Not long ago, most people worked as long as they were able and eventually either “died in harness” or relied on younger family members to care for them in their old age. And then along came this idea of retirement where through hard work, shrewd investing and some help from a pension (if you’re lucky) and Uncle Sam, you could hang up your work boots a little early and spend your golden years enjoying a bit of leisure and fun. But for most people, the math of retirement only works if they’re able to earn some interest on their savings. That is a challenging task in a world where Central Banks the world over seem to have declared war on savers. What does this mean for the long term viability of your retirement? In other words, are low interest rates ruining retirement? More importantly, what can you do to keep your plans on track?
The 4% Rule
Back in the early 1990s, a financial adviser by the name of William Bengen did research on sustainable portfolio withdrawal rates. Assuming an asset mix of half stocks and half bonds, he back tested withdrawal rates against historical 30 year periods in the market. His conclusion was that if you wanted your portfolio to last 30 years, the maximum withdrawal that you should take each year is 4%. That rate has worked well for millions and many assume it will continue to work great unless future returns are significantly worse than past returns. Enter the Central Banks.
ZIRP and NIRP
The global economy has been stuck in slow growth mode since recovering from the near death experience of the 2008 financial crisis. To stimulate growth, Central Banks around the world lowered rates to pretty much zero and engaged in endless rounds of quantitative easing. When that didn’t work some of them started adopting negative interest rates. That’s right, zero apparently wasn’t low enough. Now they’re moving to negative. ZIRP (zero interest rate policy) has given way to NIRP (negative interest rate policy) in countries such as Denmark, Sweden, Switzerland and Japan. The logic is to force banks to lend, weaken currencies to help exports and stimulate economies. Not surprisingly, there are a lot of people who think these policies could come with some pretty significant unintended consequences, not the least of which being that it will be pretty tough for savers, pension funds and governments to meet those future withdrawal needs if large portions of their bond portfolios are earning zero instead of the 4%-5% that history has taught us to expect.
The $64,000 question (more like $64 trillion) is whether or not these low interest rates will derail retirees and the portfolios, pensions and Social Security program that they rely on to fund retirement. I can say with certainty that…it depends. If these low rates are an anomaly and they eventually return to normal, then the 4% rule of thumb that retirees rely on and the return assumptions that pensions rely on can continue to work. But if they stay this low for a long time, then retirement as we have come to know it is at significant risk. Which will it be? My gut tells me that rates will eventually rise and the 4% rule will continue to work, but it makes sense to plan for the worst even while hoping for the best.
What to do
There are several levers you can pull in order to improve your odds of success. Some are better than others. One side effect of ZIRP has been to force people into riskier investments in search of returns. That works great until it doesn’t as we saw recently when markets rang in the New Year by plummeting. Another side effect of ZIRP has been to encourage individuals, companies and countries to take on more debt. That can also work for a while, but debts eventually needs to be repaid. Are there better options?
Draw less. If a 4% withdrawal rate is too high, the most obvious way to protect yourself is to take less than 4%. I have some clients that are taking 2%-3%. Some are even taking 0% because their pension and Social Security cover their expenses. There is an extremely high probability that those taking less than 4% will be fine even if rates stay low for a long time. Of course drawing less only works if the amount you’re taking is enough to cover your expenses. That might mean you need to…
Cut retirement expenses. Examine your retirement budget for items you can reduce or eliminate. Housing and transportation are often major expenses. Consider downsizing to a smaller home or sharing a car with your spouse. Staying active and healthy can save on health care co-pays and prescription costs. Substituting planned hobbies or activities with less expensive alternatives also can trim costs without significantly changing the quality of your retirement. Taken cumulatively, these adjustments to your retirement budget can help reduce the strain on your nest egg and still provide a meaningful retirement.
