MonthJanuary 2017

Management of the Retirement Funds (What happened to creativity?)


I have been trading stocks and making the investment decisions related to our personal portfolio for the last 40 years. Some were good, others not so much, but at the end of the day, we are retired and living in Sarasota, so I guess it worked out. As a retirement gift to myself, I thought it would be great to turn over the bulk of the responsibility for managing the retirement funds to an expert. Certainly they could do at least as good as I had done. And so the adventure began.

The goal for those of us with money to live on in retirement is to make some predictable income and not lose the money that we have. We have the most sophisticated financial industry in the world so I thought that there would be several great options to choose from. You can’t imagine my disappointment when the world that brought us the zero down variable rate mortgage couldn’t give me a good safe way to earn 8% on my money.   The bigger frustration was that they had a lot of offerings that said they could but actually didn’t. Now, I didn’t review every financial product out there for retired folks and there may be some very good programs that I missed. I’d appreciate hearing about them.

Let’s look at some of the products that I did find. They tend to break down into two broad categories of offerings. The annuity that takes a lump sum from you up front and makes a periodic payment back to you for some period of time. The other product is a management of your portfolio for a fixed fee. This doesn’t guarantee anything except that the broker gets paid their fee. The magic number that both these products advertised was an annual 8% return with limited downside risk. But the reality is that neither looked to deliver on their advertised results. I want to make it clear that these products are the best solution available for certain individuals, but let’s go into the product with a realistic understanding of what you will get.

The annuity is the scarier of the two products that I looked at. These products claim to offer an 8% yield and have the math to support it, but read the fine print. The basic premise is that you give the annuity company $100,000 and they pay you $8,000 per year for some period of time. It could be your lifetime or the longer of your lifetime and your spouse’s lifetime.   They may give your heirs some of the original principal back. Let’s look at the math very simply. Using the above example, an annuity that takes $100,000 from you today and pays you $8,000 for the rest of your life will have a yield that depends on how long you live. If you live 20 years, then the actual yield is 5% and the $8,000 that you get paid in the first year is only worth $5,500 in year 20 if inflation is 2%. If you want to take any of your original investment out the cost is very high. The provisions vary between annuities, but if you die earlier than 20 years, the yield is lower, longer it’s higher. The contracts are very complex and in my opinion designed to make the simple conclusion that I came to above as difficult as possible for the customers to understand.   You might live forever and be the big winner on the annuity, but these are nothing more than repackaged life insurance programs and the insurance companies will win more than lose.

The managed retirement account is offered as the alternative to annuities from several big brokerage firms. I asked two firms to give me a proposal for managing our portfolio. We have well beyond the average retirement savings so I thought the programs would be interesting. Each proposal came in with lots of financial analysis and a historical yield of about 8% a year. Of course, the historical yields are no guarantee of future yields. Still, they promised upside in good years and minimal risk to the original investment. Not a bad overall pitch. Then I dug into the details. Both programs charged a 1% annual fee based on the account balance or $1,000 for every $100,000 that they managed. The real frustration for me was that most of the money that they managed was placed into mutual funds and bonds. They had some “internal” funds but those were no more than a third of the portfolio. The yield on the bonds were about 4% and the mutual funds had fees. I felt paying 1% to have someone put my money into stock mutual funds and low yield bonds was not a good way to go. But I have been picking mutual funds for years with good results so again, this is not a bad solution for some. Just an expensive way to go.

After looking at the options, I have chosen to manage my own money for the time being. It’s split between dividend stocks and mutual funds. I’m exceeding the 8% yield so far, but it’s been a good market. I have spoken to several individuals that use financial managers successfully. These individuals offer to manage your portfolio for a fixed annual fee.   You need someone that’s smart and willing to do the work. You should not give them the authority to access your money. You should talk to a number of their existing clients and make sure that they aren’t selling you products on which they make a commission.   If you find someone that’s willing to work on a fixed fee, communicate with you at least monthly, take your calls when you have a concern and is not making anything off of you other than the annual fee that’s good. Then they need to be successfully guiding their clients to good yielding and safe investments.   I am sure that they are out there.

My bottom line is that I expected some creative solutions from the brightest financial minds in the world to manage my money. The solutions that I found were designed to give me poor results and the company that I bought them from the good results. They were creative, but not to my benefit. Caveat Emptor!


Health Insurance (What happened to quality)

Like to many services in the country today, healthcare is very expensive and the quality of care is somewhere between really disappointing and really bad. In 2015 we spent 17.8% of our GDP on healthcare. That means for every dollar of goods produced in the country, we spent almost $.20 of that on healthcare. That’s about 50% more than most of the European countries spend and their health as measured by life expectancy is equal to or slightly higher than ours. I could just bitch about the numbers, but the real problem is we have a quality problem that is making the cost of healthcare much higher than it needs to be.

