Stocks in Roth and Bonds in 401k To Minimize Taxes

Most people have a mix of stocks and bonds in their retirement accounts.      Stocks are expected to grow faster than bonds in the long run.    If you put your stock investments in a tax free account and your bonds in a pre-tax account you'll come out a bit ahead in retirement. 

Lets illustrate this with an example.   Pretend you've got $100,000 split evenly between Roth and 401k accounts with $50,000 in each.   Now say you've got a 50 stock / 50 bonds allocation.    That would give you $25,000 in stocks and bonds in each account.   Now say your stocks grow 10% over 20 years and the bonds grow 5%.    Assume you've got a 33% tax rate on your 401k withdrawals.

	Roth 70/30	410k 70/30
stock	$25,000	$25,000
bond	$25,000	$25,000
10% for 20yr	$168,187	$168,187
5% for 20y	$66,332	$66,332
total	$234,520	$234,520
tax	$0	$77,392
after tax	$234,520	$157,128
TOTAL	$391,648

Now instead put all the stocks in the Roth and all the bonds in the 401k and you get :

	Roth 70/30	410k 70/30
stock	$50,000	$0
bond	$0	$50,000
10% for 20yr	$336,375	$0
5% for 20y	$0	$132,665
total	$336,375	$132,665
tax	$0	$43,779
after tax	$336,375	$88,885
TOTAL	$425,260

In the end you've got about 8.5% more money simply due to allocating your investments per the tax advantages.

Note:   I'm not saying that you should *only* have stocks in the Roth and bonds in the 401k.    In the above example its set up that way just to illustrate.  If you had a 70/30 split allocation then you'd still need some bonds in your Roth.    Further, reallocating periodically to keep a specific % asset allocation isn't possible if all your stocks are in one and all the bonds are in the other.

Admittedly this is pretty contrived example, but I did that to illustrate the point.    Its more likely you'd have money invested periodically annually over a long period rather than starting with a lump sum and its also likely your effective tax will be lower. 

I didn't come up with this idea, but I can't recall where I saw it.

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401k's Usually Have High Fees But Most Peoples 401k Does Not

You may have heard that 401k's often have high fees.   They do.   Most 401k plans are charging high fees just for the 401k itself.    Thats bad and erodes peoples retirement savings.    But while most 401k's may have high fees, that doesn't mean that most people have bad 401ks at their jobs.    Let me explain..

When you look at all the 401k's out there you'll be looking at lots of 401ks offered by small businesses.   Small business plans have 401k's with a few employees and relatively low balances.   Those plans tend to have higher fees as a percent of assets.    This is due generally to overhead costs and scale.    Large companies have 401k's with many 100's of employees and millions of dollars of assets.   When the 401k administrator figures the fees it can be a much lower percent of assets due to volume.    Large 401k market is also much more competitive so you get lower prices that way.

Generally small companies have high 401k fees and large companies have low 401k fees.     But since there are far more small companies then there are far more 401k's with high fees.     On the other hand most people work for the larger businesses and then they have 401ks with lower fees.

Combine that all and you get :

The average 401k has high fees.   - AND -  The average persons 401k does not have high fees.


The GAO report  401(K) PLANS Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees (from Apr. 2012) has this chart showing average fees based on plan size :

So while the average 401k had a fee of 1.13% the large plans were only at 0.15%.   Plans with 50-400 people were paying 0.24%.    And the majority of people work at companies with > 100 employees.

Looking at BLS data on employment by firm size  (figures dated 2009) we can see that ~60% of people work at companies of 100 or more.     38% of people are employed by companies over 1000 employees.

Whats more the small 401k's offered at small companies with under 50 people are even worse than the average and they charged 1.33%.


Bottom line :   As far as fees, the 401k's at small businesses are usually bad but big  companies offer decent 401ks.

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What is the Normal Retirement Age For Social Security?

I think a lot of people still associate 65 years as being the normal (full) retirement age for Social Security.   But that hasn't been the case for people retiring for many years.  

For most people now the full retirement age is 67 years. 

The statement you get from Social Security will list your full retirement age, but if you don't know it you can look below.      If you are between 56 and 73 years old then it 66 plus a number of months depending on your exact age.

Below is a table that I directly copy/pasted right off the Social Security website:

Year of Birth *	Full Retirement Age
1937 or earlier	65
1938	65 and 2 months
1939	65 and 4 months
1940	65 and 6 months
1941	65 and 8 months
1942	65 and 10 months
1943--1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 and later	67

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How To Die Penniless

Lets say theoretically that you're single with no kids.   Does it make sense to die with a pile of money in the bank or wouldn't you rather enjoy spending that money while you're still alive?     I think optimally you should try to die broke after spending every last dime.   But thats easier said than done. If you plan wrong and run out of money you'll spend your retirement broke.   Thats no fun.     If you plan wrong and die with money then you'd miss the enjoyment of having spent it when you're alive.  So how do you die penniless?

You can accomplish the goal mostly by buying an annuity.    On the day you retire, you could take 100% of your assets and then use that money to buy a single life fixed income annuity with a cost of living adjustment.   You're basically broke, but you've got a large check coming every month which you can squander on a month by month basis until you pass.

It would be easier to rent a house instead of owning.    Its easier to rent in general too.   This plan will maximize your monthly spend so you can rent whatever you want.    Renting will also give you a lot of flexibility to live wherever you want.    Course the downside with renting is that its not permanent and your landlord can stop renting to you unexpectedly (with proper notice).    And if you're elderly then moving with little notice is likely to be a big pain.   For that reason owning a house may be preferred.

If you own a house you could mortgage it with a reverse mortgage.   That will allow you to tap the equity in the house and convert it into fixed income and then leave virtually zero equity when you pass.   This however may not work out if you pass early.   You could have equity left in a home even with a reverse mortgage if you pass shortly after taking out the loan.    Instead you could do a cash out refinance on the property for the highest LTV you can and then add a HELOC on top of that.   You could use HELOC to drain as much equity as possible from the property on an ongoing basis.   You likely can't get 100% out but after costs of sale, and settling other debts you could get close.

