5 Tips for Managing Your Money in the Transition to Retirement

When you get to the period of transition to retirement, things get tricky. Have you saved enough money to retire? Or should you continue working? Financial advisor Allan Roth offers some tips for making the best choices when retirement comes knocking. Enjoy the show!

Margaret Manning:

My guest today is Allan Roth who is the founder of Wealth Logic. He has been in the investment world and corporate finance for over 25 years. He knows all about making good investment decisions and has some great tips that will help you plan for your retirement. Welcome, Allan.

Allan Roth:

Thank you.

Margaret:

Today’s discussion is going to focus on that period of life when you’re within a year or two of retiring, or you’ve just given up your job, and you’re now moving into retirement. What is your advice to women who find themselves in that transition period about making the best of spending and investing their money?

Allan:

First and foremost, when you’re close to retirement, get a handle on how much you are spending. Then, you can compare that to how much you’ve saved up. This will give you a reasonable understanding of whether or not you can retire in a year or two. That’s incredibly important.

Margaret:

Even though retirement is slowly getting redefined, people still think, “Well, I’m sixty. I’m going to retire.” Or, they feel like they’re owed the right to retire at that age. Yet, as you say, if you haven’t saved enough or have no money coming in, maybe you’ve got to delay it a little bit.

Allan:

Exactly. Your portfolio, that is your savings, is like stored energy. If you have enough of it, it’s going to give you a freedom to do what you want with your life. That’s why you have to make sure you have saved up enough stored energy, or you would need to change the way that you are going to live for the rest of your life.

Margaret:

A few days ago, we put an article up on our website about saving in retirement, and people said, “What is this thing called savings?” It seems a lot of women and men have simply not saved even a penny. They have no money saved going into retirement. If someone in this situation came into your office, what would you tell them?

Allan:

People in this situation have two choices: either they start saving now to have a modest retirement, or work the rest of their life, if they want to continue spending the same way. There is no shortcut.

Margaret:

In a previous discussion you mentioned that in the pre-retirement period we have to think pessimistically and spend less. So, every month when we get our salary, we should put it aside. Does this mean we should stop buying stuff?

Allan:

Yeah. You’ve got to decide what buying whatever is going to do to your retirement plan. If you decide to push back your retirement by one month in order to buy some stuff, there is a chance you would keep doing that. This way, you may not retire for years. It’s straight up what you have to make.

Margaret:

In the United States you’ve got a little bit of a security blanket with social security. I think you can start taking it out at 62.

Allan:

Yes, sixty-two is generally the earliest.

Margaret:

This is probably the case in other countries too. Talking about the US, what is your advice on when to take social security? Should people grab it at 62 or wait until 70?

Allan:

It depends on health issues, but probably 99% of the time one is better off delaying social security. Here in the US, it’s a good choice to delay even to the age of 70. Part of the calculation that I show people has to do with what we call the Divert Annuity.

This is where one pays a certain amount of money in order to get a cash flow, a.k.a. income, which is, mostly, a return of their own money. I compare how much they have to give up in social security to what they would get in the future on that cash flow, which is inflation adjusted. The calculation shows that they are really buying that annuity at roughly 45% discount.

Margaret:

So people can invest in an annuity? Also, you’re saying that’s the better thing to do early on because you’ll make more from that than you would if you took your social security early.

Allan:

Exactly. There’s a lot of data that shows that wealthier people live longer. So, if you can afford to delay social security, it means you’ve probably built up a nest egg. Therefore, your life expectancy, all things being equal, would be longer than average. This is the right thing to do.

Margaret:

I suppose at that point even working part time and putting $500 or $1000 a month in the bank for a year is going to give you at least a little independence from social security. This way you will have savings of your own that you can open.

Allan:

Exactly. I’m all for working part-time during the transition period. If you quit your job and suddenly have all this free time, you’re actually likely to spend more money. This is especially true if you’re healthy; you could travel, golf, eat out, etc.

I’m a big believer that working something that you enjoy more, but make a lot less on, helps you transition into retirement and financial freedom.

Margaret:

This is where we get into emotions though, because people start to think, “Well, I’ve worked all these years, and now I deserve to retire and do my thing, my passion.” I think what you’re saying is that we should go for it, but make sure the passion makes us money. We shouldn’t do things that are going to drain our pockets even more.

