Ask an author: David Loeper here to answer your retirement planning questions!

[rafa]

Hi,
I am a 17 y/o student living in Australia, it has always seemed to me that, school just isn't for me, but I am finally finishing my last year.
Ive got two questions for you, one not really related ,but anyways

- If you could go back to when you were 18, knowing everything you knew now, what would you change , (cliche kind of question, but it would be good to know)

Otherwise my real question,
I've started my own Tshirt business, printing them myself and selling to friends, and have just begun selling on the internet from a website.
We're kind of reminded, Everyday, that life only comes around once, and that you should enjoy it while you have it.
How would i be able to retire, by lets say 21? ( I plan to keep my company going, as it is becoming more succesful, with time.
Is 21 too young of an age to think of retiring, because i don't really see myself working myself till im 40-50 years ( young :P)

ps. kinda extra info.
im not that much of a dodo, I speak 4 different languages ( learning 2 more), and have lived around the world , and am quite creative ( dance, music)
I thought i could spend the rest of my life, living and not dying behind a desk. :S

[David Loeper]

Originally Posted by rafa

Hi,
I am a 17 y/o student living in Australia, it has always seemed to me that, school just isn't for me, but I am finally finishing my last year.
Ive got two questions for you, one not really related ,but anyways

- If you could go back to when you were 18, knowing everything you knew now, what would you change , (cliche kind of question, but it would be good to know)

Otherwise my real question,
I've started my own Tshirt business, printing them myself and selling to friends, and have just begun selling on the internet from a website.
We're kind of reminded, Everyday, that life only comes around once, and that you should enjoy it while you have it.
How would i be able to retire, by lets say 21? ( I plan to keep my company going, as it is becoming more succesful, with time.
Is 21 too young of an age to think of retiring, because i don't really see myself working myself till im 40-50 years ( young :P)

ps. kinda extra info.
im not that much of a dodo, I speak 4 different languages ( learning 2 more), and have lived around the world , and am quite creative ( dance, music)
I thought i could spend the rest of my life, living and not dying behind a desk. :S

Regarding what I know now, what I would do at 18 is very hard to conceptualize. I would have made so many different choices. I wouldn't have married as young as I did, I wouldn't have entered the careers I did, I would have been so much more skeptical of what "industry leaders" were telling me. But yet, I don't think it would be possible to know what I know now without having gone through those things. I learned from those mistakes and many others. I also would have been less confident in what I thought I knew.

My dad, when we were fighting over something, always told me (after significant vetting) to not bother arguing with him until I was 30 and he would talk to me about it again then. Over the years, I took all of those things I was so confident in these arguments and jotted them down, saving them up for the magic day when I turned 30 to reopen all of the debates. When the day finally arrived, all I could tell my dad was he was right, and I wasn't being objective about my overconfidence on the topics.

One thing though...I would have read Atlas Shrugged well before I did.

As for retiring at 21, it is certainly possible. Living your life and choosing to do the things you value is what life is really all about. I don't know what you have in assets, how much your T-shirt business is worth, or what you need in resources to live the lifestyle you desire. Working longer, earning more money, etc. buys you an opportunity to improve your retired lifestyle and it is part of the price you pay for it. If the improvement to your lifestyle isn't worth it, then go ahead and retire.

I would however be VERY careful about the assumptions you are making. If your assumptions about retirement are say for example owning the T-shirt business will produce $200,000 a year in retirement income, inflation adjusted for life, merely because the business does that or more for three years, you are really kidding yourself.

Owning a business subjects you to what is known as "event" risk (aka non-systematic risk) which the only way to avoid is being diversified. Think of all of the businesses with far longer histories than yours that have recently evaporated. Wachovia was trading over $60 a share at one point, it is now around $6. People at Bear Stearns had their life savings invested in the company and it went for $10, about a 95% drop from its high. WAMU was seized by regulators and Lehman went bankrupt.

This is a risk that is not isolated to financial services. Many of the auto manufactures are trading at generational lows, and Kmart (retailer) basically evaporated, everyone knows about Enron, Circuit City is at the edge of existence...but it is a risk that can be diversified away.

If you really are planning on retiring at 21 without needing to ever return to work, I would base it on selling your business at that age and diversifying your portfolio to provide your income needs.

[FrugalNYC]

I didn't read through the whole thread, there seems to be lots of questions.
My question is, is it safe to keep my 401k with a previous employer indefinitely?

[David Loeper]

Originally Posted by FrugalNYC

I didn't read through the whole thread, there seems to be lots of questions.
My question is, is it safe to keep my 401k with a previous employer indefinitely?

I hope you were not looking for a yes or no answer on this because the answer is it depends. So long as the fees and expenses are reasonable and you have the option to avoid the risk of potentionally materially underperforming markets by low cost index options, and provided that the costs of the administration are not excessive, or charged to participant balances, then it is safe to keep your assets with your former employer.

This however, is not what the typical 401k plan is like. Most 401k plans have excessive expenses that you could easily avoid by rolling into an ETF portfolio at a discount brokerage firm, often saving you 1% a year or more on assets.

