Retirement Archives - Lazy Man and Money

Reader Question: How to Manage RMDs

April 30, 2020 by Lazy Man 7 Comments

How is it going? Wait, is there any point in asking?

We’re mentally in a difficult place. My kids are turning in schoolwork that literally just says, “School is bad” a bunch of times with a sad face at the top. There friends join the video conference and say how sad they are. Even our dog is sad almost all the time. I know that many of you are sad too. I hope you can find something to make the day a little better.

It’s been a tough time to write blog posts. Finances are either mostly okay for some people or terrible. I don’t know how to write about unemployment during this time. I’ve got nothing to share except for sympathy… and I’m not sure that’s useful. We’re fortunate that money is okay for now. I’m not making much with the blog, and there are no dogs to sit, but our passive income is doing okay. My wife’s job is still paying well. Our spending is down, so that’s helpful.

I had a reader reach out to me the other day with a different topic. This may not be the time to write about this, but the thought exercise made me feel better… almost like I can pretend things are normal for a little while.

How to Manange RMDs

For those that don’t know, RMDs are Required Minimum Distributions. If you are 72 (it used to be 70.5), the government wants you to start getting your money out of tax-advantaged accounts so they can tax you. Thus they require you take the money.

I’ve never thought much about this. It’s still quite a few years in the future for us and it falls into the category of a “good problem” to have.

However, the reader raised some interesting questions. (I’m not going to the share the whole conversation, just the highlights.)

In her case, she’s got a pension, Social Security, and this nest egg of savings. Between all that, she’s making more now than she was working. Most people expect to earn less in retirement and be in a lower tax bracket, but that’s not how it seems to be working out.

To compound the “good problem” to have she has few expenses with the house and car paid off. She has some things like lawn and snow removal, but I got the feeling they aren’t too bad.

She’s getting an excess amount of cash from RMDs that she has to take. Unfortunately, there aren’t a lot of good places to put that money. Banks are paying almost zero interest. CDs aren’t much better. This is a scary time to invest in the stock market. Personally, I feel that it might drop a lot. It doesn’t seem normal for the market to only be down 10-15% when unemployment is going through the roof and corporate profits are in the gutter.

I don’t have a lot of good answers for this reader, but I felt like I should try anyway. Here were some ideas I had:

1. The most important thing, is to have a financial expert look over the situation. A Certified Financial Planner (CFP) is a good start. One of my goals for the year was to do this for our own family. However, it’s hard to do that with businesses closed. If this isn’t possible, that’s not easy.

2. Invest in a bond ETF. My favorite is Vanguard’s BND. It pays a 2.5% dividend. That’s not very high, but it has been very safe during these times so far. It’s still high enough that it can support most people if they have other sources of income like a pension and Social Security.

3. A diverse, high-dividend paying ETF. I personally like iShares HDV ETF. It’s paying a 3.4% yield now, which is a lot better than banks. Of course, the stocks in it can go down (see above warning about the stock market), and companies may stop paying dividends. Without work and profits, it’s hard to imagine them having the cash to pay big dividends.

3a. Dividends are taxed at a favorable rate. This means that the earnings aren’t taxed as income, which would be in a (likely) higher tax bracket. As always, check with your tax professional about this.

4. Look into QLACs. A QLAC is a qualified longevity annuity contract. That’s a mouthful, right? It’s also a good topic for a finance professional. Essentially, as I understand it, QLACs allow people to put 25% or $135K (whichever is lower) of their retirement savings in another account that doesn’t get taxed. I want to stress that I don’t know this very well, so please see someone more qualified.

So that’s what I have. Do you have any more ideas? Most of these don’t really solve the RMD issue itself, but at least it helps manage it a bit.

I’ve been looking at investing more outside of pre-tax retirement accounts because the dividend tax treatment is so much better than regular income. Most of those ideas are on pause for now, as we try to navigate COVID-19.

Is it Okay NOT to Save for Retirement?

