#35 4 Benefits of Forest Fires and Market Corrections [Podcast]

It's natural to fear a market correction. Losing money (even if on paper) sucks. News reports act as if market corrections are bad.  That's not true. The economy and the markets don't function well without corrections.   Just as there are benefits to a forest fire, a market correction is an essential element of a strong economy and market.

Invest Wisely:  4 Benefits of a Forest Fire and Market Correction

Are we headed for a market correction? Last week the S&P 500 was down 3.4%. It's been over 34 months since we've had a correction in the S&P 500 of over 10%. Normally we experience one every 18 months.

I've always likened market corrections to forest fires. Both cause some short term pain but are essential to the long-term health of the forest (or market).  I've used this analogy for years. Sure enough, if you read the Benefits of Fire from the California Department of Forestry and Fire Protection, the 4 benefits of forest fires parallel to the benefits of a market correction.

In this podcast I explore these 4 benefits of forest fires and market corrections:

  • Cleans the Forest Floor
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  • "Fire clears the weaker trees and debris and returns health to the forest"
  • Provides for More Habitat
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  • "When fire removes a thick stand of shrubs, the water supply is increased. With fewer plants absorbing water, streams are fuller, benefiting other types of plants and animals."
  • Kills Disease
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  • "Fire kills diseases and insects that prey on trees and provides valuable nutrients that enrich the soil.
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  • Fire kills pests and keeps the forest healthy."
  • Provide Room for New Generations
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  • "Without fire, these trees and plants would eventually succumb to old age with no new generations to carry on their legacy."

Plan Well:   Kim Blanton From the Center for Retirement Research at Boston College

Recently I had the pleasure of talking about the retirement landscape with Kim Blanton. Kim works with the Center for Retirement Research at Boston College and writes their Squared Away Blog. Her Blog is about financial behavior as it relates to working, saving and retiring. 

Kim and I discuss the changing landscape of retirement and how we can plan for it.

  • How retirement is changing
  • The impacts of being responsible for your own retirement savings
  • More than half of Americans are on track to have their standard of living decrease during retirement
  • The benefits of working longer
  • The benefits of taking Social Security later
  • Retirement: a Good State of Mind
  • The danger of consumerism during retirement
  • Stark Differences in U.S. Cost of Living
  • How to better plan for retirement

Retirement Toolbox: Retiring to a Different State

If your family is considering retiring to a different state, there are some important planning items to consider. To help you, I’ve added a new worksheet to the Retirement Toolbox titled Retiring to a Different State.

[spoiler]

The Retirement Answer Man Episode #35

What is this? What? Yes, I know it was a bad week in the equity markets last week, but that doesn’t mean we need to change our theme music to AC/DC.

Hey everybody. This is Roger Whitney. Welcome to The Retirement Answer Man Show. Let me turn that music down. That’s a great song, but not near as optimistic as our normal theme music. I’ll make sure I get that back. We’re not quite to the point of having to change our music to that. Yes, the markets have been rough.

This week, in our Invest Wisely segment, we’re going to talk about market corrections and how a market correction is like a forest fire and how they can actually be healthy for you. I’ll also give you some practical tips of how to manage through a forest fire or a market correction. But we don’t need that theme music.

In our Plan Well segment, I speak with Kim Blanton. Kim is a long-time financial and economic reporter. She has worked for the Boston Globe and has written for The Economist and other publications. Currently, Kim writes a blog called the Squared Away Blog for the Center for Retirement Research at Boston College. She and I are going to talk about some of the things that she sees in the retirement landscape and some of the research that Boston College’s Center for Retirement Research has found when they’ve analyzed the retirement landscape. This might help give you better perspective as you work to plan well and invest wisely in your retirement.

Before we begin those two segments, I want to make sure you know about the new worksheet that I uploaded to the Retirement Answer Library. Now, the Retirement Answer Library is a free resource that you can find at rogerwhitney.com. Last week, I committed to adding a new worksheet every week to help you on that path of planning well. Last week, I added the basics of long term care insurance worksheet to give you a primer before you actually try to go price it and understand it.

This week, I uploaded Retiring to a Different State which will give you the framework if you have the dream or aspiration to move to a different state in retirement. This is a good worksheet. There’s not a lot of rocket science to it. But, when we have those aspirations to move, a lot of times, we just do it intuitively and this will help prod you a little bit to make sure you think prudently and take some little steps, real easy steps to make sure that this is the right decision for you and to allow you to do it the most efficient way as possible. This way, if you do decide to move to a different state during retirement, you can do it successfully and avoid a lot of the pitfalls that I’ve seen over the years of people that fall in love with an idea and realize it wasn’t quite everything they thought it would be.

