Planning for Retirement

[pigou]

The thing that bothers me about this kind of thread, found on just about every financial forum, is that folks making posts on these threads often see it as a black and white issue, either you pay off your mortgage, or you are mortgaged for as long as possible.  There's plenty of gray area middle ground for your comfort zone.  It's certainly a good mental exercise to read through these threads while you're defining your attitude toward debt and risk. On the MMM forums, there's a long one "Don't pay off your mortgage club". Search with the text  "don't pay off"  or "mortgage pay off" you'll see  the variety of opinions.

This isn't unreasonable: for optimization questions like this, you often end up with corner solutions. E.g. if you have a credit card that has a 10% APY and one that has a 15% APY, the optimal thing to do is to pay off the 15% card first (if you can rule out late and missed payment fees). People may prefer mixing for psychological reasons, but that's not what financial forums are generally set up for. If people want to do what feels good, they can just go with their gut. Usually, forums like this are very much about optimization and squeezing out an extra percentage point in returns -- because over 30 years, that can make a substantial difference in your assets.

The people posting on these financial forums are all about more more more more more more.
Rarely if ever is the concept of enough brought up.

Some people enjoy optimizing, while others need to do it to retire comfortably. Personally, I don't really get the concept of "enough" for finances, because more money lets me re-allocate my time or expand the things I can do.

Suppose I had an extra million dollars in investments that I didn't need. I could draw down an additional $40,000 per year. Great: that's a couple small grant applications I don't have to write. Maybe I want to eat healthier, and an extra $10,000 per year let's me hire someone to come to my apartment twice a week and prepare fresh food for me. An extra $50,000/year lets me organize a workshop and do whatever I want, without having to report back to a funding agency. An extra $100,000/year means I can spend my summer months working out of a Four Seasons hotel. Or I could set up a summer residency program to connect the field's leading junior scholars.

None of these things are by any stretch necessary, but all of them would make my life more pleasant or interesting. Some would probably be a good contribution to my field of research, too. And if you gave me an extra million a year, I'm sure I could figure out something to do with that, too. Finding things to spend money on is generally pretty easy.

[spork]

What investments will be safest when collateralized loan obligations collapse?

With the additional information, I think that we have already seen the playbook.  What performed best after 2008/2009?

Banks are (hopefully) in a better situation than they were 12 years ago. They undergo stress tests and have more of their own money in the game as a result of the higher capital requirements.  As long as the government and Fed are willing to bail them out, (as the Fed can print as much money as they need, they are always able to... the value of that money (ie inflation issues) is another issue).

The good news is that while the Great Recession had some long lasting problems, none were necessarily permanent.  Investments recovered.  Most housing markets recovered ( and more) .

My own thinking on the issue leads to a first pass answer of residential real estate as a solution.  IF paid for, then the cash flow from the rental will be inflation protected as the land lord can raise rents annually or so to keep up with inflation.  However, I would worry about the financial situation of the state and county or city that it is located.  IF they have to raise money, they will raise property taxes.  If there are no jobs (high unemployment in the area) then it is harder to rent the houses for a market rent (and collect it !) . 

Paid for, at least eliminates the risk that the tenants default will lead to the landlord's default.  However, IF there WERE inflation, then it would have been better to have borrowed the money as the money repaid would have a lower value than the money borrowed.   

[. . . ]

The real estate example reminds me of a couple of my in-laws -- starry-eyed immigrant siblings who purchased a 3-unit apartment building at the height of the real estate market in 2006. One had a fantasy of life on easy street as a landlord occupying one of the three units and the rent on the other two paying the mortgage. The other sibling was the one with the savings and credit rating required by the lender(s). The latter sibling didn't exercise good judgment over the former's desires, they got suckered into a set of mortgages that equated to 100% adjustable-rate financing, and the building lost a third of its value in the 2008 recession. The latter sibling ended up spending $100K on a house she doesn't live in and that will only start building equity when the now-refinanced mortgage is paid off in twenty years. By then she could be dead.

[mamselle]

Is this going to be a problem as well?

   https://www.forbes.com/sites/edwardsiedle/2020/06/13/dol-throws-401k-investors-to-the-wolves/

Or is it more of an upper-level fund management issue?

M.

[pigou]

Unless I'm misreading this, the new regulation just allows private equity funds to be offered as part of 401k plans. Much like you can already put money in those funds through a traditional brokerage account, your employer's plan manager could include such funds. Unless you decide to invest in them, this shouldn't change your risk or your fees.

