Tag Archives: distributions

Your Current Lifestyle: The Managing of Unrealistic Retirement Goals

  By petillo | March 22, 2011 - 2:02 pm | 401k, debt, financial planning, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, taxes
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There is only one thing left to discuss about retirement that seems to be the most over-discussed thing about retirement: your current lifestyle. We, meaning all of the folks who regularly weigh in with their thoughts about risk and reward, how to use a 401(k), taxes and inflation, contributions and savings discuss the ways we can adjust our expectations. And the you in retirement planning has been discussed at length as well, from how long you will live to how you should spend down those hard earned dollars to your generally erratic behavior when it comes to the whole process.

Yet I keep coming across the same, almost volatile term, the one that is likely to have the largest and longest lasting impact on any plan, good or bad: your current lifestyle. Apparently, how you live today is supposed to be the goal you are striving for. But is this realistic? Is it even possible?

One of the first things we need to do is answer those questions based on how your current lifestyle looks compared to your past lifestyle. In almost every instance, it has evolved over the years, perhaps adding nuanced layers to what you didn’t consider a “need” in the past to a “can’t-live-without” necessity in the present. Is this evolution of your own attitude to what is important likely to play a role in what you think your lifestyle will be in the future?

Fresh into the workforce, you probably have adjusted to your new life of poverty. For those of you who began this journey without subsidized help from your parents know what it is like to tote around a bag full of college debt, suffer the low paying entry level job and scrap by enough to pay for your new lifestyle. Looking back you wonder how you did it. But more wondrous was the fact that based on that level of austerity, you pulled yourself up and moved into the next phase of “current lifestyle”.

This second phase of your current lifestyle involved the pursuit of more permanent residency, a chance to raise a family and even take the occasional vacation. This lifestyle move was far from inexpensive and perhaps demanded more effort at your workplace, closer accountability for how you spent your money and making the tough decision about how much you were going to put away for the future. This is perhaps the most costly phase of any “current lifestyle” and the one that has the most direct impact on any calculation of what would be the next phase of your “current lifestyle”.

By the time you reach the last phase of your “current lifestyle” you have become accustomed to certain expectations that your financial situation affords. It is this last and final phase that impacts your thinking about how retirement should look. That said, it’s no wonder that so many of us are anxious about those years that we have planned for in the near-future.

Each financial step in this process came with increased opportunities to earn more to support those lifestyle changes. Each change came with its challenges, the risk and rewards of investing, taxes and inflation and added to that, the people that may have depended on you during this process. But current income trumped those issues and you coped, some better than others. Nonetheless, you made it to the final phase.

But the thinking that the final phase of your lifestyle is something you can maintain when there is no (working) income, no way to adjust for taxes and inflation, and the biggest adjustment of all, the different aspects of risk and reward (which seem to change from how you invest to how much your health impacts you in the coming years) seems to be the goal we are striving so hard to get. The last thing you want to consider is downsizing your current lifestyle.

But that option may be the only thing left. In the best case scenario, you enter into this final phase without any debt and in possession of your home. Neither of these provides income. Both however provide solace. So how do you manage the unrealistic goal of maintaining your last phase of current lifestyle? Hard numbers provide some clue as well as the expectations that are considered average.

You will be able to embrace the next phase of your current lifestyle if that lifestyle is based on those first years of work. While student loans might be paid for, that financial burden is replaced by taxes. While the expense of living on your own in those first years are replaced with inflation in the later ones, all that is left is the relative income of those low-earning years. Maintain a five percent pre-tax deduction in your 401(k) and this is your current lifestyle in retirement.

The second phase of your “current lifestyle”, the one where much of the pressure your income experiences is based on the burdens you chose to bear (kids, a house, etc.) can become your retirement lifestyle with a simple 10% rate of retirement deductions. This is wholly tolerable but adds little in the way of wiggle room. You probably recall those years vividly as a time when you got by but you always seemed to be poorer than your income portrayed. This 10% rate contributed to your retirement plan will give you a 50% replacement of your current lifestyle.

Only phase left is the last and final one, the phase that exists in those last years in the workforce, when if you were fortunate, the kids launched and the house was paid for. A 15% or better, lifelong deduction of your pay will give you only about 75% of what your current lifestyle provides. And that is considered typical and achievable under a wide variety of retirement tests and projections.

But most of us fail to consider this, thinking instead the current lifestyle means maintenance of all the bells and whistles that those final work years might provide. There have been numerous reports over the last week or so that point to two things: our portfolios have recovered but only because we continued to contribute to those plans and we still think that we will have to work longer to get to retirement. Problem is that we have never considered the fact that current lifestyle we are shooting for as less. It always seems to be full replacement.

No retirement plan and this includes pensions ever intended to give back a 100% financial maintenance of those last work years in our non-working years. While we have considered current lifestyle to mean various things throughout our lives, we need to consider which one we can live with in retirement. Once you do that, and save accordingly, you will be able to project with some degree of accuracy exactly what the last phase of “current lifestyle” will look like.

Two Plans in Retirement as You Invest Towards It

  By petillo | June 13, 2010 - 9:47 am | 401k, financial planning, Repercussions: A Retirement Review, Retirement Planning Target 2025
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Retirement is based on a whole series of assumptions made while you are working. Problems with those guesstimates that has been frequently pointed to is the inability of knowing all of the components of the actual arrival at the age when your retirement income is your only income.

