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The Sandy Spring Way

June Observations

June 7th, 2012 | By Beau Mercer

“A good puzzle, it’s a fair thing. Nobody is lying. It’s very clear, and the problem depends on you.” ~ Erno Rubik.

My sense is that trying to figure out when one can afford to retire became far more challenging after the housing market went bust in 2008. Retirement, once a certain option, may need to be reexamined because of the tumultuous environment. Answers require both esoteric ideas and best wishes. As the race for the 2013 Presidency demonstrates, the retirement question requires a clever financial calculator and an expensive lobbyist! The revelation of the expense of a longer life and a flawed internal calculator can be debilitating. Seemingly, the media keeps generating rumor after rumor, particularly if they are conflicting in nature, enabling a schizophrenic market, which negatively affects consideration of alternatives.

Start the game and game pieces are strewn on the table; the players focus on the obvious, such as Social Security and Medicare payments. The Social Security and Medicare pieces are frayed by overuse, misleading expectations and political gamesmanship. The retirement game player then asks the question: “Will I have enough savings to maintain a comfortable lifestyle and make adjustments that may be necessary once I stop working?” Adequate savings are relative and are the riskiest part of our lives. Vanguard and Fidelity recently published reports which put the AVERAGE participant balance of US 401(k) funds at $75,000. Unfortunately the MEDIAN is $26,926. Restating the obvious, the Associated Press-LifeGoesStrong.com poll states, 43 % of boomers polled said they were “very” or “extremely” worried about being able to pay for their medical costs, including long term care. Almost the same number, 41 %, said losing their financial independence was a big concern. Efforts to quickly replenish or initiate a substantial retirement savings program are difficult in a bond market characterized by safety which guarantees a loss. Alternatively a portfolio in equities means having to cope with uncertainty. Will the prospective retiree buy the Facebook new issue after it has fallen 25 %?

Lurking in the retirement solution are expensive unknowns, such as average life expectancy, health care costs, taxes and inflation. The government cannot keep printing money and borrowing against itself at a rate close to 0 % interest forever. The Supreme Court will soon rule on the legal challenge to President Obama’s health care initiative and the decision promises repercussions. Finally, since 1992, inflation has not been an issue, but the end is near. A few percentage points difference in the inflation rate can have a significant impact on how long a retiree’s savings will last.
Implementing a prospective retirement plan strategy is problematic. Not considering the next moves insures defeat. Obvious ideas include living within your means, investing within your comfort zone, and taking care of your health. There are “retirement calculators” that project how much the prospective retiree needs for retirement and calculate in CPI (inflation) over the accumulation years. But the solution to the puzzle entitled “When Can I Afford to Retire”, rests with the player and should be initiated early in the game. Acknowledging the challenge and seeking assistance can enhance the likelihood of a winning strategy. Retirement planning is a “long and winding road that leads to your door, will never disappear. I’ve seen that road before, it always leads me here.” The Beatles.

—Fred