[clean]

Is this going to be a problem as well?

   https://www.forbes.com/sites/edwardsiedle/2020/06/13/dol-throws-401k-investors-to-the-wolves/

Or is it more of an upper-level fund management issue?

I dont think that it is an exaggeration to say that the typical 401k participant is not a sophisticated investor.  I think that they could be easily swayed to move some of their retirement investments/savings toward these accounts.  The article, as I recall, indicated that the fees and risk vs return issues are not in favor of the average investor, but 'the wolves' that run the funds.  (The wolves get the profits and sheep take the risks and the losses).  But there is a 'shit ton' (a metric unit) of money in retirement accounts so those that are pushing to make these investments available to 401k participants are looking for a small percentage of it. 

So, I dont see it being a problem to a well informed populace, but I dont think that the average 401k participant is well informed and would understand the investments that would be involved in these plans. 

Frankly, I thought that someone had to be a 'Accredited Investor'   to be able to invest in such things, but that seems not to be the case.
"(In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount ...") 

I wont be putting my money in such funds. 

[pigou]

There are private equity ETFs even -- so the average person with a non-retirement investment account can already do some of these investments. They're not my cup of tea (I do index investing only), but they can have a place in a portfolio for some investors.

Some people have 401(k) balances in the 7-digits and even for people with less, they may have more of their savings in traditional brokerage accounts. It may then be advisable to have the PE fund in a tax-advantaged account and hold index funds in a taxable account. The law doesn't have to ban everything that isn't perfectly suited for the average or the least-informed investor.

Almost more importantly, though, I really don't like investment restrictions to "accredited investors" as a policy. Yes, some investments are complex and there's an argument to be made that they shouldn't be actively marketed to small investors. But we're getting to a place where the average investor is de facto barred from investing in the next Google. That undermines market credibility, making it appear like a rigged insider game, and can also impede the functioning of markets: it reduces how much capital is available to boost new companies that could significantly change how we do business and how we live.

It's worth keeping in mind that if everyone puts their money in index funds, index funds stop working. They're sort-of parasitic in that they don't actually provide information about the relative value of companies. They just allow investors with no information to easily benefit from long-term market trends. That's great (and also why I do it), but that's not actually the purpose of the stock market. That is primarily to provide real-time information about the expected future revenue/value of companies, which index funds simply don't do. Neither do any of the "values funds" that ostensibly promote people's ideological values... those profit from a misunderstanding of how stock prices are determined, as people incorrectly think less "demand" for the stock will drive down the price.

[spork]

Reviving this thread.

I'm 57 years old, tenured, working conditions at my university are slowly but steadily deteriorating. I had planned on working until ~ 70, but now 65 is much more likely (I'd prefer retiring even earlier, but I have chronic medical problems and will need Medicare if I do not have health insurance through an employer).

Assets: $700K in 403(b), 98% invested in equities (index funds) with a personal annual rate of return of 8.6% over the last 15 years. $100K in Roth IRA, also nearly 100% invested in equities. I max out my contributions to both every year. About $30K in savings, some in CDs earning 5% APR.

Liabilities: $100K principal remaining on the mortgage, 3.375% interest rate, 9 years until its completely paid off, was making 1-2 extra payments per year on the principal before interest rates shot up.

I have three questions:

• What locations should I consider for retirement? I'm currently in a high tax area of the U.S. Delaware has low taxes but most of it is not much higher than sea level. Cleveland has access to freshwater. Puerto Rico has some tax advantages and access to Social Security/Medicare benefits, but . . . hurricanes, an unstable electrical grid, and massive corruption. Bentonville, AR? No thanks. My wife would never tolerate it.
• To diversify out of equities, are there any alternatives to bond funds? Returns on bonds have sucked for years now and I doubt that's going to change. No, I'm not interested in "emerging markets" nor investment vehicles based on commercial real estate (market implosion in 3, 2, 1 . . .).
• What question(s) should I be asking but am not?

[Ruralguy]

Wow, you are courageous at well into 90's % of your assets in equities. I'm not saying its wrong, because as you have stated, my doing otherwise has only acted to shave off some points from my total % gains as compared to yours.

You mentioned being married, so, financially speaking, how does that change the numbers?

As for location, you have places you'd never go to, it might help to mention those first, besides Arkansas, which you already mentioned.