You don't want to have $0 in the bank since you'll need some money to operate your life.   But you can negate that equity with some ongoing debt.   You can use credit cards to float some debt.   If you use a card to pay all your bills you'll have up to a full months expenses floating on credit at any given time.

If you want to have $5-10k in the bank at any given time to pay bills and live your life, then you might get one of those 0% promo deals for $10k and then float that $10k all the time.   Shortly before the promo time period is up, you could transfer that $10k debt to another 0% promo deal.

You can prepay your funeral costs.

You can lease a car instead of owning.   Leasing isn't a great financial deal usually, but in this case it will let you drive a nice car for cheap and minimize equity if when you die.

This isn't Brewsters Millions.   I'm not necessarily advocating you squander all your money or spend it needlessly just to spend it.     Give away unneeded money while you're alive alive.   Most charities would like to have your money today instead of tomorrow.   You'll get the satisfaction of being around to see your money doing good.   Plus you can even get a tax deduction for giving it now too.     You can also do a charitable gift annuity which will both help your favorite charity and provide a fixed income stream.

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Millenials Don't Save For Retirement, Which is Nothing New Really, Except They Do save...

Have you heard that Millenials don't save enough?     OK then did you later hear that they in fact do save?   Did you further hear that they save more than anyone else?   Kids these days...

I recall seeing this topic in vaguely remembered news story headlines or reported via hearsay on the internet.   Its declared : Millenials don't save!       Then its rebutted :  Yes they do!

I did a google search and found some articles :

Younger Generation Faces a Savings Deficit  (Nov. 2014)
This one talks about the millenials having a -2% savings rate.  

‘Irresponsible’ Millennials Saving More Than Almost Every Other Group (Feb 2015)
Reported "least 56 percent of millennials reported saving at least 5 percent of their income last year, compared to 52 percent of Americans overall"

Why Millennials Are Saving at a Younger Age Than Any Other Generation (Nov 2015)
which reported that "millennials began saving at a median age of 22, Gen X at 27, and boomers at 35"

More than half of millennials have less than $1,000 (Dec 2015)
Sounds bad but then they point out that most age groups are in the same boat mostly.

Millennials Are Outpacing Everyone in Retirement Savings (Jan 2016)
Points out that the kids increased their savings rates "The typical 20-something is now stashing away 7.5% of income vs. just 5.8% in 2013." while other generations didn't.

These all muddy the picture by talking about different things.   How much do they save.  When do they start saving?   What is their "savings rate"?    etc.

Lets look at some hard data from the ERBI.
Retirement Plan Participation: Survey of Income and Program Participation (SIPP) Data, 2012,
Take a look at Figure 3 from that document.

I'll summarize.   From 1988 to 2012 :

21-30 year olds saved 33-39%
31-40 year olds saved 51-57%
41-64 year olds saved ~60%

Participation in 401k plans by age group has been fairly consistent for ~25 years.   Fewer young people save and more old people save.  

Now look at figure 4 on the same report.  It breaks down savings rates by income level.  

75-80% of people who make over $50k saved.
14-21% of people making $5-10k saved.

Now lets look at the report 401(k) Plan Participants: Characteristics, Contributions, and Account Activity

They say the most frequently cited reason for NOT participating in a retirement plan was :
"No extra money to save"


Ok so lets add this all up...

Young people save at the lowest rate.  
This really hasn't changed much at all in the past 25 years.  
Savings rates are directly and clearly related to income levels.
The biggest reason people don't save is lack of money to save.
Young people make less money than older people (on average).

Nothing to see here folks.

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Could I Retire Today? - Feb. 2016 Edition

In August of 2014 I asked the question Could I Retire Today?    The answer was yes, but it would require us to move to my hometown where my dad still lives which has a cheaper cost of living and lower housing costs and rental returns.

A quick summary of that possible retirement scenario from 1.5 years ago was :
We would keep the rentals we jointly own with my father and try and beef up earnings on them by me helping my dad to renovate.
We'd sell all our other properties we own in our current city and move to my dad's city.
This would net us about 300k to spend on a house and some rentals.
I figured total income would end up about $33-42k including $12k from retirement accounts (using 72t early withdrawal) and a range of $21-30 from rentals.
I figured basic living expenses of about 25k which would give a good surplus.

That was the situation in 2014.

I took another look now and after some rough figuring, I think I could retire right now and stay in our current city.    To do it we would have to downgrade our current house to something cheaper.  We would also sell the out of town rentals and then pay off our mortgages.   In the end we'd end up with three paid off houses here.   That would include two houses we already own as rentals.    The two rentals would give us about $20k of income.    With the $12k from our retirement accounts we'd have about $32k annual income.   With the same $25k budget for basic expenses that would give us $7k a year for entertainment and margin.

I could modify the plan by keeping the rentals in my dads home town and using their income to continue to pay the mortgage on one of our current rentals.   That would be about a wash because the profit on those properties just about equals the mortgage interest and principal payments.   If I did that we'd avoid tax bills on those properties and I'd have the opportunity to spend some time in my dads town working on those properties to renovate them and improve their income.   And even if we didn't have any plan to keep those properties long term we could hang on to them until its more opportune to sell them.  

The only real change I'd have to do to switch to this kind of early retirement is to downgrade our current house into a cheaper home and then start drawing down retirement.