So, if you’ve like access to that worksheet along with over twenty worksheets, you can go to rogerwhitney.com and just register for the Retirement Answer Library. It’s totally free. I use these worksheets in my practice a lot of the time and I just want to share them with you so you can plan well and invest wisely in your life.

Before we get started with the Invest Wisely and Plan Well segment, I want to make sure we have this important disclosure. Wait, it’s supposed to be “disclosure.” My attorney said I need to say that in an ominous voice, so that’s what I got. And that disclosure is only you know your entire financial situation. So, before you make any decisions on what you hear on this podcast, or read on my blog, make sure you consult your legal advisor or your tax advisor or your financial advisor. Consider my material – as well as, bluntly, anything you read or hear on the internet – as helpful hints and education. I don’t know a thing about you. I wouldn’t presume to be able to recommend or give you advice without understanding your situation. And that’s just not a great legal disclosure; that’s a fundamental tenet of planning well and investing wisely in your life.

Well, let’s start off with the Invest Wisely segment. This last week was pretty rough with the equity markets and I generally don’t like to talk statistics on my show. I’d rather have more wisdom than knowledge when we’re talking about retiring well. But, this last week, the S&P 500 which is the index for US equities – the major index anyway – was down 3.4 percent and that’s 5.5 percent off of its September high.

The IFA index which represents the world of equities outside of the US was down 4.2 percent last week. That’s in five days. Since June, it’s off 14.5 percent. That’s definitely a market correction. Now, I think a market correction is considered a 10 percent downturn from the high so that’s over 14.5 percent. That’s definitely in correction mode. So, we’ve had a really rough week in equity markets and you’re starting to hear the rumbles of “What’s going on?” and “Are we in a market correction? Is this the new bear market?” and things like that.

I want to give you some perspective so you can invest more wisely in your life.

First off, let’s look at the S&P 500. It’s been 34 months since the S&P 500 has had a downturn of 10 percent or more which is considered a correction. It’s been 34 months since that’s happened. Historically, since 1945, we’ve had a correction or a 10 percent downturn every 18 months. So, it’s normal every year and a half or so to have the S&P 500 fall by 10 percent and it’s been well over two years – almost three years – before we’ve had that happen so we’re well overdue for a normal market correction.

Though it’s normal for humans to react, to think that market corrections or downturns in the market are really bad things, the markets don’t function well without a market correction. Does that sound familiar? That’s like a forest. Although we think of forest fires as bad things for wildlife and for the trees and for our homes and everything else, forests really don’t function in a healthy way without having a forest fire every now and then.

I want to give you four ways how a market correction is like a forest fire and why that can be good for us long-term and then give you a few practical steps of how to manage through this forest fire in the markets if, in the event, or actually, in that correction mode right now.

I originally came up with this analogy or metaphor – I always get those two confused – when I was talking with a client a few months ago. What I decided to do was research a little bit. “Well, how does a forest fire work in that sense?” What I did is I went to the California Department of Forestry and Fire Protection and I found this one-page brochure called The Benefits of Fire. They outlined four reasons that a forest fire can be beneficial to the overall ecology.

If you read each one of these and you replace “forest” with “markets,” you can see the similarities between market corrections and forest fires. I actually want to read a little bit from that brochure and then we can talk about how each one of these can be applied to a normal market correction.

The first benefit of a fire or a correction is cleaning the forest floor. This is straight from their brochure. “Fire removes low-growing underbrush, cleans the forest floor of debris, opens it up to sunlight, and nourishes the soil. Fire clears the weaker trees and debris and returns health to the forest.” It makes total sense. If you don’t have forest fires, what you have is all this underbrush grow underneath that isn’t as strong and as healthy as the forest, and it squeezes the nutrients that supply the stronger, healthier trees.

Now, think about that in our economy. If we have an economy or markets that always do well, what we end up having are weaker companies come up underneath the stronger companies and compete for nutrients. What are nutrients in an economy or in the market? That’s capital. That’s money for investment – for growth. If we have an economy that grows and grows and grows and never has a correction to clear out that underbrush, then we’re going to have more competition for the capital which is the lifeblood of any company, and capital is a really good thing because a good company serves its clients and the great company serves its clients well and gives them a benefit for the services that they provide and the money that they get.

Well, if you have all these smaller companies that are weaker, that are more profit-driven without providing service, without these forest fires to clear them out, the good companies of the world can’t get capital to serve you and to grow strong.

