The Big Picture for the Week of January 16, 2005

This week’s Big Picture will be a little different. I saw an interview on Bloomberg TV Saturday morning with a guy from American Express Financial Advisors, who is some sort of planner, named Chris Hamowy.

The interview was about retirement planning with the idea that most people will be retired for much longer than they might expect, thanks to longer life expectancy. Chris’s advice was wildly generic and uninsightful. He did manage to slip in that people should only work with large firms. I’ll leave that one alone, but what do you think about that idea?

That interview combined with the Businessweek special report on social security private accounts has motivated me to write my, possibly quasi-radical, thoughts on retirement planning and share what steps my wife and I are taking in our planning. Now, realize I live in a cabin on a mountain in the woods. Apologies if this resembles an excerpt from a manifesto.

It looks like people my age (38) will have a private account to provide some portion of their social security benefit. According to the Businessweek article the contribution will be capped at $1000 a year into the private account. I did not see where that cap might be raised, but maybe it will. If not, I might have 23 years of $1000 contributions. If I average 7% per year my account will be worth about $53,000. The article assumes we will buy an annuity with the lump sum. Annuity or not, if my calculations are anywhere close to right, the private account plus the “regular” benefit may not only fall short but may turn out to be a small fraction of what will be needed.

I don’t think anyone should expect social security to be there, nothing unique about that I realize. I also believe that there are enough savings mechanisms available to save what you need, but you need to take advantage of them.

I think I saw Suze Orman say not to put money in a 401k, to use a Roth instead. So that I don’t get sued; I’ll just say I disagree. If you have a 401k use it. I would say to max it out but at the very least put in enough to get the most out of the employer match. There are some instances where a 401k may not be the best thing but the reason I like it is you only need to be disciplined once (when you sign up), not every paycheck. A 401k builds up very quickly. Being self employed I do not have access to a 401k, although recently a product called an individual 401k has popped up, but I haven’t looked into it yet.

The next thing I would recommend after your 401k is a Health Savings Account, as soon as one is available to you. There are plenty of articles out there you can read to learn about them, they are a great vehicle, my wife and I are going to start one this quarter.

After funding the HSA the next account we use is a Roth IRA. We each have one, and I’m sure by now you know the advantages over a Traditional IRA.

Between the HSA and two Roths we will put away about $11,000 this year. While that doesn’t sound like much it is more than we need thanks to some diligent savings that started in my mid 20’s.

Here’s where I start to veer off the path. Planners say you need 70% of your income in retirement. I have never understood this. Most of the people I know that are retired or close to it have no mortgage. That might be something to shoot for. Also most retirees I know don’t have car payments. That may be a little tougher, but with minimal planning you should be able to work it so you never have two car payments, right? With no mortgage and only one car payment I would think that might cut fixed expenses in half if not more. It is also unlikely you will have the expense of raising children in your retirement years. If you think about your expenses ex-mortgage and only one car payment the only variable is the cost of health insurance. You know what to expect inflation-wise from just about every other fixed expense. I would encourage you to think in these terms.

Another thing to think about is Multiple Streams of Income. I read this book a few years ago. I don’t remember the details but the concept made quite an impression on me. I love the type of work I do enough to keep doing it until the end. It probably makes sense to find something you like that much. For example a neighbor, who is 74, owns a back hoe and has to turn business away. He gets paid $65 an hour to play around on his Tonka Toy. Work you love can be one stream.

Your investment portfolio will be another stream of income. Keep withdrawals to 5% or less.

Another potential stream I believe in, that I don’t write about much is real estate. Let me say up front I like simple. In a year or two we plan to buy a six unit apartment building (maybe four units or maybe eight). The idea is that ten years from now normal inflation may cause rents to go up 50% from where they are now while the mortgage payment will be the same, giving a substantial positive cash flow. Real estate in Prescott (the town where I live) is not very expensive so we will be able to afford to cover any negative cash flow that might come from vacancies. If you go that route it may make sense to learn how to do some simple repairs. I have a little experience with plumbing and a little more with electrical work. Expect a lot of little problems, owning rental property is not easy.

Lastly is live below your means. There is something I heard a long time ago that rings true for me as a philosophy; who is richer, than man who makes $20,000 but only spends $10,000 or the man who makes $200,000 but spends $210,000?

Obviously I have simplified every point made in this article. The idea was not to imply one way is right for everyone or that I think I have all the answers. I did want to try to get you to think outside the lines a little bit. Like investing, personal finance continues to evolve. This is why you have a financial plan and why you review it.

But that’s just me.


  1. Imagine that–an AMEX financial advisor saying you should only work with big firms!! I never would have guessed(heavy sarcasm).

    Seriously, comments like that are so transparently self-serving that the TV should have an automatic laugh track for that sort of thing.

    Otherwise, I think you’re spot on. Whether you live in a cabin in the mountains or not, it’s worthwhile to 1)Live below your means, 2)use every tax advantaged investment plan you can, 3) pay special attention to planning for health care, and 4) never completely “retire”, but do something (or several somethings) that can pull in money. Do those things, and you’ll never have to worry about money.