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Percent of Income You Should Save If You Start Saving For Retirement At Various Ages

The general rule of thumb I've seen quoted for how much you should save for retirement is usually around 10% or 15% depending on who you ask.   This kind of rule of thumb is based on some assumptions and one of those assumptions is how long you save.    I would expect that the number of years its assumed you work and save into retirement is probably around 30-40 years based on someone working most all of their adult life.   In other words the rule of thumb takes it for granted that you start working at some age like 25 years old and you save the 10-15% your entire working life until you retire around 65.    So it assumes you work 40 years and save 10-15% that whole time and then benefit from the growth of your retirement account over that same 40 year period.   Now this is fine for figuring general retirement plans.    But hey, we all know that a lot of people don't start saving the first day they start working.   Some people end up changing careers, etc and may have to play catch up with retirement savings at a later date.

If you start saving at varying ages then how much of your income should you save towards retirement?

He is the short answer :

age	target %
22	10%
25	12%
30	15%
35	19%
40	24%
45	29%
50	37%
55	46%

So simply put if you start saving from $0 on the age in the left column then you ought to try and save the % of your income in the right column.    A 22 year old could target retirement savings of 10% but a 50 year old ought to save 37%.

I figured the table above based on the following assumptions.   a) your income will increase 3% a year, b) your investments will grow at 8% annually, c) you'll use the 4% withdrawal rate at retirement, d) you'll receive social security payments enough to replace 20% of your working income, e) you won't need to replace ~7% of your working income due to lack of social security/medicare taxes during retirement, f) you also wont' need to replace the % of income towards retirement savings

So working through an example.   Say you start your retirement savings at age 35.   If you save 19% of your income then that will grow over 30 years to be enough to replace about 53% of your working income.   Your working income less 7% for SS/medicare, less the 19% savings gives you about 74% of your income to live off during the working years.  If your social security replaces 20% of your working income then replacing 53% of your working income with your retirement savings will give you the same money post retirement that you lived off during working years.

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Home Storage Gold IRAs Are a Bad Idea

I just saw a google ad for a "home storage gold IRA".    It had a picture of a older dude grinning behind a pile of gold coins and a home safe.   My reaction was to roll my eyes and think : "oh geez".   Clearly this is a borderline scammy investment to exploit peoples fears that the world is going to crumble or corporate thieves / socialists are  going to make the stock market evaporate.   So the only solution is to have your money in good old fashioned gold.   And if that isn't crazy enough for you then why not put your IRA in your own safe too!

I really don't have to investigate this to conclude that the fees are going to be ridiculous.     Its a given.   Fees for self directed IRAs are steep and this is adding another layer of cost on top of that.   Not to mention the high costs of buying and trading in physical gold.

Worse the scheme may not even be legal as far as the government and IRS are concerned.
The Law360 article : Are 'Home Storage' Precious Metal IRAs Legit? discusses the topic and they seem to conclude that its probably not appropriate management of an IRA.    IRA funds are supposed to be managed by a trustee and putting the money in your own safe is not really going to fly.   I imagine that the self directed IRAs used for real estate investments are probably border line as far as the rules go and piles of gold in your house is not going to fly.


The way the companies pitching the deal structure it you generally have to set up an LLC to hold the investment.   Now thats not really legit if you setup the LLC then put the money in your own home.  Plus that system adds to the costs.

But thats not the only source speaking against these things.     An article from Globalnewsire :  Home Storage IRAs: Risky New Trend May Leave Retirees Liable  quotes Trevor Gerszt, investment specialist and CEO of Goldco Precious Metal saying : 
""I've cautioned people in the past about so-called 'home storage IRAs,'" he says. "Unscrupulous providers tell consumers the law allows them to store gold and silver held in their IRAs at home, when it's clear the IRS codes forbid that."   Now he may be biased since from what I gather Goldco Precious Metal helps people do self storage IRAs using a bank as the storage location which is competing with home storage.  But still.


I don't think I've hidden my opinion about gold as an investment.  Gold is not a good investment.  
But then hey, if you'd ignored me and bought gold when I called the peak in 2009 
you'd have seen your money double and then plummet and you'd still be up ~20%.

I talked about high premiums on gold coins and if you're not careful you can spend a lot more than what gold is worth.    You can do better if you shop around but even then generally you pay ~2-5% over spot prices.   Then you'd likely pay similar fee when you sell.   So between them you're looking at say 5-10% in transaction fees buying & selling.     You're better off just buying a gold ETF to avoid those steep transaction costs.Buying and selling physical gold generally has relatively high fees each way.


Theres a few good reasons to avoid home storage gold IRAs:

High transaction costs of buying/selling physical gold.

Self directed IRAs have hefty fees.

Using an LLC will generally add the cost of licensing for the LLC, and that can be several hundred dollars a year in some states.

Home storage of gold held by an IRA is probably not even legal under IRA rules.

Bottom Line:  Don't do it.  Its a bad idea and probably not even legal to boot.    If you really must insist on investing in gold then just buy an ETF.

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Wait Till You're 70 To Take Social Security

Lets say you're a single 65 years old right now and you make $60,000 a year.  If you retire at age 66 then your social security benefit would be about $1530.   If you wait until you're 70 to claim social security then you would get $2159 a month.    Now clearly you get a lot more money if you delay till you're 70.    But most people don't want to wait and want to start getting their money as soon as possible and $1530 is quite a bit of money.    

Even with a very simple comparison waiting to age 70 nets you more money.    If you're 66 years old you're likely to live another 17-19 years.    Lets just say 18 years for simplicity.   So claiming at age 66 and living 18 years would get you about $330,000 total without counting for cost of living adjustments (COLA).    Claiming at 70 and living 14 years after that would net you $362,000.      This is roughly 10% more total from delaying benefits till age 70 versus taking them at normal retirement age of 66.

Waiting an extra 4 years give or take to claim your social security may be easier said than done.   Most people want to retire earlier than 70 and want an income to support themselves.  If you're in this situation then drawing down your IRA funds for a few years till you hit 70 can make sense.   There are a couple articles discussing that strategy from Kiplingers and USNews.

If you're married then the equation gets a lot more complicated.    Choosing when to take social security will depend on the benefits for each spouse and their ages. 