So, the first benefit of a forest fire/correction is to clean out all that weak underbrush so the nutrients can go to the stronger, healthier companies in an economy. It makes total sense to me.

The second benefit of a fire/market correction – again, I’m reading from The Benefits of Fire brochure – is, “Fire clears wild lands of heavy brush, leaving room for new grasses, herbs, regenerated shrubs that provide food and habitat for many wildlife species. When fire removes a thick stand of shrubs, the water supply is increased with fewer plants absorbing water; streams are fuller, benefitting other types of plants and animals.”

The second benefit of a forest fire or a market correction – and let’s stick with that – in the economy is it clears out, again, the weaker underbrush of an economy and that leaves room for new grass and healthy plants to grow and prosper. And, just like in an economy, if we have markets or an economic environment where there are only winners, we have all these weaker companies crowding out capital, nutrients, and the flow of capital, the stream, and that chokes out the good ideas that can help an economy grow over the long term.

So, every now and then, you need to have market corrections to clean out the weaker companies, the bad ideas in the markets, and that leaves room for the good ideas that are trying to sprout up to actually receive the capital to be able to grow. It’s not only about making the healthy plants healthier; a good market correction clears out weaker plants or companies so the new ones that are trying to grow – that actually could be the 100-foot redwoods of the forest – give them a chance to take root and compete for those nutrients and grow. If you don’t have a market correction, those great ideas, those great sprouts of companies will always be crowded out by all the weak players that are taking all the capital in the market – just like a forest.

The third benefit of a fire or a market correction is it kills disease. Again, I’m reading from the Department of California’s brochure. “Fire kills diseases and insects that prey on trees and provide valuable nutrients that enrich the soil. Fire kills pests and keeps the forest healthy.” We definitely saw this in 2000 and 2008 when we had that major market downturn. That was much more than a correction. But one thing that a fire or a market correction does is it kills the bad companies and the bad players in the capital markets or in the economy. It kills them because it exposes what they’re doing.

When do we have hedge funds or bad financial players really get exposed? We typically have them exposed – whether it’s a Bernie Madoff or the gentleman down in Houston – you can name countless companies, big and small, that were the “bad players” in the markets that were exposed; they were always exposed after a market downturn because a market downturn, just like a forest fire, kills the insects, it kills the bad players in the economy because it exposes them because, when everything is good, they can hide for cover in all that underbrush.

But, when a fire happens or a market correction, all of a sudden, the bad players – these insects that prey on our economy and on consumers and on other companies – they get killed off and that’s a really healthy thing because it removes them from the playing field and it, again, creates more room for healthy players to sprout up because these bad players have been killed off. That’s the third benefit of a forest fire or a market correction. It kills all the bad players or a lot of the bad players in the economic forest.

Now, the last benefit that I want to talk about of a fire or of a market correction is it creates room for new generations of growth. Again, I’m going to read from the Department of California’s Forestry Department’s brochure on benefit of fire. “Change is important to a health forest. Without fire, these trees and plants would eventually succumb to old age with no new generation to carry on their legacy.” Wow. Those two sentences can be applied to so many different things – not just forests or the economy, but it could be applied to our lives with our children and everything else.

Change is important in an economy – like it is in a forest, like it is with a family. Without a fire in a forest, just like without a fire in an economy, the strong trees will just become older and more bureaucratic and less innovative and ultimately succumb to old age and there wouldn’t be a new generation of strong companies to come and take their place. We’ve seen that over and over again.

If we look at the S&P 500 over the last 40 years, it’s almost completely turned over in terms of the companies that make up that index and the S&P 500 is selected based on the companies that best represent the growth and change of our economy. So, over the last 40 or 50 years, we’ve seen the members of the S&P 500 – those companies that represent the growth of our economy – almost change completely. This is the kind of thing that market corrections help.

Because they clear the underbrush to get rid of pests, allow the stream of capital to flow to good players, it will allow these new companies – you know, whether it’s a Google or an Amazon or Dell Computer when they were first starting out or Microsoft when they were first starting off or Xerox when they were first starting off way back in the 70s – it will allow capital to get to these new companies so our economy can slowly grow and change and ultimately be healthier. That’s just like in a forest. That’s a huge benefit to our economy when we have market corrections.

So, there are a lot of benefits to market corrections. We have cleaning the forest floor, we have providing room for habitat, killing off diseases, and ultimately allowing new generations of those companies that we haven’t even heard of yet to help our economy grow and to serve the consumer which serves you and my family. That’s what these corrections do. So, they’re a natural part of our economic ecosystem.

