May 3

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The Wild Saga of John and John

We are planning our summer. It is getting incredibly complicated with my daughter going to college. We will spend a week or so in Pittsburgh with my parents at their house. They live out in the country on a hill surrounded by lush greenery. My Dad chose the place because you can see great sunsets from the front porch. A lot of ping-pong is played, and my parents installed their very own shuffleboard court. My Mom is almost unbeatable. The kids love having campfires (mostly the part that involves S'mores).

Also, on a separate week, we rented a huge house that looks like a campground. All twenty-five of the immediate family members stay the week, including nine cousins for my four kids. Everyone lives locally, and there really is no reason to drag all these people somewhere else. So we chose a place east of Bradenton on the Manatee River. It has a dock for their boat (my wife's family fished all the time growing up), and we rented a jet ski. You won't believe this—it has a pickleball court!

Hemingway seems to like my new orchid trellis.


Let’s walk through the thinking process of a newly minted retiree who is doing everything wrong. Then, following his thought process, we'll look at someone attacking the retirement bogeyman with logic and planning.

How much does the following sound like you?

The following conversation occurred between Mr. John Jones, 65, and his brain (also 65) shortly before his retirement.

Hmmmmm ... my last day of work is next week. It looks like I will get my last paycheck on Friday.
Okay, we should bring about $4,000 a month with Jane's and my Social Security. Is that enough? It doesn’t sound like very much.

My property taxes are $5,000 a year, my homeowner’s insurance is $4,000, my car insurance is $2,000, and my electric bill is around $200 a month ….

Wow, we spend a lot of money each month. How much do we average? I guess I really have no idea. How is this going to work? I have $700,000 in my IRA, but I can’t touch that. I might run out of money. I guess I have another $50,000 in a CD and the same money in savings, but that isn’t going to make any difference.

I don’t know how this is going to work.

Wait a minute, I have my IRA invested in the stock market. Is that still appropriate for a guy like me? What if the stock market crashes? That guy on the radio keeps saying that we are "due" for a crash. Maybe I should get a part-time job? I think Home Depot said they were hiring. They pay around $15 an hour. So, if I need an extra $2000 a month, I must work 130 hours.
Wait a minute! 130 hours! That’s a full-time job.

Okay, John, think. Think. I am 65 years old. I am probably going to live at least another 20 years. So, if I divide the $700,000 in savings by 20 years, it comes to $35,000 a year. That is a little more than $7,500 a month. That could work.

But wait, Jane’s Mom is still alive at 95. What if I die at 85 and Jane lives another ten years? I can’t leave her destitute. She has put up with me for forty years already. So maybe I should divide my savings into 35 years just to be safe. That gives me about a little more than $2000 per month. So, I guess if we cut out our yearly vacation and stop going out to eat so much, we can get the budget down to $6,000 a month. We should be ok. Maybe.

But wait! What if one of us gets sick?! What if we need a new roof, air conditioner, or other unexpected expense? The roof is 20 years old.

This is getting serious. How is this going to work?! We need to set aside some money. I guess Jane and I could both work part-time. But our health won’t let us do that indefinitely. Jane will NOT be happy if she needs to work a part-time job.

Wait a minute! I’m not even considering inflation. $6,000 a month may not be enough in ten or twenty years. What are we going to do then?! I need a stiff drink. I feel my chest tightening. Maybe I should turn on the financial news channel to get some ideas...

Actually, John Jones is in much better shape than he realizes.

Now, let’s examine the thoughts again. Below, you will find the same internal dialogue, but this time, I will show you a realistic and healthy way of thinking.

Hmmmmm … my last day of work is next week. It looks like I will get my last paycheck on Friday. Okay, we should bring about $4,000 monthly with Jane's and my Social Security. I had better put a budget together to get a real handle on my monthly cash flow needs.

(John spends a couple of hours on a detailed and accurate budget.)

It looks like we spent $68,000 over the past year, which comes out to $5,600 a month. I’ll round it up to $6,000 monthly to give myself room. If I need $6,000 a month, how will this work? Where is the other $2,000 a month coming from?

If I divide my $700,000 in savings by 20 years, I can pay myself around $35,000 annually, which gives me about $3000/mo. That is cutting it close, and what if we live longer than that 20 years?
Wait a minute. My retirement savings can be invested so that my nest egg continues to work for me even though I am not working.

I guess it doesn’t make sense to just look at the money and divide it by how many years I expect to live. I’m leaving out the most important variable: My money will continue to grow once I am retired. I know that while it is impossible to predict the financial markets in the short term, we have a very good idea of how a diversified portfolio will perform between now and the day I die.

Okay. From the $700,000, I can start safely withdrawing $3,000 a month made up of the money that the money is making. By only taking the profits, it doesn’t matter how long we live; we will always have the original amount.

That puts us right at $7,000 a month coming in. I can still go to work part-time at the golf course. That sounds like fun, and it would get me out of the house. That income can be our "vacation fund." If we have some unexpected major expenses like a new roof or air conditioner, I have some extra money in the bank to cover those costs.

Sure, nothing is guaranteed in this life. I guess there is always a small chance that we will experience something as bad as the Great Depression in the next few years. But what a terrible way to view my life! I don’t want to spend all my time worrying about something with such a small chance of happening.

I should also keep an eye on inflation. Luckily, Social Security increases lock-step with the rate of inflation. If inflation goes up by 3 percent for the year, my Social Security check will increase by the same amount. Not to mention that I’m sure Jane and I will be spending a lot less money in our eighties than in our sixties. I read somewhere that it could be as much as 40% less.

Whew. I feel better. I need to figure out what I want to do in retirement. I will take my monthly money from my investment accounts, spend my Social Security, and trust the plan. I will turn off the financial news channel, stop my subscription to Money Magazine, and tune out the inflammatory, fear-based rhetoric around me. It’s time for Jane and I to enjoy the fruits of our labor. I refuse to live scared and die rich!

<End Transcript>

You see? It takes a little re-education, but very few retirees end up living in the Walmart parking lot. It's remarkable. When I talk with clients nearing the end of their lives, they all say the same thing. "I don’t know how, but everything turned out just fine."

Be Blessed,

Dave

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