Retirement: Getting To The Summit Of Mt. Everest

Includes: DVY
by: Maks F. S.


We answer a reader's questions about their retirement preparedness and strategies for Social Security and retirement plan rollovers.

Discussion of retirement funding options and the various drawdown strategies.

We take a look at various options for taking Social Security benefits and the impact on lifetime payouts.

Discussion of whether or not working with a financial planner is a good idea for you.

Over my last few years on Seeking Alpha, I have focused primarily on mutual funds, ETFs and a few stocks that I closely follow. However, I was recently asked to help answer a reader's question about a topic on which I spend 90% of my time on professionally, which is financial planning. This will be my first article here on this topic and I hope to answer more of these in the future to help out the community.

The Case:

Female, age 56; earning $130,000 per year.

Wants to retire at age 59.5; plans to begin Social Security at age 62

Has done a great job recently of putting money away.

403(b) $ 500,000
Roth IRA $ 27,500
Brokerage Account $ 5,500
Savings Account $ 27,500

Over the next few years, plans on putting away an additional $100,000 to $140,000.

She is not concerned about leaving an estate/legacy, and is primarily concerned about not outliving her money.

Being an avid SA reader, we are assuming she has done a good job managing her brokerage and Roth accounts and has a dividend stream of around 6.5%.

Her Questions:

1. Is there a calculator that will let her play with withdrawals from various accounts to see the impact on taxes and to determine the optimal plan?

2. Should she put away more money into taxable accounts (after achieving the max 403(b) match)? Or put more money away into the 403(b)?

3. The plan is to roll over the 403(b) when she leaves work and do a Roth conversion. Does that make sense?

3a. Is there a way to do that now, while working?

3b. Once the money is rolled over, is there a tool that helps figure out how much to convert to a Roth IRA so that the tax consequences are manageable?

4. The money that is currently in the low-interest savings accounts is the current emergency fund. Would it make sense to put a portion of that in the after-tax brokerage account so that it can help create dividends knowing that it is a "little" riskier and not as liquid?

The Back Of The Napkin

As a financial planner, experience teaches that you do not always need to do a full blown financial analysis in order to draw some conclusions.

During a strategy session, the first thing I will do after gathering the data and before inputting the information into one of three financial planning software packages that we use is to go into the conference room, open up the dry-erase board and get to work.

We will list the four cornerstones: assets, income, debt and insurance needs. In this example, we do not have all of the data, but we have a good amount in order to keep the conversation going and to address some of the points.

First and foremost, this person has done an admirable job of saving - especially when we consider that most Americans have little to nothing saved and will be dependent upon Social Security and likely need to work through retirement.

The quick and dirty way of seeing how okay you are is to figure out how much income your money will need to generate for you.

Desired Income - Guaranteed Income (Social Security + Pensions) = Your Gap.

Since we do not know exactly how much the questioner is looking for and states that she can live frugally, one way to guesstimate this number, again from experience, is to take the current salary and subtract any amount put away into savings.

$130,000 minus $30,000 per year currently going into savings, plus another $20,000 "frugality" factor and we can go with $80,000 per year.

In the planning industry, and quite frankly in most financial guides and on websites, it will be recommended to plan on living on 80% of your pre-retirement income.

Personally and professionally, I think that is a bit low. In my experience, our retirees end up spending the same if not more money, as for the most part they are spending more time at home and are finding more time to shop, go on vacations and generally to entertain themselves.

Over the years, I have had just one client who actually stuck to their stated goal, living off of 75% of their pre-retirement income.

For this case, $80,000 per year retirement lifestyle is a 40% drop from pre-retirement income. This is an extreme case, but for this example, let's go along with that.

Next, we have to look at the guaranteed sources of income. Most people are not going to receive any types of pensions and will only have Social Security to depend on. In this case, since we do not have the exact SS benefits, I am going to assume the best case scenario. Today, the current full retirement age benefit is $2,639.

$80,000 per year - Maximum Social Security Benefit of $31,668 leaves a gap to fill of $48,332.

Again, assuming the questioner will contribute an additional $100K-$140k over the next three years, we can plan on having approximately $700,000 in assets.

$48k/$700k is approximately 7%.

So under the best case scenario, not accounting for taxes, and assuming an $80k per year desired income, we already have an unsustainable withdrawal rate.

