Friday, June 15, 2012
Three Ways to Control Your Retirement-Save, Invest and Live Smartly
In 2002, I retired from the US Food and Drug Administration. At that time besides my Social Security (SS ) and Civil Service(CS) pensions( Federal service), I was also withdrawing from my private savings. My SS and CS pensions could cover only about 50% of our monthly expenses.
To maintain our style of living to the standards before my retirement, I had to withdraw a regular monthly amount from my private savings, and from my mutual and stock investments.(IRA and mutual funds).
My private savings lasted only for 5 years. Luckily, my mutual funds was not seriously affected by the stock market downfall in the mid 1990's, because my investment councilor converted most of my stocks into a cash account. My cash account was earning a conservative but stable interest.
Today, based on the current business environment, my financial counselor and I calculated that my private investment could still last me another 10 years assuming that it will be earning at least 5% annual interest. As a safety factor, if I am still alive in the next 10 years, I have a private life insurance I could also cash in. If that is not enough, I could always apply for a reverse mortgage of my house which is almost paid( mortgage-free). I hope I do not have to do it, but if I live another 20 years, I may have to do it.
The following article from Fortune Magazine attracted my attention. It is titled three ways to control your retirement.
Save smarter: In today's low-yield environment, most of us must salt away more. Easy to say, hard to do. If your employer hasn't adopted the program, urge it to do so; and if it won't, then follow the program on your own. In choosing your saving rate, face the new reality of inflation. Experts debate whether years of monetary loosening in the U.S. and other major economies will push up prices significantly, but ignoring the risk would be foolish. Suppose you'd like your portfolio to pay you $100,000 a year (in constant dollars) for 30 years. With an after-tax return of 6% and inflation at 2%, a nest egg of $1.82 million will do the job. But if inflation turns out to be just one point higher than you assumed, at 3%, you'll need another quarter million dollars.
Invest smarter Back when we all thought we'd get 11% long-term annual returns, we could maybe afford to ignore fees and expenses. No more. It's time to get tough on the "helpers," Buffett's sarcastic term for the intermediaries who take bits and pieces of our investment returns. As he and Vanguard founder John Bogle constantly preach: Over decades, tenths of a point matter. Some helpers, such as the best fee-only advisers, are emphatically worth their cost. But in today's environment, investors must know exactly how much they're paying and for what. Investing smarter may also mean cleverly using your natural biases in your favor. Behavioral economists have found that we think of our spending in buckets -- one for dining out, say, another for travel, another for car expenses. The tendency isn't always rational, but Carnegie Mellon economist George Loewenstein has proposed that retirees harness it by setting up separate "pay the rent" and "spoil the grand kids" accounts. The rent account could be invested conservatively; the grand kids account could be invested aggressively for growth.
Live smarter It's a hard reality that many people will be living a bit less large than they had hoped in retirement, and maybe before. Don't fight that thought. Embrace it. We're living through the first era in history when significant numbers of people are being made unhappy by having too much rather than too little. The term is "affluenza," now the subject of books and academic research. Why are you planning to retire at all? It isn't to maximize income. It's to be happy. Millions of people are finding that having less makes them happier. Spending less and saving more is kind of like sushi: You have to be made to try it, but then you may find you love it. As conditions change, reaching our goals demands a new course. With the right strategy you can still find your way to a great retirement. It could even be a happier one than you'd expected.