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Dana Anspach

Money Over 55


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Woeful Timing

Wednesday April 16, 2014

Did you pull money out of the markets in 2008/2009 and then sit on the sidelines for far too long? If so, you're not alone. On average, investors have woeful timing.

Dalbar, a research company, studies average investor behavior to quantify just how woeful the timing is. Their 2013 data is out.

Take a guess... for the last 20 years did the average equity investor under-perform the S&P 500 Index by 2%, 3%, 4%, or more?

You can find the answer in Why Average Investors Earn Below Average Returns.


401k Terms That Confuse You

Monday April 14, 2014

In every field of study there is something called "the curse of knowledge".  When you get deep into a topic for a prolonged period of time it can be easy to take your knowledge for granted, and assume that something that you consider basic, is, in fact, basic. Most of the time it is not.

401k rules provide a perfect example. I recently received this question, "If a company closes and still has their 401k, who pays the penalty?"

It's a great question and illustrates the fact that many people who have 401ks do not realize that the funds are portable - meaning when they no longer work for that company they can transfer the funds to their own IRA (Individual Retirement Account) or possibly to a 401k plan with their new employer, if that plan allows incoming transfers. These types of moves do not trigger taxes and penalties.

So in the case of the question above, this reader should be able to roll their 401k money to an IRA, and no taxes or penalty will be owed.

Many people believe if they move money out of their 401k plan at all they will owe taxes and penalties - even if they move the funds to an IRA. This may be one reason why so many people leave money in an old 401k.

The confusion is understandable. The words distribution and withdrawal do not have clear meanings in the 401k world. A rollover is a form of a distribution, but not a taxable one.  A withdrawal usually means a taxable distribution.

I took a stab at clearing up some of the confusion in Understanding 401k Terms - Distributions, Withdrawals, Transfers, and Rollovers.

Learn more ~ or join the conversation!


Retirement Budget Mistakes

Monday April 7, 2014

There are several ways to figure out what you might spend in retirement. The easiest is to start with your current take home pay. If you can live on that, then you might assume that if you had that amount of after-tax income in retirement, then you should be able to continue your lifestyle.

Overall, I find this method of estimating needed cash-flow works, but not for everyone. You might have health care premiums that your employer currently covers that you will have to cover in retirement. If so you'll need to add this new expense to your current take home pay to accurately project the amount of retirement paycheck that you will need.

And what about auto or home repairs? You might cover those out of your current take home pay.... unless you get bonuses that you use for those expenses. Lots of people use their current company bonuses to pay for extra items like vacations or home remodels. You'll still have home repairs in retirement. Have you accounted for this periodic expense in your planning?

Overall, I find most people accidentally leave expenses out of their retirement budget. Dental work is a great example - I've yet to see a line item on anyone's budget for "dentist" yet I know crowns, bridges, and other expensive dental work occur more and more frequently as you age.

To help you avoid the most common mistakes, a colleague and I have gathered together the most common items we see missing in retirement budgets in 7 Disastrous Retirement Budget Mistakes.

Should You Care About Average?

Tuesday April 1, 2014

I often get frustrated with the way averages are used. This frustration is most often instigated by average portfolio returns. You see, no one earns average. Depending on when you retire, and how you invest, you might get above average returns, and you might get below average ones.

If you earn above average returns, and you built your plan on average, your retirement should be just fine. What you need to be concerned about is the below average scenario.

The other area where averages can throw you off is longevity.

Based on 2009 life expectancy tables, at birth, males can be expected (on average) to live to about 76, and females to about age 81. However, that's not the end of the story. The longer you live, the longer you are expected to live.

A 65 year old male will (on average) will live another 17.5 years, and a 65 year old female will (on average) live another 20 years.  However, that's not the end of the story either. Half the 65 year old males and females will live longer than average, and half shorter.

So if you're 65, and thinking there is no way you will need your money to last for 30 years, think again. And if you're married, you must consider the probability that either of you will live a long time - not just one of you.

I know it's not a fun thing to think about, but if you can set aside the emotional aspect of it, and approach it like a scientist, you'll build a better retirement plan.

You can start by checking out 5 Ways to Estimate Life Expectancy.