The best bang for your buck might be rural or exurban areas that aren't too far away from at least a moderate sized city, with probably most of the South away from biggest cities and most of midwest away from 2 or 3 of the biggest cities being cheaper than the same in the Northeast or almost anywhere out west save for very rural parts of California or Nevada, something like that. A large chunk of the East is subject to hurricanes, or the remnants of them. But the worst of it would be coastal Florida, and gulf coast into AL and MI, LA, TX. A little bit better moving up Atlantic coast, but not impervious.

As for alternative investments, if you want to get away from non-equity funds, you'll probably need a financial adviser to guide you to specific bonds or whatever that might be a better path for now than generic funds.


 

[spork]

[...]

You mentioned being married, so, financially speaking, how does that change the numbers?

My wife is four years younger than I am, also a tenured academic. Our annual salaries are approximately the same, ~ $100K. She does not contribute as much as I do to her 403(b) and does not have a Roth IRA.

As for location, you have places you'd never go to, it might help to mention those first, besides Arkansas, which you already mentioned.

[...]

We currently live in a city with an aging population of 200K, four seasons, expensive real estate, and crumbling infrastructure. Medical care is relatively good, but not on par with major academic medical centers like UCLA Cedars Sinai, UPenn Med Center, or Mass General. Although I grew up in the boonies, my wife is from a large African city. Her ethnicity, religion, and urban predilections rule out many parts of the U.S. (like Bentonville). We both love Montreal, but are not Canadian citizens and I don't know what rules Canada applies to non-gazillionaire retirees.

[dismalist]

Get an estimate of what you and your wife will get from Social Security. I recall it's sent out once per year. Make a political prediction -- worst case, cut the number by 20%. Add that into your decision making.

As for the rest, it's difficult, so many trade-offs. You seem to value good medical care highly. How much are you willing to pay extra in housing to get it and give up warm weather at the same time.

At your age I was invested in financial assets much like you were, actually no bonds. I didn't go into bonds until I was 65 or so, and at 74 am still largely in stocks. All indexed of course. I know of nothing safer than indexed bonds, that give you a higher rate of return than cash. But that's a matter for your personal degree of risk aversion.

A piece, not of advice, but an alert to all others: Don't let the financiers fool you. If you own your own house, and you don't want to move, Social Security let's you survive well enough. Though there may be up to -20% coming. Returns from accumulated financial assets sweeten life, but you won't starve without having much.

[apl68]

You may have the wrong impression of the Bentonville-Fayetteville-Rogers area.  Last time I spent a few days up there, I heard, besides myself, only two people who sounded like they actually might have grown up in Arkansas.  And one of those was Johnny Cash playing on a store's speakers system.  You would probably find the people in the region much less detestable and beneath you than you suppose, and much friendlier to your wife.  I'm sure that nowhere else in the state would measure up.  I know where I live we routinely lynch anybody who looks like they might come from outside of the U.S.  Heaven knows how all the hundreds of Spanish-speakers who live around here manage to survive.

But seriously, at least give some other places off of your evidently very narrow shortlist a look.  Prejudice runs more than one way, and it can rob people of seeing people and places that might actually surprise them.

[clean]

a lot of questions, but for many, only you can answer.  IF you want to pick a city to live in, you should visit them first, and stay for a while before ruling one or another in or out. 

In my 40s, (and Im not yet 60), I said I would retire at 70, and 'retire' would mean 'dont teach summer school'.  Like you, though, the job has changed for the worse, and I dont know that I can stay until 65.  (I have started thinking that working after 63 is too late!). 

Where to live?  Consider that there are states that dont have income tax.  You may certainly want to consider one of those. Then consider that each of those states there  are bigger and smaller cities and more and less affordable places.  You live in the Snow Belt now, do you want to retire and have '4 seasons'?  (I m guessing that you dont want those 4 seasons to be "death by heat" season, "Bug" Season, "Hurricane Season, and "tourist/snowbird" season.   That may limit your choices further.   

other questions:   When you say you have about 830K (Ira, 403b, and cds) is that for both of you or does your wife also have retirement savings?   

When you consider retirement expenses, what do you think you will need to spend a year?  (certainly that will be dependent on your location as you dont need Hurricane Insurance in Kansas!).   Your Bride is 4 years younger, does she plan to retire at 61?   Will you have a pension when you retire?   Will you have health care in retirement from your employers in retirement or rely on Medicare?  (You would get medicare at 65, but you will be 69 before she qualifies.  Have you factored that in?)

