A funny thing happened on the way to the Casino….Ann was in her early 40s, with a good job and wanting to buy a house so she could stop renting. She lived in the San Fransisco area and liked to go to Reno once in a while with friends. On one of these occasions, while waiting for a show in a large casino, she asked for them to hold her place in line while she went over to the slots. The casino was noisy, the slots paying off pretty well, and Ann had a roll of quarters left. So she left the line and slowly made her way across the red and black mosaic carpet, past the nickel machines, weaving musical machines, coins cascading down, bells playing and occasionally there was a WHOO HOO coming from a winner. In the corner was a lone slot machine with a racing car motif to it.
Ann put 8 quarters in the slot at a time and pulled down on the handle. The machine spun, bells chimed and finally showed a red car in the first slot, paying back 10 quarters. This went on for few pulls, winning some, and giving back some. Then, just as the doors to the show were to open, Ann put in 8 quarters and pulled the lever. When the wheels stopping turning, nothing happened, a loser she thought. But before getting up to leave, she saw not one but 3 red racing cars lined up in a row. A light blazed above the machine and an attendant came over. Ann was not sure what she won but the attendant asked her to stay with the machine as she left to get her supervisor. Ann’s friends came over to see what she won and they all speculated on great sums of cash, free meals, even the room comp’d. The supervisor, in a black suit with an ear piece followed the attendant back to Ann and congratulated her on winning. He said he would need to notify the manager who must authorize the payout from the machine and that he first needed her driver’s license. He told Ann to stay there and not leave the area. Ann was nervous now. How much had she won? $1,000? $10,000? More? In a few minutes the supervisor returned with the manager. Beaming, the manager approached Ann and congratulated her on winning her choice of three cars or $50,000. They were in the lobby and if she would please follow him, he would fill her in on the details. There they were, glistening in lights, cordoned off from the crowd, a Lamborghini, a Rolls Royce, and a Ferrari.
Ann, a co-worker of mine, shared this true story with me. She said she picked the Ferrari for its color, “the Rolls was an awful yellow color” she said. Ann paid to have it shipped back to the bay area where she put it up for sale at a local dealer. Being new, red, and in demand, she sold the car for $95,000 which she put toward the down payment on a house.
Now, I haven’t been so lucky as to win a car, nor the Lotto. We have just worked hard, like you, to save in our IRA and a 401K. We also will have pensions from current and a past employer. Our house is not yet paid for, but has an equity value we would use as an asset. I met with our financial planner to go over our plan and see where we stood both on an overal financial status but also to work out the “what if” scenarios of retiring at 60, 61, 62…or heaven forbid, later. The great thing about having someone to assist with the plan is that they can share questions, ideas and options – reconfiguring the plan based on changing assumptions.
Plan Spending Rate w/ Inflation
Our plan is a “retire at 60” scenario. The assumption, as in all plans, is that there would be a constant spending rate based on how many dollars you will need each month. This is then inflated by some factor for inflations which we have set at 3%. Please note that $50,000/yr today is hundreds of thousands in 30 years which is why the blue bars go up and up!
Plan @ 60
The assumption then takes the savings, pensions, Gov’t programs (Social Security) and other incomes and determines where income would come from, and for how long…the next diagram shows retiring at 60 with 5 years part-time work (initial green), our savings would last until we were 94 then pensions and SS would be our source of income (purple and green). The plan says at the constant expense rate we started with, we would have a shortfall (red) but I assume spending will go down when we turn 90. It also shows a spike of investment from the equity in our house in year 5. This can either be a direct sale of the home and move to something at a less cost or look into a reverse mortgage (I know, scary). We are now working to determine the impact of taking money out of the plan to pay off the house, therefore reducing the monthly expenses by $1,500. It is an option.
Plan @ 61
This is the same plan but at a retirement date of 61 with less initial part time income so more initial draw from savings. As you see, the savings run out sooner even though I retire later. That is because the draw starts at a higher level so compounding is affected. These plans are based on the IRA and 401K making 7.5% and an inflation rate of 3%. Inflation isn’t there yet but the investments have exceeded 7.5% this past year. So both are helping the plan.
We use a local person at Edward Jones who we have worked with for over 15 years. He has encouraged us to diversify and buy large companies that pay good dividends that re-invest. He has also asked the right questions to test assumptions and offer ideas and options. The plan is just that, a plan that can be altered as long as we understand underlying assumptions and the effects of the change. For example, if I continued working until I was 65, we would have plenty of funds to last past 100 years old. So we are balancing the need to maintain our life-style with the need to alter our work-style.
I share these to encourage others to produce their own plans. There are many online estimators and they are just that, an estimation. They generally do not allow a lot of “what if” scenarios or options. By working with a planner, usually free, they can set this plan up and help discuss and manage it over time.
A Ferrari would be nice to win,and so would the Lotto. But alas, you can’t live solely on the hopes of a handful of quarters and a racy slot machine.
A Voyage To Retirement 