Typically, although you will hear a sustainable withdrawal rate of 4% or more over the last decade or so, the planning community has dropped that rate closer to 3%. Obviously, it may not be a problem for someone who does not need to worry about leaving a legacy; however, keep in mind we are already working on the best case scenarios.

BlackRock has put together a pretty good chart showing the effects of various withdrawal rates over the years.

Unfortunately, we have to make an adjustment.

The maximum SS benefit of $2,639 is for the full retirement age at 67. As per a Social Security tool, for someone born in 1960 whose full retirement benefit is $2,639, their Social Security benefit at age 62 is only $1,847.

That would bring the gap up from $48k per year to nearly $58k, which would require a withdrawal rate of more than 8%.

The gap further increases if the questioner is not able to make the full intended contributions or the markets enter a recession and the account value suffers.

Beyond that, that equation only works from age 62 on, the earliest the client can receive Social Security under most cases, so the first three years of retirement would have to be fully funded from savings.

A few more things on Social Security: While it is tempting to want to access benefits at age 62, it may also be significantly detrimental to your financial plan.

Typically, waiting until at least the full retirement age, or better yet age 70, will provide the highest total payout. The biggest question is that of longevity. As more and more people live well into their 90s, waiting to collect until age 70 will put you ahead of the game. Using a benefit planning tool from BlackRock, you can see an example below.

As you can see, if your full retirement benefit were $2,639, your first breakeven age would be 77 if you take your full retirement benefit at age 67, or age 81 if you delay and take your benefits at age 70.

Let me know if you would like a report like this run for you.

The Deep Dive

To facilitate consideration of various scenarios, we go from the dry-erase board to financial planning software.

We used the same assumptions as above: $130,000 per year in income, maximum contributions and match to the 403(b), and full contribution to a Roth IRA.

Below is the first straight-line analysis that we get.

Simply put, you can expect your money to run out by the time that you hit 80 years old with a moderate risk portfolio.

The plan assumes that the very first assets that you will go into would be your taxable accounts and you would leave your retirement assets to continue growing tax-deferred for as long as possible.

The plan also assumes taking Social Security at age 67, the full retirement age.

Taking Social Security at age 62 would require less of a drawdown on the portfolio, although she would still run out of money by age 80.

The reason why 62 works better here is that since the questioner would like to retire at age 59.5, taking Social Security earlier would impact the portfolio more gradually.

Ok, the markets go up and down you say... we cannot just look at a straight-line number. What about running a Monte Carlo simulation to see how it would do?

As you can see in most cases, you will still run out somewhere in your 70s.

Now, in full disclosure, for planning purposes we assume age 100. With the progress of medicine, you are ever more likely to live longer.

Yes, we can absolutely run the numbers for a life expectancy of 80 or 85, but that would simply be irresponsible unless you have a high degree of certainty your current health will prevent you from enjoying a lengthy retirement.

Next Steps:

In most cases this is the point in time where you have a financial planner or professional sit down with you and start going over the options, or more importantly to ask you what are you willing to drop?

Are you willing to work longer?

Or perhaps live even more frugally and accept more risk?

The Negotiation:

Before going into and answering the specific questions, I would urge that a lot of the questions are simply not going to matter with the goals laid out as they are.

Is it possible that we will have a bull market for the next 20 years and stocks will only keep rising? Sure... there is a chance of that, but how realistic?

What is more important?

Is it leaving that job and simply retiring? Or would you want to retire once and for all with peace of mind that you will not have to return to work in 10 years?

Or maybe it just means retiring from full-time work and working part-time while you have more time to enjoy life.

One important item not being discussed that is critical for people retiring prior to 65 is the increased expenses that will come in the form of healthcare premiums. After retiring at 59.5, you will still need health insurance until you are Medicare-eligible at age 65. Healthcare premiums can often run up to $2,000 per month for those in their 50s and 60s - something that needs to be addressed.

This is the point in time to start going into the specifics to really iron out exactly what is a must have and what is merely nice to have in retirement and to get a concrete retirement number that you will need. Once those expense numbers are established, then it is time to shuffle the other blocks around to figure out what you are comfortable living with.

The Questions Answered:

1. Is there a calculator that will let you play with withdrawals from various accounts to see the impact on taxes and to determine the optimal plan?

Yes, but not that I can find available to consumers.