For now, regardless of what you decide... If you are employed by a university, you would also each qualify for a 457 plan.  As you are both over 50, you could contribute about $30,000 a year (each) into one.  Could you (are you willing to) cut your current living standard to add to your retirement savings?  (This has the benefit of getting you used to living on a smaller sum, reducing the need for retirement income to support 'lifestyle', and it increases savings). 

Have you spoken to a TIAA counselor or Voya or whoever is holding your retirement funds?  They can help you with a plan to decide how much you need to have to afford to retire, your allocation based on your risk tolerance, and help determine if (and how much) you may need to contribute for a while longer.

Given that your wife is 4 years younger, and you said that she is originally from Africa, does she fully qualify for Social Security (has she/will she have 35 years of US work experience to maximize her social security?  (Otherwise she may only get 'spousal benefits' which would be 1/2 of your benefit). 

Sorry for the sporadic, disjointed questions, but 'happy wife, happy life' comes to mind.  Does SHE want to retire 4 years younger than you?  Does SHE want to work until 70?   

One of the pieces of advice I got from retired people was ,"Dont retire FROM something, Reiter TO something".  What is your "To"?    (although some of the advice I have also been given from my parents and some other folks, include, "Dont wait too long.  You can not get your health back, and you will not be able to do MORE than you can do today.  IF you have things you want to do, do them while you can!"    ...   Ive asked several retired coworkers questions and not one has said "retirement sucks".   Some have said that they are busier now than they ever were when they worked for money. 

So start planning!  Figure out how much you need. Figure out where you will be, and what you want to do.  Make sure you have enough to support yourselves and make the necessary adjustments to get that much saved as soon as you can. 

good luck, and keep us informed!

[Puget]

I have no contributions to the financial decision, but for locations, may I suggest you take a look at my home state of Washington? Outside the Seattle corridor, there are still many reasonably affordable places to live in western WA (e.g., the Olympia area) that are progressive, have both cultural and natural attractions, and a moderate climate (though it does rain a lot in the winter). Except for the risk of earthquakes there are few natural disasters. There is no income tax (though there is a substantial sales tax to make up for it).

[ciao_yall]

My husband's cousin did All The Research and landed in Spain. Easy (except for the paperwork) to get a retirement visa. COL is very low.

It's like the Florida of Europe so full of retired English-speaking expats.

There are several Facebook groups full of advice - look into it!

[spork]

Has anyone here already selected a retirement location, or created a very short list? If so, where and why?

[...]

Spain. Easy (except for the paperwork) to get a retirement visa. COL is very low.

It's like the Florida of Europe so full of retired English-speaking expats.

Yeah, I need to check Spain out, and Portugal. Do you know if retirees from the USA are covered by these countries' government-sponsored health insurance systems?

[...]

(e.g., the Olympia area)

Is cost of living in Olympia substantially lower than the Sea-Tac metro area?

[...]

If you are employed by a university, you would also each qualify for a 457 plan.  As you are both over 50, you could contribute about $30,000 a year (each) into one. 

I do not qualify for a 457, either because my university does not offer them or because my salary isn't high enough. I contribute the maximum to my 403(b), which this year is $30,500 for people over 50. I have retirement savings currently worth $830K. My wife has her own retirement savings, worth ~ $600K.

I am definitely in a "happy wife, happy life" situation.

[...]

I know where I live we routinely lynch anybody who looks like they might come from outside of the U.S.

[...]

Prejudice runs more than one way

The most racist place I've ever lived was Boston in the 1980s. Far worse than Gaffney, SC. Bentonville has a population of 50K and Fayetteville little more than twice that. Given the convenience of amenities and the cultural diversity where my wife and I live now, I'm guessing that a metro area with a population of 200K is about the lowest my wife would be willing to endure. As for me, my hometown was only slightly fictionalized in The Beans of Egypt, Maine, and I have no urge to return to that type of environment.

[...]

so many trade-offs. You seem to value good medical care highly.

Yes, partly because I have a chronic autoimmune disease and I've been fucked over by dumb-ass physicians too many times before. When you have the kind of medical history that I have, you unfortunately learn about the huge variability in quality of care in this country.

I should talk to my university's TIAA rep, although when I've tried this in the past, it was useless. Probably a CFP would be better. I don't know any, but can ask around.

I think much of this is going to come down to dragging my wife to various locales to see what we think of them. Did I mention that she loves beaches? Too bad we're not billionaires who can afford a private estate on Maui.