I’m going to guess that you get that. Some of you might be saying, “Well, that’s great, Roger. But you know what? I hate it when my statements go down in value. I don’t like losing money even if it’s on paper. Just like we don’t like having some houses burn down when we have a forest fire. It still sucks!” I know.

Part of how you handle it when we’re talking about market corrections and not forest fires is we need to remember what an investment is and I want to give you a distinction between orchards and gardens. Now, a garden, what do you do when you plant a garden? I’m definitely not a “green thumb” but my understanding of a garden is you plant every year – you plant your lettuce, you plant your carrots, and whatever vegetables that you’re looking to grow that season – and you reap that season, right? You plant a tomato plant, it grows tomatoes, you pluck them off. Next year, you plant a new tomato plant and you pluck them off. That’s what a garden does.

Now, what is an orchard? I looked it up in the new dictionary of the 21st century; Wikipedia says an orchard is “an intentional planting of trees and shrubs that is maintained for food production.” So, unlike a garden which is a short-term venture where you plant and you reap in a very small period of time, an orchard is something that you intentionally plant trees and shrubs and you nurture over time. In a lot of ways, that’s what long-term investing is.

If you look at market timing and trading, that’s gardening. You’re trying to plant something and reap something right away. That’s gardening. It’s very short-term nature. Every year, you have to go back and you have to plant again and sometimes you get wiped out – your garden gets wiped out. An orchard is something that you nurture and tend to over time just like a forest. You plant trees and you hope that they maintain food production for very long periods of time. So, when I talk about investing wisely, I am talking about creating an orchard – creating an orchard and tending an orchard – and that’s a very long-term proposition.

How do you maintain an orchard or manage through normal forest fires of that orchard over time? Well, I want to give you three simple tips that can help you build your orchard, handle market corrections, and invest wisely in your life. You’ve heard these before said different ways if you’ve listened to this podcast because managing an orchard or handling forest fires doesn’t change from season to season.

  1. You want to maintain a fire break on your balance sheet. What does a fire break do? It gives you a buffer to help stop the fire from spreading throughout the rest of the forest or the rest of the orchard. You want to maintain a fire break on your balance sheet and that fire break takes the form of having cash reserves and I’ve talked about cash reserves at lengths.

Cash reserves give you that buffer so, when forest fires happen, you have stocks of food put away that you can reap or use while you’re waiting for your forest to regenerate or your investment portfolio to regenerate after a typical market correction. You want to have that fire break so that forest fire in the equity markets, if we have corrections, doesn’t invade your lifestyle or your plans or your entire balance sheet. That’s the importance of having cash reserves and I’ve talked at length and I’ll put some links to past episodes of how to determine how much cash reserves you should have.

  1. You need to manage what you grow. You need to diversify your orchard to make sure that you have a lot of different things growing in it at any one time. That’s basically asset allocation.

Volatility is the cost of investing in markets. The more volatile your portfolio is or the more concentrated your portfolio is on just apples or just oranges or just bananas or whatever the orchard might be, the more volatile your reaping will be from time to time because, if a parasite comes in or a fire or a correction happens in that one particular fruit or investment, it’s going to wipe you out for a year or two so it can be very volatile whereas, if you have a diversified or a diversified orchard of many different things that react differently in many different scenarios of corrections and markets, you’re going to have a much smoother ride in terms of maintaining an orchard to serve you and your family.

  1. Lastly, you’ve got to make sure that you prune the fast-growers and rebalance your orchard so you can have healthy stock. You take any plant – again, I’m not a green thumb guy so, gardeners, shoot me an email if I’m wrong, but I know in the shrubs just around our house – you always have to prune them because, when you have trees or a shrub that grows way too fast, it can get weak. It can grow more than its trunk or its infrastructure can support, and that’s generally what happens in markets, isn’t it?

We have cycles of different asset classes – whether it’s real estate or oil and gas investment or technology stocks or technology companies – we have seasons of lots and lots of growth and then consolidation as they either prune themselves through layoffs and cutoffs and consolidation or they grow the infrastructure or the trunk of their company to support their growth. We have different cycles for all of these different investment classes and we need to make sure that we prune them when they grow too fast and nurture the ones that are in that consolidation mode. That’s basically rebalancing your portfolio to make sure that you’re properly diversified.

My challenge to you is to take action on the three steps that I mentioned and keep a proper perspective when you’re looking at investing in the capital markets. Are you a gardener or are you building an orchard? A forest that will serve your family for years.

