As you might imagine, I get a lot of emails asking for financial advice.
In fact, I get so many that I have a standard response to them:
I don’t give out specific advice because 1) if I did that’s all I’d spend my time doing 🙂 and 2) there’s no way to really get to know someone’s complete financial picture and give great advice via email.
If you like, I’d be willing to publish your email (with no name of course) and let my readers offer their thoughts. This won’t give you a complete answer, but will offer a set of suggestions/ideas for you to consider as you put together your next steps.
Sometimes they take me up on the offer and sometimes they don’t.
Today’s post comes from a reader who did accept the offer. His story is as follows:
I’m a 59 1/2 year-old former nonprofit professional who was told by my physician of ten years approximately two years ago that I had to stop working due to a congenital medical condition. I had planned to work until at least 67 and hopefully 70 to save enough to retire (which I estimated at that time to be about $700,000). Unfortunately, I now find myself disabled and my private disability insurance – which replaced 60% of my annual income of about $95,000 – is capped at two years, which ends mid-December of this year.
After that, I am solely reliant upon Social Security Disability Insurance, which pays only about $2,000 per month, with the extra amount needed for my very modest living expenses coming from my retirement savings, which are about $270,000. The good news is that I have a very reasonable rent for the home I’ve rented from the same landlords for 18 years (they are in good health and are planning to pass the home to their daughter at their deaths), and I have no debt.
After closely tracking my expenses for the last 18 months, I’ve established an achievable, though pretty tight, current budget of $2,650 per month, and have prepared for this time by making certain purchases I needed and will use during the foreseeable future. I paid cash for my 2013 Honda and am putting approximately 2,500 miles per year on it, since almost everything I need is within 3 miles of where I live (I currently have about 24,000 miles on it). So while I’m still somewhat stunned that I had to retire at this age, I’ve made the best of my situation given what I can control.
I’ve assessed my situation against your 3 steps and am contacting you for any thoughts you might have. Regarding increasing my income, I’m fairly restricted right now due to health in taking on additional work such as consulting, which I’ve done before and have talents that are marketable, including professional writing and editing, which I’ve done, enjoy and am considered quite proficient at (as are you!).
My savings are the best that I could manage considering that I had planned to work at least 10 more years and had not focused early on saving for retirement (at the time I retired, however, I was saving approximately 50% of my net pay and was investing the maximum in my 401(k)).
Regarding investing, I’m not doing well in this regard in my opinion, because I currently have approximately 61% invested in both my 401(k) (about $137k) and a taxable mutual fund through Chase (about $29k). The remaining 39% (about $104k) is in cash, which I know I need to invest but I’m very concerned about the political situation, which I think will become more unstable, added to the historic high valuation of stocks according to certain widely-used measures (such as p/e ratios) and the uncertainty of bonds given rising interest rates. I’m planning to roll over my 401(k) next week into one or more Vanguard low-cost index funds (which I read you also suggest) and, in a tax-wise manner, want to eventually move my higher-cost Chase fund into a Vanguard fund as well.
Because my health condition will not necessarily result in a lower life expectancy, I’ve used the Vanguard retirement calculator to project a maximum of 35 years and, if I stay within my budget (with about a 3% draw-down per year on average), the calculator projects I have a 98% chance of my retirement funds lasting until age 95 (which I seriously doubt I will reach). Of course, that presumes I won’t need long-term care, which I couldn’t purchase due to my medical condition (no insurer would insure me).
In your opinion, what types of things would you suggest I think about regarding my income and investment needs? Should I go ahead and invest my relatively large amount of cash reserves and, if so, would a Vanguard index fund or perhaps an entirely different type of investment be advisable given my situation? Am I being unrealistic with my fairly tight budget, albeit with the understanding that I might need a bit more (I’ve given myself a “test” period of six months beginning in June to see if my budget is adequate or a bit too restrictive)?
Any thoughts or ideas you might have would be greatly appreciated.
What suggestions would you offer him for making the best of this situation?
Lance @ My Strategic Dollar says
I would keep very little in cash – just enough to help in case something came up medically that needed to be taken care of. Beyond that, I’d find a low-cost investment with decent returns to supplement your income. I’d keep reinvesting dividends until you no longer can. Then start withdrawing a small amount.
Beyond that, I’d reduce expenses as much as possible.
Sorry to hear about your disability. I wish you the best!
CA says
Thank you for your good wishes and thoughtul advice.