It used to be that weather forecasting was the only field where you could consistently be wrong and still be a valued member of your profession with a long and successful career. Today, we have too many services where bad performance is the norm and the players have long and successful careers. I could go on, but today the focus of my disappointment is the healthcare community. I think two examples of the level of service that was delivered will highlight why I formed my opinion.

Two years ago, I was told after an annual physical that I had a high PSA level. For those unfamiliar with the PSA level, it’s a measure of the protein produced by the prostate in males. Elevated levels are an indication of prostate cancer.   My physician suggested further examination by a urologist and that was the route that I took. The first appointment confirmed the elevated level and subsequent appointments showed even higher levels. At that point, the doctor suggested a biopsy. So I subjected myself to a biopsy of the prostate which consists of taking 12 core samples of the gland and looking for cancer cells. The good news was that the test showed nothing. The bad news was that the PSA levels continued to rise. My doctor suggested another biopsy since they only tested the stuff they pulled from the first test and they may have missed the cancer.

Something seemed amiss as I was not experiencing any of the other symptoms of a problem prostate so I declined. Knowing we were moving, I figured that a new Urologist might shed a different perspective on the nature of the increasing PSA levels. When we got to Florida, I made an appointment with a local doctor and explained the problem. He confirmed my suspicions that additional drilling was not the right approach. Their office’s approach in situations like mine are an MRI of the prostate to see if there are any suspected problem areas. If those are found, they can target the biopsy to those areas. This was not even an option in Mass. where we are supposed to have the most sophisticated healthcare in the world. The MRI showed that I have an abnormally large prostate and therefore would have a higher than normal PSA level.  Nothing was really wrong beyond the fact that I am not normal.

My frustration with this series of events is that I would expect someone that earned a specialty in urology after 8 years of advanced education and some number of years of internship should look beyond basic rule of thumb. The bigger prostate, higher PSA level should have been a simple conclusion. The Urologist in Mass. even commented on the size of my prostate after the biopsy. She just never made the connection between size and PSA level. As a result, I worried about cancer for two years and was frustrated that there was no simple answer. I didn’t care that I was spending a lot of my insurer’s money on tests and visits, but I was. At a minimum, if my Urologist was stumped, she should have suggested seeing someone that was better informed about situations like mine.

The second scenario relates to an experience that my wife had with her vision. About 18 months ago, she began to have trouble with bright lights. It began as an irritation and quickly became a condition where she was having difficulty driving. She went to the optometrist and was told she had dry eye and a nodule on her cornea. She was proscribed Restasis for dry eye and the doctor suggested removal of the nodule surgically. After a few weeks on the Restatis her condition worsened to the point where she could not drive until the sun was setting and needed to sit where there were no lights directly in her line of vision. A return trip to the doctor proved useless and the condition failed to improve.

After a bit of encouragement on my part she made an appointment with a optometrist at the Lahey Clinic. We went in together since she could not drive that far. After explaining the problem to the doctor, he asked a few questions and noticed a red rash on my wife’s face. The rash was rosacea and the doctor suspected that it had spread to her eyes. He started her on an antibiotic and within a couple weeks she was driving again and we could open the curtains.   Within a month she was almost as good as new.

We are very thankful that she chose not to follow the advice of the first doctor and have surgery. Unfortunately, she suffered unnecessarily for months when the first doctor couldn’t move beyond the fad of the day, Restasis.

Looking back at both of these situations, the medical profession failed to offer a real solution but was recommending expensive treatments that would not have worked. It took us as patients to find a doctor that knew what they were doing to get a solution. At the end of the process those solutions were very inexpensive. It seems like the insurance carriers are creating a network of mediocre providers that are cheap but not very well trained. In the book “Cheap: the High Cost of Discount Culture” by Ellen Rappel Shell, she explains how low quality merchandise is taking over store shelves because consumers mistake low cost for bargains. Perhaps it’s time for the insurers and the government to realize that this concept doesn’t just apply to poorly made consumer goods, but even more importantly, to our healthcare needs as well.

A Personal Budget for retirement(Less can be so much more)

A Personal Budget is not all about the dollars.

We enter retirement with an expectation that we can enjoy a life unfettered by the demands of a career. Much of the literature that discusses how much money you will need in retirement focuses on a percent of your working income. Numbers like 60% to 70% are common estimates of what the “experts” say you will need for your personal budget to retire comfortably. This income level requires a large retirement savings that is well beyond what 95% of us have. I suggest that a slight adjustment to your perspective on “what you need” could lead to a happy retirement years before the experts think you are ready.

When I looked at my financial requirements in retirement they were about 35% of my income in the last year that I worked. Much of my income in the last few years that I was working went to my children’s college, income taxes, social security, retirement savings and I had child support. Those items accounted for about 50% of my earnings and they all went away when I retired. The big expenses that remained were housing, health insurance and an auto loan. Health insurance becomes much more manageable when you and your spouse reach 65 and Medicare kicks in, but it needs to be included as a major expense if you retire before age 65. The auto loan had about a year to go so it’s just a short term issue. That leave housing as the open question.

