Retirement fire drill

Retirement fire drill

If you spend a good portion of your day in a building like an office or a school, chances are good that you’ve participated in a fire drill.  Those faux escapes give everyone a chance to practice evacuating the building and give those in charge an opportunity to identify and fix any potential problems.

If retirement is on your horizon, it would probably make sense to do something similar.  Call it your “Retirement Fire Drill.”  After all, sometimes you get to choose when you retire, sometimes (through illness or layoffs) you don’t.  It’s good to be prepared.

So let’s sound the alarm and pretend that today is the day that you’re transitioning into the next phase of life.  How will the planning you’ve done so far hold up in the real world?  Below are 5 areas to test.

Is your budget going to work?

You have made a retirement budget haven’t you?  If not, download our free retirement budget worksheet.  What will your sources of income be once your paycheck stops?  Do you have a realistic estimate of how much that income will be?  How about expenses?  Some people say you can live on about 70 percent of your preretirement income, but is that realistic for you?  There’s only one way to find out.  Practice living for a few months on the income and expenses that you’ve projected.  Then reexamine your budget and see if anything needs to change.  If it didn’t work for a 2 month trial, it probably won’t work for a 20 year retirement.  Take what you learned and make adjustments as necessary.

Is your asset allocation going to work?

If you retired today, how would your investments fare if we had another downturn like 2008?  Are you invested too aggressively?  Or how about if we got into a period like the late 1970s and early 1980s when inflation increased by double digits each year.  Are you invested too conservatively for your retirement income to keep pace?  Shocks to your portfolio early in retirement greatly increase your chances of running out of money.  You can minimize that risk by having your asset allocation correct and by setting aside a year or so of retirement income in cash so you can draw from that, rather than your investments, in the event of a downturn.

Is your health care going to work?

You won’t be eligible for Medicare until 65.  Are you planning on retiring before that?  If so, how are you planning to bridge the gap?  Even if you wait until 65, do you have enough set aside to pay for the premiums and co-pays required under Medicare?  Have you budgeted in the cost of a Medicare supplement policy?  Are there any health care issues (e.g. dental work, operations) that you should take care of now, before transitioning into retirement?  And what about long term care?  What if you or your spouse became disabled or needed ongoing professional care?  Do you have a plan to pay for that care that doesn’t include spending down all of your assets and leaving the healthy person in a financial bind?

Is your income strategy going to work?

If you and your spouse are 65, there’s a 72 percent chance that one of you will live to age 85.  There’s a 45 percent chance that one of you will live to age 90.  Will your income last that long?  Are you taking a sustainable amount from your investments each year or are you in danger of running out of money because you’re taking too much?  Will part or your income (such as a pension or Social Security) disappear when you or your spouse dies?  Can the surviving spouse live on the remainder?  Rework your budget to factor in one or more of those income shocks and then think about how you would respond.

Is your estate plan going to work?

If you plan on moving to a different state, have you checked with your attorney to see if your will and estate plan documents will be valid in the new state?  What if you became disabled or incapacitated?  Do you have powers of attorney that specify who takes charge?  If that person is your spouse, what happens if he or she dies before you?  Does your will reflect your current wishes?  Do you have the correct beneficiaries listed on accounts and insurance policies?  Are your documents organized and easily accessible?  Do everything you can to have your affairs in order.

How did you do?  If you encountered a few problems, don’t worry.  One of the great things about a drill is that it’s just practice.  Take the information you learned from the fire drill and tweak your plans to give yourself a better outcome.  That way you’ll be ready when the real alarm bell sounds.

~ Joe

I originally published this article at
Why you should roll your 401(k) into your IRA when you retire

Why you should roll your 401(k) into your IRA when you retire

Your 401(k) is a great tool for accumulation, but it’s probably not the best place to leave your money once your goals shift to distribution.  After retiring, it usually makes sense to roll your money out of your 401(k) and into your IRA.  Here’s why:

Simplification.  The average person changes jobs several times over the years.  That could mean multiple retirement plans at former employers in addition to your IRAs and other investment accounts.  During retirement, you will need to begin drawing money from those accounts.  The more accounts you have, the more complicated that becomes.  If you have multiple 401(k)s, roll them into an IRA.  If you have multiple IRAs, consolidate them into a single account.  Doing so will cut down on paperwork and expense and will make your distribution strategy easier to manage.

More choices.  Your 401(k) likely has a limited number of investment options.  That’s not the case in your IRA, where you can invest in pretty much any stock, bond, mutual fund or ETF.  More choices typically means more money, because you can choose funds with better performance and lower expenses.

More control.  When it comes to accessing your money, your IRA has fewer limitations and rules than your 401(k).  For example, you can take penalty free early withdrawals from your IRA for things like higher education or certain medical bills.  In addition, your 401(k) may have restrictions on how often you can make changes to your investment allocation. Finally, most people prefer to call the shots on their account rather than having to deal with their former employer every time they need to make a change or take a distribution.