But suppose for a minute, you took the worst-case scenario approach to the subject. Suppose you knew how much you would receive from Social Security at full retirement (you receive a statement every year from SSA right around your birthday with this estimate on it). Wouldn’t the most prudent approach be to base everything on this figure?

From there, you could make some varied assumptions on other potential costs. Would your SS check be enough to cover the mortgage you may be carrying with you into retirement? Will it cover the costs of taxes, insurance, upkeep and be enough to out food on the table? Will it be enough to cover inflation? If the answer is yes to these questions, then you may have positioned yourself in the best of all postions.

But if the answer is no, then you can look to what you have invested as making up for the shortfall. Keeping in mind that the earliest years of retirement tend to be the most expensive, you can project your drawdown, perhaps taking as much as 6-8% in the first five to ten-years and planning on a scaling back to half that or less as you age.

The other plan you might be able to consider is doing the opposite of using Social Security as the base. If you draw your Social Security at the first opportunity, invest it conservatively and do so until your full retirement age, you would achieve two things as a result: you would have it and when you pay it back at full retirement age, your payment is increased to the full amount and you will have had the investment income it may have generated and the peace-of-mind of knowing that you have it.

I bumped into a report done by US News and World Report written by Rob Silverblatt. In it, he quoted a series of authors and financial advisors who suggested that investing the unneeded check, if you were among the fortunate few who would not see any need for it, in ETFs. The thinking was based on dollar-cost averaging, the same method you employed for decades in your 401(k). It was accompanied by the standard warnings of trading and how much stock was enough in a retired portfolio to be considered prudent.

But there are other ways and why, I asked, would you invest the sure thing?

The best possible enhancement for your retirement is how you arrive. The liabilities that go with living this mortal coil will accompany you into retirement. The fewer the better and the stronger your financial potential will be. That will, unfortunately, require some work now. But the payoff will be in the options.

Mr. Silverblatt’s article can be found here.

Retirement Planning: Your Property Taxes

  By petillo | May 10, 2010 - 6:41 am | Repercussions: A Retirement Review, Retirement Planning Target 2025
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What, you may ask, do property taxes have to do with a retirement plan? Other than exerting a negative force on the available cash in your plan, once you do decide to begin distributions, they also have a positive influence on the quality of the community you live in. So if your taxes are excessively high, should you try to get them lower? If so, define excessive.

Are you paying too much?
In many parts of the country, homes are worth less than they were two years ago. But what often does not follow those changes in valuations are the taxes assessed. For those lucky enough to still have a job, have maintained their salaries and have seen a minimal decline in the value of their house, challenging the property taxes you are currently paying might be counterintuitive and not worth the effort. While a reassessment of your home does not take into consideration your ability to pay, it might be worth considering if the information the assessor has on your home is not correct.

During the heyday of fast money, folks did remodels, bought houses in neighborhoods that were previously out-of-reach, and otherwise paid no mind to the recurring, long-term effects of those projects and purchases. When resale was the only consideration, the cost of those renovations was often overlooked and only calculated as part of the resale potential. Property taxes were simply relegated to the status of cost-of-doing-business.

Fast forward a couple of years and you have homeowners who are wondering why their taxes are so high. There are a couple pf things you can do to see if your assessment is accurate (this is different than challenging your valuation, something that can be done if a large number of homes have lost a significant amount of value). Assessments deal with such details as square footage, number of bathrooms, type of roof, etc.

What can you do?
There are several ways to approach the subject. The DIY method requires getting the assessor’s card. This is a worksheet with all sorts of vital information about your house including previous owners. This is the first step in checking the assessor’s accuracy. Perhaps a room that was assessed as a bedroom has no closet or a bar sink in the family room is listed as a kitchen. These are challengeable items.

The next step involves doing some legwork (checking at least five comparable properties in your neighborhood) and homework (not only the assessor’s math but the process of making the appeal, preparing a written summary). Historically, few homes actually are found to be under-taxed (something to worry about if you uncover a mistake in your favor) and of those who feel as though they were over-taxed, only around 5% of the homeowners actually challenge the taxes they pay.

The vast majority of the grievances were filed by businesses who do the legwork and homework for you. The cost is substantial, from a fixed percentage of the lowered tax bill over one to two years all the way to the cost of filing. The success rate is rather good. But this is comparable to hiring an attorney to fight a parking ticket.

Are there reasons to challenge property taxes?
If you are preparing your home for resale and feel as though the lower property taxes might add to your home’s appeal, this might be worth the effort, particularly if, when compared to similar homes, your taxed assessed value appears significantly lower. (Most reassessments change the taxed owed by as little as 5%).

If you are preparing for retirement, in other words, you intend on staying put for quite some time, the lower taxes may help in the short-term. But as I mentioned earlier, your municipality can only be stretched so thin before it begins to cut vital services. And although you may not think school closures or other service cuts will affect you, you need to think again.

Some communities have made revaluations a priority to cut back on the cost of the increasing tax challenges. Keep in mind, these are usually temporary fixes but the community cuts that follow may be more permanent.

If you are planning to stay and you believe that your tax bill is too high, you appeal it and win, be money smart and channel the savings into your tax-deferred retirement investments. This is like “found money” and is the best source of future benefits.