Before retiring, my wife and I lived in a 3,000 sq. ft. house in the greater Boston area. We had a big mortgage and a lot of expenses for maintaining the home. It was a nice home and the location was wonderful, except for the winter, but it was much more that we needed with all the kids gone. We also needed to get our expenses down and lower cost housing was a good way to save some money. As I have discussed in earlier blogs, we looked at our location options with an eye to saving on housing and landed on Sarasota. But we could have achieved the same result with a move to central New Hampshire or Western Mass. Neither of those locations solved the winter problem. With the downsizing, we saved about 10% of my preretirement earnings.

If I listened to the “experts”, I would be back in another job and really unhappy. When I sat down and did the analysis of what we really needed to support a comfortable lifestyle, it was much less than their estimates and much easier to achieve. The elimination of the big stuff listed above was easy and the remaining 5% just took a little tweaking here and there. Until I had taken a hard look at where we were spending our money, I thought that the experts were right.

Building a retirement budget starts with a deep dive into what you are spending before you retire. If you look at each element of your spending for the last 12 months it creates a wonderful picture of what you need to live on. Drill down into your spending and get a monthly breakdown of what you spent by category for the last 12 months. The objective is to get detailed so looking at what you spent eating out is important, but it’s unlikely that breaking that down between steak houses and seafood restaurants is necessary. If your situation will require you to continue to support a dependent for some period of time, then separating the spending that will cease from the continuing support is important.   It’s also important to look at spending that will phase out over a short period of time, like my car loan. The short term items can be looked at as reductions to the retirement savings versus long range retirement commitments.

After you have detailed out your spending, eliminate those items that will go away like retirement savings and you have a baseline of your current spending which should be livable.   You can add and subtract spending in any category to get a true picture of what you will need to earn in retirement to cover your living expenses.   Be realistic, if your spending $400 a month on utilities, don’t expect that to drop in retirement. It’s much better to overestimate the basic living expenses than underestimate them. This will also give you the information that you need to think about the tradeoffs and determine what’s important. Do you want to live on the golf course in an expensive area and spend $3,000 a month on housing, or would half that offer you a comfortable home and the opportunity to travel. Those tradeoffs are yours to make.

Once you have an understanding of what you spend on a comfortable lifestyle, you will need to look at how you will generate that income. Some of your income will be fixed and predictable like social security. Other types of income will be less predictable like earnings from mutual funds. There are investment vehicles that are available to us that make the predictability higher. The tradeoff is virtually always a lower return. If you want a predictable income from a US government bond with virtually no risk of principal loss, the yield will be 1% to 2.5% annually depending on the term of the bond. An annuity can give you a higher yield, but it locks up your money and the contract structure make it very difficult to determine the real yield. With dividends on common stocks you can get yields of over 10%, but risk those dividends changing if the companies perform poorly.

I will discuss investment options in more detail in future posts, but for the purpose of this discussion, let’s go with a retirement “rule of thumb”. After a lot of reading and analysis, I feel good about using an estimate of 5% of my retirement portfolio as a good estimate of what I can comfortably spend and not deplete my principal over time. There are several studies done by “experts” that have confirmed 5% as a spending level that will preserve an income level for the remainder of our lives. The logic behind this statement is that the portfolio balance will rise and fall with the markets, both stocks and bonds, but over time it will earn 5% between dividends and capital gains. It’s not guaranteed, but the yield on a guaranteed portfolio is very low and requires a large balance to make any difference in how you live your retirement. Using my formula, a $240k portfolio should add $1,000 a month in additional income. To get the same result from a guaranteed portfolio, you would need $480k and a commitment not to spend any of the principal for 30 years. That’s not a good plan.

Let’s summarize the discussion on income. The income projections should be as follows:

Your Social Security Your Spouses Social Security Pension Income (if you are lucky) Portfolio yield at 5% of the total balance Wages if you plan to work Other if you have guaranteed income from other sources like net rental income

Take the total of the above and divide by 12 to get the monthly income for your retirement plan. Now compare the total monthly income with the monthly spending that you developed and if you are lucky, the income is higher than the spending. If the spending is higher than the income, your options are as follows.

  1. Continue working fulltime to build a portfolio that supports your desired spending level.
  2. Revise your spending level to match the income.
  3. Ad an income source to the retirement plan like a part time job.

In my case, my wife and I revised the spending level to match the income. We are very lucky to be able to live a comfortable life in a beautiful part of the country. Giving up on the snow bird lifestyle and extensive travel was well worth the price of keeping my career going for another few years. The consultant life on the road to the exclusion of all else was not something that I wanted to go back to. After a year of retirement, I feel like it was the right choice.