Better beneficiary options.  Your 401(k) will typically require you to list your spouse as the primary beneficiary unless he or she consents to you naming someone else.  That can complicate planning for those in their second marriage who want to keep certain assets separate.  Also, if your spouse dies first and you haven’t named someone else, the 401(k) will typically default to your estate when you die.  That can result in unwelcome tax consequences.

With an IRA, you can name anyone as your beneficiary and that beneficiary has more distribution options than they would if they were inheriting from your 401(k).  With the IRA, they can choose to distribute the money over their lifetime, rather than being forced to take it all at once as with the 401(k).  That can spread the taxes out over many years.

Easier Required Minimum Distribution (RMD) calculations.  When you turn 70 ½, you are required to begin taking minimum amounts from your IRA and 401(k) accounts.  The fewer accounts you have, the easier it will be to calculate the correct amount and take the proper distribution.  Make a mistake and you will owe a big penalty to the IRS.


Case study: When can I retire?

Case study: When can I retire?

I met with a prospective new client this week and he asked me the question I get asked by most people during introductory meetings:

“When can I afford to retire?”

We spent about an hour working through some numbers and coming up with the answer.  I thought seeing a real world example would be helpful to some of you, so I asked him if I could share the details as long as I kept his name confidential.  Here are the basic facts:

  • He and his wife are 61 years old
  • He has worked for his current employer for 41 years
  • His 401(k) is worth around $700,000
  • They have another $600,000 in savings and investments
  • His estimated Social Security benefits are $1,900 per month if he retires early at 62 and $2,500 per month if he waits until full retirement age at 66.
  • His wife does not work outside the home and has not qualified for Social Security
  • Their house is paid for and they have no other debt
  • They need an income of $60,000 per year in retirement

Step 1 in deciding when to retire is answering the question “How much income do I need?”  As George Foreman said, “The question isn’t at what age I want to retire, it’s at what income.”  In this case, the client (Let’s call him Jim) wants to have about $60,000 per year gross (i.e. Before taking out taxes).

Step 2 is figuring out where that money is going to come from.  If Jim retires at 62, he will get $1,900 per month from Social Security.  That’s $22,800 per year.  He wasn’t expecting his wife to receive any Social Security because she hadn’t worked the 40 quarters required to qualify.  Needless to say, he was happy when I told him that she qualifies for a spousal benefit.  Spouses are entitled to receive the higher of their benefit (in this case $0) or half their spouses benefit (in this case $950 per month).  That adds another $11,400 in income per year.

So they need a total of $60,000 and $34,200 of that is coming from Social Security.  That means their personal investments will need to generate the remaining $25,800.  Is their nest egg up to the task?

They have a total of $1,300,000.  As we have discussed here many times before, research shows that a safe withdrawal rate from a portfolio is around 4 percent.  Taking a 4 percent withdrawal from their portfolio would get them about $52,000 per year, which more than covers the $25,800 they need.  So looking at the numbers, Jim and his wife could afford to retire at 62.  But should they?  I advised him to seriously consider waiting a few years.  Here’s why:

  • They will almost certainly need more income than they are expecting.  Jim told me that his $60,000 estimate is the absolute minimum they’d need to maintain their lifestyle.  If anything unexpected happens and they need to draw more, they could run out of money sooner than expected.
  • They are both in good health and have parents that are alive and in their nineties.  Given their health and family history, there’s a good chance that they will live for a long time.  If that’s the case, their money needs to last.  Working for a few more years not only gives them a chance to save more, but also means that they won’t be drawing income from their savings yet, which will help it last longer.
  • The breakeven point on their Social Security (where it makes sense to wait until full retirement age to claim benefits) is about 12 years.  That means if they plan on living past age 74, it probably makes sense to wait to begin collecting benefits until full retirement age rather than taking a reduced benefit at 62.
  • Another potential reason to wait is health care.  Right now, Jim’s employer pays the cost of his health care, but that would stop if he retires.  Since he and his wife won’t be eligible for Medicare until age 65, retiring now would mean either going without health care or paying out of pocket for coverage.  To continue his current coverage using COBRA would be about $900 per month.  Waiting to retire until they are eligible for Medicare would eliminate that expense.
  • Finally, we’re living in an uncertain time.  Inflation is tame now, but could easily get much worse.  The markets are volatile.  Interest rates are low.  All of these things can damage a portfolio’s ability to generate enough income.

Conclusion: Jim and his wife can afford to retire now, but as long as they’re in good health and Jim is relatively happy at his job, waiting could greatly increase their security during retirement.  I hope that example helps shed some light on the process of deciding when you can afford to retire.  Touch base if you have any questions or if there’s ever anything I can do for you.