One percent a year may not sound like much, but let me give you some examples of what a 1% reduction in costs would add to your lifestyle.

Say you are 30 years old, with $75,000 in your 401k, saving $10,000 a year including your employer's match with a 60% stock allocation and 40% bonds.

The price to a 1% excess cost, all other things being equal, is the equivalent of:

-Saving $5,600 MORE a year until retirement at age 65 to make up for the fees

-Delaying retirement by SIX YEARS...to make up for the fees

-A reduction to your retirement income of $12,200 a year...to make up for the fees

-A 90% chance of your balance at age 65 being reduced by somewhere between $130,085 to $747,275! All this just to make up for a 1% excess fee.

An extra 1% doesn't sound like much, but over time it certainly adds up.

This comes from page 118 in my book where there are tables you can look up this sort of information. Hopefully you will be this week's winner of my book and you can see whether it makes sense to keep your assets at your old employer, or move it to your new employer if their plan is more competitive, or roll it into something more cost competitive to help make the most of your life.

[lghbob]

Question, and then a comment on the question.

Why is it that there is almost no information about a retirement plan that does not involve protecting the capital of the retiree? Every financial plan seems to be built about investing for continuous withdrawals during retirement, but always maintaining the principal. In short, planning for living forever.

Comment:
Having retired at age 53, I continue on my personal plan, which consisted of investment for the maintenance of my capital until age 62, and then a combination of ultra safe investments (IBonds, Annuity and IRA's) to my current age of 73, with a plan for draw down of capital to my life expectancy of age 87.
Thus far, this has worked beyond my expectations, and although my calculations were a little off on inflation and interest rates..., property appreciation and a relatively conservative lifestyle have left me with more current capital assets than I had planned. My net worth was relatively limited at retirement. In the interim, no direct stock investments... just money market funds, CD's, Bonds and Annuity.

There are many website calculators "How long will my money last?", but nowhere have I found guidance that takes into consideration the idea that one may wish to retire a little earlier and not have to plan his/her retirement based on leaving an inheritance equal to his/her net worth.
So far, the Ibonds, IRA's and Annuity have kept me safe from taxes, and it looks as though the income tax code will allow me to continue my comfortable lifestyle without unduly penalizing my withdrawals.
Just wondering why no one has written a book about dying the day the money runs out. I consider that I've had an extra five years of retirement, by not following the standard advice.

[David Loeper]

Originally Posted by lghbob

Question, and then a comment on the question.

Why is it that there is almost no information about a retirement plan that does not involve protecting the capital of the retiree? Every financial plan seems to be built about investing for continuous withdrawals during retirement, but always maintaining the principal. In short, planning for living forever.

Comment:
Having retired at age 53, I continue on my personal plan, which consisted of investment for the maintenance of my capital until age 62, and then a combination of ultra safe investments (IBonds, Annuity and IRA's) to my current age of 73, with a plan for draw down of capital to my life expectancy of age 87.
Thus far, this has worked beyond my expectations, and although my calculations were a little off on inflation and interest rates..., property appreciation and a relatively conservative lifestyle have left me with more current capital assets than I had planned. My net worth was relatively limited at retirement. In the interim, no direct stock investments... just money market funds, CD's, Bonds and Annuity.

There are many website calculators "How long will my money last?", but nowhere have I found guidance that takes into consideration the idea that one may wish to retire a little earlier and not have to plan his/her retirement based on leaving an inheritance equal to his/her net worth.
So far, the Ibonds, IRA's and Annuity have kept me safe from taxes, and it looks as though the income tax code will allow me to continue my comfortable lifestyle without unduly penalizing my withdrawals.
Just wondering why no one has written a book about dying the day the money runs out. I consider that I've had an extra five years of retirement, by not following the standard advice.

The reason most of the calculators from "free" web based product vendors do this is they don't want you to spend your principal...the more you spend the less they make in investment fees.

But, many investors would like to have their portfolio run out the same time their blood pressure does.

In my book, Stop the 401(k) Rip-off! and my new book coming out next spring (available for preorder now at Amazon) Stop the Retirement Rip-off ( http://www.amazon.com/Stop-Retiremen...579862&sr=8-10) there are appendix tables for people to look up estimates based on their age, current assets, asset allocation, spending levels, savings rates, portfolio expenses, etc. that show you exactly what you are looking for, that is...spending down your portfolio in retirement...with one caveat...

That is, it isn't based on life expectancy (that is a coin flip age, 50-50 odds). The tables are based on the 80th percentile life expectancy.

We have a platform we offer professional advisors (it is a lot more sophisticated than the easy planners you normally find on the web so it may be a bit more difficult to figure out) that you could sign up for a free trial on our website to calculate exactly what you are looking for if you can figure out how to use it.

Just go to www.wealthcarecapital.com and sign up for a free trial account.

[Joebelle]

Mr. Loeper, I am already retired. I pull $4,000 a month to pay my expenses, which is the interest only.