Well, in my Plan Well segment today, I talk with Kim Blanton of the Center for Retirement Research at Boston College. Kim writes the Squared Away Blog on financial behavior – work, save, and retire. She’s a veteran of financial and economics reporter for the Boston Globe and she’s written for The Economist and many other publications.

She and I had a great conversation about the landscape of retirement and some of the research that Boston College’s Center is doing and what that might mean for you as you plan well and invest wisely for your retirement. Here’s my conversation with Kim:

ROGER: Kim, let’s talk about retirement. What is it that you and your friends at the center see in terms of how retirement’s changing?

KIM: Yeah. Well, there’s first of all the long view, Roger. You know, your listeners may be familiar with this but we are in the middle of or maybe even towards three-fourths of the way through a very long transition from a world – even when I was growing up, I’m a baby boomer – where there were defined benefit pension plans which paid you every month if you worked long enough at a company and retired at the right age. You got a check in the mail every month without fail.

You know, kids who are coming up in the work force today – I say “kids,” kids graduating from college, coming up in the work force today – the odds they’re going to have a defined benefit pension, a guaranteed pension is fairly low unless they go into the public sector – you know, a teacher, a firefighter, police, that kind of thing.

Most people now, it’s all about the 401k. I’m here at Boston College at the Center for Retirement Research, we have a 403b – basically the same thing.

Retirement now is all about saving money. You know, this is a change that I think caught a lot of baby boomers by surprise because we grew up with a lot of our parents – if you were kind of middle class or upper middle class – your parents may have had a pension – caught us by surprise.

Baby boomers’ children are growing up in a completely different world. It is all about how much money you can save for retirement. It is all on employee now – or not all but largely on the employee – to save. Employers, if you’re really lucky and work someplace like I do, Boston College, I get an 8 percent match from Boston College. Most employers don’t give that high a match. And I mean 8 percent of my s alary.

Most employers will give you maybe 2 or 3 percent of your salary if you also put some money in. A lot of the responsibility is on the employee to save for their long retirement. That’s the really long over-arching view.

When you get into just what’s happening on the 401k front now that we are in this 401k world, you know, we’re finding people aren’t really equipped to know how much to save. A lot of Americans don’t save so there are a lot of problems with this 401k system that we’re now in that really haven’t been worked out.

ROGER: So, if you think about it, we have, if you’re a baby boomer, more than likely, unless you have a pension, unless you’re one of those lucky few, you have all of the burden of saving for retirement on yourself, you’re going to live healthier than any generation prior, and you’re going to live longer so it’s very much a grand experiment.

KIM: Yes, it is a grand experiment. You know, I don’t have the figures here but longevity due to all these wonderful medical advances, you know, I take a few pills for a couple of little conditions I have like hypothyroid – we’ve all got stuff like that by the time you’re near mid-50s, right? We are living a lot longer than, say, our grandparents’ generation.

And so, what’s happened to baby boomers is, at the same time that they’ve made the world, the United States have made this transition into pretty much reliance on the 401k which we’re not saving often enough for, we’re also going to be living longer and we need more money. You know, the longer you live, the more money you need. It’s an unfortunate confluence of events.

As I’ve told you, I’m not a researcher; I’m a former economics and financial report. In fact, I was at the Dallas Times Herald for a while before it folded. But some researchers here at the center regularly look at, they basically try to estimate the percentage of Americans who are at risk of having a decline in their living standard after they retire. So, whatever your living standard was while you were working, when you retire – because you haven’t saved enough, don’t have enough assets – the percent of people who are going to have a decline in their living standard because of that is more than half of Americans – at least risk in their future.

Now, things could change. They may start saving more. The stock market could go through the roof. A lot of things could happen. But based on what’s happening right now, more than half of Americans are in track not to have enough to maintain their standard of living in retirement. Certainly, longevity contributes to that. You know, just having enough in the bank to pay those bills year after year after year when you’re living much, much longer.

ROGER: Now, as the center’s researchers look at those type of trends, do they get into the prescriptive portion of “okay, what are some things that can be done for those people that are facing that?”

KIM: Well, yes. The woman who heads the center here, Alicia Munnell, she’s very well-known – former assistant treasury secretary, was head of the Federal Reserve Bank of Boston. You know, I even knew this before I came here so I’m not buttering up my boss. You know, she really was a retirement guru and is one of if not the nation’s retirement guru.

The big description that she put forward a lot, there are a couple, one is, you know, if you’re a baby boomer and retirement is barreling toward you, you know, start saving as much as you can.

ROGER: Step one.

