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Financial Immunization Against Poverty in Old Age
By Paul Solman
The key for older people managing money, whether or not their kids are involved, is to make sure they don't outlive their savings. Image courtesy of Flickr user 401(K) 2013.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Friday's come from readers at Next Avenue. The NewsHour has partnered with Next Avenue, a new PBS website that offers articles, blogs and other critical information for adults over 50.
Patricia M. Bellace: Virtually every column that I read regarding money management of (or for) older people (whether it's about estate planning, how the adult child should "talk to" the parent about assets or how the parent is planning to manage their finances in retirement) assumes that the older adult has children.
I don't. I know other men and women my age who do not have children. What money management, retirement management and estate management issues should a childless older adult consider as part of his or her planning?
(Separately, I know other older adults my age who wouldn't begin to trust their adult children with their finances for very good reasons!)
Paul Solman: If you don't have children or, even if you do and don't care about leaving an inheritance to them (or to anyone else), money management reduces to a simple question: will you have enough to see you through your remaining years?
As Larry Kotlikoff often points out in his "Ask Larry" Social Security q-and-a here on Mondays, the greatest financial threat of old age is outliving your savings. That's why he almost always recommends waiting until age 70 before collecting Social Security benefits because that's when the benefits reach their highest point. Social Security is an annuity that will pay you as long as you live.
And speaking of annuities, they are an option well worth considering. You can even buy ones that are inflation-protected. Financial educator Lew Mandell has written about the virtues of annuities on our page several times. If you remain skeptical, you might continue to frequent this page because Lew has promised to respond to skeptics soon.
For those who can't bear to tie up their money for life in an annuity, the original gelt guru on the Making Sen$e Business Desk, Boston University finance professor Zvi Bodie, has long suggested an overarching principle for money management in retirement: what he calls "immunizing" yourself. That is, you match your investments to your need for them.
Practically speaking, that means estimating your cost of living in each of the years ahead and then making sure you will have enough income to cover each year. (If you don't, you should be cutting down on your expenses now.)
Under Zvi's guidance, I invested a substantial portion of my retirement money in U.S. bonds called Treasury Inflation-Protected Securities, known informally as TIPS, in the late '90s. Zvi himself invested in "laddered" TIPS, so that the bonds mature year after year, to bring him and his wife the money they anticipated needing as they aged, money that comes in the form of the principal and accrued interest on the inflation-protected bonds. Here's a TIPS post from 2011 and another from the summer of 2012 to explain.
But even I, with Zvi's approval, began to run scared on TIPS by the end of last year.
That's because they had become so popular (with investors who read Zvi and the Business Desk, perhaps?), the government could sell them even though TIPS were in effect paying a negative interest rate, not counting their inflation adjustment.
That is, investors had to pay more than $1,000 to buy a bond that would return only $1,000 in principal at some date in the future when it came due ("matured") in five or 10 years. The catch is that the bond would also pay interest to cover any inflation over the life of the bond. So investors were buying inflation protection. A $1,000 bond maturing in 10 years might cost $1,100 -- in effect, a negative nominal interest rate. Though if inflation suddenly shot up to, say, 20 percent (a number nearly reached in the late 1970s, by the way), investors would be getting that 20 percent, a lot better than the measly few percent they'd be getting on other pre-inflation era investments like bonds with fixed interest rates.
At any rate, I suggested that TIPS no longer seemed so safe, given their negative yield, and I myself mostly got out of our TIPS mutual fund not long after, though it had already begun to drop in value. (Most of our TIPS retirement money was transferred to a 3 percent guaranteed fund I'd invested in at TIAA-CREF long ago, as described in the "Running Scared" post mentioned above, a fund unfortunately unavailable to new investors in this era of low interest rates.)
Meanwhile, Patricia, you might go through the exercise of estimating future expenses and seeing if you will have enough money coming in to cover them. My rule is to invest as conservatively as possible, the older I get, hence the 3 percent fund investment. And to be safe, I do all the calculations for my wife and me under the assumption that at least one of us will live to 100. You may call that wishful thinking. I call it "ultra-conservative," given my goal: that we not outlive our savings.
Joanne Jacobsen: Our financial planner retired, and the person who took over that position doesn't charge by the transaction. He charges an annual fee that is a percentage of the portfolio. The fee percentage goes down as the portfolio value increases. Is this a common practice? What should the percentage be, or what would a reasonable percentage be?
Paul Solman: Yes, it's a common practice. It's also the reason I would never use a financial planner who charged by commission, unless she or he supplied annual services like tax counseling and preparation that made the 1 percent a reasonable fee. The problem with so many financial planners is they are beset with perverse incentives -- to trade securities on your behalf, most notably -- and have a very hard time making a living by just giving sensible, one-time advice. Boston University's pension expert Zvi Bodie and I wrote about how to find a financial adviser some months ago. It's advice we stand by.
Question: Do you think it is best to wait until age 70 to sign up for Social Security? That is what my husband is planning to do.
Paul Solman: Yes. God yes, unless you're sure you're going to die before 70 or soon after. Larry Kotlikoff has explained this in his Monday "Ask Larry" column on the Making Sen$e Business Desk again and again.
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