If you're in poor health or have a history of low life expectancy in your family then taking social security earlier can make good sense.   That may seem morbid but it is what it is.

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Will Life Expectancy be 90 Years By The Time I Retire?

When my grandpa was born the average life expectancy was about 50.   But he lived into his 90's and when he passed the average person lived to be over 70.   One might think then that if someone born in the 1990's when average lives are over 70 years then they might end up living to a point when the average life expectancy is in the 90's.   Follow me?   But is this really the case?   Can we expect life expectancy to shoot up another 10 or 20 years in our lifetimes?

Lets take a look how life expectancy has changed over time.    I'm going to look at just white males to simplify it but generally women and minorities would see roughly similar patters with bit different numbers.    The source for my information is the Infoplease website and they seem to be just republishing government data.

So here's the change in life expectancy over the decades for birth, adult and at age 60 :

Now I'm showing the different age groups to point out how they differ.    Life expectancy at birth (red) went up a lot more but a lot of that is reflecting how much fewer infants and children die from diseases now compared to the early 20th century.      Its not as if the averages shot up because everyone used to die in their 50's but now live to 70, in reality for the most part the averages went up because many more people lived into adult years.     For the people who make it to age 60 (green) the average life span has not shot up much. 

Also, most of the gains in life expectancy were from 1900 to 1950.    In those 5 decades the average life span went up over 18 years.     However in the next 6 decades it has slowed down some and only grew about 10 years.     In the most recent 2 decades its gone up less than 4 years total.

How does the current trend project over the next few decades?    I plotted the most recent figures from 1990 onward and then had Excel run trend lines out to 2060.   

Here's how the projections look :

Roughly speaking it looks like at the current rate that life expectancy in about 50 years may increase about 10 years from birth, around 9 years more for age 20 and about 7 years for age 60.


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My Retirement Account Asset Mix - Jan. 2015

My personal retirement accounts are a little bit of a jumble.   I've got a Roth IRA, a 401k at my employer and another retirement account that my employer manages.   The funds are split about 2/3 in the employer managed account and 1/6 in each of the Roth and 401k.

I've got a mix of assets in the different accounts. The employer ran fund has a mix of stocks, foreign, bonds and other investments that the retirement program manages.  Its kind of like an all in one fund.    The money is in that fund by default though I should really start to move it to other funds.  My 401k is generally split between a general stock index fund and a broad bond fund about 50/50.   The Roth is mostly index funds with a dividend emphasis and a handful of individual stocks left over from my stock picking days.

Here is the current mix:

Its not looking too bad really.   The individual stocks are just whatever stuff left in my Roth IRA from when I was picking individual stocks more.   As its just ~1% of my total I"m not too concerned with it.  I've got some BPT I should liquidate next time oil goes up in value and some HPT that seems to be doing fair enough so I havent' got a plan to sell that.

The "other" category is whatever assets my employers retirement plan has that don't fall into the other categories.   Seems a mix of stuff like hedge funds and commodities.   I'd generally prefer to get out of that stuff as I don't know much about what it is and I'd prefer simple stock & bond mix.

I'd probably like to get the whole mix to something like more like 40% domestic stocks, 40% bonds and 20% foreign funds.   Or maybe 50% total stock funds and 50% bonds.

Other than my retirement accounts we have other assets in :  my wifes retirement accounts that she manages, rental real estate and cash.   The mix is roughly 40% rentals, 30% retirement, 20% house and 10% cash.    We're pretty heavily invested in real estate as you can see.

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Most Government Employees are Covered by Social Security

Government employees aren't necessarily covered in Social Security so they may or may not be taxed for it and eligible for benefits.  

The document titled Social Security: Mandatory Coverage of New State and Local Government Employees  has specifics on the percentage of government employees people who are in the program.    Turns out that the large majority of them are in SS.

Only 27.5% of state and local government employees are not in Social Security.

It varies state to state.   For each state the % of employees covered by SS is as follows.   Sorted on the left by state and then on the left by the % of employees:

AK	65.6%		OH	2.5%
AL	92.3%		MA	4.1%
AR	90.2%		NV	17.6%
AZ	95.3%		LA	27.9%
CA	43.6%		CO	29.1%
CO	29.1%		CA	43.6%
CT	71.8%		TX	47.9%
DE	94.0%		IL	54.6%
FL	88.4%		ME	54.7%
GA	72.3%		AK	65.6%
HI	69.4%		HI	69.4%
IA	89.2%		CT	71.8%
ID	93.4%		GA	72.3%
IL	54.6%		MO	72.7%
IN	90.1%		KY	73.8%
KS	92.1%		RI	83.3%
KY	73.8%		ND	87.1%
LA	27.9%		WA	87.7%
MA	4.1%		MI	87.9%
MD	90.5%		WI	88.0%
ME	54.7%		FL	88.4%
MI	87.9%		NH	88.7%
MN	92.4%		IA	89.2%
MO	72.7%		MT	89.5%
MS	92.1%		IN	90.1%
MT	89.5%		AR	90.2%
NC	91.7%		TN	90.4%
ND	87.1%		MD	90.5%
NE	94.2%		NM	90.5%
NH	88.7%		WY	90.5%
NJ	92.0%		UT	90.8%
NM	90.5%		OK	91.2%
NV	17.6%		NC	91.7%
NY	96.7%		WV	91.7%
OH	2.5%		OR	91.8%
OK	91.2%		NJ	92.0%
OR	91.8%		KS	92.1%
PA	92.6%		MS	92.1%
RI	83.3%		AL	92.3%
SC	92.8%		MN	92.4%
SD	92.8%		PA	92.6%
TN	90.4%		SC	92.8%
TX	47.9%		SD	92.8%
UT	90.8%		ID	93.4%
VI	94.2%		DE	94.0%
VT	97.9%		NE	94.2%
WA	87.7%		VI	94.2%
WI	88.0%		AZ	95.3%
WV	91.7%		NY	96.7%
WY	90.5%		VT	97.9%

Half of the states have over 90% of employees in SS.     Only 7 states have less than 50%.



