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Forget traditional retirement financial planning. It’s nuts.

Posted by John Reed on

Today’s WSJ has an article about retirement. Its main point is the 4% rule is out of date. The new rule is 3.3%.
That is the amount of your life savings you should spend during your first year of retirement. In one part of the article, they assume you have 50% of your savings in stocks and 50% in bonds.
Jesus H. Christ on a crutch!
I am not an estate-planning expert. The problem is apparently neither are those who say they are.
In order to make a how much to spend your first retirement year recommendation, you have to make assumptions about the amount of your savings, the yield you will get during retirement, and how many years you have to live. 
Anyone who claims to choose those assumptions correctly for you is a liar or a fool. The whole point is that your retirement planning must reflect the fact that you CANNOT predict such things.
The salient retirement plan that deals with the unknown duration of your remaining life span is the ANNUITY. The reason is they pay you for the rest of your life regardless of how long that is. The annuity company assumes the risk that you may be Methusela, or just live longer than average.
But I despise annuities because they are disaster in high inflation. They are a sort of defined-benefit plan—they guarantee how much you get out. Generally, the insurance industry has run away from defined-benefit plans in favor of defined-contribution plans. That is, they promise to put a certain amount of money IN, but how much you get OUT is your problem.
There is such a thing as a life estate. In real estate, it means you get to live in a house or rent it out for as long as you live. That duration is identical to an annuity.
But the key difference is that it is an annuity IN KIND, NOT a CASH annuity. The dollar value of annuity—the right to live in the house—adjusts to inflation by definition. The dollar value of the life estate annuity is the fair market rent for the property. During inflation, that will adjust to the market and to inflation, instantly and automatically. No CPI calculation or delay.
When you create a life estate, you also by definition create a remainder estate. If you are the life tenant, you can use the property until you die. And when you die, the property automatically become the fee simple property of the remainderman.
There is a similar thing in the HECM reverse annuity mortgages. Those FHA nonrecourse mortgages allow you to stay in your home rent- and mortgage-payment-free until you die or move out for one year.
You can get the proceeds of the HECM in several forms. I say to get it in a lump sum and invest it in some hedge against inflation. You can even use a HECM to buy a home.
You can also get it in the form of a monthly fixed payment. That is inflation nuts as described above.
Is just owning your home free and clear the same? Sort of, as long as you are alive. No mortgage or rent payments to make. After you die, instead of going to a remainderman, it goes to your heirs, with stepped-up basis. That is a really good deal for them.
Although a HECM is a mortgage, you do not have to make any payments on it. The interest just accrues—negative amortization. If there is ever not enough equity to cover the mortgage and its accrued interest, that’s tough for them. They cannot go after you or your other assets or your heirs for the deficiency.
Since there are no payments, you do not have to qualify for it by proving your income or any of that.
The main big picture point is that the essence of retirement planning is to invest in assets that you can USE in retirement like a house, cars, computers, furniture, long-shelf-life food. You can invest in home climate control by moving to an area with a mild climate.
The normal retirement plan is financial assets that you have to sell, pay transaction costs and taxes to use to buy retirement necessities.
I am not familiar with other types of annuities in kind but I suspect you could create some. The annuity payor must be trustworthy and financially solid.
I wondered if one could buy cash annuities in a diversified portfolio of currencies. Apparently not. I am not sure, but I got the impression that you have to be a citizen of the country to buy an annuity in that currency. In Canada, anyway, I was turned down flat.
In theory, you could buy things you need in retirement by selling off small tenant-in-common percentages of your home. Those would be taxable transactions. For example, a 1% TIC interest in a free-and-clear $1,000,000 home gets you $10,000 to spend on travel and necessities.
You may be able to sell that 1% interest as a remainder estate. I have not researched the federal income tax implications of that.
As far as having 50% of your life savings in stocks and 50% in bonds, Aaagh! In the early 1930s, stocks fell 90% in value. Will that happen again? No one knows. It could.
In inflation, bonds fall in value. How far depends on the percentage of inflation. In hyperinflation, bonds become worthless.
Financial advisors may be fundamentally barred from advising on retirement. Why? Many if not most are on commission. And they do not earn commissions on the things I have just recommended because they are not real estate agents and do not want to become real estate agents. They also do not get commissions on cars and other assets that you can USE in retirement.
When asked about retirement, financial advisors try to squish your retirement plans into their securities-only world. Bull! Invest in things you can USE like a house, cars, and annuities in kind not cash from diversified, trustworthy providers.

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