Tag Archives: saving

How to Safely Spend Savings in Retirement

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It can be complicated to determine what is a safe level of spending in retirement. There are many thoughts on this problem which can be useful but also make it complicated to figure out what is sensible.

Partially determining the safe amount to spend is a complicated problem so when we try to find simple solutions there are problems. For those in the USA the past results provide fairly reassuring starting points. Historical investment returns in the USA have been substantially better than elsewhere; this results in historically safe spending plans in the USA not necessarily safe elsewhere. It also does point out the risk that if the USA doesn’t maintain historically excellent investing returns that may make seemingly safe plans turn out to be less safe. Those are some of the complications that make retirement planning annoying.

recliners and palm trees on the beach

Photo by John Hunter in Langkawi, Malaysia. Prepare so you can retire to a relaxing life on the beach.

There are easy rules, like spending 4% of savings. That has worked pretty well but has potential issues with risk so people worry about using it. Also it is so simple that it isn’t surprising it has issues.

There are no super simple answers in my opinion. But ideas like 4% (or 3.5% or …) do get you at least in the right ballpark for what has worked historically in the USA with specific portfolios… The idea of adjusting spending based on results seems like a very sensible idea to me though many don’t like the complexity this ads to the plan. To me a plan to adjust spending just is a sensible way to deal with the complications that a long retirement (whether that is 20, 30, 40 or more years) brings.

No one blog post is going to provide an answer to the question of How to Safely Spend Savings in Retirement. There are some very good posts, articles and studies on the topic, here are a few:

USA Treasury Inflation Protected Securities (TIPS) do not always offer this return but today you can purchase a 30 years portfolio of TIPS that allow for a 4.6% inflation adjusted “withdrawal rate” (so above the 4% idea) – this link (from the Tips Ladder website) provides what the rater would be when you are reading this. You are limited to 30 years so if you need a longer plan this can’t be your entire portfolio but it certainly provides a good potential investment for some of your portfolio. I have been buying TIPS for the last year, as they have been providing such a favorable safe investing option.

Retirement spending calculators

Related: Using Annuities as Part of a Retirement Plan – Save Some of Each Raise

Google Finance – Tracking a Portfolio with Mutual Funds

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Google Finance offers a simple way to track a portfolio. You can use a Google spreadsheet and have all of the features of a spreadsheet (to track % of portfolio, % gains, etc.) and also insert a bit of code to get current values of securities.

There are simple tutorials for doing this for stocks.

You need to first put the exchange (NYSE, NASDAQ, etc.) and then the symbol. So NASDAQ:AAPL for example. The complete code to use to retrieve the prices is

=GoogleFinance("nasdaq:aapl")

If you don’t know the exchange it trades on just put it in Google Finance and it will show you the code to use. Directly below the security name it will list the [exchange]: [symbol].

view of apple quote screen

You can also use this to find the code to use for mutual funds. So for example searching for Vanguard Health Care Fund Investor Shares will return

Vanguard Health Care Fund Investor Shares - image of syntax for Google Finance

So you would use

=GoogleFinance("MUTF:VGHCX")

And for the Fidelity MSCI Health Care Index

=GoogleFinance("NYSEARCA:FHLC")

The spreadsheet is an easy way to collect items held at several brokers and to do real time calculations based on current stock prices. One reason I have several brokers is that provides some security from technical failures on their part (their webs sites, applications… being down). Also different brokers can do certain things a bit better than others (pre market trading etc.).

I hope this is helpful to some people. Good luck with your investing.

Related: Use FI/RE to Create a Better Life Not To Build a Nest Egg as Quickly as Possible – Retirement Portfolio Allocation for 2020 – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation – Retirement Planning: Looking at Assets

US Savings Bonds – Actually a Good Investment Option

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I will admit I have only recently looked at US Savings Bonds as an investment option. It seems to me series I savings bonds are the better option. Series I bonds are based on the inflation rate and given how strongly the Fed has been surpassing interest rates (which is likely to increase for the next few months) this offers an option to get a higher rate of interest.

Rates for EE bonds depend on the issue date and are either a fixed rate of return or a variable rate based on 90% of 6-month averages of 5-year Treasury Securities yields.
The annual interest rate for EE Bonds issued from November 1, 2019 through April 30, 2020, is 0.10%. At that rate these certainly don’t seem worth bothering with to me.