I just sold a large piece of property which was left to me, and after taxes, I devided the money in 2 equal parts, and purchased a home for each of my children. I have been saving for their education (college) since they were babies, so they are now done with college.

I think I have my ducks in a row, so to speak, but what major upsets can cause a problem for me? I fear hyper-inflation, etc. Is that possibility real? Or should I just stop watching the news?

I live debt free and have for years. I don't believe in credit cards, and I drove the same old car for 19 years until I could save up enough to buy a new car for cash.

Any ideas?

Thanks, Joebelle

[David Loeper]

Originally Posted by Joebelle

Mr. Loeper, I am already retired. I pull $4,000 a month to pay my expenses, which is the interest only.

I just sold a large piece of property which was left to me, and after taxes, I devided the money in 2 equal parts, and purchased a home for each of my children. I have been saving for their education (college) since they were babies, so they are now done with college.

I think I have my ducks in a row, so to speak, but what major upsets can cause a problem for me? I fear hyper-inflation, etc. Is that possibility real? Or should I just stop watching the news?

I live debt free and have for years. I don't believe in credit cards, and I drove the same old car for 19 years until I could save up enough to buy a new car for cash.

Any ideas?

Thanks, Joebelle

Congratulations on your financial responsibility! On the surface it appears you have a solid foundation. You didn't mention your age, so I don't know how long your portfolio needs to provide that income, or whether you are also receiving social security benefits.

You did mention that you are pulling $4,000 a month from your portfolio in the form of interest only. Am I to presume that you wish to leave your portfolio basis in tact as an estate goal? If so, if you are pulling all of your interest out for spending and taxes you won't need hyperinflation to cause problems down the road. Time and normal or even low inflation will erode your spending power significantly over time.

For example, at only 2% inflation, in twenty years the $4,000 a month in interest you are currently spending for your lifestyle (assuming you can still get the same interest rates as today...another uncertainty) would be reduced to only $2,670 a month in spending power. Ten years of 3.5% inflation would reduce it to $2,801 and 5 years at 6% would reduce it to $2,935. None of these examples are even close to hyperinflation. I wouldn't lose sleep over the media blaring gloom and doom to you every night, but that doesn't mean that you should be unprepared to plan on how you might alter your plan IF such things play out.

The other risk you have of course is reinvestment risk. I don't know what you are invested in, but presume for a moment the money is currently in Bank CDs paying 2.5%. Interest rates could go higher, or they could go much lower and they can do so for long periods of time. (Japan had rates under 1% for over 10 years for example.)

Many people retired 25 years ago and bought 20 year government bonds that at the time were paying 14% or more. When those bonds matured such retirees obviously were dealing with a shock with yields dropping by 2/3.

There is ALWAYS a real risk of hyper (or high) inflation, declining markets, etc. It always troubles me when people talk about how things are "currently" uncertain. The fact is, things are always uncertain. It is when we complacently think that things are not uncertain that surprises disrupt our lives. Being prepared by stress testing such outcomes (much like the administration is doing with the banks now...a little too late obviously...don't make the same mistake!) and assessing the best lifestyle choices one could make in advance can prevent a lot of heartache down the road.

A couple of other risks you may need to think about are potential medical costs and of course credit/default risk. While the FDIC is insuring deposits up to $250,000 through the end of this year, they very well could go back to $100,000. So I would not put more than $100,000 in any bank deposit maturing after 12/31/2009.

Maybe you are not invested in bank deposits or government bonds...if so...you really need to pay attention to the risk and make sure you are diversified. For example, if your income is coming from an annuity, there is no guarantee the company will live as long as you do.

Finally, don't be a victim of a scam. If something sounds too good to be true, it usually is. Just ask the victims of Madoff, Stanford, and numerous other "sophisticated" hedgefunds.

My new book, Stop the Investing Rip-off might be good preparation or a reference guide for you to protect yourself from the numerous scams people fall victim to everyday, even by supposedly "reputable" firms. If you have money, the financial product vendors (banks, brokers, planners, mutual funds, money managers, websites,etc.) will be after you and some of them will have excellent sales pitches. This is probably your biggest risk over time.

[Joebelle]

Thank you for the information. I retired at age 40, and am currently 48 years old. The way the principle is kept, I figured a very low level of interest. I have been saving for my retirement since I was 11 years old. Yes, I am a financial nerd. I also get my military retirement check, and unless the US Govt. goes bankrupt, I can always use that money, which is currently being dumped into a savings account.

My children both got 10 years of education and a house. If there is anything left after my passing, they are welcome to it. But, I feel that paying for medical school and a $250,000 house each, they have received their inheritance.

Yes, I will stop watching the doom and gloom on the networks.

It can be done, I don't plan on being a millionaire, I just don't want to eat Alpo dogfood at age 75 and not be able to turn on the heat or air conditioning.

[BobW]

I am retired and collecting Social Security. I am working and my wife is assisting with the consulting business. What tips do you have for keeping net income from the business within allowable range of $28,000?