Archives For Retirement Planning

I found this tidbit from John Cassidy’s latest column in Fortune to be interesting:

“A couple of months ago I mentioned the cyclically adjusted price/earnings (CAPE) ratio, which was flashing amber. Another warning sign is provided by the so-called Q ratio, which compares the market value of corporate assets with their replacement cost, and which was developed by the late James Tobin, a Yale economist. As of March 6, when the S&P 500 closed at 1,877, the Q ratio was indicating that the market was overvalued by 76%, says Andrew Smithers, a London-based analyst who helped popularize the measure. The only times the market has been more overvalued with the late 1920s in the late 1990s.”

My wife and I are still in the accumulation phase and I’m not one to time to try to time the market. If the market comes crashing down, I simply won’t look at the 401(K) balance for a few months. Ignorance is bliss.

A friend of mine gave me her 401(k) information to look at. Her company changed 401(k) providers and went with Nationwide. I wasn’t fond of their previous 401(k) provider (I forget the name now), so I was happy to see a change.

I flipped through the information packet and landed on the page listing their options. I was pleased to see companies like DFA, Vanguard, American Century, etc. Expense ratios for the funds were fairly low too (the highest was 1.21% for a SmallCap value fund).

Then I turned the page…

IN ADDITION to the mutual fund expenses, Nationwide tacked on an additional annual management fee ranging from 1.02% to 1.27%.

So…the Vanguard Index 500 Signal Class, with a .05% management fee, now had a 1.32% annual fee! FOR AN INDEX FUND!!!!!

Now, I know why companies do this. Small companies are struggling. Health insurance premiums are going up. Gas is expensive. So, a broker or advisor comes along and offers a 401(k) plan that is really cheap to the business owner and the costs to the employees are either glossed over or buried in the information. Sadly, most employees don’t have a clue.

To give you an idea of the impact of a 1.27% additional fee, I ran some numbers. I assumed an employee socking away $10,000 per year in the S&P 500. Using monthly returns, I calculated that at the end of 10 years (2003 – 2012), the 1.27% annual fee would have lead to a loss of $8,800 to fees (you can see my numbers here). That’s a sizable chunk of change.

My advice would be to only invest enough to get any company match and then max out a Roth IRA (assuming you qualify) or a traditional non-deductible IRA. There is no sense in throwing away money due to useless fees.

We have had a good year so far in the stock market.

So, curious minds want to know…

What is your personal rate of return for 2013?

Our personal rate of return through yesterday is 16%.

We are 100% stocks:

401(k) Asset Classes (05-21-2013)

I am not recommending this route to AFM readers. It can make for a very volatile portfolio with pretty big swings. Beware.

The reason it has taken me so long to get this posted is that these spreadsheets contain a lot of information and I didn’t know the best way to go about writing it for AFM readers.

So, here is part one of a several part series (I’m not sure how many parts will be in the series).

First, let me lay out what I did:

• I took the monthly total returns for the S&P 500 and a Bond Index (using returns found in Ibbotson’s SBBI Yearbook) and created a 50/50 portfolio with annual rebalancing. NOTE: These are index returns and not actual investment account returns. In other words, my numbers were higher because they do not take into consideration fees associated with mutual funds or brokerage accounts.

• I assumed a beginning retirement balance of $1,000,000.

• I assumed a 4% initial withdrawal for income needs. The first withdrawal occurred at the beginning of the first year. In other words, $960,000 was invested the first year.

• In this scenario, I assumed that annual income would be 4% of the investment balance at the end of each 12 months. I know a lot of people disagree with this strategy. Most people like to use the initial withdrawal and then adjust subsequent withdrawals for inflation. I have those numbers and will publish them later. My findings seem to show that the fixed percentage withdrawal led to more income over the years—though the income could be variable.

• I assumed a 30 year retirement.

• I began the first 30-year period in January 1926, which ran through December 1955. The second 30-year period was February 1926 through January 1956. (You get the idea, I hope.)