Save more. Spending less is one option, but you could also improve your chances if you save more (assuming you’re not already retired). Recent research by Aon Hewitt and others shows that a person will need Social Security plus savings worth about 11-12 times their annual income in order to fund their retirement. If interest rates stay low, that multiple will be higher. If you are still working, make saving a high priority. Both 401(k)s and IRAs have higher contribution limits for people over 50. Take advantage of those limits by putting away as much as possible. The maximum 401(k) contribution for 2016 is $18,000 plus an additional $6,000 if you’re over 50. IRA contribution limits are $5,500 plus an additional $1,000 if you’re over 50. Extra additions to your portfolio could significantly improve your financial position in retirement.
Pay off debt. As I mentioned earlier, one of the unfortunate side effects of low interest rates is that the Fed is punishing savers and encouraging debtors. Debt can make sense if it’s used to purchase an asset that generates income such as a new computer for the office or a college education. Last I checked, however, a $60,000 SUV or a gourmet kitchen aren’t income producing asset for most people. When used unwisely, debt adds risk and reduces cash flow. Those things are especially troublesome to someone in retirement. By retiring debt free, you can greatly reduce the amount of savings necessary to fund your retirement.
Work longer. Working longer may not sound fun, but neither is running out of money. If low rates reduce the viability of your retirement plan, one option is to keep working and earning a paycheck. This strategy has multiple benefits: it allows you to save more, it gives your portfolio more years to grow, it could help boost your potential Social Security benefits and it decreases the overall amount of income you need to draw over the years. Of course this assumes that working longer is an option. Don’t put all your eggs in that basket in case your health doesn’t cooperate or your job skills don’t translate well in a changing world.
Delay Social Security. If you delay collecting Social Security until after your full retirement age, you will get a permanent increase in your benefits. The increase is based on the year you were born. For example, those born after 1943 will get an 8% credit for each year they wait. The increase caps out at age 70, but waiting until then will increase your benefits significantly.
Obviously, we have to deal with the world as it is, not how we want it to be. When I started my career, you could buy a 1 year CD yielding 7%. That made retirement planning much easier. Now you’re lucky if you can get 1% on that same CD. That’s just the world we live in and there’s a chance that it could persist for some time. Plan accordingly and you’ll greatly improve your odds of retirement success.
Note: Retirement is more than just a math problem. Yes, money is important, but you need meaningful activities and relationships too. When money and meaning intersect, you have the chance for something special. With that in mind, I’m starting a new periodic series called “aMUSEments” that will focus on a particular trip, activity, idea or adventure. Each article will be packed with links and resources to help you dream, plan and do. I hope they act as a muse to stir your imagination and help you plan your own adventures. Enjoy!
America’s Best Idea
Writer and historian Wallace Stegner called the national parks “the best idea we ever had. Absolutely American, absolutely democratic, they reflect us at our best rather than our worst.” Filmmaker Ken Burns summarized this sentiment when he named his wonderful national parks documentary “America’s Best Idea.”
With spring in the air, now is the perfect time to begin planning an adventure in one of the parks. Incidentally, I’m eating my own cooking on this recommendation. In about a month, I’m heading to the Grand Canyon to hike it from one side to the other and back again. Rim to Rim to Rim. My family and I will also be hitting a few of the other parks this year to do some hiking and camping. Assuming I survive the GC, I’ll let you know how it goes.
What they are
There are 59 national parks that cover 51 million acres in 27 states and two U.S. Territories. They contain some of the most beautiful scenery and natural wonders anywhere in the world. The first National Park was Yellowstone. It was signed into law by President Ulysses S. Grant in 1872. President Theodore Roosevelt established more national parks (5) than any other president. California has the most (9) and Alaska has the biggest (Wrangell-St. Elias) as well as the least visited (Gates of the Arctic). The most visited parks are the Great Smokey Mountains and the Grand Canyon.
It’s fun to visit exotic, far flung places, but let’s not forget that we have some pretty incredible places right here in the United States and the national parks are the crown jewels of that collection. They are relatively inexpensive to visit and because they’re spread out across the states there is a variety and selection that is tough to beat.
This year is the 100th anniversary of the National Park Service. There will be special programs at the different parks to celebrate the milestone and there will be 16 days where entrance fees will be waived in order to encourage people to visit. Throw cheap gases prices in the mix and this is the perfect year to plan a road trip to one or more parks.
