Category Archives: Investment Strategy

Why I’m Fascinated With Dividend Investing

Income Streams, Investment Strategy, Retirement Plan, Risk Tolerance

I’ve been fascinated with dividend investing for many years. It goes back long before I started my journey to financial independence and early retirement. It seems so simple. You buy a company stock that is stable and has dividend history on their side. A stock that figures for a potential future of continued business with dividend and stock growth. They then return to their investors a dividend that can either be reinvested to buy more of their stock or distributed as cash. My wife and I have financially benefited from dividend investing. We have dividend stocks in Mutual Funds and ETFs¹ within our portfolio. We have also benefited from growing wealth with reinvestment and harvesting distributions by owning individual stocks within our retirement accounts.

Why I'm Fascinated With Dividend Investing

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Some Folks Aren’t As Fascinated With Dividend Investing As I Am

Dividend focused investing doesn’t thrill everyone. A quick internet search will reveal opinions where fans of dividend investing will explain how they build their wealth and even divulge their monthly passive dividend income. You can also find just as many who aren’t fans of dividend investing who will explain why growth stock investing is the best and the only way to invest. 

The real appeal I see with dividend investing is that we have options to how dividends can be used depending on our financial situation. At least that’s my argument for using dividend focused investing as part of our retirement portfolio strategy. For those dividend investing naysayers who tell me to just buy some bonds, well I do have bonds as part of my portfolio diversification² strategy. They just don’t do it for me like dividend paying stocks do. Bonds feel like a loan I’ve made, one that can be paid off early. Once mature I get my money back but then other bonds have to be bought to replace them. Dividend investing feels much different. I like owning a piece of the company.

My Story With Dividends

Using dividends to pay down debt

All of my 401K match was in company stock in the first 20 years of my career. That was before my company was eaten by a growth company. There was no option to reinvest so every year I would receive an end of year dividend distribution. What I did was add it to my house payment and applied it to my mortgage principal to pay off my mortgage faster. It equated to about 3 months in additional principal payment. It was a painless way to reduce what I would end up paying in mortgage interest. Which at the time was at the going rate of 8%. Wow!

Reinvested dividends to increase wealth until needed for retirement

Today my wife enjoys a quarterly distributed dividend in her early retirement from her old ESOP. It is part of her retirement funding. The dividends come from owning her employer’s stock. Existing share to dividend yield is 5%. Over her career she had her investment split where 50% was invested in their Class A shares which reinvests dividends and 50% in their Class B shares that distributes quarterly dividends. 

After 20 years of equal amounts invested, the dividend reinvested Class A shares fund has 71% more in it than the Class B side of the account. It shows that even with a stable value stock that’s unlikely to rocket in share price appreciation, reinvested dividends do work through compounding to increase overall wealth until electing to use dividend distributions as part of a retirement income strategy.

A friend’s investment move that feeds my fascination with dividend investing

A company executive that I worked with told me something regarding dividend investing that seared into my brain. It was March 2009 and I lamented my portfolio losses right when I was planning to retire early. He had pulled out of investments in 2008, several months before the market found its bottom. He was planning to retire in 3 years while in his lower 60s. He told me that he just moved $800,000 of cash holdings to be split between AT&T (T) and Verizon (VZ). At that time their stock price to dividend yield was about 8%. It was a risky move, even with understanding the telecom industry we were part of, but he told me: 

I don’t care if these stocks ever rise another dollar. I am locking in at an 8% return. I will reinvest the dividends until I retire and then take distributions to use for retirement income. 

Both stocks have climbed since then³. A quick look at AT&T shows it was $25.XX a share around that time and recently traded at $33.70, about a 30% increase. Its current dividend yield is in the 6% range. Verizon was trading then at $28.XX, now $57.37, a 101% increase. It’s current dividend yield is 4.26%. Was he lucky? Genius? Stupid? Risky? Whenever I tell this story I hear it all. Personally, I wouldn’t risk going all-in with a large sum like that on two dividend paying stocks, especially within a single industry segment, even if I had an equal amount to invest elsewhere. 

But here’s the overall message that I took from him. 

What imprinted on my brain is the concept of being satisfied with locking into a return based on the share price to dividend yield percentage you buy in at. That is of course as long as the dividend payout is sustainable, which is always the question. With this mindset, any stock price appreciation is just gravy. In a way, dividend investing with this mindset is like having an annuity that you can sell out of at the stock’s share price whenever you feel you should, need to, or want to. 

What To Consider When Buying Dividend Stocks 

Sustainable Dividend

A key aspect of dividend investing is owning stocks in healthy companies that can sustain the dividend it pays for years going forward. This takes analysis of the industry, company prospects, direction, management, financial strengths, etc. 

Dividend Payout Ratio

How safe is the dividend? Look at the payout ratio, the percentage of company income the company pays out in dividends. Having too high a percentage could spell trouble. There isn’t much left for the company’s retained earnings to promote growth. A lower percentage can mean there is sustainability and room for dividend and/or stock growth but may be too little to meet our goals.  

Avoid High Yield Seduction

Don’t be blindly seduced by high yield dividends. Safe, sustainable, and reasonable are the goals. Some high yield dividend stocks are risky. If the numbers don’t add up for the business or industry sector there is a chance the company will have to cut its dividend in the future. If that happens the market can sour on the company, causing the stock price to significantly drop too. Meaning we not only lose the high yield dividend we were chasing but also experience a loss in share value. 

Diversification

Keeping a diversified portfolio is still the goal. It’s ill advised to go all-in with a single dividend paying stock or even stocks within a single industry. The amount of dividend stocks we add to our portfolio should fit within the portfolio’s overall diversification strategy. One that’s aligned with our risk tolerance and goals. 

Buying Dividend Stocks

A Common Method of Dividend Investing is Buying an ETF 

Exchange Traded Funds are bought and sold like stocks. The single ETF contains many company stocks but is traded as one under its own stock trade symbol. They aggregate the various company dividend yields. Buying an ETF takes away all the required company stock analysis of dividend investing out of the equation as they are invested across entire indexes. 

Some high dividend yield ETFs emphasize holding large-cap equity stocks that are forecasted to have above-average dividend yields. They may have aggregated ETF dividend yields in the 3.3% range. Others provide a convenient way to track the performance of company stocks having a record of growing their dividends with ETF aggregated dividend yields around 1.85%. 

Seems simple enough. Go to any of a number of brokers who offer Dividend focused ETFs, select the index or type that meets your needs, and happily collect or reinvest your dividends. However, what we gain in convenience and possibly lower risk we lose in stock holding selection. That and the possibility of getting better stock appreciation and yields that better meet our individual goals if we had a more targeted investment approach. ETFs are a low cost but broadly spread out investment choice. Not that there’s anything wrong with that.

Buying and Owning Individual Dividend Paying Company Stocks
DIY Stock Purchases

If we’re able to do all of the company analysis ourselves, then picking individual dividend stocks to build our dividend investment portfolio is another option. This way we can concentrate on the companies and industries we believe have long term sustainable dividends and the business potential for possible stock and dividend growth. We could also craft a higher dividend yield portfolio.

Once decided on the companies, diversified investment strategy, and dividend yields that meet our goals, just open a brokerage account. Choose an online low cost brokerage like Ally Invest where each stock trade is a flat $4.95. These types of online brokerages allow for dividend reinvestment or distribution. But if planning smaller monthly deposits, take into consideration that low flat trade fee could add up if we’re constantly buying various stocks to build up our diversified dividend investment portfolio.

With this approach we will have to manage our portfolio ourselves. Looking for signs of future company dividend distress, business pressures that can affect stock value, etc. Also needed is yearly portfolio rebalancing* analysis and making any necessary trades to bring it in line with the overall diversification strategy.

CFP Managed Portfolio

Including a dividend investment strategy through a Certified Financial Planner (CFP) is another option. They can work with us on the company stock analysis and diversification strategy. There will be obvious CFP type fees to pay. Depending on our portfolio size those frees can range from 1% to 2% or more plus any brokerage trade fees. 

It does however mean that their knowledge and systems are in place to handle our rebalancing. They are also able to setup a dividend investment portfolio aligned with our goals and within our risk tolerance.

Online Robo Advisors Specializing In Dividend Investment Stock Ownership

There is a newer robo stock dividend investment option. Instead of our having to do all the important stock and sector analysis ourselves, they take care of that and offer dividend focused stock ownership. Rather than having a broad stroke index investing strategy as with ETFs, or paying a CFP’s high fees, they can build a dividend investment portfolio owning company stocks that is focused and tailored to our goals. Also one that’s within our risk tolerance, all without the higher CFP type fees. 

Like any stock investment, dividend investing has risks 

The rules of the investment universe are always with us. Even with complete and proper analysis, there’s no guarantee that investors will get the same results of a stock’s history, its expected returns, or dividend rate going forward. There’s no guarantee stock investors won’t lose money either. Investors should always consider the risks of any investment being made and remember the general rules of investing- Higher expected returns usually comes with expected higher risk. 

Having a diversified portfolio within the investor’s risk tolerance that’s aligned with their unique financial situation is always advised. That investment balance includes considering the allocation of both growth and value (dividend) stocks. 

_________________________________________________

  •  1.Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
  • 2.Asset allocation and diversification do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
  • 3.Past performance is no guarantee of future results.  The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
  • 4.Rebalancing/Reallocating can entail transaction costs and tax consequences that should be considered when determining a rebalancing/reallocation strategy.

 

The Retirement Calming Effect of More Cash and No Mortgage

Bucket Strategy, Funding Retirement, Investment Strategy, Non-financial Aspects of retirement, Retirement Plan, ,

There are a lot of financial decisions a retiree has to make. How to best fund their retirement, when to begin social security benefits, etc. But once that is settled, there’s a couple of decisions a retiree might have to make that can bug us to no end. How much cash should I keep and should I pay off the mortgage? If you have the funds to even consider these questions then the mental conflict is to just keep the money fully invested in the markets. That way it can possibly provide decent returns. I made these retirement money moves and can attest to one under-reported and powerful aspect to these decisions – The retirement calming effect of increasing cash and being mortgage free.  

The Retirement Calming Effect of More Cash and No Mortgage

My Retirement Calming Decisions of Cash and Mortgage

It’s certainly a first-world problem for those of personal finance success. Even talking or writing about it feels a little dirty knowing the struggles of many underfunded retirees trying to figure out how to pay for retirement when there isn’t enough. I am only able to reign in guilt when I think about where I came from to get here. Just another poor working stiff who used frugal living to feed an early retirement plan.

I never questioned retiring with a mortgage when I retired in 2009. There was about $100K still on the bank’s books and I budgeted for the monthly payment. As to cash, I left my first career with only about $20K available. The rest of my retirement funds were all in recession diminished stocks and bonds within my 401k and IRAs.

The Retirement Calming Effect of Cash

Going To One Year Retirement Funding Cash

I did wish that I had set aside more cash but it didn’t overly disturb me. It was just there in the background of the normal “what ifs” all new retirees go through. I had always planned on living a “retire early and often” lifestyle and after a few months put it to action. With my first stepped down retirement gig I continued to live off of my 72t distributions and I used my salary to increase my cash to around $35K. That represented one year’s retirement funding. I invested the rest of my paychecks into the offered 401K and my IRA.

That simple cash increase gave me my first retirement calming taste of having a bigger cash cushion. It reminded me of how I felt when I became non-mortgage debt free. This small cash jump gave me a feeling of calm knowing I added to my financial strength and it told me something about myself. Not only did I feel more confident about my retirement funding, but I didn’t sweat all the market swings as much during this 2010 through 2011 period of my early retirement.

I was a proud risk taker regarding my ditching a long career for early retirement. But I mentally preferred a bigger cash cushion when it came to my portfolio. Financially rational or not, I simply had less market worry and higher retirement confidence.

Going To Two Years Retirement Funding Cash

Two years into my early retirement I left the stepped down retirement gig and started what I call my encore career. I stuck to living off of my 72t and used the new gig’s larger salary like I had done before. Knowing the retirement calming effect I received with my first cash increase, I decided to increase my cash to cover 2 years retirement funding. It provided even more early retirement confidence. I discovered that I find financial calm in using cash to hedge against market volatility.

Going To Four Years Retirement Funding Cash

Years after my encore career and last paycheck ended I decided to once again increase my cash. The market was at all time highs and when running my numbers I found that I could take some chips off of the table to pump up my retirement cash. There’s no doubt about it, I’m really calm now. I should be able to easily outlast a recession or market downturn when it comes and for me there’s nothing more retirement calming than that.

The Retirement Calming Effect of Being Mortgage Free

As I mentioned above, I had never considered retiring mortgage free. It seemed out of reach without staying on the job I no longer enjoyed a lot longer. My total house payment was reasonable after refinancing to lower interest rates and it made for manageable payments in my retirement. I had already dropped below Federal Tax ‘Schedule A’ filing thresholds and wasn’t getting any mortgage interest tax benefits. It was during my encore career after hitting my 2 years cash goal that I made the decision to focus my salary on the mortgage. It was dispatched just 18 months later and I joined the small ranks of mortgage free homeowners. I was surprised at how eliminating this payment made me feel. No matter what manufactured market crisis occurred, I would own my home. It’s an intangible value that provides long-lasting retirement calm and happiness.    

Why How Much Retirement Cash To Have or Using Funds To Clear A Mortgage Are Tough Questions To Answer

The financial argument against cash is its inability to retain value against inflation. My cash isn’t dead money. I do get a little interest from my savings account and money market accounts. I am getting 2.5% from a 13 month CD and will continue to look at other higher interest earning opportunities. Yes, all pay less in interest than inflation. But the majority of my portfolio is invested in the market and I see the difference between cash’s earnings and inflation as the cost of what I call my retirement calm insurance. I find value in the emotional peace and that makes it worth it.

When it comes to paying off the mortgage the financial argument is about the loan interest percent saved in payments vs. the percentage that could be earned if left invested. I locked into a guaranteed return. No matter what else happens in the markets, I have that locked down. But the other benefit is it takes less to live on. When not working as I am now and living off of my portfolio, I’m able to reduce my taxable income by the payment amount. I not only have a guaranteed return but I now will pay less income taxes too.

The argument against both higher cash savings and mortgage payoff includes the lost opportunity for money left in the market for big market gains if invested right. Especially over the long-term. Depending on your goals, this can not only impact your long-term retirement funding but also any thoughts towards leaving a financial legacy to your family. That’s why it’s important to run your numbers through a good retirement calculator to make sure your portfolio will last at least as long as you do. You also need to have a clear legacy plan in place and make sure you can still meet it.

In the end, we all know markets don’t always go up which must also be considered in the arguments for and against having more cash and using funds to pay off the mortgage in retirement.

The Questions That Need To Be Answered

I’m not some super investor, had no inside secrets, nor received a windfall to retire early as I did. I am just an average Joe who decided that I wanted to be free of the rat race and figured out how to pull it off in a way that worked for me. But now that I’m retired, I prefer to not be looking over my portfolio’s shoulder all the time. I prefer the retirement calm of what the extra cash and mortgage freedom provides me.

The questions I needed to answer before making these retirement calming moves were –   

Is now the best time to pay off the mortgage?

We had considered long before retirement that we would sell our home and move to a smaller home in a less expensive real estate market. That way we could be mortgage fee. But after grand-kids came we nixed that plan. I don’t believe it would have made sense to use taxable retirement funds to payoff a mortgage. In my case I had income coming in and no mortgage interest income tax benefits. Payoff also meant reducing my taxable retirement funding needs in the nearer future. Yes, it was the best time to pay it off.

Do the numbers still work with so much cash on the sideline?

When I increased to one year and two years worth of cash this wasn’t an issue. I was happily in retirement gigs and used the extra income to grow cash. This question came in the jump to four years cash while I was relying 100% on my portfolio. Running the numbers through the FIREcalc retirement calculator was my first step. I then made my proposal to my CFP and they also ran my numbers. Yes, the numbers looked good.

If the numbers work, then why risk unnecessary injury playing in a game already won?  

The same question echoed during my decision to retire or stay on the job longer. Do I have something more to prove or can I be happy and satisfied by making the move. I never regretted giving up the title and salary of my career, I had enough. It was easy to answer this question. I had no doubts. I wouldn’t regret about my higher cash savings missing out on any market runs.

Would I really value this as retirement calm insurance?

History and numbers show that staying at two years cash with a diversified asset allocation would work fine over the long-haul. But what I was going for was gaining even less concern about market volatility and being able to fully enjoy my retirement without thinking about finances all the time. The sting of the last great recession hit me hard. When being truthful about what causes me more distress, either having this sidelined money miss out on a bull market run or not having enough cash to get through a long market downturn, the answer was clear.

Are there any other upsides other than the retirement calming effect of jumping up cash?

Along with the memory of the last great recession’s sting is also the memory of all the opportunities to buy heavily devalued investments if only I had some cash. In 2009 as the markets hit bottom and the years that followed, stocks were a bargain. Having higher cash reserves means being able to take advantage of any future investing opportunities.

 

Everyone’s risk tolerance is unique to the investor. Finding the perfect formula that meets both necessary funding needs without adding investor distress is the recipe for a retirement calming portfolio. My mentally preferred recipe just happens to love the higher cash allocation and being mortgage free.

Seek that which keeps you calm, Lokah Samastah Sukhino Bhavantu.

6 Intriguing Home-Based Business Ideas For Retirees

Funding Retirement, Income Streams, Retirement Business, Working In Retirement,

 

Home-Based Business Ideas For Retirees

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Retiring doesn’t have to mean you stop working if you don’t want to. Keeping busy and challenging yourself is a great way to stay active, both mentally and physically. In fact, retiring is the perfect time to start a passion project, creating a business just because you want to do it — not because you have to. Here are some great ideas for you to start your own business, right in your very own home.

Get writing

A lot of budding writers say their least plentiful but most valuable resource is time. There’s just not enough hours in the day to work fulltime and write as well! But now you’re retired, you’ve got an abundance of time, and these days there are plenty of ways you can make money from writing.

For a start, you could start blogging. Writing regularly about something that interests you can be a great way to build up followers online who share your interest. Once you’ve amassed a following, you could place PPC, CPA or CPM ads to earn a little money on the side.

Or you could host sponsored content on your site from businesses related to your blog, charging a little each time. There’s lots of ways to make money blogging, so do a little research and see what’s on offer.

On the other side of blogging, there is the ever growing self-publishing and copy-editing industry. With a huge need for high-quality online content, you can help businesses with their content, or fulfil your dreams of becoming an author. The best self-published books tend to be in a popular sub-genre, don’t cost a lot of money, and come as a series. To establish yourself as a copy-editor, put some listings up on freelance sites, and collect client testimonials and ratings.

 

Start your own radio station

If you’re passionate about something but you don’t have the chops required to write regularly about it, why not start your own radio station? With the rise of the internet, you don’t need to have an aerial and sophisticated recording equipment anymore. Instead, all you basically need are an internet connection and a microphone!

There are plenty of affordable radio hosting services online that make it quick and easy to start broadcasting. Once you’ve gotten your name out there and built up a good listenership, you can start offering ad space to businesses from your field of interest.

Similarly, podcasting hosting is something that more and more people are embracing. It’s a pretty low-cost business idea, and if you can find a good topic to podcast about, it’s one that is likely to take off pretty quick as the popularity of podcasts continues to grow.

 

Become a professional coach

Throughout your career, you’ve probably accumulated a wealth of knowledge, skills, and wisdom. A lifetime of learning (and making a few mistakes along the way of course!) has given you a deep well of experience. But just because you’ve retired doesn’t mean it ends there. Why not share it with others and become a professional coach?

There are plenty of people out there who want to learn from you, to get firsthand advice that will help guide them in their career. Maybe you managed a successful business before you retired — that will have given you exactly the kind of hard-earned knowledge that young entrepreneurs could benefit from. Create an online profile that showcases your work history and start networking. You’ll find scores of people willing to learn from you!

 

Become a tutor

Instead of passing on your knowledge to people in the workplace, why not pass it onto people in school as well? Parents want their kids to do the best they can, and will happily pay for someone to give them extracurricular lessons outside of normal school hours if it gets them ahead.

You don’t necessarily need to have any qualifications to do this, you just need to be knowledgeable about something. It could be a hobby like playing an instrument or a sport, or you might have a passion for maths or history that you’ve nurtured over the years. Pass on your knowledge and passion to the next generation and help them grow because of it.

 

Start a second-hand store

After a lifetime of working hard and raising a family, you’ve no doubt accrued a trove of bits and bobs. Record players, furniture, collectibles, clothes — the ephemera of life can build up very quickly without you even realizing it. It might be tempting to just take them all down to the junkyard and get rid of them, but as the old saying goes: one man’s trash is another man’s treasure. So why not sell them online?

Now you’ve retired, you’ve got plenty of time to start going through your old things and finding what can be reused. Even if it’s broken, you might find it a nice little side project to fix it up too. Digital marketplaces like Amazon, Etsy, and eBay are easy to use, and with the entire internet at your fingertips, you’re bound to find someone willing to buy what you’re selling.

 

Turn your hobby into a business

Most of you reading this will have a hobby of some kind: gardening, playing an instrument, baking, photography, model-making, the list is endless. While it might have kept you busy in your leisure time before retiring, and even provided some comfort to you when you needed a distraction, you might never have imagined it could provide you with an income.

However, retirement is the perfect time to start making money out of that thing you enjoy doing most. For example, if you enjoy gardening, you could offer your services out to others, of course. Or you could create an ebook or video tutorials on gardening to share your knowledge with others. Almost every hobby can be monetized, you just need to find the right angle….

 

For some, retirement might be the perfect time to put your feet up and have a well-earned rest. But for others, it might be an even better time to really get busy. With so many business ideas out there that you can start today from your own home, why sit around twiddling your thumbs? Get thinking and start your business today!

**If you want to see more on starting a home business, check this out- How to Set Up a Small Business at Home. 

This is another informative post contributed to Leisure Freak by author Kayleigh Alexandra.

Kayleigh Alexandra is a content writer for Micro Startups — a site dedicated to giving through growth hacking. Visit the blog for your latest dose of startup, entrepreneur, and charity insights from top experts around the globe. Follow us on Twitter- getmicrostarted.

Income Streams: Tips for Successfully Renting out a Spare Room

Income Streams, Renting Out A Room, Retirement Business

If renting out a spare room or suite in your home is on your mind, you have lots of company. Many homeowners are looking for supplemental income in retirement or are saving for that milestone. Shared households are more common than most people realize. More than 22 million U.S. households fell into this category in 2012, meaning they included a primary resident and at least one other adult. Sharing is particularly popular with the younger crowd, 9.7 million of whom are between 25 and 34.


Income Streams: Tips for Successfully Renting out a Spare RoomPhoto by Kate Ausburn on Unsplash

Two Common Options

Homeowners can choose between two basic paths when it comes to renting out space. Some find hosting overnight or short-term guests through sites such as Airbnb. Hosts typically set a per-night price that includes essentials like clean linens. Their listings include photos and prices. Homeowners receive payment, minus a service fee, via electronic options and are able to message guests prior to arrival.

The second option is a long-term rental to one or more occupants, beginning a homeowner’s journey into real estate investment in a sense — or at least letting them dip their toes in to see if it’s something they’d enjoy. The homeowner rents space using a rental agreement that specifies the exact space, price, duration of occupancy, and any other important terms.

Regardless of which option is the better fit, a homeowner who becomes a landlord will need to manage the rental and maintain an arrangement that’s stress-free. Here are some important tips on how to do just that.

 

Understand Local Laws

One early have-to is being aware and keeping abreast of local laws related to rentals. Many locales have specific regulations on what they allow, the permits required, and occupancy taxes. Fines for non-compliance could be hefty. Communities typically restrict the number of occupants in a home. Some also require that each individual have a certain amount of square footage of space. If remodeling to rent is a consideration, it’s essential to check on rules regarding access to exits in case of an emergency. Sites such as Airbnb might offer guidance on requirements in major cities. However, a wise homeowner is one who regularly checks local regulations for updates.

 

Get Your Home Ready

Preparing to rent space requires making decisions to get a home ready. A major one is whether you’ll need to remodel or add one or more rooms. Homeowners with children typically have privacy concerns. The way to start is to go through each room and figure out what realistically needs to be done to make the property acceptable for a renter.

Getting ready might require updates such as a bathroom renovation. Ensuring the safety of possessions could require purchasing a fireproof safe. If kitchen privileges will be available, now is the time to replace that aging microwave.

 

Determine a Rental Rate

Sites like Craigslist are a good resource for learning about the local market. A homeowner should be sure to wrap into the rate the cost of home maintenance, utilities, and insurance.

For long-term rentals, some homeowners quote a weekly rent to make the rate more appealing.

 

Get Everything in Writing

Hosting sites take care of this in their terms and conditions. A landlord’s rental agreement should be written and signed by both parties. It should specify:

The dollar amount of the rent.
Date when rent is due.
How utility usage will be charged.
Usage specifics for common areas such as the kitchen and the laundry room.
Any special concerns such as cleaning or parking.
Talk to Your Insurance Agent.
Homeowner’s insurance might not cover injury of a renter on the premises or any losses from theft. An insurance agent can recommend the right policy.

 

Find the Right Renters

In addition to placing free ads on sites such as Craigslist, consider some fee-based sites. Many first-time landlords are surprised, however, at how well word of mouth sometimes works for finding renters. Great prior or present tenants are sometimes perfect sources to ask for suggestions of anyone they know looking for space to rent.

An interview and reference checks are the first step. A tenant credit check should follow.

 

Get a Grip on Taxes

Many would-be landlords don’t realize that rent might be subject to federal, state, and/or local income or other taxes. This applies whether the tenant pays directly or a hosting service collects it.

Landlords might also lose a property tax exemption. However, keeping accurate records can minimize taxes by documenting deductible rental expenses.



Wondering exactly how to get started with renting out your spare room? A local real estate professional can offer important tips on how to make the most of your experience as a landlord for short-term guests or long-term renters. An agent’s input is particularly valuable when considering whether to spend money on your home to create a suitable rental for meeting retirement goals.

 

This informative article was contributed to Leisure Freak by Preston Guyton.

Preston Guyton is a native of the Grand Strand and Broker in Charge/Managing Partner of CRG Companies.

How Much Cash Is In Your Portfolio? Why I Increased Retirement Cash Holdings

Bucket Strategy, Funding Retirement, Investment Strategy, Protect Assets, Risk Tolerance, Saving Money,

I decided I wanted to cash in a few chips and take some of my profits off of the table. I sold off investments and increased retirement cash holdings in my portfolio. Not just a little bit either. I’m on my way to 20% of my portfolio being cash. My decision had nothing to do with in-depth analysis of the yield curve or stock price to earnings (PE) ratios. Nor inflation threats or claims a lack of available workers may drag down this country’s latest economic growth predictions. Not to mention the possible negative economical impact of trade wars. Nope, it’s simply because of the convergence of my age, life expectancy, and the numbers to cover my nut with less on the table. It’s personal.

Increased Retirement Cash Holdings

Increasing Retirement Cash Holdings – What’s the Right Portfolio Percentage?

We all know we have to accept investment risk if we want decent returns. You have to play to win. Nobody can exactly predict or time the market. Major drops happen when they happen. That means we have to stay in through thick and thin.

Investment history suggests that over the long-term the balance of risk vs returns is generally favorable to the investor. Especially when we are practicing dollar cost average investing through both good and bad markets. But that all turns more into a gamble as the investor’s age vs longevity ratio tightens and we are no longer feeding the portfolio with earned income but instead depending on the portfolio to fund our retirement lifestyle. Market recovery time becomes more critical. A 5 year recovery period is a bigger percentage of your remaining life when you’re 60 than when you’re 45.

Portfolio Rebalance and Re-Running the Numbers

When I retired at the age of 51 I kept a small amount of my net worth in cash. I have different expectations now that I will hit the age of 60 later this year and can almost see my Social Security full retirement age ahead of me. I know how fast my years in early retirement have flown by thus far and will soon no longer be considered an early retiree.

For the most part I use the 110 minus age declining equity glidepath approach to rebalancing my portfolio. Subtract your age from 110 and that is the equity portfolio percentage to consider having. Logically that leaves the rest to bonds and cash. I use 110 instead of 100 for my declining equity glidepath rebalance calculation because Social Security will eventually play a role in the non-equity side of retirement funding. The calculation doesn’t explain how much cash is appropriate in the non equity side of the portfolio. Opinions seem to always be critical of holding too much cash. As far as I am concerned, when you have experienced a good run and have enough, it’s time to set aside some of your winnings.

I settled on 4 years retirement funding in cash plus a $25K emergency fund. My retirement withdrawal strategy uses a bucket approach and the cash is in my IRA’s bucket #1 and a savings account. My portfolio allocation looks like this:

  • 18.5% Cash/Cash Investments
  • 29.5% Bonds Fixed Income
  • 48% Equities
  • 4% Alternatives

To determine how much cash I wanted I simply understood my overall goals.

  1. Not have to worry or sell equities during a rotten market.
  2. Have my portfolio last as long as I do.

Increased Retirement Cash Holdings looks good

I then ran the numbers through the retirement calculator-FireCalc. I used 35 years of funding, 45% equity investment position, social security provided estimate amount, bumped up my yearly spending amount by $10K to counter higher cash holdings with its lower returns, and let her rip. The results looked great!

Full Proof? Hardly

Cash doesn’t offer anything in earning interest today and I have no idea how hard inflation will hit. Will interest earnings climb enough to offset inflation? Who knows. I also don’t know what will happen with social security, the markets, or the price of tweets in the White House. However, I am comfortable with this level of cash holdings even going to 20%. This is a decent time to take profits and I will continue rebalancing as long as the market continues to climb. I feel that the FireCalc calculation padding I used in my income numbers and longevity (I seriously doubt I will live to 95) that my odds look really good. Aside from all the financial considerations there is also the mental benefits to my increased cash move.  

High Retirement Cash Holdings – Cowardly or Courageous?

I do have a healthy fear of another market crash and multi-year recovery. There have been enough of them in my years of investing to know there will be more. I am making some optimistic assumptions when there are plenty of unknowns going forward. But what’s new there, there’s always unknowns when it comes to investing and retirement. I do count on adjusting things as needed.

I don’t see pulling a higher amount of cash to the side as either cowardly or courageous. This is simply wanting to hedge my bets and have options. I can cease selling any assets or taking IRA withdrawals in a down market and take advantage of opportunities to buy investments when they arise.

 

As far as I can see, taking profits after a historically long running Bull Market to have higher retirement cash holdings provides both downside protection and upside opportunity. At least in my personal situation. What is the perfect percentage of cash holdings to have in one’s retirement portfolio? How much cash is in your portfolio?

How To Save For Retirement

Investment Strategy, Retire Early, Saving Money,

You should always be planning for your retirement. You need to make sure that you have enough money to live on in the years of your life when you cannot work. This might seem like a long way away, but the sooner you put a plan in place and start to work towards having money for retirement, then the easier it will be. Here is a quick guide on how to save for retirement.

How To Save For Retirement

Image Credit: Pexels

3 Basic Moves To Save For Retirement

Property

If you can outright own your house or home, then you will have a much easier retirement life. This is because once you have paid off the mortgage, you won’t have that large monthly outgoing to worry about. Instead, you will own the house and be able to live in it into your twilight years. This also means that if you need to move to somewhere smaller, you could sell the house and make a large amount of money from doing so. This money will help you live in your retirement years, and even if you spend some of it on another house, you should still have a large amount left over.

Aside from your home, if you can, you should consider investing in other properties. You can either flip them or rent them out for a monthly income. Renting is a popular choice as it will mean that you have a steady cash flow coming into your bank account long after you have stopped working. With that rental income you can live a more enjoyable retirement life. If you don’t have any property investments, then you should consider making some.

Pension Fund (aka Retirement Account)

This is the most basic way that you can save your retirement. Your pension fund, usually 401K and/or IRA, is yours alone, and the amount that you put in within their limitations it is entirely down to you. This means that it is great for retirement planning after a divorce. How you want any left behind pension funds handled when your retirement comes to its official end is up to you too. Remarried couples where children are involved can include within their retirement planning their specific estate distribution desires.

Your pension fund can take a flat rate or percentage of your earnings each year and gradually grow through your life. Not just grow with investment gains and interest earned, but also grow because of higher pension fund contribution amounts as your salary increases over time. The larger the percentage of your earnings you pay in each month, the more you will have access to when you retire. This means that if you can, you should try to live on a little less each month so that you can save more. This can be as little as a few percent extra of your yearly income each year, but it can make a massive difference when you retire.

Regular Savings

There are a number of other savings accounts and ways to save money that are available to you and if you treat one of those as your retirement account, then the more that you put in the better. You should be aware that interest rates change all the time and try to switch your account to a different provider for the best deals when possible. However, even if you don’t do that, you should try to save as much as possible and make the most of your yearly interest. Time and compounding interest are your best friends when it comes to saving for retirement.

My Early Retirement SEPP 72t IRA Ends: How It Worked Out

Funding Retirement, Investment Strategy, Retire Early

My last SEPP 72t IRA payment was just delivered. I now close the door on government control over my early retirement funding. For the last 7.75 years I had IRA penalty free withdrawals using what the IRS calls substantially equal periodic payments (SEPP). I thought I would share how the IRA did from its original funding to its last payment to me.

I think this could be of interest whether anyone is considering a SEPP 72t approach to early retirement funding or not. It gives a glimpse into the impacts of investment allocation, a bad investment, and what a rigid withdrawal rate has on an IRA over several years of retirement funding.

SEPP 72t IRA Basics

The SEPP 72t is an IRS rule that allows someone to make pre-age 59 ½ withdrawals from an IRA without having to pay the early withdrawal 10% penalty. Only your normal income taxes would apply.

The IRS 72t rule dictates the withdrawal amount. It is based on current bond interests rates, your age and your life expectancy at the time of beginning the 72t. The idea is that your IRA would survive long enough to fund your retirement for your lifetime.

There are 3 IRS approved withdrawal methods and you can make one withdrawal method change during the life of the SEPP 72t.

The 72t payments must run its course once it begins for the longer of 5 years or you reach age 59 ½. In my case the run-time was to age 59 ½, making my 72t in play for 7 years and 9 months to complete my 72t run-time rule obligation.

Run afoul of their rules and the IRS will assess the 10% IRA early withdrawal penalty back to the very first SEPP 72t payment you received plus applicable interest. That applies even if the IRA fails before meeting the obligated run-time length rules. Careful investment allocation is advised so that a market crash doesn’t send the 72t IRA into funding default.

(Update 1/13/19: I made a mistake regarding an account being depleted as the IRS States: What is the effect of an account being completely depleted? If you have no assets remaining in your individual account plan or IRA, you will not be subject to the Code §72(t) tax as a result of not receiving substantially equal periodic payments. In addition, the recapture tax will not apply. I mistook explanations and missed this. Thanks Brian for pointing this out)

It is for these reasons I used a CFP to set up and manage my 72t IRA. It is advisable to not lockup all of your retirement IRA funds in a SEPP 72t. Always hold some of your retirement portfolio separate from the 72t.

 

My SEPP 72t IRA Details

My SEPP 72t began February 2010. At that time the IRS allowed 72t interest rate was around 3.5% to use in the SEPP calculation.

Looking today online at the SEPP 72t allowable set interest rate to use, it seems the allowable interest rate to use is 2.4% for December 2017 and estimated to be 2.54% for January 2018. The approved interest rate changes as bond rates reset.

72t IRA Balance Details

My SEPP 72t began Feb 2010 and ran until Nov 2017 = Obligated run-time 7 years, 9 Months.

72t IRA Beginning balance – $665,000

72t IRA Ending balance – $586,528

The 72t IRA Amounts Paid Out During IRS Obligated SEPP Timeline

72t IRA Early Retirement Income Paid – $260K

72t IRA CFP Fees (estimated) – $39K

Total Amount 72t paid out = $299K

Figuring Out The 72t IRA Results

The first observation is that the 72t IRA is down $78,472  (11.8%) from my initial investment. That may seem odd given the run-up in the stock market since February 2010 to now. There are a couple of issues that I believe addresses this result.

One of my investments (highlighted below) took a 40% dump. This represented a large part of the SEPP 72t IRA $78,472 deficiency when only looking at the beginning and ending totals.

The SEPP 72t withdrawal calculation used a bond interest rate of 3.5% within its algorithm. Bond rates were higher at that time than they are now. This resulted with what was a 5% withdrawal rate of the total funding SEPP IRA. There were no yearly inflation adjustments but this is still far higher than the well discussed 4% safe retirement withdrawal rate. That 4% rate is now challenged as being too aggressive as a safe withdrawal rate. A 5% withdrawal rate clearly has an impact on the portfolio.

The SEPP IRA was conservatively invested and designed to chase yield. It did not benefit as much as it could have had there been more stock exposure. This was done purposely. The rest of my portfolio outside of the SEPP 72t IRA was invested heavier in stocks. The overall portfolio was considered for an appropriate investment allocation when looking at stock to bond and international to US investment ratios. This was also done to avoid 72t default in the event of a stock market downturn.

Even after the above considerations, the SEPP 72t IRA produced enough income and growth to pay out $220.5K overall ($299K paid out minus the $78.5K beginning to ending IRA balance deficiency).

How My SEPP 72t Was Invested

Please note that the 72t IRA had investment changes over it’s 7.75 year run and this is the current (11/24/17)snapshot/reported yield.

Cash = $34,066

Investment Mutual/UIT Funds = $552,462

Total SEPP IRA Value = $586,528

Invested Mutual/UIT Funds

ACETX – INVESCO EQUITY & INCOME $40,509.06 (7.33% of 72t)  Yield 1.76%

BIICX – BLACKROCK MULTI ASSET INCOME INSTL $29,362.14 (5.31% of 72t) Yield 4.5%

DIFIX – MFS DIVERSIFIED INCOME $29,881.61 (5.41% of 72t) Yield 3.2%

FGIYX – NUVEEN GLOBAL INFRA $35,119.09 (6.36% of 72t) Yield 2.76%

FRIRX – FIDELITY ADVISOR REAL ESTATE INCOME $37,563.30 (6.8% of 72t) Yield 4.08%

FSRIX – FIDELITY ADVISOR STRATEGIC INCOME $94,852.42 (17.17% of 72t) Yield 3.18%

MBDIX – MFS CORPORATE BOND $67,315.98 (12.18% of 72t) Yield 3.38%

MLPOX – OPPENHEIMER STEELPATH MLP ALPHA $19,307.78 (3.49% of 72t) Yield 8.1%

OIBYX – OPPENHEIMER INTL BOND $59,600.10 (10.79% of 72t) Yield 4.18%

OOSYX – OPPENHEIMER SENIOR FLOATING RATE $57,604.36 (10.42% of 72t) Yield 4.44%

PXHIX – PAX WORLD HIGH YIELD BOND INSTL $81,346.39 (14.72% of 72t) Yield 5.46%

 

In Closing

It’s easy to see that a higher IRA withdrawal rate, an investment loss, and a yield focused conservative investment allocation can result in a lower portfolio balance regardless of any prolonged market recovery.

As I move into Phase 2 of my early retirement funding plans I will be using what was learned from the first 7.75 years of my SEPP 72t. I happily look forward to being able to have more control over my retirement account withdrawals going forward.

After considering everything, I do believe this was an early retirement funding success. I have enjoyed this adventure called early retirement much more than I could have imagined.

Using the SEPP 72t IRA rules to allow early access to my retirement accounts without penalty was definitely a successful strategy for my situation.

Cryptocurrency: Rocket Fuel for Your Retirement Fund?

Investment Strategy, Risk Tolerance,

The risks and the gains of Bitcoin are becoming increasingly well-known as this previously under-the-radar cryptocurrency hits the mainstream, with everywhere from specialized exchanges down to your local pizza place now trading in it. But if income tax is making a hole in your retirement funds, then this unregulated, untaxed market – even with all its attendant risks – may begin to look attractive.  Earning Bitcoin is becoming more of an option for growing your overall portfolio, not something to go all-in with. But what are the best ways to make it pay? Here are some of the easiest:

CryptoCurrency: Rocket Fuel for Your Retirement Fund?

Join a mining pool

 

Traditionally, the way to earn with Bitcoin was through ‘mining’ – solving sophisticated mathematical algorithms to create new ledger blocks. However, those days are probably over now. You will need to invest in a Bitcoin mining pool to get access these days, as the current algorithms are too complex to be processed on a home PC and require specialist hardware that harnesses the processing power of many computers. A Bitcoin mining calculator can help you work out how profitable this might be.

 

Create a faucet

 

Bitcoin ‘faucets’ are basically websites that give away micro amounts of the currency to their users, and earn revenue through hosting advertising. The business model is referral-based, generating high-volume traffic to create more ad clicks. This can be done ‘out of the box’ with no experience in coding needed, just a domain name and website creator, plus a micro wallet payment processor service like FaucetHub. Once built, monetize the site through a provider like Google Adwords or spend time building affiliate revenue streams, where you make a small percentage of commission on referrals.

 

Invest in funds

 

It’s now possible to invest in funds that themselves invest in bitcoin. Values are increasing and have been known to double in a matter of months. So although there are definite risks, there are also significant gains to be made by doing this. With a finite supply and tightly regulated production, in theory, Bitcoin should always gain in value over time. There are other cryptocurrencies backed by global conglomerates to invest in such as Ethereum  and you can even set up an ethereum IRA online.

 

Become a Bitcoin lender

 

Becoming a lender is another way to get a slice of the Bitcoin action. Buy up some currency from an exchange, and then lend to another party with interest.  Lend either with no collateral and higher returns or secured against something for a lower interest rate. However, this should be approached with caution due to the lack of market regulation. Cryptocurrency is not part of any insurance scheme or regulated by any official bodies.

 

Accept payments in Bitcoin

 

The other channel is to add Bitcoin to accepted payment methods for whatever goods or services you can sell. But obviously, this depends on being able to effectively market whatever you need to in order to create the wealth. Bitcoin has brought with it some new entrepreneurial opportunities as it removes a lot of the barriers to conducting global business by virtue of its totally digital format.

 

Although its newness makes it a fairly high-risk option, Bitcoin is becoming increasingly mainstream. For a savvy investor, meaning knowing when to get in and get out, there may be opportunities there to make swift gains.

Can cryptocurrency be rocket fuel for your retirement fund? I still have a lot of research to do before I can honestly answer that. But with knowledge comes opportunity and understanding whether something is too risky to invest in.

 

Disclaimer- Leisure Freak is in no way advising readers to invest in cryptocurrencies. Invest at your own risk. Crypto is a high risk investment scheme. This article is for information purposes only. 

Investment Options: The Best Plans for Your Retirement

Funding Retirement, Investment Strategy, Retire Early,

Unfortunately, there are many people who don’t plan for their retirement and find themselves having to survive on a much lower income than they’re used to. It’s important to plan financially for the future, no matter what stage of life you’re at. One of the best ways to ensure you’re provided for in your retirement is to invest money in plans that are likely to result in a substantial return. That way, the younger you start investing, the more money you’ll have in retirement. So, what are the best options for retirement investment?

 

Retirement Investment Options

Pension

Of course, the safest option for retirement is a pension. However, the state pension or Social Security you receive from the government may barely cover the essentials. If you can help it, you don’t want that to be the only pot you have to rely on. The money being put into pensions at the moment reflects the cost of living right now. By the time you’ve retired, the cost of living is expected to increase. Additionally, many corporate employers in the US are backing out of retirement schemes, leaving their employees to fend for themselves.

So, what do you do? Pay into your own pension. There are many ways you can set up your own pension pot and put a percentage of your monthly wage in. Once you’re used to that percentage being missing from your paycheck, you won’t notice it’s gone.

 

Defined Contribution Plans

You’ve probably already heard of a 401K, but are you making the most of it? The benefit of having a 401K is that you’re not responsible for putting money in. The amount you pay towards it is automatically deducted from your pay, so you never see it anyway. Your employer is likely to contribute too. Many employers match the amount you put in, so you’ve got a 100% increase with every contribution. It’s safe, and you’ll hardly think about it until the day you need it. The only downside is the tax fees whenever you make a withdrawal.

Retirement Investment Options

 

Property Investment

If you already have a full-time job, the thought of property investment may be something that puts you off. However, investing in property doesn’t mean you have to have a huge portfolio. In fact, investing in just one property per year could make you enough to have a decent nest egg by the time you retire. Purchasing fixer-uppers and using your spare time to upgrade the property could give you a great financial return. Similarly, investing in foreign real estate like resale HDB could mean you have access to cheap properties that you can rent for a profit, especially if they’re in the right location. Just make sure you understand the country’s property ownership rules and you qualify to purchase or invest there. You don’t have to take property investment on as a full-time job, but there is huge potential to make big money.

 

Stocks

Some stocks have the potential to earn you a significant amount. Whether you invest in a stock that stays steady and you make a small amount often, or you take a risk on a stock that could go either way and come out with a big payment, stocks have the potential to set you up for life. The problem is, you need to be willing to learn about the stock market, rather than just take a gamble. Investing in stocks through ETFs or other mutual funds may be the easier path into stocks. Just like any other kind of business, you need to do your research and continue to gather knowledge so the stock investment choices you make become more of a sure thing.

 

Business

If there’s a gap in the market, setting up your own business could be something that rewards you in retirement and continues to reward your family after you’re gone. Just one great idea is enough to get a business started. If you’re already working and want the business to be an extra income for you, consider investing in someone else’s business ideas. There are lots of small businesses looking for a cash injection to expand. You could buy shares in the business, be a silent partner or just agree to a percentage of the profits. Just make sure to get everything you agree on down in writing. You need to cover yourself if you’re going into business with someone else.

Retirement Investment Options

 

Savings Accounts

The majority of savings accounts aren’t worth looking at because the interest they gather is next to nothing. However, there are a few accounts that are worth opening if you’re planning your retirement early. For example, look for accounts that increase your interest level if you’re willing to keep your money in the same account for an extended period; usually more than five years. If you touch the money before the period ends, you’ll forfeit the interest, but if you keep the money in until retirement you can take it out in one large sum or have it in installments in addition to your pension. Obviously, the more you put in, the more you get out.