Darren says
Don’t leave your cash just sitting there! At least put it in short term CD’s and ladder the purchases or what I like to do is use online banks like gsbank.com which is a Goldman Sacks sub. It’s better then watching inflation eat away at it even more. I stay away from bonds as well due to rising interest rates. I agree that valuations are waaaay too high right now to get into equities.
CA says
I hadn’t heard of gsbanks.com and will be sure to look into it. Thank you for the helpful advice.
Darren says
sorry I had a typo it’s gsbank.com
Darren
CA says
Actually, I think it was my mistake. I found the website and will explore gsbank.com’s products further. I appreciate your recommendation.
Ellen says
One thing I did not read in your email is whether you have calculated what you’ll receive from Social Security at 62. I don’t know if, as a nonprofit professional, you are eligible, but if you are then you are only three years away from being able to collect. This would likely be offset by the disability pay, but the retirement benefit may be higher, either at 62, 65 or 70. A higher retirement benefit would reduce some of the stress on your savings.
I have a different opinion on cash — If I were concerned about market volatility, I’d have at least one year’s expenses in cash (CDs, money market). That way, you don’t have to fret when the market moves significantly and quickly.
Finally, I do want to offer you some encouragement. I have a good friend who retired recently, and she is shocked at how little she needs to live on. Because she now has time, she cooks instead of eating out, has time to clip coupons, go to the library for books, etc. I don’t know where you live, but I think that you can do this! I wish you the best of luck.
CA says
Thank you for your good advice and words of encouragement. In fact, a retired friend of mine told me the same thing about how little one actually needs to live on in retirement. I have found the same to be true. I’ve also realized just how valuable saving a few dollars in expenses can be, especially if it’s a recurring expense.
I will make sure that I fully understand how Social Security Disability Insurance interacts with regular Social Security. My understanding is that the amount that I now receive, which actually is larger than the amount that I would have received if I were able to retire at 62, is “frozen” except for cost of living adjustments. So I will never receive a greater or lesser amount than my base amount plus cost of living adjustments. But I will make sure that this is the case so that I plan wisely.
Thank you again.
John Bennett says
As others have said, and you are well aware, get that cash to work. I’m a huge fan of the doing 4 Vanguard funds (international, balanced, large cap, mid cap). Fidelity was convenient for my father so I’ve those fund names. Vanguard has equivalents. Pay attention to the fee structure and how you plan to withdraw. Vanguard was charging per transaction where Fidelity wasn’t and dad wants to draw out every two weeks. That is a fee from each fund 26 times a year. [FOSFX – Fidelity Overseas Fund FLCSX – Fidelity Large Cap Stock Fund FGRTX – Fidelity Mega Cap Stock Fund FTRNX – Fidelity Trend Fund]
Renting means you have the knowledge that you aren’t responsible for any major housing maintenance or repairs, which is good. It also means that you live on the whims of your landlord and the paperwork you sign. Make sure that paperwork is good and that you have an escape plan. Terms are good with them now, but 30 years is a long time to think about being with one landlord.
Now is a good time to go through your “death box”, “inheritance drawer”, or whatever vehicle you have that keeps record of your worldly possessions and instructions for their distribution. This is your will plus the information to make your wishes actionable by the executor without extra work.
Finally, you might consider doing an adjustable SWR. 3% is pretty standard, as is 4%. I prefer the concept of last years percentage of growth minus 2%. So if you had 5% growth last year, you are back at the 3%. If you had 6%, you are at 4% withdrawal. But if you had a 15% year, you could draw 13% out and have some fun or do some more exciting investments with it. With a decent nest egg and a reasonable minimum withdrawal dollar amount, this is almost by definition sustainable and avoids the point in your life where your body is starting to fall apart but your accounts look amazing. It’s still structured but allows some excitement. And it makes an annual budget easy because you still know at the beginning of the year how much you have to work with.
CA says
All extremely valuable advice and much appreciated. I will indeed consider doing an adjustable SWR. Right now I’m a little over halfway into my six months “test” budget period and am actually living beneath my budgeted amount, which might reduce my projected withdrawal rate. Plus, my expenses will actually decrease when I qualify for Medicare this December, as I’m currently on COBRA, which is fairly expensive (but superior in the types of health coverage I need compared to an ACA-based plan).
Regarding my “death box,” I actually have been reading about additional documents such as a letter of instruction that I should include along with my will, etc. I was the executor of my mother’s estate and she was quite careful to put together her documents and files in a way that made it easy to take care of matters following her death. This included a letter of instruction that you referred to, which accompanied her will, etc.