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Your Tax Rate is Likely to Be Lower After You Retire

Most people have lower incomes when they're retired compared to when they're working.  With lower incomes comes lower tax rates.  So it ought to follow that your tax rate is likely to be lower when you're retired.   Thats often the case.  

A married couple has a combined income of $60,000 from wages of $40,000 and $20,000 currently.   Their expected social security checks will be $1200 and $800 monthly for total of $2000 or $24,000 a year.   They've done a good job saving 10% of their pay and have amassed a total retirement nestegg in IRAs and 401ks of $600,000.    They plan to withdraw 4% of that annually for $24,000 of income.   This gives them a combined retirement income of $48,000 a year between their SS checks and retirement accounts.   That replaces 80% of their pre-retirement income.    They paid their house off a few years ago so their basic living expenses aren't too high now.

While the couple is working they would have a taxable income of about $33,700.   Thats after taking out 10% they saved in IRA/401k's and then the standard deduction and exemptions.    That $33,700 income puts them in the 15% tax bracket with $4,148 due to the IRS.

After retirement they would have lower household income.   Half of their income is from SS and little of it will be taxed.   Given their total income of $48,000 then only $2,000 of their SS check counts towards taxable income.   They'd get a higher standard deduction of $14,600 due to being 65 years or older.   Their final taxable income is just $3,500 and they'd be in the 10% bracket.    They'd only owe the IRS $350.

Of course this is just one random example.   But in this relatively typical looking couple their tax bracket went down from 15% to 10%.   Most people will see better tax situation in retirement due to social security tax treatment and the higher standard deduction for people over age 65.  

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Hardly Anyone Moves Out of State After They Retire

If I was to take a guess I'd assume probably something like 5-20% of people move to another state after they retire.  I mean doesn't half the state of New York move to Florida on their 65th birthday?    Well no.

As it turns out only about 2% of retirees even move out of state.

At least thats what I found in this article : Retirees move, but not very far

They say :

"In 2010, just 1.6 percent of retirees between age 55 and 65 moved across state lines, according to an analysis of U.S. Census Bureau data by Richard Johnson, director of retirement policy research at The Urban Institute."

If I think about all the people I know who have retired, I can only think of one couple that moved across state lines.   Everyone else I know has stayed put.

My family all lives in the state I grew up in and I'd consider moving.  However if I end up living in my current state for very long I will probably have developed enough roots here that I'd probably stay put.

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What Would it Take For Me to Retire Without Moving and/or Cutting Spending?

The other day I figured if I could retire  or not and how much income we'd have.   That plan depended on moving to a cheaper city and cutting our spending level a fair amount.  But what if we wanted to stay in our current house and didn't cut our spending?  How far away are we from being able to hit that target?

To retire yet not change our current standard of living would require a higher income target.  We'd have to pay off our house and have about $67,000 of income to cover our current spending levels.   That would cover health insurance and out of pocket costs of $10,000 since with that income level we wouldn't get a subsidy.  Our property tax and other expenses would be a lot higher if we stay where we are as well.   Plus right now we do spend a fair amount and this wouldn't include any cut backs in spending or additional frugality.  

Our current retirement funds would get us $12,000 towards the goal.   The rentals we own out of state generate about $6000 of profit.   That leaves us $49,000 short of the goal.

Our current rental properties don't have a great return on capital.   Profit after expenses is only about 4% of the total capital.     If we paid off our mortgages and bought more rentals in this area with similar return it would take roughly $1.1 M total more than what we've got now to get to the point that we could stay where we are and maintain our current spending level as well as pay for health insurance.

Don't move or cut spending = $1.1M short of target

Another option would be to move back to my home city yet keep our current level of spending.   This would be cheaper since housing, taxes and overall cost of living are cheaper there plus you can get better returns on rentals.     That route would probably cost around $670k more than what we've got now.   That would cover the cost of more expensive and nicer house as well as more rental properties to provide higher income level.

Move but don't cut spending = $670k short

One last way to go would be to stay where we are yet cut back on spending.   This option would require an income of about $43k and a bit cheaper paid off house.   TO hit that level I think we'd need about $300k more than we've got now.   The difference with this option is that I'd get a lower return on our rental properties in our current city since cost of real estate is higher here.

Cut spending but stay in current city= $300k short


These figures are all very rough estimates.

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Could I Retire Today?

This blog is about my eventual goal of retiring early at the age of 50.  I'm now 43 years old.  Every year I get closer and closer to being able to retire.  I figured it would be a good exercise to check in and do a rough estimate of my ability to retire right now.      My original stated goal for retirement was $50,000 income and a paid off house.   How close am I to maybe hitting that goal?

First off... when I say 'retire', I mean that I would quit my day job and then manage some rental properties.   I'd still be working on those rentals but I'd otherwise be retired in the true sense of not working for an employer.   Maybe you could call it semi-retired if you want.

We own rental properties and our own primary home.   I figure if we retired, then we'd sell some and keep others.   Some of the rentals are in my home city where I grew up and my family all still lives.   It would be financially better to move back to my home city since its cheaper to live there and the rental investment returns are better there too.   If we stayed here in my current town housing would cost more, taxes are higher and rentals would return less.    A very quick estimate in my head tells me we probably couldn't really afford to live in our current city with our current assets so I'm really only looking at moving to the cheaper home town.    Note that we're not planning to move and this really isn't a preferred option but this is just a 'what if' exercise to see how or if we might be able to retire now with our current asset level.