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What Got You Here, Won’t Get You There

Monday March 31, 2014

What's the big deal about retirement investing anyway? Don't you just invest the same way you always have, and everything will be just fine?

The truth is, that might work. And it might not.

Here's why it's not quite the same.

When you are growing your money and saving - what we refer to as the accumulation phase - a portfolio is typically created by solving a math problem. The math problem is used to determine what type of portfolio allocation can give you the highest potential for return at any given level of risk. Various portfolio structures are plotted along a path, and the portfolios that offer potential for larger returns at lower levels of risk are said to be "efficient". The path they are plotted along is called the "efficient frontier".

When you are in retirement and withdrawing income - what we refer to as the decumulation phase -  you are now solving for a different math problem. The portfolio now needs to deliver a minimum level of income for life. When you solve for this math problem, it does not lead to the same portfolio design that you would have in the accumulation phase.

I expand upon this and link to the underlying research in Why Retirement Investing Needs to Be Done Differently.

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How to Look at Risk

Wednesday March 26, 2014

Have you ever filled out a "risk tolerance" questionnaire? You know the kind that asks what you would do if the market is down 10%, 20%, or 30%? You answer a bunch of those kinds of questions and it determines you are a "moderately conservative" investor, or something along those lines.

I stopped using those questionnaires years ago. They didn't make sense to me.

This week, I heard Michael Kitces, an industry expert, explain a view of risk measurement that does make sense. He broke risk into three parts as follows:

  1. Risk capacity - if something bad happens are your goals in trouble or not? This is a quantitative measure. It is not about how you feel. It is about whether your money will meet your desired level of spending for life.
  2. Risk perception - has a lot to do with your knowledge level. When you are educated about markets, investing, and have realistic expectations, then volatility is less scary.
  3. Risk attitude/tolerance - has to do with your willingness to engage in trade-offs. Perhaps a slightly higher allocation to equities may offer the potential for you to accumulate more, spend more in retirement, or pass more along to heirs - but the trade-off may be you must accept a 5% chance that you could get a prolonged period of poor market returns, and if that happens then some downward adjustment in spending will have to occur. Once you understand the trade-off you can decide if it is one you are willing to accept.

The first measure above is determined by a good financial plan; the kind of plan that tests your retirement goals across variations in spending, inflation, longevity, and over various potential economic conditions. This kind of planning clearly shows you whether your goals are realistic or not.

The second measure is something you can control by educating yourself. If you want to get a good handle on investing, I'd recommend Carl Richard's Behavior Gap, and William Bernstein's Four Pillars of Investing.

The third measure has to do with a combination of the first two. Once you have a good plan and a solid knowledge base, you can tweak your plan to see which trade-offs make sense for you, and which don't.

You can also check out a few other articles I have on risk and risk management:

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Smart Retirement Income Plans (vs. Dumb Ones)

Saturday March 22, 2014

Most of the time, both halves of a couple don't retire at the same time.  Several weeks ago, I spoke about this topic with Tara Siegel-Bernard, a journalist for the New York Times, as she was working on an article about it.

Her article Coping When Not Entering Retirement Together, was published this weekend. It does an excellent job of capturing the conversations that need to happen to navigate a staggered entry into retirement, where one spouse may retire many years earlier than another.

The financial side of this transition takes works too. In Tara's article, I suggest creating a retirement income timeline that shows you a year by year picture of what amount of cash flow would need to be withdrawn from your savings and investments. I provide instructions and an example in my article How to Create a Retirement Income Plan in 4 Steps.

As I was reviewing the sample retirement income timeline today I realized it provides a great example of exactly why things like the 4% withdrawal rule don't work. In this sample, the couple Sam and Sarah Sample, need to withdraw quite a bit form savings early on, but then they have a few years after Social Security and annuity income begins where they have more income than spending needs. Then when one spouse passes, they will lose the lower Social Security amount, and withdrawals from savings and investments will need to resume.

This is an example of a smart retirement income plan. Withdrawal amounts don't follow a nice, neat 4% pattern. They vary, depending on other aspects of the plan. Once a smart plan is created, you can buy laddered bonds or CDs with maturity dates that match the uneven cash flow pattern. This makes far more sense to me than trying to withdraw 4% of your portfolio value each year.

