Page 81 - Ready Set Retire

Ready. Set. Retire!

Taxes are a most destructive force confronting most
retirement plans. Especially in the case of tax-deferred plans.

Here’s an example. Bob and Judy came in to see me recently
to get a second opinion on their retirement plan. Bob is 66 and
Judy 64. Bob’s Social Security PIA (the benefit amount
received at FRA, or full retirement age) is around $2,400 a
month, and Judy’s is $1,200, as she is receiving half of Bob’s.
Neither has a pension, but together they have saved about
$350,000 in tax-qualified plans plus $200,000 non-qualified,
and require $55,000 a year after taxes, plus 3% cost of living
adjustments. Their biggest concern is running out of money
and their advisor was not giving them much in the way of
comfort, and advised them to increase their risk to increase the
income they might receive.

From my perspective, there were two things wrong with this
advice. First, they already have substantial risk as they are in a
low-cost fund tied to the S&P 500. This has a standard
deviation of 18%, which is high for the return provided. When
the risk-reward is unbalanced in this way, we say a security is
inefficient, and the S&P 500 is VERY inefficient, as depicted
in Figure 11: Markowitz's Efficient Frontier, on page 82.

A quick note about risk and my assumptions: If you look at the
historical returns provided by the S&P 500, it’s around 11%.

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