Tuesday, May 27, 2008

Ruminations about Retirement

When I first thought about retiring, it seemed that a new industry had sprung up overnight. Every newspaper, magazine, television new program and web site wanted to give me advice or sell me something. Borders seemed to have a full wall devoted to books about retirement. AARP began sending me greetings. Aside from the tower of child-rearing books that teetered on my night table twenty-odd years before, never had so much been written with me in mind.

I read some stuff, mostly articles in the Wall Street Journal that my wife starred as “must read” and a really good book called “The Number” (which is NOT about figuring out your number), but some things became clear to me without aid of experts, some of it much too late. If you figured this all out already, forgive me for wasting your time. If any of this helps you, it’ll make me feel good.

First of all, it’s not about “how much do I need to retire”. Its more like “how much can I put away for retirement to make sure that I can afford the double wide and the moist cat food without living like an ascetic for the next X years”. You can’t do more than you can do, so advice like “you’ll need 80% of your pre-retirement salary” is not helpful. Why is 80% the correct number? If you are making a hefty salary in your last year of work (let’s pick $300,000) how in the world are you going to accumulate enough to pay you $240,000 a year from age 60 or 62 through 90 (since we will all live to be 90)?

Start early. Yeah, if you’re 30 and reading this, keep reading. Some practical thoughts in no specific order (I don’t give advice and I don’t fix up my single friends):

1. Find a financial advisor, preferably one who charges for his services and not one who makes his money by selling you things like whole life insurance or annuities. Ask the senior executives in your office for a referral. If you need to plan for college and retirement, it’s good to get some help as early in your career as you can.

2. Find out how much your pension will really pay you (if your company has a pension plan). The company internet site or the HR person may not have the full scoop. My pension, fairly typical, was calculated by multiplying my average salary during the ten years prior to retirement by 1.6% and then again by my years of service. So, on its face, if I worked for 25 years for the company, for each $100,000 of final average earnings, I would have $40,000 in pension. Right? Nope. From that sum we deduct: (i) 4% for each year that I collect my pension prior to age 62 (yours may be 65), (ii) a portion of my projected social security calculated pursuant to a formula (yes they take a credit for social security), and (iii) a further reduction if I want my spouse to continue to get 50% of my pension after I shuffle off (the standard way of planning)

3. When you retire, your life does not become cheaper. If you retire on Friday, what expenses have you shed by Monday? Dry cleaning? Hah! Commuting expenses? Probably. What big expenses do you lose? Let me tell you. Nothing. What expenses do you pick up? How about COBRA and long term care insurance. I can assure you that those costs more than offset the dry cleaning and commuting savings (and yeah, I’ll even throw in the cost of eating lunch out). How about “I’ve always wanted to spend a month in that little village in Tuscany, but I could never do it when I was working”?

4. Directly related to the paragraph above is the reality that if you have done everything you should do by the time you retire (your kids are out of college and your mortgage is paid) the final few years prior to retirement will give you more disposable income than you’ve ever had. You can travel, buy lots of stuff and basically do whatever you want. Then you run some numbers and realize that when you retire you may just have to give up that daily double latte from Starbucks.

5. “I can always get a job consulting” is much easier said than done (even though I have just started doing some consulting). You should not assume that someone will pay you a whole bunch of money to work 10 hours a week imparting thirty years of your knowledge to groups.

6. Notwithstanding the book that the guy just wrote about how working at Starbucks turned his life around, the bottom line is that $10 per hour for 20 hours per week (even with the medical benefits and free pound of coffee) doesn’t really cover the new roof.

I didn’t mean to scare you. I’m doing fine. I’m a volunteer teacher in an adult literacy program, sit on two boards of not-for-profits and spend time in the gym and cycling. My consulting work is nice, but not regular, and I’d rally rather volunteer than be on someone ‘s work schedule for $10 per hour.

The point is that you may live thirty plus years after retiring, most of them active. No one is going to take care of you. Your parents money may all be spent on caring for them in their last few years, so don’t bet on that inheritance. Powerball tickets are not a substitute for planning.

-Michael Schnipper
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