Saturday, June 25, 2011

It's A New World

When I decided to retire a few years ago, I read enough books and papers on retirement planning to fill a small library.  I also talked to several financial planners.  I got some good advice, a little great advice, and a lot of very bad advice.

I read about Sustainable Withdrawal Rates, for example, a body of work that suggests retirees can invest their nest egg in stocks, withdraw 4½% of their total savings the year they retire, and continue to withdraw that same dollar amount annually with a 90% - 95% probability of safely funding at least thirty years of retirement.

Not only did I read books and papers about “SWR”, I built my own Monte Carlo simulation software.  In doing so, I realized that the statistical inferences are flawed and that, even if the statistics were correct, the strategy is not “safe”.  

Retirees who employ the SWR strategy are promised a rate of bankruptcy of “just” 5% - 10%, but the bankruptcy rate for households in the United States over the age of 65 is currently less than half a percent.  If your goal is to increase your chances of going bankrupt by more than an order of magnitude, SWR may be just the ticket.

It is easy to understand why the financial services industry likes SWR, though; its premise is that retirees will buy lots of stocks and mutual funds.

Next, I began to read academic papers written by economists.  Surely, they would be objective. I found one that explained the virtues of fixed annuities, contracts sold by insurance companies that promise to provide income for life, no matter how long that life might be.  Then I discovered that the academic who wrote them moonlights as a contractor for the insurance industry.  Maybe not entirely objective after all.

I considered hiring several financial planners and even hired one for a brief period.  Again, I heard some good advice and a lot of what appeared to be just plain wrong.

A highly regarded financial planner in the Washington, DC area gave me a lot of good advice regarding stock investments, but some terrible advice on mortgages.

When I asked if I should pay off my mortgage of several hundred thousand dollars, he replied, “I don’t see any reason why you should.”
Over the next few years, my taxes shrank dramatically, leaving little tax advantage to holding a mortgage.  Then the stock market tanked and that several hundred thousand dollars I had invested in stocks instead of paying off my mortgage began to evaporate.  Meanwhile, I was paying a bank nearly 7% a year in mortgage interest for the privilege of losing the principal in the stock market.

There are lots of people who want to help you plan retirement, but most want to sell you something, like mutual funds, stocks, or annuities.  It’s difficult to get an objective opinion on fixed annuities from someone who makes their living selling mutual funds.  Like asking a barber if you need a haircut.

Ultimately, I took the drastic step of becoming a financial planner myself, primarily to plan my own retirement, but also to help others.  We Baby Boomers started serious planning for retirement way too late.  We failed to understand the challenge of funding perhaps three decades worth of Golden Years and, in my experience, we find it far too difficult to find competent, unbiased retirement advice.

It isn’t surprising that we missed the memo.  During our lifetime, life expectancies have risen dramatically and company pensions have been replaced by IRA’s and 401Ks that shifted all of the financial risk of retirement from our employers to us.  We are the first generation to face potentially long periods of retirement without company provided pensions.  It’s a new world.

I hope to remedy this as best I can by providing unbiased, logical financial planning advice.  My goal is to provide information that is useful, easily understood and as enjoyable to read as retirement planning advice can be.

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