January 15, 2020 by Lazy Man 6 Comments

That’s the question I’ve been asking myself many times over the last couple of weeks. For a number of readers that might be a strange question to ask. After all, not all people can afford to save money for retirement. And they certainly can’t be doing it all the time.

For me it’s different. I’ve maxing out my Roth IRA since it was invented. I also maxed out my 401k from all my post-college jobs for years. It was around $10,000 in 1998 then so it may not sound as impressive as it would be today. In the world of flat wages, it’s much harder to max out 401Ks now.

I moved from a standard software engineering career to blogging and side hustles in 2007. I got burned out with the long hours, the changing technology, and I just wanted to spend more time with family. The drop in income made it more difficult to fund retirement accounts, but I was still able to put some money aside.

My wife has been saving in her TSP (the government’s 401k plan) since she started working around 2000. As a pharmacist, she could afford to max out her retirement accounts too.

After so many years of maxing out retirement accounts and an incredible 10-year market run, we have saved up a great retirement nest egg – at least great compared to the average 43 year old person. It’s been a powerful habit that has contributed tremendously to our net worth. We currently have about 45% of it there, and another 45% in real estate (our own home and 3 rental properties) that will be mortgage-free around 2027.

There’s just one problem…

… we often live paycheck to paycheck.

We have some emergency funds, but not a lot. I can usually reach into a business account and shift around some money when we have a rental property renovation. Sometimes we use the HELOC on our home for an expense. We pay that debt back monthly. Obviously this isn’t financially ideal. It would be better if we just used cash on hand.

However, between saving for retirement, four 15-year fixed mortgages, and private school for two kids our “expenses” are high. I put expenses in quotes because saving (for retirement or anything else) is not your typical expense.

Those savings aren’t there when we look at how much cash we have available to use at the end of the month. It’s great for our net worth bottom line. In the case of TSPs and 401ks, that retirement money hasn’t been taxed. One exercise that I need to do (and maybe you do as well) is figure out how much money a 401k is really worth when you start to pay taxes on it upon withdrawal.

Our Retirement Future Looks Bright

When I last published our comprehensive retirement income plan in 2015, it looked like we might have around $200,000 a year in income.

My wife’s military pension forms a strong percentage of that. However, we also have the rental properties, the retirement accounts, Social Security (which will still be around in some form), and income from websites. Since then we’ve added dog sitting and a private equity investment with a high cash yield.

I intend to publish a new update this year, and my expectation is that it will be around $250,000. At the same time, we’ll have a paid off mortgage, and (relatively) cheap military health insurance. We even have my wife’s GI Bill that helps us save less for college. When we look at our future expenses they are relatively small.

We realize we are fortunate in all these areas. It took a lot of planning, but luck always plays a role in the execution.

A Little YOLO Can Be a Good Thing

As you can tell, we’re flying a little too close to the sun in our lives now. Some of it is because we’ve gotten a little “spendy” with restaurants and children STEM toys (my shopping addiction). The rest of it is the funding for the future. I don’t know if there’s such a thing as over-funding the future. However, we aren’t striking that balance.

The strong market performance in 2019 gave us more returns than we would have expected in three years. It seems like the right time to slow down on the future and build up some cash for today.

Exploring My Downsides of Early Retirement

September 25, 2019 by Lazy Man 2 Comments

A while back an old blogging colleague of mine named ESI Money wrote about 10 downsides of early retirement.

Yesterday, Joe from Retire by 40 shared his biggest downside to early retirement. I won’t give you any spoilers. However, when you finish reading it, you’ll see that last sentence was a bit of a pun.

Joe covered all ten of ESI Money’s downsides before giving his own thoughts. Since there are few original thoughts in the personal finance space nowadays, I’m going to blatantly steal the idea, while giving him great credit. It will help if you click on his article, so he doesn’t get mad at me. Just kidding, he’s too happy and nice to get mad.

