on Sun, Nov. 03, 2002
Sound retirement plan insulated this couple
Pioneer Press Columnist
and Richard are 71 and living retirement in the comfort they imagined—without a worry about the stock market.
fact, their life is so pleasurable, they do not want me to reveal their last
name because they feel a bit sheepish when they compare their lifestyle and
peace of mind to their friends'.
place we go socially, people are moaning and groaning about what they've lost in
the stock market, and we just sit there quietly," Rita says. "I don't
want to seem like we have it better than them."
a time when severe stock market losses are forcing their friends to cancel trips
and cut back on indulgences, Rita and Richard are planning to take their usual
two-month trip to a Florida condo they will rent this winter. This year they
visited friends in Seattle and relatives in California and Canada. Last year
they went to England.
weather permits, Richard plays golf twice a week and Rita gardens as a hobby —
growing expensive wildflowers. On days when Rita spends too much time in her
garden and doesn't feel like cooking, they have dinner at a restaurant with
tablecloths. Richard doesn't like Denny's or fast food.
have never been rich. Until they retired at 67, he headed a nonprofit
organization and she taught home economics in small colleges. Each of them saved
diligently in employee retirement plans while working.
saving put them on the right track. But the reason I am telling their story is
because of what they decided to do with their money when they retired in 1998.
the stock market was on a tear, and many seniors were caught up in the
excitement of making 20 percent each year—oblivious to the damage a 40
percent drop in the stock market would inflict on retirement savings.
some retirees realize what's wrong with that approach: If you lose money in
stocks during your working years, a regular paycheck keeps coming in and you can
continue to build up some of the retirement savings you have lost in a bad stock
in retirement, there is no new money coming in, so you can't replenish the nest
egg. If a retiree needs to cover living expenses by selling a stock such as
Cisco—which was once worth $70 and is now under $11—that guarantees
never regaining the money that was anticipated on the retiree's last working
the help of a financial planner, Rita and Richard designed their retirement in
1997 so they would be somewhat insulated from a lengthy stock market decline.
that point, the couple had 85 percent of their retirement savings invested in
stock mutual funds. They were inclined to continue to stay with the goose that
laid the golden egg. Instead, St. Paul financial planner Marc Hadley advised
them to leave 50 percent invested in their stock mutual funds and invest the
other 50 percent in bonds.
bonds now provide money for their living expenses. Their plan is to never touch
the stock mutual funds when they are down in value.
strategy, developed by St. Paul certified public accountant Roger Katzenmaier,
is what has provided the couple peace of mind. Investors who want to consider it
can use the software free at www.DefinedWithdrawals.com.
feel like our income is even safer now than when we were working," says
how it works:
Rita and Richard planned their retirement for 1998, they and Hadley figured out
their annual income needs for each year of retirement and made sure they
wouldn't tap retirement savings so much that they'd deplete the money within 30
calculated that inflation would force the cost of living up 3 percent a year and
the couple would get Social Security in addition to their own savings.
Hadley created what's called a "bond ladder," which would cover their
annual income needs for each of the next 10 years. In other words, he had the
couple buy from a discount broker 10 different safe bonds—ranging from
Treasury bonds to A-rated corporate bonds. The first bond matured—or came
due—in 1999; the next 2000; the next 2001 and that will continue for each of
the 10 years. Together the package of 10 bonds yields about 6 percent a year.
and Richard derive their income from bonds in two ways—from the interest the
entire 10-year bond package provides and from a bond that matures each year. So
in the year 2000, as the stock market was falling, Rita and Richard didn't need
to worry. Besides Social Security and bond interest, their income came from the
$38,705 they pocketed when the bond for 2000 came due.
early in 2000, Hadley started planning for the couple's income needs beyond the
original 10-year bond ladder period. He had just the opportunity he needed.
had been climbing more than 20 percent annually for five years. Although Hadley
couldn't be sure when the good times would end, he decided it was time for Rita
and Richard to lock in some of their stock gains and extend the period in which
their income would be guaranteed. They took enough money out of stock mutual
funds to buy two more bonds—one that would mature in 2009 and one for 2010.
while their friends have worried about their incomes, Rita and Richard have been
sure all their income needs will be covered through 2010—no matter what
happens to the stock market.
is the strategy that Katzenmaier calls "navigating through an investment
idea is that instead of planning to sell stocks when retirees need income, they
sell them when stocks have climbed more than 10 percent a year for some time—the historical average. There is no way investors can guess when those periods
doesn't want retirees to leave the opportunities to chance. By holding 10 years
of bonds, retirees provide themselves a cushion to ride out the storm and to
sell stocks only when it's profitable.
notes the system isn't perfect. The stock market has been declining for more
than two years, and as it has gone down Rita and Richard's stock mutual funds
have fallen about 20 percent.
says she realizes that if the losses continue, she and Richard will have to cut
back on some of their pleasures later in retirement because the stock portfolio
won't provide the money they anticipated. Still, she says, the income levels and
modest investment returns Hadley calculated before she and Richard retired give
her the comfort of knowing how much leeway they have to lose money and still do