Unlike other withdrawal strategies, the fixed 4% withdrawal never ran out of money. In fact, the smallest ending balance over 30 years of withdrawals, was $1.8 million. This makes sense when you think about it because the withdrawal is a relatively small 4% of the account balance. The downside as stated earlier is that the income can be quite volatile from one year to the next.

• There were 685 rolling 30-year periods from 1926-2012.

• The average income over each 30-year period was $2,547,750.

• The highest income over a 30-year period was $5,778,756 (October 1981 – September 2011).

• The lowest income over a 30-year period was $1,210,642 (September 1929 – August 1959).

• Each first year’s monthly income was $3,333.

• The average final year’s monthly income was $13,030.

• The lowest final year’s monthly income was $3,363.

• The highest final year’s monthly income was $16,052.

• The average monthly income over all 685 rolling 30-year periods was $7,077.

• Over all 685 rolling 30-year periods, the average number of years that the income decreased was 9.6 times during each 30-year period.

I created a 58-page PDF report that you can download here. There will be more reports to come.

I received an email from Kiplinger’s with these five steps to take before paying off your mortgage early during retirement:

• Pay off consumer debt—given today’s interest rates, you’re probably paying less than 5% on your mortgage, compared with about 13% on credit card balances. Paying credit card debt give you an instant return on your money equal to the rate on your cards—and you can continue to deduct the interest on your mortgage (no such tax break for credit card balances).

• Fuel retirement accounts—the remaining few years before retirement represent your last chance to stash money in tax-advantaged retirement accounts. You’ll waste that opportunity by not maxing out your accounts. An even worse idea is withdrawing money from your IRA to pay off the mortgage.

• Keep a reserve fund—even if you don’t plan to touch retirement savings to pay off the mortgage, be sure to have enough money in your emergency fund to cover six months of living costs; otherwise, you could end up tapping retirement accounts anyway. Also, be mindful you’ll need income in retirement to cover other expenses.

• Weigh return versus risk—if you’re paying 4% on your mortgage and you have nonretirement cash accounts earning less than 1%, retire the mortgage. But, if you think you can earn 6% on your investments and your mortgage costs 4%, keep the mortgage and let your investments grow—assuming you won’t kick yourself if your investment return takes a dive.

• Stay flexible—you could refinance a shorter-term mortgage, saving thousands of dollars in interest. The downside: you would incur closing costs and could also lock yourself into a higher monthly payment, depending on your current interest rate. Consider prepaying your current mortgage each month instead.

You can read the entire article here.

I have always felt that the decision of whether or not a person should pay off their mortgage should be a function of interest rates. The higher the interest rate, the faster it should be paid off. When I can get a mortgage at under 4% and I have no trouble making the payments, it makes little sense to me to worry about paying off my mortgage quickly. Yes, there are benefits other than financial to paying off a mortgage early. Peace of mind is one of them—especially during retirement. I understand that. I guess a person must decide what’s most important to them.

From 94% of Pension Plans Underfunded: Wilshire:

“The $282.3 billion funding shortfall at the beginning of the year expanded to a $342.5 billion deficit,” Russ Walker, vice president, Wilshire Associates, said in a statement. “Defined benefit pension assets for S&P 500 Index companies increased by $113 billion, from $1.11 trillion to $1.22 trillion, while liabilities increased $174 billion, from $1.39 trillion to $1.56 trillion. The median corporate funded ratio is 76.9%, which represents a modest decline from 77.7% last year.”

The article continues:

The defined benefit plans in Wilshire’s study yielded a median 11.8% rate of return for 2012. This performance combines with the 3.6% median plan return for 2011, the 11.9% median plan return for 2010 and the 16% median plan return for 2009 to mark four consecutive years of gains for these plans after the global market dislocation events of 2007 and 2008.

So, we had four decent years and the pension funds are still that much underfunded? Not good.

Don’t count on your pension fund. You’ll likely be disappointed if you do.

Where does it stop?

Obama budget to take aim at wealthy IRAs

From the article:

Under the plan, a taxpayer’s tax-preferred retirement account, like an IRA, could not finance more than $205,000 per year of retirement – or right around $3 million this year.

I’ll look more into this later.