RETIREMENT: TAILOR THE PLAN FOR YOUR OWN SITUATION

As originally appeared in The Jerusalem Post on November 22nd, 2019.

Real people have trouble balancing their checkbooks, much less calculating how much they need to save for retirement; they sometimes binge on food, drink, or high-definition televisions. They are more like Homer Simpson than Mr. Spock. 

-Richard Thaler

I recently had a meeting with a couple that was planning on retiring in the next 3-4 years. They had done a great job of preparing for the meeting having all their various bank, brokerage, and pension accounts organized. They knew what they were going to receive from both Bituach Leumi and Social Security. They also clearly had spent a lot of time on the internet researching what the “experts” say about how much money is needed to fund retirement and what to expect in terms of future spending. They were quoting the typical financial media retirement advice. That they will need 70- 80% of pre-retirement income in order to retire. That they should draw down 4% of their portfolio annually, and that if they invest in the ‘right’ stocks they will have a secure retirement.

After asking them just a few questions, it became quite clear that the typical ‘cookie-cutter’ advice that they read was not at all going to be applicable to them. They told me that 2 of their children lived in the US, and two lived here. At retirement, they both had high up on their list of priorities, the desire to visit their children and grandchildren in the US multiple times a year. Locally, their son was learning in Kolel and they were planning on helping out his family with a good chunk of their monthly expenses, as they encouraged their son to stay in Yeshiva. After going through other particulars it became clear that their spending would actually be higher than it is currently. This is actually something I find quite common. The beauty of working is, aside from actually earning a salary, you are busy at work and it becomes much harder to spend money. When you no longer work and have more free time, your spending increases. It may be taking your spouse out for brunch, going to Prague for a few days, picking up the grandchildren on Tuesday’s and buying them pizza or falafel, and taking the extended family away on vacation for Channuka or for a few days in the summer, these activities are not free. 

As such it’s imperative that retirement planning be specialized and personalized to the individual retiree. An approach that makes sense for a retiree with $5 million in the bank and a vast real-estate portfolio, may have no basis in reality for a retiree with $500,000 in savings and children and grandchildren to support. When I read the financial media’s take on retirement planning, I am often left with the feeling that the authors have never sat down across from a living, breathing retiree. 

Spending

The most important aspect of planning you can do vis-à-vis your retirement is to try and figure out your estimated expenses. 

If you can figure out how much money you will need, then you can figure out how much income you will need to generate to supplement your pension, social security and any other income sources you may have (part-time work, etc).

Steady income

Once you have a handle around your income needs, you should go ahead and create an income stream. Forget about the 4% drawdown rule. In many instances, you can create a portfolio that will be able to generate the income you need without having to draw down principal. Alternative investments such as real estate (hire estate planning lawyers – Kristin Magiros from here) are good assets to be part of a well-allocated portfolio and generate much higher levels of income than you will generate in government bonds or CDs.

Growth and inflation

Retirees still need growth assets in their portfolios. As we are living longer we need to make sure that we don’t outlive our savings. A probate law firm can help with asset management and estate planning as you grow older. In addition, investors need to protect the purchasing power of their money by keeping up with inflation. Dividend stocks that have a history of rising dividends are an effective way to solve both of these issues. Not only do you get the potential capital appreciation that stock investing gives you, but you also receive a steady income stream that at current levels is as competitive with — if not more than — investing in bonds.  

Investors need to realize that markets can fall dramatically and if they are near retirement, a big market hit can put a major dent into retirement plans. That’s why as investors get within 5 years of retirement they should become much more conservative, and adjust their allocation to start creating the aforementioned income stream. 

Don’t rely on some general advice when planning your retirement. Sit down with an advisor and start figuring out your goals and needs. Some solid planning will go a long way towards financial peace of mind in your retirement. 

 

The information contained in this article reflects the opinion of the author and not The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. 

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com  or email aaron@lighthousecapital.co.il.