KIM: But, you know, you have only limited number of years to do that. You really need to start saving when you’re younger. When you’re a baby boomer, there’s only so much you can do when you start saving if you start saving now.

The other things that can be done and she is an enormous proponent of working longer. The benefits of working longer – you cut the amount of time in retirement that you have to pay for so you sort of get at that longevity issue. Also, as you know, since you’re a financial planner, the more you delay getting your social security, the bigger the check is every month.

A lot of people say, “Oh, I want to get my check as soon as I can. I’m eligible when I’m 62.” Well, that may be true. But the other question is, “Is that check – that relatively small check that you can get when you’re 62 – really going to be enough to help pay the bills?” If you work longer, I’ll tell you the incredible number. The difference between your monthly social security check when you retire at age 62 and when you retire at age 70 ,if you wait until you’re 70, your check is 70 times bigger than if you retire at 62. That’s big.

ROGER: That’s huge, and that’s a base that will increase with the inflation adjustor that social security uses as well.

KIM: Right, there’s always an inflation adjustor so I don’t think that 70 percent increase will necessarily go up, but the longer you wait, you’ve got more (00:32:12 unclear) increases under your belt. So, working longer is also another option.

Another one that some people here talk about is figuring out a lot of baby boomers have equity in their homes and you can use your home to generate income. That’s another thing that’s a possibility. Maybe you downsize. You know, you’ve got a house, a $300,000 house that’s got $230,000 in equity, you know, take that equity, buy a smaller place, cut your expenses, maybe put some of the extra money in the bank that you didn’t spend on the new place. You know, downsize, downsize, that’s one way to do it. Another way to do it – and Americans don’t really use this option very much but it is an option – is to take out a reverse mortgage.

Those are some of the things. You know, I’m not a financial planner; I’m just a journalist so I’m kind of translating to you some things that economists here at the Center for Retirement Research have talked about as other options for baby boomers who may not have enough money.

ROGER: Now, the idea of working longer is something that we talk about a lot here. From a financial perspective, it’s obvious, right? You earn more income, you can delay touching your assets or turning on social security, but it also has a lot of physical and mental benefits.

KIM: Yeah, it does, actually, interestingly. I view this in a little bit of an ambivalent way. I have a blog post coming out. Can I plug my blog?

ROGER: You can plug your blog. You go right ahead.

KIM: Great! Well, if anybody wants to look at it, it’s called Squared Away. If you just Google “Squared Away” and “Boston College,” it’ll pop right up. But I have a blog post coming out talking about, you know, whether retirees are happy. There’s a lot of different conflicting research about whether it’s good or bad sort of from a psychological point of view to retire.

This new research I write about says it is good to retire. It makes you happier. But there is other research that says, you know, people who retire early – and maybe they’re not very active – that’s associated with cognitive decline. You know, you go from a job that’s demanding and you’re always thinking to maybe not being in any intellectually stimulating environment and it could possibly be, you know, like I said, it may not cause the cognitive decline but it may hasten it or something

There are a lot of different ways, I think, to look at it and, you know, I can totally relate. My husband is a public school teacher. He teaches high school kids biology and he’s 61 years old. He’s been doing it for 20-some years – 25-plus years. He’s exhausted. You know, it’s a tough and draining job and I think, you know, when you get older, a lot of people get to the point where you just feel like you can’t do it anymore, right? I’m different. I’m a writer. I love writing. I kind of can’t really picture retiring. I think, to some extent, it’s individual, right? It’s very much personality.

You know, my mother has been retired for a long time and she joins everything. You know, she plays bridge. You name it, she does it. She’s really, really busy and she’s still very sharp.

ROGER: Yeah, and if you take somebody like your husband who is tired of his vocation, there’s a lot of opportunities to think more than one-dimensional in that, “That is all that I can do,” in terms of exploring other ways. That’s one thing I’ve seen in my practice with retirees. They end up doing something very different than what their “career” was in terms of earning money.

KIM: Does it have somewhat of a bridge though? Like, there’s some little connection to what they did in their lives or did they just go completely into something they love that was totally unrelated? What do you see?

ROGER: I’ll use one example. I use it all the time but I have a gentleman who worked at a major telecom company and he always loved playing in the dirt and he had a desk job. When he retired, he started a small sprinkler company solely so he could tinker around and play in the dirt. He’s 72 now and still doing it and having a blast. There are a lot of examples like that.

I think a lot of it comes from hobbies or passions that are outside the “career.”

Kim, are you still there?