The financial planning software that we use does have that ability, but once again, if you are looking for a specific number, the best answer would come from playing around in TurboTax or TaxCut and adjusting your tax return with your specific numbers.

When it comes to taxes, I am not as much concerned with the tax bracket you are in, but rather what your effective tax rate is.

Typically though, in pretty much every scenario we have run across, your best plan is to let your tax-deferred accounts go as long as you can before accessing them (or before required minimum distributions kick in).

First you go for taxable accounts, then your IRAs and finally any Roth IRAs. The one area where it may make sense to leave your taxable accounts alone would be if you are holding highly appreciated stock and you have other sources of income such as pensions and annuities and are not reliant on those accounts. In those cases, you may want to access IRAs for anything extra or when you have to take them in case of RMDs, which will leave the highly appreciated stock to remain for your beneficiaries with a potential step-up in cost basis. (This is not tax advice; consult your tax professional.)

2. Should I put away more money into taxable accounts (after achieving the max 403(b) match)? Or put more money away into the 403(b)?

The general rule of thumb is to max out your employer-sponsored plan up to the match, then max-fund the Roth IRA if you are eligible, and then go back and max out your 403(b). If you have savings beyond that, you would then fund after-tax accounts. If you are self-employed, you have a few more options available to you in the form of self-employed plans such as Solo 401(k).

Other options may be after-tax, tax-deferred annuities.

3. The plan is to roll over the 403(b) when she leaves work and do a Roth conversion. Does that make sense?

In all likelihood, with the stated goals of retiring at 59.5... it is not going to make much of a difference if you are expected to run out of money in the next 10 years.

Beyond that, if we are assuming that you will live on less money in the future, why do a conversion now and pay 25% or more in taxes when you can expect to draw less money in the future and thus pay less taxes at that time?

3a. Is there a way to do that now, while working?

Some plans do allow in-plan conversions; essentially you would be going from a traditional 401k/403b to a Roth 401k/403b. Find out from your plan sponsor if they allow it.

3b. Once the money is rolled over, is there a tool that helps figure out how much to convert to a Roth IRA so that the tax consequences are manageable?

For this one, you know your situation best. The answer is the same as for question No. 1, with the further advice that you speak with your tax professional.

4. The money that is currently in the low interest savings accounts is the current emergency fund. Would it make sense to put a portion of that in the after-tax brokerage account so that it can help create dividends, knowing that it is a "little" riskier and not as liquid?

Would it make sense to reposition it to earn a bit more income? Sure.

Would I recommend putting your cash reserve into dividend paying stocks?

Absolutely NOT. In fact, that is the point where I would ask someone to sign a waiver stating it is against my advice and you are choosing to do so yourself.

A cash reserve is a cash reserve.

I can absolutely appreciate wanting to earn something above zero... and you can, be it in high-yield savings or money market accounts.

The one thing we did not address is the current allocation. In fact, I have not seen it so I do not know what you are currently invested in. What I do know is that I do not know of any high-quality dividend portfolios paying 6.5%.

A high-quality dividend portfolio is likely to yield in the neighborhood of 3%. One example can be a unit investment trust portfolio such as this First Trust Dividend Income Plus portfolio or an ETF such as the iShares Select Dividend ETF (NYSEARCA:DVY).

Even those high quality dividend portfolios suffered greatly during the GFC (Great Financial Crisis).

The equities that are yielding 6.5% may be lower quality bond portfolios, leveraged ETFs or closed-end funds. Stocks yielding 6.5% may be reducing those yields in the future, as they may be unsustainable, and higher quality REITs are currently yielding less than that on the publicly traded markets. Exceptions are of course non-traded REITs, where you can get a 7% distribution or higher.

A cash reserve is not about making money, but rather about not losing money. A cash reserve is there to provide you access to your monthly living expenses.

If anything, as you head closer to retirement, you should be increasing your cash reserve rather than looking to move a part of it into securities.

For someone in retirement, we typically recommend at least a 6-month cash reserve, so for this example $40,000, and would be far happier with a 12-month cash reserve.

Many of our retirees prefer to have more peace of mind and will have a 12- to 24-month cash reserve.


Because no one knows what the equity markets are going to do over the next 12 to 24 months, your income should not depend on the market's sentiment.

For a cash reserve, you would have a 2- or 3-tier system:

1 to 2 months of expenses in a checking account which you use on a daily basis.