Exploring My 10 Downsides to Early Retirement

Well first you have to retire early to have a downside, right? Depending on your definition of retirement I either retired at 30 or I will never retire. I like to say that I’m self-employed, but my life isn’t that much different than Joe’s who views himself as retired. Just to make it more complicated we aren’t sure if we are FIRE, leanFIRE, or FatFIRE . For the purpose of this article, let’s just assume that I’m retired.

Let’s look at each of ESI’s top 10:

1. Loss of Income

That’s a natural one. However, my wife has a military pension. We also have a lot of alternative income, which includes side gigs like dog sitting and blogging, along with rental properties and equities. In fact we should have more than $200,000 in annual retirement income with many of our expenses paid off. We don’t have that now, because we have about 8 years of rental properties to pay off. It’s also hard to get to the money in our retirement accounts at our age (43).

2. Reduced Social Security Income

My wife has been a big earner for a long time. I was for awhile, but not as long. I keep paying into social security with my side gigs. We don’t need this income and don’t plan for it, so it’s not a big deal. Last I looked it could be $50,000 a year combined.

3. Health Insurance

My wife’s military retirement comes with a very generous health plan that we can keep for life. We realize how extremely lucky we are to have this, especially in this day and age. We do have to pay for it and I’m sure it will get more expensive. However, it will surely be much better than what ordinary early retirees could get for the money.

4. Mental Decline

Here’s where it starts to go south. It would take a lot of work to be a good software engineer again (if I even was in the first place). I’ve spent the last 7 years focusing on interactions with babies and toddlers. I’ve spent the last 4 years sitting over 200 different dogs. While I have learned some very valuable skills that I treasure, the intellectual challenges are more about patience and understanding, not intense problem solving.

To help combat this, I’m trying to learn Japanese with Duolingo. I’m looking for more things that I can work in to windows of a few minutes of the day. I don’t get a lot of time to sit down and study anything at length.

5. Physical Decline

I’m getting older and that starts a natural physical decline for most people. I try to keep active with lots of dog walks. If I was full-time computer programmer, that wouldn’t be the case. I need to get back to going to the gym and lifting weights.

6. Loss of Social Interaction

This is a big one. I was never very social with my co-workers, but there were adult conversations. This goes back to my main conversations being about Pokemon and Daniel Tiger… or with a barking dog. There’s not a lot of deep peer friendships in my day-to-day life.

I didn’t lose these because of early retirement though. I feel I lost them through a series of moves, my introvertedness, and my old college friends just moving in different directions.

I’m hoping to build some new friendships with other parents through kids’ activities. So far, it hasn’t been very fruitful.

7. Loss of Identity

I very much feel this. I used to be a software engineer who built search engines. It was easy to explain and people understood it in just a few words. Now I’m unexceptional blogger, dog sitter, landlord, investor, customer support specialist, and corporate blog editor. I don’t know if they make a big enough business card for that.

I’m not even “retired” (except for this exercise) and my primary focus is on the kids.

I have no identity.

8. Boredom

You’d think that with all the above that I wouldn’t be bored. If so, you’d be wrong. There are not a lot of “new” things going on in any of those activities. It’s not like I have a new assignment of a special project that requires me to learn a new skill. I suppose that blogging is always changing, but with all the other activities, I have some difficulty in keeping up with the changes.

I’m planning to buy a wet suit next year and take surfing lessons with the kids. The kids joined the Cub Scouts recently so we’ve got a camping trip planned. There are so many new and exciting things in this world, I just need to find them. Many FIRE bloggers love to travel. I don’t like traveling much. Also, it makes sense to wait until the kids are a little older before going to any distant countries. I would want them to remember it.

9. Spouse Overload

My wife already works from home a lot. However, sometimes we do need our space. She’ll go off on a run. I’ll go blog at the library for a bit. We have some different interests, but we share many too. If she weren’t working from home, it might be different. For now we each do our own thing for most of the day.

10. Lack of Challenge/Purpose

This is a little like the identity question above. I did have a good professional challenge in exposing MLM fraud. Unfortunately, we don’t have the freedom of speech in the US that we are taught in school. It’s only available to those who have 3 or more million dollars that they can blow on lawyers.