KIM: We all like to keep busy and, I think, when you get older – at least for me – it’s like, “Am I keeping busy doing something I want to do?” I think that becomes more of an issue.

ROGER: And I’ll tell you, one other thing outside of the health aspects and intellectual engagement aspects, another thing that I’ve seen is, when people retire, the expectation is that they will have a lower lifestyle because they’re not traveling, they’re not having to buy work clothes and things like that, but if you don’t have something to spend your time with, I have also seen people decide to spend their time with consumerism.

KIM: They spend more.

ROGER: Because they have so much time in their hands and they’re not engaged.

KIM: Oh, boy. Yeah, so they’re spending more money – that’s interesting.

ROGER: Exactly.

KIM: You know, it’s funny that you said that because I just remembered a blog post I wrote, it was one of the first ones I wrote in the blog which started back in May, I think, of 2011. It was based on some research done here by some economists here who said that what they found when they looked at some of the spending, they looked into and just dug into retiree spending data and what they spend their money on, and they actually found that, when the kids leave home and the kids are all established, that spending may actually go up because they’re spending money on traveling more, they’re going out to dinner more because they’ve been sitting around during the day, et cetera. You know, that is definitely a concern and definitely a possibility.

There is some research that shows kind of what percent of their working income people need in retirement just to maintain their standard of living. We’re talking about people who start spending more money because they’re retired. But, if you just want to maintain your standard of living, these are really rough estimates – you know, nobody should take them completely to the bank, but it gives you a little bit of an idea – people who are low income when they retire, they need about 80 percent of what they earned while they were working to maintain their standard of living partly because of what you didn’t mention which is another piece of retirement – your taxes are lower, you may not be saving for retirement so you don’t need 100 percent of what you made when you were working when you retire because some of your expenses are going down, your taxes are probably the biggest one.

Low income probably need about 80 percent of what they made when they were working. Middle income people, to maintain their standard of living, need about 71 percent. The reason that that goes down is that middle income people pay higher taxes so they get a bigger break on their taxes when they retire. High income people need maybe 67 percent of what they made while they were earning – what they earned while they were working.

ROGER: Now, you had mentioned talking about growing old in place in terms of – well, actually, you didn’t mention it but you had a blog post about it a little bit ago about some of the best places or states to grow old in.

KIM: Yes, some are less expensive than others, right? Let me look that up because I don’t remember them. There just happened to be two lists that came out from two different sources with best places for retirees to live and one was in the United States – best locations in the United States – and one was the best locations overseas.

I’ll tell you some of the ones in the United States first but one of the things – even though they came from different sources – that these two lists have in common is one of the big factors in the best places for retirees to live is that they have lower cost of living.

What’s a snowbird? You know, people who go from the northeast and go down and live in Florida or even Texas. One of the big benefits of doing that is your cost of living goes way down. You know, my mother lives in Florida. I can’t tell you how many of her retiree friends sold their big houses up on the northeast for a lot of money – where housing prices are very high – and went down to Florida and bought a bigger house or a very nice house or a newer house for less money, right? Everything costs less. Groceries cost less where my mother lives in Florida and she lives in Orlando. Orlando is, in fact, one of the cities on this list put together by a group called WalletHub – it’s a financial website.

ROGER: And that’s not just simply standard of living in terms of lifestyle but it also can include things like healthcare and long term care – the cost of those facilities – very greatly from state to state.

KIM: Yes, it does. In fact, you know, I’m in the Boston area and I have a blog post that looks at comparing, you know, assisted living and nursing homes up here compared to other parts of the country and the price differences are, you know, unbelievable. There’s a big, big difference.

ROGER: So, just like thinking strategically about possibly working in a passion or working on your own terms which may not be in your particular career, it can pay greatly from a lifestyle perspective to think creatively about where you actually settle when you do retire.

KIM: Yeah. You know, the thing that you may end up doing is you may end up losing a lot of your friends. You know, sometimes people’s friends also are migrating, maybe sometimes they’re not. Another question is, “Are you going to be leaving your kids?” or maybe your grandkids. But one of the things that I think has happened with the baby boom generation is we’re much more college-educated than previous generations. We’re living all over the place. You know, how many baby boomers do you know don’t live near their parents, right? Things have really changed anyway so maybe that’s less of a factor.

You know, there’s a lot, I think, that goes into that decision. My husband and I have talked about, you know, “What are we going to do when we retire?” Just the simple idea of not having to shovel snow anymore which has nothing to do with finances, right? But it sounds very appealing.

Should I read you the list then of some of the cities that are best places?

ROGER: Yeah, why don’t you run through that?

