashing out to some extent. 

A lot of the comments on the Yahoo article talked about moving to a zero tax state or low tax state. Some states have no income tax, Arizona is pretty low I'd say at 2.5%. For $100,000 of income, Copilot says the states with the highest marginal tax rates are California at 9.3%, Oregon at 8.75% and Hawaii at 8.3%. While that seems high, Copilot also says that those states do not tax Social Security. Only nine states tax Social Security according to Copilot. Any sort of move for tax reasons needs to include looking at sales tax and property tax to make sure that if lower taxes is the objective, you're actually lowering your taxes. 

Years ago I wrote a few posts about living in a state with no income, near the border of a state with no sales tax. Washington/Oregon was one example as was Wyoming/Montana. 

Adding other income streams beyond portfolio withdrawals and Social Security adds optionality. If someone's numbers just barely work with little room for error then adding that financial optionality is pretty important even if the way they do this is not their first choice for things to do. If, as was the case for some in the WSJ article, an income stream can be derived doing something you enjoy, why wouldn't you keep doing that to some extent even if not as a full time endeavor? 

If you think you might need financial optionality, how much of your time would you be willing to trade for that sort of peace of mind? Saying "no time spent is worth it" is a valid answer but isn't the answer for everyone. 

I place so much importance on optionality because we never know what we will want to do in the future or what we will need to do. Reducing the uncertainty of that potential want or need is important to me. 

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.