March, 2008
by Dr. Thomas E. Bell, CMG Member, Michelson Awardee (Retired)
Retirement isn't like going on vacation for year after year after year. I've been a CMG member since 1975, and I retired at the end of 2005. I've found that the challenges of the professional world have been replaced by other challenges, some of which I might have avoided if I'd done things differently in the past. And I've had to undertake quick educations on topics I never anticipated in order to deal with the realities of my new career: Retirement.
In a series of articles in MeasureIT, I'll be describing some of the lessons I've learned about retirement - and that may help my fellow CMGers. Joe Delano, Certified Financial Planner, is the broker for both me and for CMG; he'll be contributing to this series too.
Although many articles (and whole books) have been written about how to handle retirement, many of them are focused on issues not very relevant to CMGers (e.g., how to invest $10,000,000), and very few of them are written from the point of view of a retiree. As a retiree, for example, I now understand how much I needed to learn about the details of Social Security. However, very few people make a commission on Social Security payments, so it's not a popular topic for salesmen, and I didn't look at it early enough.
We'll be giving links to sources that can help, and we'll try to indicate at which age a CMG member should look at the topics. But we won't be giving advice on specific investments or attempting to predict changes in laws and regulations.
I've found that my issues can be divided into two areas: 1) life-style decisions like when to retire and where to live, and 2) accumulating and managing retirement funds. We'll deal with both of these tracks in this series. Starting NOW.
If you're younger than 40 (even 30), it's time to get started accumulating your retirement funds.
When I left one employer and went to another in my under-40 years, I cashed out my retirement contributions and spent the money. That was a very bad way to accumulate adequate funds for retirement!
When I was 40, I started my own company and realized that I was behind in my preparations for retirement; my accountant embarrassed me by asking about my retirement account. So my wife and I decided to save 20% of our incomes in corporate-sponsored tax-deferred accounts each year. In addition, we limited expenditures and furiously built up equity in our residence. At 65 we had enough to retire, but it was painful along the way.
I wish I had started about 10 years earlier so I wouldn't have needed to squeeze quite so hard for so long.
You may have one or more retirement accounts at your employer(s), so you may have already begun your accumulation. However, it's quite likely that the values of those accounts, even with the addition of Social Security payments currently promised, won't be adequate for you to maintain your lifestyle when you retire. You should make at least some simple computations of how much you'll have when you retire. (More about this below.)
Even if you are saving consistently, a very large problem looms ahead: the maturing of the Baby Boomers (those born in 1946 through 1964)i. For those of you who didn't have the good sense to be born before them, you'll probably be expected to help support the Social Security system and cover Medicare (e.g., for me and my wife). We can't predict the way that may be done, but it will probably mean that you'll need to have more assets than you would have needed without all us elderly folks hanging around.
So you need to save more. When should you start? NOW! (Even if you're many years away from retirement.)
You may have some Defined Benefit accounts as well as some Defined Contribution accounts. Defined Benefit accounts are usually called "pensions" and provide defined benefits (dollars) each month (or every 2 weeks) after retirement. Defined Contribution accounts (usually called 401(k)s) put defined amounts of money into them, but allow the retiree to withdraw funds with far fewer limitations than defined benefit accounts. You need to do the projection to find out whether you must increase your savings in order to have a reasonable retirement.
Projecting the effective value of a 401(k) (Defined Contribution) account at retirement requires assumptions about the amount of future contributions, the level of contributions each year, and the return on the evolving amount of the account. For a first-cut approximation, you can create a spread-sheet that assumes your current level of contribution (adjusted for probable salary increases), a rate of return (perhaps 7% for mixed equity and bond investments), and inflation (perhaps 2.5% for the next few years). Of course the actual rate of return on your assets will vary year-by-year, and it may even be negative in some years. But some planning is vastly better than none; you can determine whether you'll be near your objective or you need to take dramatic action.
The value of a pension (Defined Benefit) account is usually dependent on how long you're employed by the organization providing the pension, your salary, and the characteristics of the plan. In some cases, a "lump sum" payout can be obtained instead of regular payments until death. There may also be an option to have the payments deposited into a tax-deferred account that you hold (like an IRA). In the case of a pension account, the natural result of a projection is the amount of the regular payment you will obtain - even if you'd like to have a lump sum.