KIM: Okay. I just have the top few – not many here – but Tampa, Florda; Orlando, Saint Petersburg. Florida’s inexpensive right now partly because they had a housing market collapse and prices are pretty low there. Scottsdale, Arizona, is still actually fairly affordable. Grand Prairie, Texas, which is by you. Laredo, Texas, is another place if you just look solely on affordability; Laredo, Texas, is actually another really good place to retire. And there are a lot more on my blog, if you want to look it up.

ROGER: Okay. I’ll put a link to that blog post in the show notes for today.

KIM: Oh, great! Thank you!

ROGER: I want to finish off with, outside of some of the things that you’ve covered, what are some of the things that people can do to better plan for retirement so they can actually retire well and feel comfortable about that journey?

KIM: You know, I honestly think we’re all really busy. This is almost too obvious in a way but we’re all so busy. You know, who has time to think about what you’re doing tomorrow when you can barely get everything done that you need to do this week? You know, I’ve talked to financial planners and they say people, oh, there are a lot of people out there who would just benefit from getting all their paperwork together, figuring out what they own.

You know, my husband and I have been just kind of roughly estimating how much retirement income if he retires in three years, how much is his pension going to be, what’s our total retirement going to be because, you know, I have a teeny pension from an old newspaper I worked at. I’ve got social security. I’ve been saving money. You know, we’re just trying to sort of figure out, like, what is our ball park in terms of what our income is – can we live on it? You know, where is the money?

Read about, you know, premiums for Medicare take a good chunk out of your social security. Look at your social security statement. Figure out how much you’re going to lose paying your premiums for Medicare. You know, read my blog – Squared Away. You know, go talk to a financial planner. You don’t have to necessarily sign on for life with a financial planner. You could call him up and say, “I’d like three appointments over six months to come in and bring my original paperwork, talk about where I’m at, you’ll tell me what to do, I’ll come back in a couple more months.” You know, just start talking to your partner about it. So, this is for people who haven’t really prepared at all.

For people who have saved a lot, it’s time to start thinking about things like, you know, if you have the luxury of deciding when to retire, you know, when do you retire? What are your priorities? Talk about some of that really basic stuff.

Another thing that’s important for people who have saved money is, “How are you going to decide how much to withdraw from your 401k every year?” You know, if you’re not getting a check in the mail every month, you’ve got to make some really difficult decisions, very mathematical decisions about how much to withdraw

ROGER: So, basically, to sum all that up, you want to make sure that you plan intentionally as you walk that journey rather than just look at it, you know, feel that it feels so complicated that you just ignore it.

KIM: Yeah. You know, I did a blog post once, I think a lot of people are in denial about retirement. It’s difficult to think about. You’re worried you don’t have enough money. But there are things that can be done – working a little bit longer. I’m trying to remember the age – you know better than I – once you start doing the catch-up 401k contributions, is it when you’re 55?

ROGER: Age 50.

KIM: Age 50. So, if you’re over 50 and you do have the income, you can actually put more in your 401k than you’re allowed to when you’re under 50 under the tax code. You know, I’m putting 30 percent of my pay right now in my 401k because, you know, I’m just trying to save as much as I can. Some people can’t afford to do that. But, you know, if you’re going to be really reliant on social security, really think about your health. Can you afford to work a couple more years? Go call social security and say, “How much is my check? Depending on when I retire, how much will I get when I’m 62, 64, 66?” Look at those hard numbers and really compare them to what you’re spending now.

I mean, it doesn’t have to be that complicated. It is complicated but you’ve got to start somewhere.

ROGER: Kim, where can people find you again? Give us the URL for your blog.

KIM: I’d love to and I’d love to get more readers back in my old home in Texas. Just Google “Squared Away” and “Boston College” – that’s one way to find it. Or if you’d like to type the actual URL up in the line at the top of the search engine, it’s squaredawayblog.bc.edu.

ROGER: Great. I’ll have a link to it in the show notes.

Kim, thank you so much for joining me today.

KIM: Roger, it was a pleasure to do it and thank you for having me.

I want to thank you so much for joining me for the Retirement Answer Man Show. If you’ve found value in this episode or in this podcast, please go to iTunes and leave a review. That would mean a lot to me. It would give me great feedback on how I can serve you better and it’ll also increase the visibility of the show which means a lot and you can do that on iTunes and I would be forever grateful.

Until next week, this is Roger Whitney hoping that you plan well and invest wisely.

Hey! There’s our optimistic music! Thanks for changing that.

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BOOK - Rock Retirement  by Roger Whitney

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