Monday, September 23, 2013

Retirement - Your Second First Job (1)


Congratulations!!  You made it to retirement.  As the title of this post implies, you now have a new job.  During your working career, the majority of your retirement savings have, in all likelihood, been managed by a pension administrator or a 401K plan provider.  You may have picked the investment options or opted for the portfolio suggested by the plan provider.  In other words, while you were busy with your career, someone else was making most of the investment decisions for your retirement portfolio.  Like many others, you will probably choose to receive a lump sum transfer of those retirement proceeds into an Individual Retirement Account (IRA) after you have wrapped up your last days of work.  

You are now sitting at the kitchen table on that first morning of your "golden years" wondering where all the time went.  At some point you will begin to wonder about how much money you have and will you outlive your savings.  Your new job, what I call your Second First Job, is to make sure your money is there for you through the remaining time you have, hopefully a few decades.

When Social Security was created in 1935, the retirement age (when benefits could be received) was set at 65.  There were approximately 7.8 million people that age when it was established. Today, a 65 year old enjoying reasonably good health can expect to live at least an additional twenty plus years.  Most women have even more time left.  Remember, these are averages, and when trying to calculate your remaining life expectancy, you need to factor in family history and your life style. For our purposes, let's assume that, as a 65 year old man or woman, you have another twenty years of life ahead of you.  Your money has to last that long if you are single.  A couple must make the expectancy calculation based on the prospects for the survivor.  Here is a link to the Social Security website with a life expectancy calculator.  Another issue to consider is whether you want to leave a legacy for your children, but that is beyond the scope of this post.

The truly organized individual has probably lived within a budget for many years.  Many of us have not, thinking that there is always going to be another paycheck.  The game has now changed.  There will be no more paychecks, unless you intend to keep working in some capacity.  If you are not going to continue full time employment, the size of the paycheck will shrink.  It is now time for a budget to figure out what you can spend and where that money will come from for the duration of your life.  Once a budget is established, your Second First Job begins: how to fund that budget.

A typical retiree will have three sources of income:  Social Security, proceeds from an employer's retirement benefit program (pension or 401K plan) and personal retirement savings, usually an Individual Retirement Account (IRA).

As mentioned in an earlier post, there are three certainties in this life: death, taxes and inflation.  Of the three, inflation is a retiree's worst financial enemy. The annual inflation rate is low these days, but anyone 65 or older will remember the late 70s and early 80s when annual inflation rates were double digits.  There is no reason to believe that this could not happen again in the next twenty or so years.  Even low inflation rates, over time, will significantly erode the purchasing power of a retiree's income.

We will continue exploring this topic in the next post.

Comments are always welcome.

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