We jointly own two properties with my dad in my home city.  We would keep those properties. 
We could sell our properties here and generate around $300,000 total.   We could use that money along with most of our cash on hand to buy a home to live in and more rental investment properties.   Using 1031 exchanges we could also avoid paying taxes on the sale of our current property.  We've also got a lot of assets in retirement accounts right now and we could tap that using a 72t distribution.

New rental purchases : 

We could buy a couple single family homes and rent them out and net around $16,000 a year after expenses roughly.   We could probably get closer to $18,000 or $20,000 profit off of multi-units.    Thats pretty rough estimating on my part based on quick search of whats for sale now on Realtor, and skimming over current rent rates on Craigslist.   I'd also assume ~40% expense rate on multi-units and about 25% on single family.   Generally I'd say something in the $15,000 to $20,000 is a reasonable guess with margin built in.

Existing rentals in home town:

The rentals we currently own generate about $6000 a year in profit right now.  But if I were living there I could help my dad and we could renovate some units and increase that a lot actually.    I think it is realistic to expect that we could increase the profit from those properties up to $9,000 a year or maybe $10,000.

Retirement accounts :  $300,000

This amount would generate approximately $1000 a month in income using a 72t distribution.   I figured this with the 72t distribution calculator and a current 'reasonable interest rate' figure of 2.25% based on recent AFR  
  
In summary the retirement plan would be :
1. start taking ~3.7% distributions from retirement accounts via 72t
2. sell properties in our current city
3. buy a home to live in free and clear in my home town
4. buy a couple more SFH to use as rentals
5. keep rentals in home town

This would net us annual income of about :

Retirement = $12,000
Current rentals = $6000 to $10,000
New Rentals = $15,000 to $20,000

Total estimated income = $33,000 to $42,000

We would then own a home free and clear and have around $33,000 to $42,000 of income.      I have high confidence I could get it up to $36,000.    This is short of my original old retirement goal of a house and $50k.

Expenses:

To know if we can retire on that kind of income I have to have an idea of a rough budget.   I'm going to run down the various expense categories we'd have and then try to ballpark some estimates on what we'd spend.    The numbers I'm using here are very rough and this is not meant to be too precise.

Housing While we'd own the home outright we would of course have to pay property taxes, insurance and budget some money for repairs and maintenance.   I'd put this number around $3,500 a year.  Of course thats a rough guess and I might want to allocate more for future repairs to be safer.

Our taxes would be very low if not zero.   Given a relatively low income and deductions for the rentals our income tax rate would be close to zero if not zero.   We would not have to pay for SS/Medicare taxes since that isn't required on rental income.  I'm going to figure taxes as negligible.   Note this is a pretty big assumption on my part and of course it would be subject to change if tax rates went up in the future.    If I were doing this for real I'd probably build in some margin in the budget somewhere to account for potential future tax changes.

Healthcare would be a potentially high cost but with the new ACA law (Obamacare) we'd be capped at around 10% of our income in expenses so I could just assume spending roughly  10% of our income on health insurance.   I'd also want to allocate some money towards out of pocket costs since the insurance plans generally have high deductibles.   I could be conservative and figure 10% of income plus $4000 out of pocket annually.   Though I don't think we'd average $4k a year out of pocket.   I'm going to guess a total of $8,000 year assuming we get ACA subsidies.  

Utilities would cost us a fair amount for electricity, natural gas, water, garbage.   I'd estimate those to add up to something in the ballpark of $4000.   Could be more or less.

Food would be a large expense for us I'd guess.   We have always tended to spend more on food. I'm not analyzing this one much but I think a reasonable guess on a food budget would be around $5,000 a year.

Transportation.   We'd need car insurance, money for gasoline, repairs and maintenance.  Plus I'd want to set aside some more money to buy replacement cars down the road.    All in I think we'd be spending around $4,000 on cars per year assuming about half of that would go to a fund to buy new replacement cars.   This is also based on owning two cars so if we wanted we could easily cut this figure in half by owning just one car.   We could also cut the spending down by having one nicer car and one backup beater.   I could do that for closer to $3,000.

Other items I'm not listing.   There are other spending categories that I'm not listing as expenses as I figure them mostly in the discretionary / luxury pile.   Things like vacations, cable television, gifts, etc.   

Very rough estimate of basic expenses :

Home : $3500
Taxes : $0
Healthcare : $8000
Utilities : $4000
Food $5,000
Cars : $4000

The sum of these expenses are just shy of $25,000 at $24,500.   

Based on the income range of $33,000 to $42,000 we'd be left with somewhere between $700 and $1,450 a month to spend on other things like clothing and entertainment and travel.    We could also give us more room in the budget by being more frugal on the expenses I estimated above.    With the high confidence income level of $36,000 and expenses of $25,000 that would give us over $900 a month of margin or to spend on luxuries.

Comparing the expenses I'm figuring now versus what I budgeted for retirement 6 years ago there are some big differences.   Back then I had nearly $10,000 a year for food between groceries and eating out.   I also had nearly $10,000 for health insurance.   Between those two categories I've dropped my spending estimates by nearly $6000.   I also assume that I had some assumption of taxes costing me more previously.

If I retired now our assets could generate roughly $33,000 to $42,000 of income based on investing in rental properties and buying a home outright.    A rough guess at basic expenses would be in the neighborhood of $25,000.

There are a lot of unknowns not accounted for here and most of my numbers are very rough estimates so the figuring here is all pretty inexact. 

Bottom Line :   I feel that I could retire today and we could do pretty well.   If we were more frugal I don't think it would be bad at all to make ends meet.



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How Would My Projected Retirement Income Change If We Bought More Rentals?

I recently wrote the article Estimating My Future Retirement Income Based on Age of Retirement in which I figured a rough estimate of our future income at retirement for different ages from 51 to 70.   That estimate was based on the status quo situation for our finances.   However my wife and I do plan to buy more rentals in the future.   So, how would the future retirement income change if we had more rentals?