After being sued several times (and winnning!), I’ve decided that it simply isn’t worth the stress and potential harm to our family. So one of my passions, helping people avoid financial fraud, was thwarted. There’s a happy ending though. More and more media publishers are taking up the cause and awareness of MLM fraud is at an all-time high.

I haven’t found my next true professional passion project. Of course, I have the passion project of the family and teaching my kids new awesome stuff about life.

That’s a very worthy purpose, but it is different from the glitzy career of search engine software engineer or pyramid scheme activist.

Putting it All Together

Early retirement may not be as easy as you think it is. I imagine that’s even more true if it’s pseudo-retirement like mine. If you won the lottery and can hire out all the help you need, that’s a different story.

I’m still hustling quite a bit with all the jobs I’m doing now. As you can tell, there are gaps in my overall happiness, but that’s normal.

Everyone’s early retirement is going to be different. If you are not financially secure, I can tell you that the grass is certainly greener on this side of the street. However, there are at least 50 shades of green and sometimes it can be difficult to compare two.

An Improptu Early Retirement

August 22, 2019 by Lazy Man 2 Comments

I haven’t been writing much this week because my wife made the decision to take a break from work. It was a sudden decision, but a great one. There’s a narrow window when she doesn’t have students or health plan surveys. Summer moves quick here in Rhode Island… if you blink you’ll miss it.

My wife is having a lot of fun I want to be a part of it… but only a bit. I want to be around, but I also want to give her space. So far it’s working out well.

We’ve put a good amount into the local restaurant economy. It’s certainly not financially ideal, but it’s good for us now.

I’ve often wondered what it would be like if my wife really retired. I could never imagine her doing nothing… it’s just not her personality. Though this week has been different. She’s enjoying reading a book by the ocean. And why not enjoy that?

This is interesting… in a very good way. I’m learning more about what I want out of “retirement”, but also what she might want. And it might all change tomorrow, because, as we say in our house, “There are no rules.” (That’s usually about vacation time. We certainly have rules as the kids can attest to. We just question the value of each rule.)

This is a small sample size. If someone tried to assess my views about things after a couple of days, I’d say they are nuts. But a small sample size is better than no data at all, right?

So I learned a couple of things this week. One of them is that retirement can get expensive IF we continue to feed the local restaurant economy. (We can also game the system due to numerous deals for locals.) The other is that you can (should?!?!) make things up as you go along.

As much as I like to think I can predict the future, no one (even me) knows what tomorrow may bring. And sometimes it’s great to know that you don’t know.

What’s one thing that you didn’t know about retirement? Let me know in the comments.

What’s My Pension Worth?

May 23, 2019 by Lazy Man 11 Comments

The short answer to that question is zero, because I don’t have a pension… however, my wife does. She completed 20 years of military service in March, but continues to work (for now).

Earlier this month, I asked the question “Should You Include Your Pension in Your Net Worth?” and found that opinions were generally mixed. Most (61% in my small Twitter poll) believed that you should include it. This is consistent with how finance professionals and divorce courts view it.

However, there are still plenty of people who feel that a pension shouldn’t be included in your net worth. They explained that a pension is future money that you don’t have and can’t gift in an estate.

I ended up deciding that I’ll keep two logs. One log will count all the traditional assets and liabilities used in a typical net worth calculation. The other log will include the value of a pension and this website. I don’t know if there’s any great value in keeping two logs, but there’s no harm and it is a little work once you calculate the values. Also it doesn’t matter since net worth numbers don’t drive any of our financial decisions.

The first question in the comments of the article was what I wanted to write about today.

“How do you value the pension?”

If you are going to include a pension in your net worth, you have to have a number to plug in there. Fortunately, there are a couple of different methods that we can compare and contrast. For the purposes of this article, I’ll be presuming a military pension, but your pension circumstances may vary. If you are in the military, you may also be interested in “When should you retire from the military?”

