SAVE AGGRESSIVELY
AND INVEST CONSERVATIVELY!!!
Retiree Income
Withdrawal Risk
Social Security
Paying for College
College Loans
IRAs and College
100 year phenomenon
Boomtown
Outlook
Withdrawal Risk
One of the biggest
concerns retirees have is how much they can withdraw from their IRA rollover after they retire. This is one of the four main risks to retirees’ savings; it is known as withdrawal risk. When determining the amount to withdraw, we want
to keep several things in mind. First, inflation, over time, will eat into your
savings and income. Second, retirees, on average, will live a long time after
they retire. This all means that we will need to grow your savings and income
to keep up with inflation.
Inflation, over the
long term, can do serious damage to your income and standard of living. At MaxOut
Savings Advisors we think that inflation will continue to increase over the intermediate-term.
Let’s take a look at how a $50,000 income would fare under various inflation scenarios.
25 Year Inflation Adjusted Income
Inflation Rate
$50,000
0%
$30,477
2%
$23,800
3%
$18,756
4%
As we can see, a four
percent inflation rate will devastate your standard of living. This is why we
must plan for an account to grow over the long term to keep up with, or even outpace, the inflation rate.
The trick is to balance
your income withdrawal to achieve income and growth in your portfolio. Fidelity
Investments did a study of income withdrawal over time using different withdrawal rates.
The hypothetical account was weighted 50% stocks, 40% bonds and 10% short-term investments. The table below shows how long the account lasted at various income withdrawal rates adjusted upward for
inflation. The accounts were started in 1972, right before the bear market of
the 1970s.
Withdrawal Rate (inflation adjusted)
Year Money Runs Out
10%
8 years
8%
10 years
7%
14 years
6%
16 years
5%
27 years
4%
did not run out
Generally at a 4.5-5.0% inflation adjusted withdrawal rate you will achieve a solid long term growth
and income portfolio. Any withdrawal
rate over that is excessive, and will lead to trouble over the long term, during which time you might run out of money.
Social Security
One of the best ways
to increase your available income at retirement is to put off receiving Social Security from 62 to 66. Even if you have to work part time from age 62 to 66 it is often worth the trouble. The table below shows the potential Social Security
Benefits for a person
aged 55 in 2005 earning $75,000 per year.
Age Start Collecting Social Security 62
66
70
Starting Income
$ 15,919 $21,226 $28,018
Live to 70 receive
total $s
$127,355 $84,903 0
Live to 80 receive
total $s
$286,548 $297,161 $280,181
Live to 90 receive
total $s
$455,742 $509,419 $560,361
By delaying retirement
four years you are able to boost your income by $5307.00. This is quite a jump
and if you have not drawn down your IRA Rollover, the number will be materially larger as well. (If you would like a free copy of the Fidelity Retirement Income Report please drop us an email.). The bottom line is that holding off retirement will have a material impact to the
positive on your retirement income.
College Expenses
It is that time of
year, college is about to start for kids all over the country. For parents it
is an anxious time. Your child is about to leave the house, possibly for the
first time and you have to come up with money to help pay for the college or university they have chosen. Ideally, it is your alma mater that they have picked, but experience has taught us that that is not always
the case. Now comes the hard part - somebody has to pay for it. This year is especially tough because problems in the financial markets have made student loans in some
states very hard to procure. We are fortunate to be living in Texas
where college costs are much more reasonable than other parts of the county. Even
here a state school can cost $10,000 - 20,000 per year; or if we break it down another way, $5,000 - $10,000 per semester. This number includes room and board so you could save money by having your child live
at home. So how do you get the money to pay for college?
The key to paying
for college is to draw from a number of different sources to meet your expense requirements.
By dividing up the sources of funding, you can reach your goal. The best source would, of course, be scholarships or
grants for which your child might qualify. Scholarships and grants come in all
sizes. The best thing to do is speak with the school’s financial aid office
and explain your needs to them. In addition to grants and scholarships, many
schools can arrange for internships or on-campus part time jobs. This is an excellent
way to help pay for school and learn something at the same time. I am reminded
of the story a client of ours told about the guys in his fraternity at the University
of Texas. He explained that
while most all of his fraternity buddies had been professionally successful he noticed that those who had to work throughout
school were the ones who went on to become the most successful – some have even become presidents of a few of Houston’s
biggest companies. Bottom line: cast a wide net for scholarships, check with
your company, social organizations and church. At our church one of the organizations
has an annual scholarship dinner to help raise scholarship money for our college-bound kids.