Why retirement is the ideal time to visit
Retirement is the ideal time to visit the national parks. Why? For starters, you can get a lifetime annual park pass for $10 once you hit age 62. That same pass is normally $80 per year. Also, because you have a flexible schedule during retirement, you can visit the parks during the off season when things are less expensive and there are few crowds. Finally, there tons of volunteer (or even employment) opportunities geared towards seniors.
If you’re planning on visiting a few parks each year, it’s probably cheaper to buy an Annual Park Pass. The pass is normally $80, but is only $10 for a lifetime pass for those 62 or older and free for current members of the military. In addition to the pass, some parks require you to apply for permits if you plan on camping or staying in the backcountry. You can find specific requirements at the NPS website for the park you’re considering.
Best time of year to visit
This depends on the park, of course. If you’re visiting Death Valley, best to go January through March before the heat becomes unbearable. If, on the other hand, you’re heading to Glacier National Park, go in June when the weather is warming and the park is in bloom. Just Google “best time to visit <park name>” or visit the park’s official website to get recommendations on the best time to visit. In my opinion, the worst time to visit many of the parks is when the weather is the hottest and the crowds are the biggest. That means June and July for most parks when school kids are on summer break. Thankfully, one of the benefits of retirement is the flexible schedule so you can avoid peak crowds and visit in the shoulder seasons (just before or after peak season). September and October are often ideal months because the crowds have gone and the weather is mild.
What to do
Each park has a unique list of things to do and see like Old Faithful in Yellowstone, Half Dome in Yosemite, giant Redwoods in Sequoia and the Grand Canyon in…well…the Grand Canyon. In addition, there are plenty of other activities in the parks like hiking, camping, horseback riding, rafting, spelunking, snorkeling, kayaking, fishing, swimming, rock climbing, wildlife watching, sandboarding, hang gliding and leaf peeping. There is an embarrassment of riches when it comes to things to see and do.
Most of the official park websites have Trip Planner pages. Just visit the NPS site for the park you want to visit and look for the link that says something like “Plan your visit” or “Trip Planner.” Here’s the Trip Planner page for the Grand Canyon so you can see an example.
Can I take my pet?
Most National Parks don’t allow pets, but there are some parks that do. Acadia (Maine), Shenandoah (Virginia) and Cuyahoga Valley (Ohio) have hundreds of miles of hiking trails open to you and your pet. Other parks, like Yosemite and the Grand Canyon, don’t allow pets in certain areas of the park, but do have limited trails or other parts of the park where you can take your pet as long as they’re on a leash. If you want to take your pet, do some research before you go. The NPS website for each park lists their official pet policy.
There are thousands of videos online about the national parks, but I wanted to highlight a series by Jim and Will Pattiz called More Than Just Parks. They are brothers and filmmakers and have set a goal to create a short film using time lapse photography for each of the national parks. The videos are amazing. Click on the Zion video for starters. That 4 minute video will do more to convince you to get out and enjoy the parks than anything I could ever say.
If you’re thinking of visiting a park you might want to pick up a book or guide to help supplement the information you get from the park’s website. Lonely Planet makes great guide books and they have guides designed for many of the parks available at Amazon. Also, on April 19 they are publishing National Parks of America: Experience America’s 59 National Parks. It will be packed with photos as well as information, tips and sample itineraries for all 59 parks. If you’re looking for amazing photos, Ansel Adams in the National Parks is also a great option.
There is a new IMAX film called National Parks Adventure that is narrated by Robert Redford. It not only provides a history of the parks, but follows modern day adventurers as they explore some of the best things the parks have to offer. Here is a list of cities and theaters where the film is playing.
As I mentioned earlier, Ken Burns has a wonderful, six part documentary on the parks. It used to be available for streaming on Netflix, but I don’t see it there currently. You can try checking out a copy from your local library or it’s available for purchase at Amazon if you’d like to buy a copy.