The earnings rate for series I combines two separate rates:

  • A fixed rate of return, which remains the same throughout the life of the I bond.
  • A variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). The Bureau of the Fiscal Service announces the rates each May and November. The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March; the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.

image of series ii USA savings bond with Chief Joseph

The composite rate for I bonds issued from November 1, 2019 through April 30, 2020, is 2.22% (pretty good rate, you can see why I say they are a good option). This rate applies for the first six months you own the bond. The rate will then be recalculated using the CPI-U rate.

Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

2.22% = [0.0020 + (2 x 0.0101) + (0.0020 x 0.0101)]

This is calculated based on a fixed rate of .2% (showing how depressed interest rates are) and 1.01% inflation rate for a 6 month period (which also is low but compared to interest rates pretty high).

You may buy series I US savings bonds online via TreasuryDirect. In a calendar year, you can acquire up to $10,000 in electronic I bonds. Somewhat bizarrely the USA government decides you can purchase an additional $5,000 in the paper I bonds each year (but you cannot purchase $15,000 of the electronic I bonds).

You can redeem series I bonds after 12 months. However, if you redeem the bond before it is five years old, you lose the last three months of interest.

US savings bond interest is also exempt from state and local income taxes. This likely isn’t a big deal for most people but for a few states with high tax rates on high income tax holders this may be a nice additional benefit.

Given the very limited options to earn interest income today series I bonds are a reasonable alternative for the income portion of a person’s portfolio.

You may also use the Treasury Direct website to buy US Treasury bills, US Treasury notes and US Treasury bonds.

Related: Using Annuities as Part of a Retirement Plan – ACA Healthcare Subsidy, Why Earning $100 More Could Cost You $5,000 or More – Use FI/RE to Create a Better Life Not To Build a Nest Egg as Quickly as Possible – Municipal Bonds, After Tax Return (2008) – Retirement Portfolio Allocation for 2020

Using Annuities as Part of a Retirement Plan

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Annuities have a bad reputation, with a history that makes that bad reputation sensible. The main problem is the high costs (and often hidden costs) of many annuity products. Combine with large sales incentives this has led to annuities being abused by sales people and financial companies while providing poor returns to investors.

However the attributes of annuities fit a specific part of a retirement plan very well. Overall I am a big fan of IRA, 401(k), HSA – all of which provide the investor with control over their own financial assets. And I still believe they should be a large part of a financial plan.

In order to save for retirement, we need to start young and save substantial amounts of money to live off of in retirement. Retiring early requires that investments provide income to live off of for an even longer time.

Pensions provided an annuity (a regular payment over time). Social security (in the USA, and other government retirement payments internationally) provide an annuity payment.

A rough rule of thumb of being able to spend approximately 4% of the initial retirement investment assets (given a portfolio invested in USA stocks and bonds) gives a starting point to plan for retirement. That 4% rule however is not guaranteed to work (especially if you live outside the USA or retire early). In fact relying on it today seems questionable in my opinion (not only even if you retire at 67 in the USA (given the current seemingly high values in the stock market).

The best roll for an annuity in retirement planning in my opinion is to serve as a protection against longevity. The longer you live the more risk you have of outliving your investment savings. Life annuities have the benefit of continuing for as long as you live.

One of the disadvantages of a life annuity is that the principle is not yours to leave to heirs. That is a fine trade-off for protection that you have enough to live off of in most cases. And I wouldn’t suggest having all of your money put into an annuity so if leaving assets to heirs is important you can just factor that into the balance of how much you put into the annuity down payment.

John Hunter with lake and mountains in the background

John Hunter, Bear Hump trail, Glacier-Waterton International Peace Park

It is possible to have the annuity pay for as long as either spouse lives (so if that is a concern, as it would likely be for most married couples, that is a good option to use). The payment will obviously be less but not by a huge amount (though if one spouse is many decades younger, then the amount can be substantial).

An annuity payment is calculated based on projected investment returns and your life expectancy. The older you are the larger a percentage of the initial deposit you can expect as an annuity payment. Something like 5.5% if you are 65 today may be reasonable (this will change as investment projections, especially interest rates, change). So one thing you will notice right away is that is much greater than 4%. And that shows one advantage of using annuities.

Why is the annuity able to provide payments greater than 4%? A big reason is that the insurance company can balance the payment based on a large number of people. And many of those people will die in 10 or 15 years. That allows them to retain the assets they were investing for those individuals and still continue payments for those people that live for 25, 30+ years.

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