Regarding my rental house, I’m aware that I live at the whim of my landlords and have planned to move at any time close to where my best friend of 40 years and his wife are now building a horse farm in North Carolina. My friend is thrilled about this because we’ve mostly lived on opposite coasts since we attended college together. This is a relatively low cost and quite beautiful area, which I’m familiar with as my mother was a Duke grad and my friend and his wife went to law school at Duke. I’ve always rented for the reasons you mentioned – not having to worry about maintenance and repairs, plus the fact that I’m single and moved so frequently prior to moving into this house that I never felt the need to “put down roots” in any given area or community. Plus, I’ve always had wonderful landlords and feel quite fortunate for that.
Lastly, I very much appreciate your advice concerning the four types of Vanguard (or Fidelity) funds you recommend. I will indeed follow your advice to pay close attention to the various fee structures and make sure that I am selecting the best company and fund(s) from that perspective. Two generations of good advice is surely worth listening to!
Apex says
How does that work when you have 15% one year and negative 20% the next year? I don’t see how that is supposed to work when you typically have negative years every few years and every now and then a big negative year.
John Bennett says
Since 1984, the years you would have to take a base salary from your funds include: 1984, 1987, 1990, 1992, 1994, 2000, 2001, 2002, 2008, 2011 & 2015. That 34 year span has 11 years where the four funds specified wouldn’t return enough so you would take a base salary. (The baked in assumption is that you would put 25% into each fund and balance annually. You would also keep your money in cash for the years the funds didn’t exist.) You would need to have an upper salary too. It gives you some freedom but you need to pay more attention.
With a $1M portfolio, invested to return a nominal amount, you would normally see $30-40k annually with an SWR of 3-4%.
With a $1M portfolio, invested in the 4 funds suggested, you would draw out $2.5M after 34 years and have $2.8M left in the account with a 4% SWR. The first 2 years are under $50k, the first 13 years are under $75k as are 8 later years, and your last 5 years are over $100k with 6 other years prior breaching $75k.
With the same portfolio, taking either a $50k minimum or a $100k maximum salary, there are 12 years at $50k, 19 years at $100k, and 3 years in between variable withdrawal calculated. You’ve withdrawn $2.7M and have $1.1M invested still.
As the OP was about 60, 34 years would make them 94. They would have had more money to enjoy their healthier years and would still have the $1M nest egg. The standard 3-4% SWR would leave them with a larger nest egg but the higher quality of living doesn’t come until there is a higher risk of physically not being able to enjoy it. Since the OP states they have about $270k in retirement funds, they can expect $8-33k a year from that 3-4% SWR with an ever growing nest egg,
but could easily sustain a $15-25k variable safe withdrawal rate and an nest egg that has grown by 29% instead of 280-398%.
Of course this is all based on historical data. I chose 1984 because FOSFX was started in 1984 and FTRNX was well in stride. FLCSX started in 1995 and FGRTX started the last week of 1998. Future results could be different. And if you push the starting value to $2M you have nothing to worry about.
JayCeezy says
Very sorry to hear, CA. Now, first, some good news…you’ve got this!
•SSDI is not taxable at your income level. So the income and payroll tax on $95,000/year will now go to zero.
•You are going to pay almost zero income taxes. Check your exemption ($4,050, single) and standard deduction ($6,350, single), and plug it into your investment income on $270,000.
•Gather your utility bills, and look into ‘low-income assistance.’ I’m going to guesstimate this will save you $800 – $1,000 per year. Let me know how close that is.;-)
•Contact your state’s HHS, as well as your county’s. There are many programs that can help you with financial assistance, transportation, and much more. The agencies don’t always coordinate, so it is worthwhile to contact both.
•Vanguard has a free Brokerage service that can assist you in making a CD ladder, with multiple institutions at the best available rates. One stop, and you can set it up and maintain it online.
•To make up the $650/month variance in your monthly budget, you will need about a 3% return on your $270,000. Very doable.
My own situation concerns a parent with a cognitive disability, and adult sibling with special needs and declining cognitive capacity. I spend a few hours each week in contact with agencies and the services, and these people do this for a living. They want to help, and can find many ways that wouldn’t occur to those of us with no experience.
Your planning and responsible choices have set you up well, for an unexpected event. Wishing you well as you solve this challenge.