In my case, an employer from my early working days had provided two retirement accounts, one of which turned out to be an annuity (effectively a pension). My plan had been to roll over both of them into my own tax-deferred account, but I learned that I could only accelerate the annuity and have it paid out in 10 years. If I had investigated a decade earlier, I could have avoided the confusion of having these payments appearing in my account while I was also taking distributions.
Social Security is a special type of pension, but it has many characteristics that are not common to pensions from commercial firms. One of these is the lack of funding; commercial firms are effectively required to fund their pension plans as their liabilities grow, but Social Security has tremendous unfunded liabilities.
Will the full Social Security benefits be there for you?ii We simply don't know, but it seems problematic. I'm currently receiving Social Security benefits but my wife is not; she'll reach full retirement age in June of 2008 and begin taking benefits then. (Both of us were born prior to all the Baby Boomers.) If I had done adequate research, we would have done things differently. (We'll say more about that in another article in this series.)
To project your funds at retirement, you may need to find a way to combine pension amounts, Social Securityiii amounts, and 401(k) amounts. One way is to make an assumption about the level you'll take distributioins from your 401(k) accounts (perhaps at the level your account will be earning returns), and then add those amounts to the amounts from Social Security, other pensions, and your private savings. You can then see how much you'll likely have each monthiv.
If you're like me, your expenditures after retirement will be very close to your expenditures prior to retirement. (Several months prior to my retirement we paid off the mortgage on our home, so mortgage expenses were eliminated both before and after retirement.) With a projection you can determine whether you need to increase your savings rate to support your life-style after retirement.
If you started saving early, and you've checked to be sure that your retirement income will be adequate (if your assumptions are accurate), you still shouldn't assume that you don't need to study for your new career. Contrary to the assumptions in most retirement analyses, the world seems stubbornly committed to continual change, and the potential retiree needs to track it. To be blunt: The only ones who will really put your interests above all others are you and (hopefully) your spouse and family. You need to understand the issues well enough to take appropriate actions (and avoid taking inappropriate ones) to protect your retirement.
You need to understand the best recent information about financial assessments, the terminology of the latest complex financial products, the popular current investments, and the dangers of "investments" that will likely leave you with little but bitter memories. Even if you don't really want to know about how massive firms intend to collateralize the latest securities, you still need to know enough to decide when to tell the nice voice on the telephone that you're really not interested in the latest "once in a lifetime opportunity".
I've received numerous calls, letters, and e-mails from people with wonderful deals. In addition to the Nigerian opportunities, I've received lots of explanations about retirement investments, low-cost medical care, "flip that real estate" deals, chances to buy 100% per year bond returns, and on and on. Because my assets are not adequate to provide for our needs unless I maintain a good rate of return (due to my delay in starting accumulation), I need to be continually looking for additional ways to maximize returns. However, I need to filter out all the nonsense. The variety of investment and financial information can totally overwhelm me (in spite of my having a Ph.D. in business from UCLA - really, that's why I'm "Dr. Bell"). I try to keep current by using several sources of information, but I have rejected the alternatives to take special courses so I can do options trading, commodity trading, and investments in viaticles. I just don't have the time to learn enough to succeed there while doing everything else.
I rely on reading The Wall Street Journal every day, listening to CNBC as much as I can, reading several popular financial magazines (e.g., Money Magazine), subscribing to a number of web services giving economic and geo-political informationv, and discussing investments with Joe Delano on a frequent basis. I've been working to prepare myself since about 1970 (although just in printed form in the early days). The information I gain lets me make predictions that yield good returns (more on that in yet another article). This is an area where I believe I've done things reasonably well.
If you are 50 or older, you need to be building your financial literacy as quickly as possible. Start reading financial stuff so you know the lingo. Take at least an hour per day to start preparing for your final career.
We're all interested in retiring some day, and avoiding my missteps may help my CMG friends. Joe Delano and I intend to suggest additional sources of information in the next article, so please let us know what's especially important to you. Maybe Joe or I can help you.
We're interested in hearing your concerns, questions, and comments. We can't promise to respond to all your communications, but we'll try. Send an e-mail to me at or to Joe Delano at if you have something you'd like to ask or to express. Please put [CMG] at the beginning of the SUBJECT line so your e-mail won't get discarded as spam.