College Loans
College loans can
be a great way to pay for a portion of your college expenses. College graduates
today spend four to five years in school, so you have to figure any loan you get to pay expenses could grow by 4-5 times by
graduation as a student needs one every year. This could result in the student
being saddled with $50-100,000 worth of debt once they get out of school. This
will put you behind in your savings rate and could delay one getting a first house for years.
Therefore, we would recommend that student loans be used only sparingly to keep your overall debt low. Additionally, student loans have become much more difficult to obtain.
At the present time, many state student loan entities have cut back on making student loans as the credit markets have
locked up. If a student can procure them, the best loans are the federally backed
student loans because they carry the lowest interest rates and are not as affected by credit ratings. In a nutshell, student loans should be used as little as possible.
IRAs and Education
Most of the time parents
end up being called upon to pay for their child’s college schooling. Ideally,
they have saved enough money to fund the child’s college. This is rarely
the case, so what we need is a combination of savings, reduced spending, scholarships and other help. The first action item is to divide up the savings by four so you have some money for each year. Then calculate how much can be paid out of present income, or that can be paid out over the semester. If you are still short after checking all other sources, a small amount could be taken
out of your IRA. You can withdraw funds from an IRA for education expenses including
children’s college expenses with no 10% penalty (you still pay taxes as ordinary income). We do not generally recommend this approach because it could hurt your retirement plan long term, but a
small amount can go a long way to supplement your expenses.
When paying for college,
you want to draw from all resources to lessen the burden. One thing we have seen
many parents do is to ask for help from grandparents. Grandparents are often
happy to contribute in some way to further their grandchildren’s education. Any
little bit of help each semester will help. We have found that with a combination
of savings, income, student work grants, scholarships, loans and family help most people can afford to send their kids to
college.
“100 year Phenomenon”
In our last MaxOut
Savings Report titled Credit Panic of 2008, we stated that we are continuing to
see the credit panic spread throughout the economy. This week Alan Greenspan,
former Federal Reserve Chairman, stated that the credit crisis had gone from being a credit crunch to a “once-in-100-year
phenomenon and not a standard liquidity crisis we have seen in the past, verging on the issue of solvency”. In the same interview he stated that home prices were “nowhere near a bottom”. This confirms much of our thinking as the credit bubble continues to unwind. What we are witnessing is the collapse of the biggest credit bubble in history. Research has shown that people have a hard time grasping major changes when they take place; it takes time. They can understand change, but once it reaches a certain point they have difficulty
grasping the extent of the change. What we have is a seismic change in the economy
in the collapse of the credit bubble, a “100 year event”. This
is why over the last year as the credit bubble has collapsed, we have seen people trying to call a bottom on CNBC the whole
way down.
What brought about
this “100 year” event was a huge run up in credit and debt throughout the United States. As we can see from
the chart (Consumer Debt Outstanding) below, consumer debt has almost tripled in the last ten years from $5 trillion to almost
$13.5 trillion. This huge debt acceleration created a bubble in home prices and
an overleveraged consumer.
Freezing Credit Lines
The deleveraging of
the credit bubble in the banking and consumer sectors should now lead to a recession in the United States as the consumer slows down as seeks to reduce credit or have their
credit reduced by the banks. Many banks are now trying to raise capital and cut
back lending. This week, one of the country’s largest investment banks,
Morgan Stanley, told thousands of clients they will not be allowed to withdraw money from their home-equity lines of credit. The company did not release the amount of people affected by the freeze in credit
lines. This is just one example of the freezing on credit lines, reduction of
credit card limits and other action taken by banks that is exacerbating the credit crunch throughout the United States. Credit
is the lifeblood of any economy and for the consumer it is being cutback and this will lead to a further slowdown in the United States.