CA says
All terrific pieces of advice and I can see that they’re based upon a great deal of experience in helping your loved ones with disabilities. They are very lucky to have you.
I had no idea that Vanguard had this free brokerage service with laddered CD investments that can be set up and maintained online. I will definitely look into this.
I am indeed planning to apply for low-income assistance for my utility bills, which for my electric alone will save me 20% per year. I don’t think that I’ll be at an income level to qualify for a discount on my gas, but I’ll be sure to check more closely into this before my private disability insurance ends. I’ll also check into any discounts offered for my trash removal service (my landlords currently pay for water). As you noted, the savings will be significant – I should save about $150 per year on my electricity alone.
I will also follow your recommendation to check into available state services. Fortunately, I live in a state and metropolitan area with strong social support services. I’ve explored the availability of some of these, but I’m sure that there are many more that I currently have no idea I qualify for.
Finally, your tax observations are quite in accord with what I project to be the case when my private disability insurance ends in December. As you noted, this will save me quite a bit of money.
Thank you so much for your advice.
Becky S. says
I’m not a lawyer, but you might want to talk to a lawyer in your area about the possibility of a special needs trust. Some offer a free initial consultation, but be sure you find an estate lawyer who is very experienced – get personal references.
IF, at some point in the future, you become more disabled and end up on Medicaid, a special needs trust would pay for extras that Medicaid doesn’t and would protect your assets. In some states, there are non-profit orgs who manage special needs trusts to make sure your assets are not spent on things that Medicaid will cover.
If your estate plan has not been reviewed in detail in the last 2 – 5 years, it should be. Agents, powers of attorney, personal representatives, and even beneficiaries may need to be updated, not to mention updates due to any recent changes to state and federal laws that impact estates.
Make sure you designate a healthcare Power of Attorney, not just a state “living will” or “advance healthcare directive” which tend to cover only very near death situations.
Good luck on both your health and your finances!
CA says
Although you’re not an attorney, I can see that you have quite a bit more knowledge about matters involving trusts and estates than the average person. I will indeed look into the possibility of establishing a special needs trust, as I think it’s excellent advice to explore measures to protect against asset depletion in the event my health condition deteriorates to the point that I need Medicaid. And your advice concerning estate planning, documents needed, etc. is all in accord with what I’ve been reading and researching. Thank you for taking the time to give me this advice.
Ray says
I understand your timidity when it comes to investing the cash portion of your portfolio. I would be wary as well.
One thing I would mention is that if buy and hold individual bonds, the fact that the face value of the bond falls with interest rate hikes won’t matter if you can hold the bond until the end of the term. Buying individual bonds is not for everyone however.
Another option to look at is an income-generating annuity. Just be sure you understand the rate of return, etc. Placing some of your money in an annuity might at least give you peace of mind while thinking about the overvalued stock market and rising interest rates.
Good luck and be sure to report back to ESI what you decided to do and how it worked out.
CA says
Very intriguing suggestions and I will investigate both options. I’ve looked at annuities before and decided against them, but I will re-look at them in this light. I’ve never purchased an individual bond, but will also explore this possibility as well. The one thing that I’m quite certain of is that holding cash is not a wise long-term strategy, even if it is earning a relatively decent interest rate for these times.
Thank you for your suggestions and I will indeed report my decision and results back to ESI.
Jack Catchem says
Best advice I could possibly give you: “Geo-Arbitrage.” It is time to cash out of ‘Murica and move to Tropical ‘Murica!
Costa Rica is a great option for low cost of living while maintaining connections with the homeland, but many of my fellow government hacks have set up awesome ex-pat communities in Belize. Despite the Central America location the official language is…English.
You may be retired, but you aren’t dead. Go have fun in the sun where that dollar can cover you all day long. 🙂
CA says
I found your comment to be quite humorous, but in fact I have been exploring relocating overseas to places like Costa Rica and Belize. I particularly liked your phrase “You might be retired, but you aren’t dead.” It made me laugh!
Jack Catchem says
Thanks! I love me some edu-tainment. Seriously, you only get to play once (that we know about), so may as well enjoy the game, CA!
ztg says
I think making private money loans with someone you trust is a good way to generate better than average rates. I have been on the both sides as a borrower and lender and have had really good success.
CA says
That’s an interesting suggestion. My grandfather, who had been a bank president, used to do the same during his retirement and I think it worked out well for him.
Thank you for your info. and insight, which I will explore.