Well, maybe the title is misleading, but there are a few things that recent retirees can do to assure they’ll have enough money to live out their lives. Inflation is not a current reality, but it is a future certainty. The problem is that inflation will destroy wealth. In retirement, you should seek to keep up with inflation while avoiding unnecessary risk.
So what should you do? (And what shouldn’t you do?)
I’ve put together a compilation of tips that I believe will help you manage and enjoy your retirement. They’re derived from a combination of life experience, financial publications, economics studies, and some fun research that I’ve done over the last year as I approached my own retirement. The stuff won’t suit everyone, but it will hopefully assist you and lead you to your own explorations and creative ideas. There’s no magic “one size fits all” plan for retirement. The goal is to have lots of fun and make it last as long as you possibly can.
Buy gold?Don’t fall into the trap of conventional wisdom on this topic. Gold is commonly referred to as a safe haven; a place to park your money as a hedge against inflation. There’s one big problem – when inflation was at one of its worst times, gold went from $800 to less than $300 per ounce. Because gold is traded as a commodity, it’s no longer tied to the dollar or any other meaningful currency. Gold is simply a metal whose price is driven by supply and demand. You can’t eat gold, heat a house with it, or fertilize a crop with it. Actually, pretty much all you can do with it commercially is make jewelry and some electronic components. If you wanted a real safe haven, you’d probably want to hoard non-perishable meals. (A meal is a meal no matter what economic conditions may be. That’s what stable value means.)
Pay off the house?Whoa! That may make you feel good, but it’s not a smart thing to do if you think inflation is coming. Keep the money. Keep the mortgage. Your mortgage payment remains unchanged for the life of the loan. (And you may be able to write off the interest and taxes to boot.) It’s always better to have the money if you think you’ll be able to earn much more in interest than the interest rate you’re paying on the mortgage. Simply stated, if you have a 5% fixed rate mortgage, keep it.
Ladder your CDs?Maybe. It’s often a good idea. But if those CDs are traditional or rollover IRAs , you may just want to go long term on all of them. A little known fact (even your banker may not know it) is that most IRA CDs have absolutely no early withdrawal interest penalties once you reach initial distribution age. And we’re talking 59½, not 70½ years old. 70½ is the mandatory distribution age, and many bankers erroneously think that this is the “no interest penalty” threshold. Not so; the threshold is usually 59½. If it’s not that way at your bank, buy an IRA CD at a different bank next renewal period, and take advantage of the higher long term rate. If rates go up, you can pull the money with no penalty and roll it over to a higher rate long term CD at another institution.
Try to live off of interest without drawing down the principal.Try to make a budget that enables you to preserve principal on your investments. If you have a mix of taxable CDs and tax deferred CDs (IRAs), you’ll be way ahead of the game if you can manage to live off interest only from the taxables and let the interest compound on the IRAs until you reach the mandatory distribution age of 70½. This provides a safety net helping to hedge against future inflation. In short, you’d be living on your Social Security and taxable interest while your tax deferred investments continue to increase your net worth, thus providing the hedge.
No stocks!I don’t recommend bonds either, but there is absolutely no sense taking risk if you can live adequately without it. In my opinion, FDIC insured CDs provide the best way to retire. And if you ladder your taxable CDs, you’ll always have accessible cash on the near horizon for unforeseen expenses without having to take early withdrawal penalties. Bonds are great compared to stocks, but they’re commodities that fluctuate in value. That means they can go down in actual value even though they may pay steady amounts of income. If you feel that bonds are a must, try and stick with U.S. Government issues. Any corporate bond can go bust, and insured bonds are only as secure as their insurer. (Remember that AIG went belly up.)
Adjust your budget every year.Baby steps are easy to take. They’re relatively painless. Simply stated, you don’t notice the change from eating out once a week to eating out 4 times a month. And once you realize how painless this is, you might even want to refrain from expanding your budget at times when available cash increases from year to year. (It’s always nice to watch your net worth increase – life’s unexpected twists occur more frequently as you get older.)
Sell the RV, the boat, and other big ticket toys.They simply do not make sense as you get older. If you want to go on an RV vacation once a year, then consider renting the RV. If you’re only going to use a large ticket item infrequently, renting is always preferable. If the budget gets tight, rent fewer times. (If you own something, you can’t escape the maintenance expenses, even if you don’t use it. And as you get older, you’ll use it less and less.)
Stop skiing and motorcycling.Old bones heal too slowly. Your biggest risks in retirement are medical costs, both direct and indirect. The direct costs are deductibles, limits and copays. The indirect costs are suspension of the activities you enjoy, the inconvenience, and the unhealthiness of immobility.
Order water instead of alcohol in restaurants.Consume alcoholic beverages only at home. Going out to eat is fun. For most people, that $3.50 beer or $5.00 mixed drink doesn’t double the fun, but it does double the average restaurant check. If you can eat out for half the cost, you can eat out twice as often. Take your choice. And also note that restaurants charge high prices for desserts. Again, it’s your choice.
Find a cash-generating hobby.If you are artistic and innovative, you can spend many enjoyable hours creating nifty works of art. Decorative novelties that are “cute” have a special quality – they sell. The venue can be swap meets, e-Bay, consignment shops, or yard sales. Just for kicks, do a Google Images search for “steampunk”. Pretty cool, huh? Or consider garden decorations such as a gimmicky looking bird bath made of an old hose valve, copper elbows, and scrap pieces of pipe (or a cut-up broom handle) “pouring” into an old cracked ceramic bowl. If it’s really unusual and it’s cute, someone wants to buy it. If it’s adorable, everyone wants to buy it. Labor is irrelevant because it’s a hobby. Material cost is negligible – used and broken stuff is cool. Need more parts? Just make them out of plaster or Styrofoam. This is fun stuff! Make goofy figurines out of coat hangers and clay. Paint them. Have a ball! If it entertains you, makes for a great day’s fun, and then fetches $15, you’re a winner. (Go buy $5 worth of additional supplies and treat yourself to two combo meals at the local fast food joint.) And if nobody wants to buy what you made, it’s no big deal. You had some fun, didn’t you?
Volunteer(I included this activity because it adds the most to your true net worth in life.) Once a week, try doing volunteer work at a local convalescent home, hospital, or shelter. Do something that puts you directly into contact with less fortunate people who need and appreciate your time. I know that you’ll get far more pleasure from this than almost any of your other retirement activities. Your charity gives others faith and hope. It doesn’t get any better than this, folks. It’s the true meaning of life, and it’s everyone’s calling. You get to have wonderful, warm relationships with people who are grateful, and it doesn’t cost you a dime.
Done! Now go and enjoy your retirement.
Steven Pein
Copyright © 2010