2 to 3 months in a savings account that gets you at least a bit of a return, but most importantly is FDIC-insured. You can look at various high-yield savings accounts yielding about 1%. If you need money for an emergency or an opportunity, you can quickly transfer funds to a checking account.

Lastly, another 3 to 12 months in the third tier, which can be a money market, a laddered-CD portfolio, or perhaps even a short-term tax-free municipal bond portfolio.

With a structured cash reserve, you know you have your next 12 to 24 months of living expenses covered, and do not have to worry about what the markets are doing. Even if they do sell off, you are not going to be under pressure to sell at the lows in order to pay your cable bill.

On an annual basis, you would refill the last tier of your cash reserve with income from your equity portfolios as you need it. Most importantly, your retirement income will have a buffer smoothing out your cash flow.

My Advice & Bottom Line

About a week ago I watched "Everest," on HBO. It is a movie about the 1996 disaster where 8 climbers were killed in one day at the summit of Mount Everest. It was a very emotional movie and most of all triggered my watching and researching other movies and documentaries about climbing Mount Everest.

The deeper I researched, the more I came to see how Everest is a microcosm for the challenge Americans face with retirement and the role that financial professionals can play in reaching that goal.

Each year, climbers die on Everest and remain there as ongoing reminders for other climbers. There are currently over 200 bodies on the mountain of climbers who perished over the years that cannot be removed from the mountain.

Perhaps the most prolific recent example is David Sharp, who died in a cave near the summit in 2006. While a number of people tried to save him, it was not possible to do so without killing others.

Why did he have to die?

In order to climb Mount Everest, you need to budget anywhere between $20,000 and $150,000 for your attempt.

The biggest difference in the price range is the expedition with whom you are sponsored to climb and what type of support you will be receiving.

There are typically guided and non-guided expeditions.

With a guided expedition, you will at the very least be a part of a group that is there to support each other and the team as a whole. More than that, you have a local Sherpa guide working with you typically on a one to one basis whose job it is to support you in your quest, to be your local guide, but most of all to put your safety above all else.

Experienced climbers, especially those that may have made a prior attempt may think their prior success on smaller or less challenging mountains or the few attempts they had on Everest before are sufficient and may think they are above the need of having the logistics of a team and the support of an expert whose job it is to protect you. For those people, there are expeditions out there that will simply take your money and sponsor you to let you climb.

David Sharp went with such an expedition and paid dearly with his life along with three other clients of the same expedition group.

David was in fact an accomplished and an experienced climber, but when things started going wrong, he lacked the logistical support of a team and more importantly lacked a person who was there to be responsible for him.

You can be an accomplished investor who made money in an overall up market, but are you okay taking on the risks?

Financial planners and other financial professionals are the full-service mountain expeditions whose primary responsibility is to get you to your Everest Summit as safely as possible. When we see substantial risks to your goals, it is our job to rectify the situation before it may cost you dearly.

Do investors need financial professionals? No, not at all, much like you do not need an accountant to file your tax returns, or an attorney to represent you in a court of law.

Today, you do not need a Wall St. stockbroker to buy 50 shares of Disney. In fact, there are low-cost providers out there who can use technology to bring the cost of investments down to nearly zero. There are companies out there offering "robo-advice" that will provide you with an asset allocation model and a very simplistic investment plan for less than any investment advisor. Those are the equivalents of low-cost logistics providers for your expedition to Everest.

Do they work? Yes... and when things go great you feel like a genius, having saved money.

For many though... a fully guided expedition with a Sherpa by your side may be what you want. It will cost you a few more dollars, but it will save you a whole lot more when things start going wrong.

A Few Resources:

Social Security Calculator by AARP

Retirement Calculators on Social Security.Gov

RetireLogix Mobile App

Retirement Checkup App

Final Note: I hope you found this article helpful. I am a believer in active management that works and I am here to help you find those opportunities. Please follow me here on Seeking Alpha as we look for those opportunities and sort out the good managers from the mediocre.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Maks Financial Services is a registered investment advisor and our Form ADV Part 2 is available upon request. We certify that the opinions and predictions in these articles are our professional beliefs at the time of publication and should not be construed as personal investment advice. Please consult your financial professional to see how anything discussed here applies to you. Furthermore this is not a solicitation to buy or sell any securities. This is not Tax Advice. Please consult your tax professional.