It's true, it takes more work to create a smart plan. But it usually leaves you with a better outcome (ability to spend more or leave more to heirs) than using the standard rules of thumb.

Learn more ~ or join the conversation!


Mind Tricks That Lose You Money

Wednesday March 19, 2014

I spent Monday and Tuesday of this past week in Chicago at the Retirement Income Industry Association's spring conference. It's a great congregation of like-minded people -  and getting to talk shop with fellow Retirement Management Analysts (RMAs) is something I truly enjoy.

At the end of the conference a thought leadership award was provided to one of the RMAs, Helen Simon, who teaches in the Department of Finance at Florida International University. She wrote a paper titled Financial Behavior of Clients in or Near Retirement: What Advisers Need to Know.

What's the paper about? It's about how your mind tricks you into losing money - and how some of these tricks loom even larger as you near retirement.

In particular, those near retirement age can exhibit exaggerated behaviors of both Overconfidence and Hyper Loss Aversion - which are two behavioral biases that are well documented by the field of behavioral finance.

Overconfidence is exactly as it sounds - people think they know more than they do. They routinely think their ability to analyze a situation and pick the best outcome is better than it is. Overconfidence costs you money. In her paper Helen points to a 2013 study, Aging, Financial Literacy and Fraud, which found a correlation between overconfidence and senior fraud. As I discuss in Financial Literacy for Seniors, overconfidence can rise at just the point in time where your true ability to analyze complex financial decisions declines.

Hyper Loss Aversion refers to a tendency to psychologically place more weight on losses than gains. This can cause you to overreact to normal market volatility.  For retirees it can also cause you to refuse products such as annuities by focusing on lack of access to principal and seeing that as a "loss" instead of focusing on the steady lifelong monthly income that an annuity provides.

How can you avoid money mind tricks?

Put a plan in place. Consider hiring a financial adviser that keeps you on track.  If you don't want to work with an adviser, another option may be to enlist a younger trusted family member to talk with before you make financial decisions.

Almost all successful people have coaches and teachers they rely on. Relying on someone to help make smart financial decisions isn't a sign of weakness - it is a sign of success.

Learn more ~ or join the conversation!


Is $1 Million Enough?

Wednesday March 12, 2014

How far does a million bucks go in retirement? The answer? Heck, I have no idea.

I could use the 4% rule and say you could withdraw about $40,000 a year inflation-adjusted for the rest of your life. But that doesn't account for taxes or any other aspect of your financial plan.

Take the case of a single physician retiring at 72, with $80,000 of combined pension and Social Security income, a family history indicating maximum life expectancy of 90, and all $1 million is in after-tax mutual funds in a brokerage account.

Contrast that with the 55 year old corporate exec who has a million in her 401k plan, no pension, and wants to exit the workforce now.

In the first case, a million is more than enough, assuming he spends around $120,000 a year. This spending number includes expected annual income taxes. If he invests in a tax-efficient way much of his returns can be long term capital gains and qualified dividends, which are taxed at a lower tax rate than ordinary income.

In the second case, a million might be enough is she is willing to live on less than $50,000 a year (this spending number also includes expected annual income taxes). In her case, every dollar she withdraws from her 401k will be taxable income to her.

No one can tell you if a million is enough without knowing an awful lot about you.

If you want to take a stab at figuring out how much is enough, walk through the 4 Steps to Determine How Much Money You Need to Retire.

Learn more ~ or join the conversation!


Fund a Business with IRA Money?

Wednesday March 12, 2014

Usually I think this is a really bad idea. But I have found an exception.

First, why do I usually think it is a bad idea? I've seen too many people cash out an IRA or 401k account to start or fund a business. They pay income taxes when they cash out, and sometimes penalty taxes.  After taxes, they may only get 50 - 70% of the starting balance.

But what if there was a way to use the capital inside your retirement accounts to fund the business without cashing out? There is.

In the right situation, I think it is a viable solution. Learn how it works in IRA Rollovers for Business Start-Ups.

Learn more ~ or join the conversation!


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