Retirement Planning Revisited

by: Roger Nusbaum

Roger Nusbaum submits: My post from the other day about BusinessWeek's retirement planning section drew a lot more comments than I would have expected, and I can see a lot of click throughs from other places that have picked up the post.

From the comments it seems like there may be a little confusion about some of the basics, which is a surprise to me. One reader got very hung up on growth rates, inflation and the like. Another reader left a complicated actuarial question.

My original statement tried to be very concise and blunt; whatever you have, don't spend more than 5%. That's it.

Filling in some detail, this 5% idea pertains to not outliving your money. The idea of having your check to the undertaker bounce is one I don't get. What if you live ten years longer than you plan for?

You can make this as black box as you want, but market up 20% this year -- don't take more than 5%. Market down 20% this year -- don't take more than 5%. In a way this is a big simplification, but starting as simple as you can and then building in the details of your life seems logical to me.

Another aspect to this that I believe is potentially crucial is the notion of different income streams, meaning working after you retire. It is possible that you will not be able to work after you retire, and a plan that hinders on working in order be successful is risky. But those caveats aside, some sort of part time work gives you money, gives you purpose, and means your portfolio has to do less.

One neighbor of ours is 75 and can have as many hours as he wants doing backhoe work at $60 per hour. His backhoe is his toy, so after expenses maybe he makes $40 per hour to play in the dirt on his toy. How many hours at $40 would it take to relieve your portfolio?

If you have crap that people want, eBaying can be a hobby that generates income. Finding the right crap to sell is not that easy I have to say.

Prescott (the city where I live) is two hours from Phoenix, so there are a couple of shuttle services to the Phoenix airport. Most of the drivers (the ones we've had) seem to be retirees working two days a week. With wages and tips this could add up to $1000 per month. For someone that needs $4000 per month to live on, $1000 is significant.

One more comment came in as I was writing this post deriding most web planners for assuming all expenses have to be paid for from your nest egg (never say nest and egg in the same sentence). This is not bad conceptually. It is more of a worst case scenario, which I think is more prudent where planning is concerned.

My bottom line take on this is to be overly conservative at every turn and do what you have to to make the numbers work. Spend less, work a little longer, whatever.