How to turn your savings into an income stream

How to turn your savings into an income stream

(Note: This is Part 3 in a 3 part series that I did for the Omaha World Herald on retirement planning for different life stages.)

To state the obvious, farming and cooking are two different things.  One is about creating.  The other is about consuming.  A similar relationship exists between preparing for retirement and being retired.  One is about filling the barn—your 401(k), IRA, pension, Social Security credits, etc.—and the other is about emptying it by using what you created to provide for your needs.

That transition—from accumulation to distribution—has a lot of moving parts.  Any missteps can impact your retirement for years to come.  Taking too much too soon from the wrong accounts or in the wrong markets can be the difference between retirement bliss and retirement blunder.  So what can you do to improve your odds of success and get your retirement off on the right foot?  Begin by asking yourself the following four questions.

How much do I need?

Before you can begin drawing income, you need to figure out how much you’re going to need.  Your costs will largely depend on the lifestyle you choose to live, so start by thinking about what you have planned for retirement.  Do you want to travel?  Are you planning on moving?  Is there a particular hobby you want to focus on?  Once those decisions come into focus, it will be easier to craft a detailed retirement budget.  To help with this process, you can download a free Retirement Budget Worksheet at

Where is it going to come from?

Once you have a good handle on your expenses, determine what percentage of them will be your responsibility.  Start by making a list of all of your potential income sources.  Social Security and Medicare will likely do some of the heavy lifting.    If you are lucky enough to have a pension, it will cover another portion of your expenses.  If you plan on working part-time or have some other source of income, list that as well.  Using this information, fill in the blanks to the equation below.  The difference between your total need and the income provided by things like Social Security and your pension is the amount that you will need to draw from your nest egg each year to fund your retirement.

Is my nest egg up to the task?

Now that you know how much you need and where it’s going to come from, you can determine if your nest egg is up to the task.  When you retire, your portfolio takes over the job that the payroll department handled during your working years.  If you retire at 65 and live until you’re 85, it needs to cut you 240 monthly paychecks.  There is no foolproof answer for how much you can safely draw from your portfolio each year, but much of the research points to around 4 percent.

With that in mind, grab a calculator and divide the number you came up with in the previous question by your total retirement assets.  If the result is less than or equal to .04 (4 percent), you’re in pretty good shape.  If it is greater than .04, it should raise a red flag.  All is not lost, but some changes are likely in order.  To avoid running out of money, you may need to save more, work longer, work part-time, or cut retirement expenses.

What is my withdrawal strategy?

The last piece of the puzzle is to decide on a withdrawal strategy that is right for you.  There are a number of ways to draw from your accounts.  You can take dividends only, convert all or a portion of your accounts to guaranteed payments by purchasing an annuity, or structure the accounts to self-liquidate over your lifetime, to name a few.

The strategy that I prefer is often referred to as the bucket strategy.  Done correctly, it gives you the most flexibility and greatly increases your chances of outliving your money.  It involves structuring your investments into different “buckets” that you can pull from at different times or under different conditions.

For example, you would have one bucket that contained several years of needed distributions in a very safe investment like a money market or certificate of deposit.  In another bucket you would have riskier investments like your stocks and bonds.  In still another bucket, you would have your tax advantaged investments like your IRA or an annuity.

The idea is to pull your distribution each year from the most appropriate bucket.  If you retire just prior to a bull market, you can pull income from your growing investments.  If you retire on the cusp of a bear market, you can take withdrawals from your cash.  The safe bucket keeps you from being forced to sell your riskier assets in a declining market.  The risk bucket increases your odds of outpacing inflation.  The tax-advantaged bucket allows you greater control over your tax bill.

The primary advantage of this strategy is that it gives you options.  If you, your spouse, and your advisers are able to evaluate those options and make distribution decisions each year that accrue maximum benefit to you, you are likely to see a significant increase in the amount of money you can draw from your portfolio over the years without a commensurate increase in your risk of running out of money.

Monitor and adjust

No matter which distribution strategy you choose, you should never “set it and forget it.”  Take time each year to meet with a trusted adviser for a periodic portfolio check-up.  This is especially critical during the early years of retirement when your sequence risk (the risk that you will retire and begin withdrawing money during a period of low or negative investment returns) is highest.  Some questions you should consider during your annual review:

  • Is your withdrawal rate sustainable?
  • Is your income still sufficient and keeping pace with inflation?
  • Is your asset allocation still appropriate?
  • Is the amount of risk you’re taking still suitable?
  • Has the value of your assets changed significantly?
  • Has your life expectancy changed?

Your answers will help determine if you can keep your withdrawals the same or if a change is in order.

Keep in mind that anyone can retire.  Staying retired is the challenge.  By crafting a well thought out distribution strategy you can help ensure that your resources will see you through your retirement years.


