investingfromtheright

I am retired and take educated guesses on all things financial.

December 30, 2009

December 30, 2009: Retirement Portfolio Concepts For The Average Joe and Josephine

There are as many formulas for retirement planning as there are financial planners and talking heads. Here is my view, inspired in part from an article by two well known financial advisers.

This program is not designed for the sophisticated investor, but I have found that at times simplicity is divine. There are takeaways here for everyone.

The retiree will likely need to replace 100% of pre-retirement final salary income. Many retirees are finding that their expenses don't actually get lower in retirement.

Four big costs can almost guarantee rising aren't often on the average retiree's radar screen:

1. Inflation. Since 1992, Americans have been lucky. Inflation has not been an issue. The end is near for this period. As recently as 1990 America had 5% inflation, and double digit inflation was the norm in the 1970s-80s. A few percentage points difference in the inflation rate can have a huge impact on how long your savings last.

2. A Longer Life. The average life expectancy is rising. That's good. But, many people haven't factored that into their retirement planning. It's not unreasonable to live thirty or more years after officially retiring.

3. Health Care. Health care costs have tripled since 2001. Despite government's efforts at health care reform, costs will continue to rise, whether as insurance premiums or taxes to pay for the largess associated with practically every government-run program.

4. Taxes. Government cannot keep printing money and borrowing against itself at a rate of close to 0% interest forever. There are already scores of state and local taxes being levied, Fees are being increased for essential services and licenses. Federal tax rates are going up for the gainfully employed.One can only imagine what type of "revenue enhancement" scheme will be floated next.

Retirement poorly planned is failure. Here are a few investment ideas and tactics to assist towards tilting the odds in one's favor to enjoy the golden years.

1. Social Security. It may or may not happen in total. Right now, the average retiree receives approximately 39% of their income from social security. Apply for benefits at the right time and maximize the abundant gifts government provides within this program.

2. Manage expenses. Pay off your mortgage and other financial obligations. Don't retire with an overhang of debt. The retiree will still have fixed expenses such as insurance, utilities, property and other taxes, maintenance and repairs. These costs will rise, not decrease, in retirement.

3. Lifestyle. Entertainment, transportation and travel costs will likely increase in retirement. There is nothing wrong with enjoying a full and active lifestyle, but you need to account for higher expenditures in this area. Few want to be reclusive, living a hermit-like existence caused in large part by poor money management.

4. Inflation. Already discussed.

5. Rate Of Return on Investments. How many average people do you know whom have earned 10%/year over the past twenty years in the stock market? Plan on earning 6-8%annual return with conservative investments, factored for inflation.

6. Move to a temperate climate,avoiding extreme seasonal utility bills and high property taxes. There are plenty of "halfbacks" in North and South Carolina. Halfbacks are northeasterners who moved to the far South, became frustrated for one reason or another, and moved, literally "halfway back" to their original locale.

Some investment ideas:

1. The obvious ones are to educate yourself early and continue to educate yourself as a lifelong strategy, live within your means,save at least 20% of your net income, invest regularly and holistically within your comfort zone, choose your mate wisely,avoid divorce and take care of your mental and physical health.

2. Don't try to be too smart by half with your investment decisions. For most, that means to keep it simple using the magic of compounding interest and index ETFs. Divide your retirement pay (sans social security and/or a defined benefit pension)into five categories. For simplicity, here is a 20x5 approach (five categories with twenty-per cent investment monies in each).

1. Open up a U.S Treasury Direct account,purchase six month t-bills and roll them over upon maturity. This gives you protection (laddering effect) as inflation ebbs and flows.

2. Open an on-line brokerage account. Scottrade is easy and cheap to use. Others as fine, too. Purchase Vanguard's Total World Stock Market ETF (VT).

3. Purchase Barclays SPDR Capital Convertible Bond Fund ETF (CWB) and iShares' iBoxx Investment Grade Index ETF (LQD) in equal share.

4. Purchase iShares' MSCI Emerging Market ETF(EEM)and PowerShares' DB Commodity Trading Index ETF (DBC) in equal share.

5. Purchase iShares' International Dividend Fund (IDV) and iShares' US Select Dividend Fund (DVY) in equal share.

Rebalance this portfolio every six months. Maximize your tax-advantaged accounts (although tax rates rates may be so high in the future that some of these type of strategies may be neutered). For those with the correct temperament, rental real estate offers outstanding income potential and tax advantages, which would be used to augment the above retirement strategy.

One additional, and vital point. I believe that pure retirement is becoming a rare event. You will most likely morph into a different type of job or career upon your initial "retirement". Educate and further prepare yourself for obtaining a job you love when that time arrives. Or, don't retire at all. Playing golf while hearing about your foursome's health problems and is not exactly living halfway to heaven.

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