Lazy Man and Money

Retire on 80% of Your Income?

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A little while back Flexo from Consumerism Commentary asked “do you need 80% of your current income in retirement?” While that might be accurate for some people, like most “rules” in personal finance there are exceptions. It is these exceptions that make it difficult for me to endorse.

There are numerous factors that weigh into that 80% number. For one example, there’s a lot of military families out there and they’ll be getting pensions (yes, I still believe government pensions will be there, we’ll just pay taxes to make it work), and very well subsidized health care. This would eliminate one of the biggest costs or retirement as well as bring in income that “doesn’t need to be saved” in advance. My fiancée is in the military so this is definite possibility.

For another, there are the people that are living below their means and saving money now. I know it’s rare, but if you are reading this, the odds are higher that you are one of them. If you are are socking away money and living beneath your means now (and you are 35 or younger), you’ll have accomplished two very important things:

1) You’ll have adjusted your lifestyle to the point that living on 80% of your current income is the norm. Jonathan from My Money Blog is living off of 57% of this his after-tax income.
2) You’ll have saved enough money that there’s the a chance that you’ll actually make more than 80% of your current income in retirement.

In the end, you need to look at what’s right for you. Maybe it’s a good guideline for you and maybe it’s not. I guess that’s what a lot of personal finance is about.

Delaying Social Security Benefits – Will Scott get Burned?

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I’m still catching up on some reading – in this case the 2006 winter edition of USAA’s magazine. Scott Burns, a syndicated personal finance writer has an article about why he’s going to delay his social security benefits.

For those unwilling to read the article, I’ll attempt to summarize a couple of quick points as I understand them.

  1. If Mr. Burns decides to defer earnings for a year, he’ll give up $23,940 in benefits.
  2. At the end of that year, he’ll make $139.56 a month or $1,675 a year in social security.
  3. He determines that in order to guarantee that kind of income ($1,675 a year), he’ll have to buy an annuity (with inflation protection) at $36,111.
  4. Thus he’s getting $36,111 of value for the price of $23,940 – a great deal.

It sounds like great reasoning if you are looking for iron clad guarantee of 7%.  That’s a pretty decent return.  However, I think he can do better.  He ends the article by saying that the “odds say that either my wife or I will live to collect life annuity income for 25.9 years.”  If that’s the case, then I would say it’s a little too early to settle for a 7% gain.

Let’s Play “Invest Lazy Man’s Money”

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The deposit for my Tax Year 2006 Roth IRA just went through. So now I have $4000 sitting an account waiting to be invested. I’m looking for an ETF to invest in. I have $8000 in Vanguard Small Cap ETF (VB). I have another $8000 in Vanguard Total Market Index (VTI) and another $4000 in Amex Technology Spiders (XLK).

I’ve been thinking about iShares MSCI EAFE Index Fund (EFA). I feel the economy getting more and more global every day. If people overseas can do the same job as Americans for 1/10th the money, then business will follow. The American economy will either suffer or those countries will have great wage inflation. Perhaps I’m wrong about this, but I can’t see how the wage difference can go on forever. I’m also thinking about Vanguard Health Care (VHT). America has more aging people than ever – and they are living longer. Everyone will need more medications, more health care. That means more dollars going to the companies that provide solutions. Lastly, I wouldn’t be opposed to expanding the small company or total market portions of my portfolio either.

I like to be diversified in ETFs. They generally have low expenses and allow for easy diversification. What would you suggest?

Are 401k Plan Administrators Robbing Me?

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Making our way has an interesting article about how 401k companies’ fees are eating away his and his wife’s gains. I don’t think I’ve run into these problems, but it’s difficult to say without the transparency behind the fees.

I can see no reason for the limited fund options that you often find in 401k plans. Also, I’m not sure what the plan administrator really does. After all, couldn’t a brokerage handle my 401k like it does my Roth IRA, but with pre-tax dollars and matching?
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Is a 401k Plan Really a Great Deal?

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A disclosure before I start… I have maxed out my 401k plan whenever given the opportunity to do so.  Recently, I put 75% of my paycheck towards it because I knew I was going to a new job that might not have a 401k plan.

The other day I realized that if I continued this for the next 35 years, I might have a huge nest egg in there.  What would happen if I had so much that withdrawing it would put me in a higher tax bracket that I’m in now?  I know it sounds like an extraordinary good “problem” to have – and I won’t be complaining.  Getting the tax-deferred gains would definitely be a benefit as well.  However, that’s just a small amount of leverage, I’d still have to pay tax on the growth when it comes out.

I think it gets confusing because now it feels like I’m escaping taxes forever.  However, down the line there will be a piper to pay.  I wish there were a way to know if that piper would be charging more or less then.

(As a post script, I max out my Roth IRA as well.  Since I “pay that piper” now, I’m hedging my bets, that if he wants more in the future, I’m still doing okay.)