I figured the numbers for a basic rental in our area.   And then reran the calculation to refigure the retirement income estimates.  I then added more rentals to see how 1, 2, 3 or 4 additional rentals would add up.    [note : I am assuming that we finance the purchase of the rentals and then make mortgage payments while gradually building equity over time. Bear in mind these are very rough calculations with some assumptions and variables that can change over time.]



Here is how the income projection changes based on adding more rentals:

Pretty roughly speaking once I get to around age 55 I could possibly plan to retire 1 year earlier for each additional rental we buy.  

So for example, say I wanted a retirement income of $100,000.   With our current assets I am projecting that I might hit that amount around age 59.    If I add one more rental then I project I'd have $100k income at age 58.  Two more rentals would help me hit the goal at age 57.    Three more rentals and I'd hit it a few months after age 56 and finally with four more rentals I'd hit it at about age 55.5.


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Estimating My Future Retirement Income Based on Age of Retirement

I wanted to estimate my expected retirement income if I retired at varying ages.   How would our income differ if I retired at 51 or 62 or 67?  The longer I wait to retire the higher income I can expect.   I'd like to retire early if possible but if working a bit longer will ensure us a better standard of living then it could be worth it.  

My figuring below is pretty rough and has a lot of assumptions built into it.   I don't know how well my investments will perform over the next 10-30 years nor do I know how our real estate assets will appreciate so I have to assume some conservative average figures.     I'm also assuming that we don't save extra amounts in retirement or otherwise above the minimal amounts we save now.   Right now I automatically get about 11% of my salary in my pension and 401k accounts between my contribution and my employers.  But we can and do save more cash in other ways in normal years so our actual retirement picture should potentially be better than the estimates here.

First I figured the annuity I'd get from my company's retirement pension account.   The pension website has a tool that will estimate pension benefits at various ages.   I figured the pension amount at given ages and then figured out how much of my salary that would represent as a %.  The results are :

Pension income:

age	% income
51	11%
55	15%
60	21%
62	24%
65	29%
67	33%
70	41%

I then used the social security estimator to figure the amount of social security my wife and I would get assuming she gets 50% of my benefit.  I took that amount and figured out what % of income it would represent.  Those figures are :

Social Security Income:

age	% income
62	26%
67	38%
70	47%

Lastly I figured out how much I might have in cash assets  between our IRA, 401k accounts and the net cash value of our rental assets.   For the retirement accounts I just projected over time with a generic assumption of 7% annual growth rate.    For the rentals I assumed I'd sell them all with 10% overhead, 20% taxes and pay off any outstanding mortgage balances.   For all real estate I assumed 3% annual growth in market value.     I then turned the cash assets into joint life annuity using payout rates estimated from immediateannuities.com

For years before age 62 I subtracted some of the cash on hand to pay 26% of our given income for the year to equate to the value of social security at age 62.

I did not figure the tax rate for our retirement income and the income figures are in pre-tax amounts.  However a good share of the income would be tax protected either by being social security or from Roth IRAs so our tax situation should be better post retirement in general.

I created a chart showing the income for different ages from 51 years to 70 years.

The figures above are in 2013 dollars.      The figures jump from 66 to 67 due to me only having estimates for a few years of social security.  If I had better granularity on the social security then the graph would be smoother.   

As you can see if I were to retire early at age 51 then we could expect an income a bit over $50k.   $50k a year is the target I had aimed for at retirement of age 50 back when I started this blog.   I picked age 51 since that is the first year I'd be officially eligible for my company's early retirement program so the soonest I could get a valid estimate for my pension benefit.  Then every extra year I work after that our projected retirement income just goes up steadily.   That is just common sense since we'll have more money saved and fewer retirement years to plan for.   On average the expected income goes up about 7% for each extra year I work.


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Do Not Rollover Your IRA or 401k to State Farm

I just saw an banner advertisement suggesting you 'Talk to a State Farm Agent today about a Rollover IRA'.    My first thought was that they were going to try and sell you an insurance policy or variable annuity for your IRA.   Well its not that bad but their investment options are not good.     The State Farm rollover site talks about their investments and their mutual funds all seem to have 5% loads and moderately high expenses.   For example the State Farm S&P 500 index fund (SNPAX) has a 5% load and a 0.76% fee.     Thats particularly bad for a index fund.    I can see the argument that a load might be worth it if the fund manager does a great job of selecting stocks and out performs the market.   But with an index fund you're paying for a simple index and the manager isn't doing anything special.   Theres zero reason to buy a index fund with a load versus one without.  On top of the load the State Farm fund has a relatively high 0.76% fee.  That may not seem like a lot but it adds up and there are index funds with much lower expense fees.

Instead of buying such a fund through State Farm you should instead seek out a cheap index like the Vanguard 500 Index fund (VFINX).   The Vanguard fund has no load and a very low 0.17% expense ratio.    Lets say you have $10,000 to rollover and you are 35 years old.  If your investment grew at annual rate of 7% a year then here is how the load and expenses for the SNPAX and VFINX funds would compare :

	State Farm	Vanguard
	$10,000	$10,000
less load	$9,500	$10,000
30 yr @7%	$        54,531	$  65,840

With that Vanguard fund you'd end up with 20% more money at retirement compared to the State Farm fund.

You should avoid putting your retirement with a company that only wants to sell you funds with sales loads and high fees.

Do not rollover your IRA to State Farm or any other company with similar investment options.   Instead go with a company like Vanguard that offers very low expense funds or Scottrade, Schwab or Fidelity if you want a wider variety of investment options.


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10 Retirement Planning Myths

There are a lot of bad ideas, mistaken information and half truths out there about retirement planning that gets perpetuated and stated as fact.   These myths can lead people to make poor choices with their retirement finances.   