1. Calculating Pension Value using Life Expectancy

The first idea that came to mind is to use the simplest math possible. My wife’s pension will be $[X] when she retires. Her life expectancy will be roughly [Y] years. The number of total pension dollar she’ll be paid is “$X * (Y – [current age])” The Social Security Administration has a life expectancy calculator that’s helpful.

Plugging my wife’s information into the calculator shows she is estimated to live another 41.7 years. That’s just as cold as I expected from the SSA. There are other life expectancy calculators that may be more accurate by factoring health and lifestyle behavior. This is good enough, especially because nothing is guaranteed.

My wife is a fairly high ranking officer (so proud!). If she retired tomorrow, her pension would be $55,462 per year. Simple math gives us: ($55,462 * 41.7) = $2,312,765.40 total pension dollars. (Since military pensions grow with inflation, we don’t have to worry about eating up the buying power.)

If my wife continues to work longer, you might think this method would value her total pension as being worth less. After all, she’ll have fewer expected years to collect. However, the pension will grow with more years of service.

2. Calculating Pension Value with with Annuities

On its most basic level, a pension is an annuity. Thus we could look at how much it would cost to buy an annuity equal to the monthly payout of the pension. I found a couple of calculators online, but they tried to get me to sign up and/or give personal information that I believe would lead to a sales pitch.

One showed that it would cost around $1,200,000 to produce the same $55,462 per year in income. I was surprised that it was so low. However, that $55,462 was not inflation-adjusted, so that $55,462 in 40 years from now is really worth $20,655 (assuming 2.5% inflation).

I next looked for inflation-adjusted annuities. Unfortunately, while they exist, they are harder to find and seemingly impossible without getting caught in the potential sales pitch.

For now, I’ll presume that the 1.2M in annuities without inflation protection would be about the same as the 2.3M number by using life expectancies when inflation protection is factored in. It at least seems plausibe.

3. Calculating Pension Value with Treasury Rates

A third way to look at a pension is by using Treasury Inflation-Protected Securities (TIPS). If someone gave you $1 million dollars and you put it in these, extremely safe investments, how much money would they generate each year. Current treasury rates between the 20-year and 30-year are very low, with an average of around 0.85%.

Thus we could say that hypothetical gift of a million dollars would yield only $8,500, a far cry from the $55,462 number we are aiming for. We need to work it backwards and take the $55,462 number and divide that by the 0.85% yield.

The result is that the pension is worth $6,524,941.18. That seems very wrong! It seems the problem is that interest rates are just too low.

What if we use another metric? The 10-year government bond rates is currently 2.33%. Using is makes the estimated value $2,380,343. Thus, if you invested $2,380,343 and were able to get a relatively safe 2.33% interest rate, you’d get $55,462 in interest.

However, the 10-year government bond rates are not inflation-protected. Twenty years from now, the $55,462 that you get back from that calculation will not have the same buying power.

4. Calculating Pension Value with a Finance Calculator

I found an interesting article on Sapling.com about calculating pension value. It uses a financial calculator, which is something that I’ve never been good at. It looks like this might be worth more value when you are looking at a point somewhere in the future when you get access to the pension. For us, it doesn’t seem to work since that date is not determined.

Final Thoughts on What a Pension is Worth

It’s hard to put a definitive number on what a pension is worth. However, considering that the first, second (after inflation-adjusting), and third calculation all came to about the same $2.3 million number, I will use that for the second net worth log.

That’s a very, very large number. It’s so big that it dwarfs much of our other financial assets – as you would expect. That’s why I’d keep it in a separate net worth log. It’s also a good time to reflect that I created this blog and have written about FIRE for the last 13 years because I knew my wife’s financial contribution wasn’t just her salary, but also a large stream of passive income. In 13 years of time, I haven’t been successful in creating $55K+ of annual passive income to match her. However, our alternative income is getting very close.

I don’t believe there’s a firm right or wrong answer to what a pension is worth. Fortunately, this is one area when a reasonable estimate is usually good enough.