  2. I started to read your articles several weeks ago and have really enjoyed vary opinions. I couldn’t agree with you more about keeping things simple and don’t live beyond your means. Back in 1992 I started my own company. I received the best advice from my grandfather who was a farmer all his life. If you don’t have the cash to buy it, do you don’t need it. We expanded our company from personal savings into a international company strickly out of cash flow. We resisted acquiring large debt and partners. When we sold our company in 2001, I was finanical secure ($$,$$$,$$$ at the age of 39) but now face 40 years of retirement. Like many retirees we can live with less income because we don’t have any debt. While we can aford to live large, but we still keep all of our cars at least five years, we don’t take all income we could from our investments, and we haven’t changed our life style.

    The other lesson after retirement (that cost me a lot of money) was nobody can make money better than yourself. We thought that we would invest in small companies as an angle investor. We were tried of working seven days a week. Let someone else make money for us. We found very few people are willing to be disciplined with their own money let alone our. I think too many retires are looking for someone to keep making them money after they stop working. Either live within your means or go back to work. Nobody is going to do it for you.

  3. If it were not for rental property I would not have not been able to qwit work at 50 (1992). However if you have never had rental prop I think you may be in for some unpleasant surprises. None of my business but I would suggest you start with a really nice or new duplex. After 2 or 3 years you’ll know if you want appts. As soon as I could I sold off the rentals and put the money in the stock mkt. Anyway, good luck and I like your blog.

  4. Roger,

    You made some great points and I enjoy your writing! It is interesting that this so-called Social Security “privatization” falls short of being the miracle it is alleged to be. With just $1,000/yr, it really doesn’t add up to much, especially with the heavy fees that will be assessed to the product. Doesn’t seem like it will be worth the opportunity to the younger generation (like you!), who will have to also shoulder the trillions of additional government debt. Don’t you think raising the social security tax limit above the current $87,000 makes sense. I mean I like the idea of a little privatization, but wouldn’t support it until such time as the government is running surplusses again. Not with ever-expanding deficits.

    One thought on retirement accounts, if our current tax-levels turn out to be a record low levels, due to the massive federal deficits that are building and the possibly higher tax rates that will be required to bail out the government (?)…anyhow if that turns out to be true….wouldn’t it turn out to be prudent NOT to take advantage of tax-sheltered accounts in times of low taxes? Just a thought…anyhow, keep up the GREAT work around here….


  5. I enjoy reading your blog, and I have a question for you regarding 401Ks. I am 25 and in the 25% tax bracket. I currently put 15% into my 401K (co matches first 3%), and make a small automatic investment into an indexed mutual fund. With the tax system as it is now, does it make sense to defer taxes now by putting 15% in my 401K or put less in my 401K and contribute more to liquid investments such as mutual funds/stocks? I saw more liquid holdings, as I may have a down payment for a house in the future or need to pay for part of graduate school et cetera et cetera. Thank you.

  6. What percentage to expect to spend during reitement can be very tricky. The standard rule of 70% of pre-retirement income rarely applies to people. Some people completely shut down spending. This is definitely true of those who survived the Great Depression. However, many Baby Boomer clients will continue to spend the same amount in retirement as they did during their working years. Additional medical expenses and travel usually make up for the less spending on autos or mortgages. The Baby Boomers and subsequent generations have become too accustomed to spending to all of a sudden shut it off in retirement.

    I have to agree with your other comments, especially limiting withdrawls to 5% of savings.

    Regarding the cost of the running the privatized S.S. accounts, I have read that they will be similar to the Thrift Plans available for govt. employees. At 30 bps. you can’t get much cheaper than that. Granted, saving a $1,000 a year won’t be much to live off at whatever age hey set eligibility but it isn’t be because of adminstrative costs. Like most CFP’s I don’t plan on people under 40 having any S.S.

    Finally, regarding the peddler from Amex, ask him if he is a fiducuary for his customers.

  7. Response to 25 year old anonymous:

    It is very difficult to give advice to a stranger. Here is my two cents in generic terms. First, money you may need for a down payment, grad school, or any shorterm need should be in a money market or CD. The point about low taxes is valid. My preference is for tax deferred or tax free but that is subjective so there is nothing wrong with putting less in to your 401k…unless the tax laws change dramatically in the future. But then if laws do change who’s to say that IRAs wouldn’t be hurt. Not much of an answer, but I believe in IRA/401ks.

    Response to AMFisher70:
    You are right that travel may soak up a lot of boomer’s income, but that is discretionary spending. The way I look at things, when I know what my fixed expenses are for the year, I can then figure what if any I will have for discretionary spending. A little discipline can go a long way. Also health care is a huge variable now and in the future. For now it seems like the cost for health insurance will be locked in for a year, at least ours is, before it goes up. Hence my year at a time comments.

    Thanks to both of you!

  8. Great post Roger. I’ve been going back and forth over buying “Multiple Streams of Income” for months now. Your recc. just pushed me over to the ‘buy it’ side.


Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing