Five retirement strategies that don’t work

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I had an interesting (and fun!) time at the Mililani Library seminar last night. Thanks for everyone who dropped by, and I hope that you’re reading the blog along with the book. Let us know if you have questions! For those who couldn’t be there, I’ll post about it next week.

Today’s topic was suggested by our daughter, who’s already thinking way ahead in her personal finance reading. I hope she finds an avocation she loves, but financial independence gives her plenty of choices while she’s looking.

(I’m also hoping to talk her into a guest post after she’s finished this semester. She’s still learning about life in the “real” military, but she’s certainly proving adept at living like a starving student. We could all learn– or re-learn– from that time of our lives. If you’re just starting out in the military then I’d also be happy to put up your guest post.)

The Forbes article “Five Retirement Strategies to Ignore” points out five traditional tactics that our parents used to count on for retirement income. However the pendulum has swung back and those tactics might not work for the next decade or two.

Here’s their short list of “problems” you’ll have to contend with in your retirement planning:

  • Low interest rates for a long time
  • Low home prices for a long time
  • Unable to tap into home equity or downsize
  • No job security
  • No company-sponsored retiree healthcare insurance

Low interest rates for a long time:
It still hurts to remember our righteous 6.25% APY three-year CDs that matured a couple of years ago, especially since today’s CDs of over twice the duration are paying less than half as much. 

But do you remember the last time you lived through a period of low interest rates?  Not me, and I’ll bet you can’t either, because statistically more than half of you readers are younger than me. Today’s interest rates are the lowest in over five decades, but there are still ways to profit from them. The challenge is un-learning old habits and acquiring new ones.

As the economy lurches groggily back onto its feet and begins to stumble up again, it will be at least another two years before interest rates rise. It probably doesn’t make much sense to buy Treasuries or CDs these days unless you’re desperately seeking to insure your principal. If you’re trying to preserve your purchasing power then I bonds will keep up with inflation, although there are limits on the total amount you can purchase each year.

Instead this is a great time to put spare cash to work in more risky assets. The overall yield of the S&P500 is also reaching record lows but there are many large blue-chip multi-national companies paying good dividends. Their total return (dividends plus share price growth) is expected to outpace inflation. The Dividend Growth Investor blog is an excellent review of ~300 stocks that meet reliable dividend-paying criteria without excess risk. I’ve tried nearly a dozen different styles of investing over the years, and value-priced dividend stocks offer attractive yields with low volatility and low risk. Even if you don’t care for picking individual stocks, it’s worth considering a dividend index exchange-traded fund like the Dow Dividend Fund (DVY) or a dividend mutual fund.

We should be happy for low interest rates. I can remember when CDs were yielding 15% APY and even checking accounts were paying 10% interest. It was a terrible economic time because borrowing costs were so high that businesses couldn’t grow and workers couldn’t get a mortgage. You bought hard goods (including groceries and gasoline!) before their prices inflated out of your reach. “Investors” were buying gold & silver bars and even gem diamonds.

Inflation may still be rising faster than employee wages or cost-of-living increases, but at least we lose more slowly when it’s in the low single digits.

Low home prices for a long time:
It’s hard to count on home equity when it’s lost 20% or more. Reverse mortgages are much smaller and some home equity lines of credit were frozen during the 2008-09 credit crunch. Even today lenders are reluctant to offer as much loan to value and fees are higher.

However buying a home and refinancing a mortgage are as cheap as they’re going to be for some time. Analysts have called the end of low interest rates for over three years yet they’re still setting new lows. If you’re renting right now, then talk to your landlord about a lower monthly rent or think about moving to a cheaper place. If you’re confident that you’ll be living in the same area for at least five years then this is a great time to consider buying a home. If you’re paying a mortgage then I’d strongly consider refinancing it.

As for the article’s comments on elder long-term care, the only good news on the horizon is that insurance companies are beginning to realistically price their policies. Although rates are headed up, there’s a better chance that the insurance company will stay solvent long enough to pay benefits on your premiums. Military retirees can also check prices on the Federal Long Term Care Insurance program, which is able to get better rates for large groups of generally healthier people.

Unable to tap into home equity or downsize:
If your retirement plan depends on being able to tap into home equity, that plan may have to be put on hold for another decade. One option may be taking advantage of low prices on buying your next home while renting out your last home. Landlording is not an attractive way of spending a retirement, though, so do your research on Early-Retirement.org before you take this option.

Low sales prices still offer opportunities. If you’re one of the rare homeowners who’s planning to upgrade their lifestyle with a move to a new area or a bigger home, then lower values can work to your advantage. Admittedly losing 20% of the value on a $300K home vaporizes $60K of your equity. However if a home seller has to discount their $400K property by 20% then their $80K loss is your $20K gain. It’s not clear when home prices will recover, though, so this should not be your only reason for moving.

No job security:
I’ve only had one “real” job, but I only see two ways to defend yourself against this trend.

The first way is financial independence. Save as much as you can whenever you can. Start early and keep saving. Conventional wisdom used to consider a worker’s years between ages 50-65 as a prime opportunity for retirement savings because the kids were out of the house (and out of college) while workers were at the peak of their earnings power. These days, with blended families and downsizing, there’s no guarantee that you’ll have 10 or 15 years to accelerate your retirement savings. Save early so that your investments have more time to compound.

Second, stay educated and keep updating your skills. Get as much college and advanced training as you can while you’re in the military. When you separate or retire, take advantage of any opportunities for more training that matches your plan and your goals. Once you’re out of the military, keep an eye on the timing of your GI Bill benefits. Even if you don’t plan to use them, you may be able to transfer them to your spouse or kids.

The article also suggests not delaying or sabotaging your retirement to pay for your child’s college expenses. Our parents dreamed of sending us to college, but the cost of a degree has hugely inflated for this generation. Today’s parents may only need to feel responsible for four years at a community college or a state university, and anything beyond that should be based on your child’s motivation. Young adults can get scholarships, grants, and work-study assistance for their college degree– but nobody will give you any of that for your retirement.

It’s probably not a good idea to burden your college student with a 20-hour/week job during their classes. However they should plan to work over holidays and semester breaks. Even during the academic year they’ll find ways to manage their time effectively enough to squeeze in a few salary bucks. The key is to make it their problem to solve, not yours, and to be available to coach them through the tough parts.

No company-sponsored retiree healthcare insurance:
No easy answers on this one, either.

Military retirees are paying higher fees for Tricare Prime and being threatened with the prospect of annual fees for Tricare For Life.  Senator McCain has even had the temerity to suggest that military retirees should no longer be eligible for Tricare Prime.

However to the rest of America, Tricare is still a sweet deal compared to their options. I would not be surprised to see companies shed themselves of retiree healthcare obligations as quickly as possible. The only reliable options would be to work part-time for employee health insurance or to pay for your own.

One option for pricing your own health insurance is eHealthInsurance.com. If you’re in good health with no pre-existing conditions then a high-deductible policy may be your best value. In addition, a health savings account can be funded from pre-tax contributions.

Is this a scary time to be saving for retirement? You bet. Are the rules changing in unpredictable directions? Sure. But if we’re able to review the last century of retirement planning with a historian’s perspective, I suspect we’d realize it’s always been that way. The key is doing as much as you can, starting as early as you can, and striving for financial independence. Once you’re financially independent and have choices, you’re not going to have to worry so much about the rules changing before the game is over.

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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