 

Cash Value Life Insurance

This is a great option for anyone who wants access to funds during retirement and a life insurance plan. You have to take out a policy, as you would with any other kind of insurance. But, as you pay towards the policy, you build up a cash value. Once the cash value is accumulated, you can use some of the cash during your retirement. For instance, if you were to accumulate $500,000 and use $250,000 during your retirement, your beneficiary would still receive the remaining $250,000 after your death. It’s ideal for stay at home parents or part-time workers with little cash flow per month.

 

Assets

If you’re not good at putting money away for your retirement, maybe you’ll be better at shopping for your retirement. There are many items you could buy that increase in value over the years. For example, antiques, classic cars, statement jewelry and more. If you’ve got a keen eye for valuable assets, it’s worth investing with a view to sell during your retirement. It’s a great way to get constant cash injections when you need them.

 

Retirement is a stage that should have a financial plan, no matter how far from it you are.

How Long Will We Live? The Retirement Planning Downer

Funding Retirement, Investment Strategy, Retire Early, Retirement Plan, ,

When it comes to retirement planning the downer part or aspect comes down to the big question. How Long Will We Live? Nobody lives forever and the flip side of that is the bummer to talk or think about. That being, how long before we die. If only we knew because it is important to get-real about our own longevity chances as it plays a huge role in our retirement funding equation. From savings goals to overall withdrawal strategy. Getting it wrong can cause an unnecessarily delayed retirement date or worse, retiring and then eating through all of our savings before we leave the planet.

How Long Will We Live?

Why It’s Important to get the ANSWER right.

I admit to avoiding contact with life insurance and long-term care sales persons. I just hate hearing the pitch. Dealing with our death is the downer part of any financial planning. It needs to be done but most of us hate to deal with it.

With retirement planning the issue of our eventual death adds a different aspect. Instead of deciding to buy life insurance to cover our premature departure from the planet, retirement planning requires our figuring out our probable longevity to make sure we don’t overspend or unnecessarily under-spend our retirement funds while in retirement. After all, we all want as enjoyable of a retirement as we can afford to have.

Getting OUR answer as close to “correct” as possible means having an appropriate retirement plan. Coming up with a likely life expectancy age allows us to make more informed withdrawal and investment decisions.

If I knew we only had 10 years left to live I would certainly rethink our budget and life plans. There would be a lot of different financial decisions made than if I came up with another 35 years of living to do in retirement.

It is not pleasant to bet on our own longevity. However this downer part of retirement planning is extremely necessary. Even though it isn’t easy or an exact science there are ways to make an educated guess (scratch that) prediction.

So how do we answer the question of how long will we live?

I mentioned in my post “My Disappointing Retirement Financial Plan” that my financial planner started off by running the numbers to support us until age 100 for me and 105 for my wife. I then came up with better age numbers.

How Long Will We Live for retirment planning
John Garfield lived to age 39. Geraldine Fitzgerald to 92.

Sure, if you have the portfolio to carry you to age 100 or beyond when running your numbers through a retirement calculator  then go ahead and use age 100. But many of us don’t have that kind of retirement financial backing to get a calculated result guaranteeing a likely 100% chance of funding success or one with a minimal chance of failure.

I have never met anyone age 100 or have known of anyone in our family that has lived that long. Yet according to data at the U.S. Census Bureau it seems there are now 70,000 people over the age of 100  in the United States. That is twice the number of Centenarians than there was 20 years ago. Do I think my wife and I will too? Not likely.

If not age 100, how long will we live?

The 3 steps I used to answer that question. 

Family History- Of course everyone’s answer will be different. First look at your family history. That is the first clue. Then look at your family’s health and habits.

  • Was there something there that shortened their longevity and health?
  • Do you share in the same health and/or habits? Live healthier than they do/did?
  • Do you have relatives living well into their upper 90s and beyond?

Obviously this isn’t an exact science but it is easy to see if longevity runs in the family.

Actuary Table – Another thing to do is look at the Federal actuary tables  to see what they predict. They are pretty good at this game. Social Security, insurance annuities, all kinds of financial decisions are made as far as payout based on the fed’s actuary data.

This data is just where the majority of people will fall. Obviously some win and live longer and some lose by leaving the planet earlier. It’s just a number to show the law of averages and where you can get a base line longevity number to compare to your family’s longevity history.

Longevity Calculator – We all love to run our numbers through retirement calculators. I use the free FIRECalc all the time. It allows for changing our thoughts on longevity to see our portfolio’s chance of lasting as long as we will. There are now longevity calculators to help us getting a little closer to the big answer to the how long will we live question so that we work with the right length of time.

I used the free longevity calculator Livingto100.com.  It will have you enter in specific personal aspects of your life like your health and health habits, family history, etc. Basically it has 40 questions to answer and it provides an educated longevity prediction result.

Answering the questions requires taking the time to be honest about your habits, not your hopeful health habits. Rerun the numbers using changes in your lifestyle if there are areas you want to improve in and see how it impacts your longevity results.

The questions cover the following areas:

  • The age of your parents/siblings now or the age they passed away.
  • Whether you smoke or used to smoke and at what age you quit.
  • Your diet regarding vegetable, fruit, red meat and processed meat consumption.
  • Your height and weight.
  • Your dental hygiene habits. Particularly whether you floss your teeth since gum disease is a predictor of heart troubles.
  • Do you exercise and if you do how often.
  • Your Water, coffee, and alcohol consumption.

The longevity calculator runs your answers and comes up with a probable longevity age to use in our retirement planning.

Making Sense of the numbers. Finding the right age to use.

Nothing we do to figure our longevity number will be absolute. We won’t really know until we actually expire. We can take some comfort knowing that the age we come up with will be better than just picking a number out of the blue.

What I did was take the numbers I got by using family history, the actuary table, and the longevity calculator results and then rounded-up the highest of the numbers I found.

For example: The history of longevity for males in my family – Mid-40s to Early 70s. Actuary table shows age 81 for me. Longevity calculator resulted in my predicted age 87.

I then rounded up my highest number found of 87 to age 90 to use for my retirement plan. Running my numbers through the retirement calculator with an age of 90 for me and 95 for my wife shows a 100% chance of funding. Running calculations using an age 100 for me and 105 for my wife as my financial planner first used came up with a less-than 100% success rate. That is why having a realistic number (age) to use is important in planning.

In Conclusion

Do I really think I will make it to age 87? Not really. Not when I consider what I have seen in my family history. But it’s best to plan for the higher number. Trying to figure out the “how long will we live” question or in other words figuring out the age we will likely die by is the downer aspect of retirement planning but one worth trying to get right.

It is also a real motivator to live a well-lived life on our own terms. Early retirement is doing just that for us.

Have you taken the time to figure it out? You know, answering the how long will you live question.