Retirement Budget Worksheet

Retirement Budget Worksheet

Much of your retirement planning will revolve around your retirement budget.  It will help determine things like:

  • How much you need to save
  • When you can afford to retire
  • What types of things you can afford to do
  • What your income sources will be during retirement
  • How sustainable your distribution strategy is

With that in mind, I’ve put together a Retirement Budget Worksheet for you (see link below or visit  Use it to begin mapping out your income and expenses during retirement.  Feel free to forward it on to friends or family as well.

Retirement Budget Worksheet (PDF)

Thanks for reading.  Have a great weekend!


Three key retirement mistakes to avoid

Three key retirement mistakes to avoid

Retiring in the place you want, with the people you want, doing the things you want, for as long as you want takes money, good genes, and a bit of luck, to be sure.  But perhaps what is more important is the role that good decisions play.  One of the earliest lessons in life is that actions have consequences and boy is this true in the final third of life.  If you’re at or near retirement, the decisions you’re about to make will have consequences for you and your family for decades to come.  Unfortunately, it only takes one bad decision to ruin a lifetime of good ones.  So what are the biggest mistakes to avoid as you approach and enter retirement?

Retiring based on your birthday instead of your bank account.

Imagine that I wrote the name of a city on a piece of paper and sealed it inside an envelope.  Giving you the envelope I said: “Without looking inside, drive to the airport and randomly buy a plane ticket to anywhere in the world.  When you arrive at your destination, open the envelope and see if it matches with the destination that I wrote on the paper.”  What are the odds that you would end up in the right city?  Not good right?

As ridiculous as it sounds, that is how most people plan for their retirement.  Don’t get me wrong.  People save; they just don’t do it with a great deal of deliberation or a clear understanding of the end goal.   Instead they do it via a completely random series of 401(k) and IRA contributions.  Much like traveling without knowing your destination, saving for retirement without knowing your end goal will likely leave you far from where you need to be.

If asked when you want to retire, your answer should be a dollar amount, not a year.  Retirement is about independence, not simply age, and money is critical to independence.  You should know exactly how much you need to save in order to fund the type of retirement you want.  Without that knowledge, there is no guarantee that your efforts will get you to where you need to be.  In fact you are almost guaranteed not to reach your goal.  Doing so would be more the result of dumb luck than anything else.

Retiring with too much debt.

I’ve written about debt here before, but it bears repeating.  Too many have gotten caught up in the debt frenzy and now, as they approach a time that is supposed to be about enjoying life and living their dreams, they instead find themselves beholden to their jobs and struggling to make ends meet.

An increasing number of people are entering retirement with no pension, inadequate savings, a big mortgage (sometimes two), an average of about six credit cards, and debt on one or more cars.  Work is not a choice at that point any more than it’s a choice for the thirty-year-old with all the same obligations and a growing family to feed.

Having debt adds risk and reduces cash flow, two things that are especially troublesome for a person at or near retirement.  Your primary goal should be to retire debt free and have your income at your disposal.  If you retire with debt, you will spend precious years of your retirement paying for the purchases of yesteryear instead of using your income to live the life you’ve always dreamed of.

Fumbling your distribution strategy.

Farming and cooking are two different things.  One is about creating and the other is about consuming.  Likewise, saving for retirement and turning that savings into an income stream are very different tasks.  When converting your savings into an income stream, taking too much, too soon from the wrong account or in the wrong markets could be the difference between retirement bliss and retirement blunder.

A distribution strategy typically occurs in two phases.  Phase 1 involves moving the money from pre-retirement accounts (e.g. your 401k) to post-retirement accounts.  Phase 2 involves creating an income stream from those post-retirement accounts.  The ideal time to begin working through your distribution strategy is with a year or so to go before retirement.  You should be thinking about how much you need, where it’s going to come from, and whether your nest egg is up to the task.

When you retire, your portfolio takes over the job that the payroll department handled during your working years, namely to send you a paycheck every month.  If you retire when you’re sixty-five and live until you’re eighty-five, it needs to cut you 240 monthly paychecks.  There are a host of variables that will affect its ability to do that, such as the distribution rate you choose, investment returns, inflation, how long you live, and good old-fashioned luck.  Some of those things you can control and others you can’t, but having a well conceived, sustainable distribution strategy will help ensure that you don’t outlive your money.

Retirement is a major transition.  That transition is not always easy and is often fraught with potential risks and pitfalls.  By diligently completing each necessary task and avoiding the mistakes that ensnare so many, you can head confidently into what will surely be one of the most fulfilling and rewarding periods of your life.

Thanks for reading!  If you found this article helpful, feel free to share it with a friend.


 Note: Portions of this article were excerpted from my book The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement.  Visit the Resource Page for more information.