Myth #1 - Social Security will run out of money and you won't get any
Reality : Social Security isn't going anywhere and if the trust fund runs out there will still be funds to pay most of the current benefit level 
This is a pretty common view nowadays.   In an AARP 2010 study only 35% of people surveyed had  confidence in the system.   79% of people didn't realize that if Social Security depleted its trust funds that it would still be able to reduced benefits while at the same time 70% of people think they are well informed about how it works.     In other words people think that if it 'runs out of money' that there will be no checks.   Thats not the case.  Social Security is a pay-as-you-go system by design so current retiree checks are mostly paid from current worker tax funds.   In addition its certainly not a given that SS will ever run out of trust funds, thats just a projection base on estimates about what we think will happen 15-20 years from now.    Even if it did run out of money,  Congress can simply change the rules and keep it solvent again.


Myth #2 - Your pension will go bankrupt and you won't get anything
Reality : Pensions are guaranteed by the PBGC
Private pensions are regulated by federal law.  Pensions themselves are setup as trusts outside of the company that establishes it so they can't simply 'raid' the money as simply as emptying a bank account.  If a company does go bankrupt then pensions are backed by the PBGC.   So if the company goes bankrupt or the pension runs out of money then you will not lose your benefits.   There is however a limit on PBGC protection so your benefits may be limited to a maximum amount, currently at about $52k

Myth #3 - You only have to plan for 20 or so years since life expectancy is only 70 something years
Reality:  Retirees typically live 20-30 more years after 65.
Most people are aware that average life expectancy in the USA is over 70 years.   As of 2011 the average was about 78.6 years.   They then base their retirement planning on the assumption that they'll live 10-15 years after retiring at age 65.   But the average life expectancy for the population is factoring in people who pass away early due to things like illness and injury before age 65.   You can look at the social security administration mortality tables to see the average life expectancy at various years.  If you look at only the people who are age 65 then their average life expectancy after that is actually another 17-20 years.    The typical retiree will live into their 80's on average.   On top of that a married couple has a 40% chance that one spouse will live past 95 years.

Myth #4 - Social Security will be enough to retire on
Reality:  Most of us will need additional savings and income in addition to SS.
Social Security generally replaces roughly 20-40% of your working income.   Usually that isn't enough to support you as most people spend more than 20% of their income.   Most people won't be able to adequately support themselves with just Social Security.

Myth #5 - Medicare will pay for your nursing home
Reality :  Medicaid will only pay for nursing home care if you've spent all your money
Medicare does not pay for your nursing home expenses.  Medicaid might pay for nursing home expenses but only after  you've exhausted all your assets.    Planning for that is not a great choice.   Its a particularly bad choice if you're married since it will leave one spouse with an empty bank account.

Myth #6 - The government will change the rules and tax your Roth IRA
Reality : There is no plan nor strong incentive to tax Roth IRAs.
I've seen a lot of people voice this opinion.   I have no idea where the basis is other than simple paranoia.  There is no agenda nor plan to tax Roth IRA withdrawals at any time.   Roth IRA valances are actually not much compared to the other retirement plans so if they were taxed it wouldn't lead to much of any tax revenue and would upset a lot of people considerably due to the broken promise.  While I can't say its impossible such a law could be passed in the future it would be extremely unlikely that they'd take such a measure.    And if you're going to assume the government would resort to such a thing then there wouldn't be anything stopping them from taxing anything or everything else so your money is no safer elsewhere.

Myth #7 - Taxes will go up in the future so you'd better put your retirement in a Roth
Reality:  Taxes may or may not go up but that doesn't necessarily impact your tax rates or change your retirement planning priorities.
Taxes might go up in the future.  Its probably a likelihood that we'll see increased taxes in fact.  But that doesn't mean that your tax rate will increase.  It doesn't mean your marginal rate will change.  It doesn't mean that your post retirement tax rate will be higher than the tax rate you pay during your working years.

Myth #8 - Annuities are awful investments and you should never buy one
Reality :  It depends on the annuity.
Annuities can be poor investments.   But it isn't a rule.   Some annuities are perfectly fine investments.    You simply need to be careful about the kind of annuity you buy and make sure the fees associated with it and terms are reasonable. 


Myth #9 - Roth IRAs are the best choice for everyone
Reality :  Sometimes Roth IRAs are a poor choice.
A lot of people are hopelessly in love with the Roth IRA.    I guess the appeal of not paying taxes in the future is overwhelmingly better in their minds than not paying taxes today.   I'm not against the Roth IRA at all, in fact it is a great retirement vehicle.   However the problem is that Roth IRAs are not always the best choice.   Your best choice depends on your marginal tax rate today versus your marginal tax rate at retirement as well as your taxable income level versus your deductible incomes.  There are many situations where 401ks or traditional IRAs are a better choice than a Roth IRA.


Myth #10 - Social Security is an awful investment
Reality : The return you get depends and can be good.  
Many people feel they are being 'robbed' by social security.   First of all Social Security is not really an investment.  It is a tax and a social insurance and entitlement benefit program.    That is not 'investment' just like you don't look at Microsoft and say its a tax or insurance program.    So its not like putting money in a CD or buying stock.   But then maybe thats just a semantics argument.   You can figure your individual rate of return on your social security taxes versus the checks you receive after retirement so its pretty natural for people to think of it like an investment and calculate rate of return.   If you do figure that then the rate of return depends on variables.   The Social Security Administration has figured returns for different scenarios.   Given current law the rate of return can be as high as 9.02%.   Is that an awful investment?  Certainly not.   Thats actually a great investment.   Theres nowhere else you can get a guaranteed benefit with a return that high.    OK now thats the best case and yes there are situations where SS is a poor return.   And if you figure in that SS might not have money to pay all the benefits and might reduce benefit rates in a couple decades it gets even worse.    In fact for the worst case scenario the returns are about -0.5%.   But lets now think about the best and worst case scenarios for other investments.   Whats the worst case for the stock market?   It isn't good.  But that doesn't mean that the stock market is an awful investment.

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