Telephone Consult

Last night I did a phone consultation with a couple from Oregon--a beautiful part of the country I once drove through with my son on one of our cross-country camping trips.  We motored down the coast to see the Redwoods of California.  An awesome experience I recommend to one and all.

My first clients in Oregon (Yeah!), Fred and Wilma (made-up names to protect the innocent), had done their homework and were knowledgeable about investments.  They had a really good understanding of their income sources and living expenses.  Fred is a retired contractor and receiving Social Security.  Wilma will retire at year's end, is an accountant, and is 58 years old.  Fred is a Navy veteran and receives medical care there. Health insurance for Wilma will be a challenge since she is 58 and has a ways to go to get to Medicare. She assured me they are up to the challenge because she and Fred have been self-employed for years and obtain their health insurance through the business.

Once Wilma retires (1/2013), they will need to draw down approximately 3.7% of their investment assets.  After 4 years, Wilma's Social Security kicks in.  Then they will require a lot less from their investments, and they will easily be able to live the lifestyle they desire.  In fact, they may want to ramp up their spending, then, if they so desire.

Fred was familiar with the T. Rowe Retirement Calculator and agreed with me that he should revisit it at least yearly.  Spending only a few minutes putting in the inputs quickly reveals, by generating a Monte Carlo analysis, whether you are on the right path.  This is a tool everyone approaching retirement should be familiar with.

On the investment front, they had read Solin's excellent book, The Smartest Investment Book You'll Ever Read, and had selected a portfolio conforming to their risk tolerance.  The portfolio is comprised of well-diversified funds with 60% in fixed income and 40% in stocks.

Their broker is TD Ameritrade, and I suggested they consider commission-free ETFs offered by TD Ameritrade and utilize the low-cost, index funds.  In fact, I looked them up and recommended specific funds to match the asset classes of their portfolio.  For example, their portfolio required 8% U.S. Small Cap and I recommended VB, a Vanguard ETF with an expense ratio of 0.16%.

Fred and Wilma are members of AARP, so I suggested they send in the postcard in the monthly magazine that provides a quote on a single premium, immediate pay annuity with New York Life.  My guess is that the annuity would pay Fred about 5.8%.  Thus, if he put $100,000 into it, he would get $483/month as long as he lives.  If he dies before he is paid out $100,000, his beneficiary (most likely Wilma) will get the balance.  Think of it like Social Security (except it isn't adjusted for inflation!) or a pension.  The idea is to reduce market risk.

We talked about location of investments - put stocks in the taxable accounts and bonds in the IRAs to the extent possible.  We talked about drawing down the taxable accounts first to let the IRAs (qualified accounts) grow tax free as long as possible.

In addition to their stocks and bonds, Fred and Wilma have a couple of real estate properties where they have long time tenants who are interested in buying the properties.  This gives them diversification and a wild card in the event funds are needed.

On the planning side, a couple of issues came up that couples need to think about because they have the capacity to upset the apple cart.  One I suggested they look into is umbrella insurance.  The fact that we live in a litigious society means there is always a risk we could get sued for everything we own. Umbrella insurance is a protection against this and is relatively inexpensive.  I suggested they talk to the provider of their automobile insurance and get a quote.

A second risk is long-term care.  And it is expensive.  I suggested they look into the type of policy that covers 3 years jointly . In other words if Fred used 2 years ( for example, if he got Alzheimers), then Wilma  would still have a year.

There are a lot of Fred and Wilmas out there who have worked hard, lived within their means, accumulated a nest egg, and who have given considerable thought to their financial situation in retirement.  When you think about it, planning for 25 years or longer where you don't have a work-related paycheck coming in can be daunting.

Contrary to the impression you might get from the popular press, however, many couples have thought it through and, as a result, are looking forward to an enjoyable retirement.