Allan:

Make sure you can afford your passion. The last thing you want to do is have your passion drain your account for two years. Then, since you’ve been out of the work force, you’d have to try and get a job with minimal wages. My advice is, pursue your passion, but do it in a smart way.

Margaret:

It’s a really difficult concept to grasp though, because a lot of our women in the Sixty and Me community have had tough lives. They have started working when they were 16 or 17, and by the time they get to 60 they go, “Just give me my social security.” The reality hasn’t sunk in, but maybe the transition period is where it starts to sink in that having a budget is really important.

Allan:

A lot of studies show that spending more money doesn’t really make you much happier. If you are happy living on a fairly modest lifestyle, then you get that financial freedom so much earlier and can pursue those passions, if they are inexpensive. If your passion is owning a yacht and sailing across the world, it’s going to take a lot of stored energy.

Margaret:

When you are in this transition period, whether you’ve turned in your notice or you’ve given yourself a year, what can you do in terms of investment? Maybe you’ve got a 401K in the United States or a saving through your company. What kind of other investment would you recommend?

Allan:

I’m a believer in saving some tax deferred, which in the United States in IRA or 401K is tax free. This makes it a wroth vehicle, which is untaxable. What’s good about this is, it gives us some diversification against what Congress may eventually do to tax laws, which is obviously going to influence us here in the United States.

Saving is definitely a good approach. Something you may find interesting is the research conducted by Terrance Odean and Brad Barber, “Boys will be boys,” which shows that women are much better investors than men.

Margaret:

Why do you think that is?

Allan:

I think it’s because men have more overconfidence. This tends to lead us to believe that we can predict what the next hot sectors or stocks are going to be, what the market is going to do, etc.

Margaret:

Do you think men take investing as some kind of a game, a challenge?

Allan:

Generally, we think we are smarter than the market. Of course, there are some women that have a lot of overconfidence as well. There are a lot of positives to your gender, you make better investors; you live longer.

Margaret:

My answer would simply be that women know how to budget better because we did the shopping and paid for expenses, and so we had to be more realistic.

Are you a fan of people investing on their own, buying and selling stock online?

Allan:

I support people doing their own investing, but not their own speculations. A speculation is, “I think Eastman Kodak and General Motors are going to do well.” These were two of the ten most valuable companies on the planet a quarter century ago. Today they are worthless, so that is speculation. It’s exciting, but it doesn’t work.

If you’re going to build a broad portfolio of a few index funds, which essentially own every public health company on the planet, and you do it right, that’s the better way to do it. That’s investing. Buying individual stock is speculation.

Margaret:

It’s easy to get seduced by Facebook, Microsoft, Google, Apple. All these companies seem to be doing so well, and everyone wants to get a few pieces of their business because they are bound to succeed. Yet, as you pointed out, the world changes in unpredictable ways.

Allan:

The world does change. Those companies you just named are growth companies. They are the stock darlings. Then there are the value companies; the beaten up companies. Warren Buffett, for example, is a value investor.

Data shows that over the long run bad stocks make better investments than good stocks. That’s because the expectations for the good stocks are so high. On the other hand, the expectations for bad stocks are so low, it’s easier for them to exceed them.

Margaret:

The media also seems to be pretty tough on those “darling” companies when they announce their profits. They’re usually great profits, but often tend to be not quite good enough.

Allan:

That’s why a company like Apple can announce record sales, but the stock drops because the expectations were for even higher earnings. On the other hand, a company can announce half a billion dollars of losses, and the stock moves up because the market expected 3 quarters of a billion losses.

Margaret:

So far we talked about investing in stocks. What about buying bonds? They can give you a lower return but are more secure. As a financial advisor, would you recommend stocks or bonds?

Allan:

In my opinion, you could do both. People think that bonds are like fixed income. However, they’re actually more like the stable store of your energy that will bring you financial freedom. Bonds have two purposes: one, to be there when stocks tank, and two, which has to do with what I call rebalancing.

Let’s say you have a portfolio that is going to be half stock and half bonds, and you have signed an investment policy that you are going to keep that ratio. When stocks tank, that means that you have to sell some of those boring bonds to buy more stocks and even out the balance.

The herd typically does the opposite. When stocks go up, they buy stocks; then they plunge, and people panic and sell. Buying high and selling low is the mistake we keep repeating, and this trend is observed across all cultures.

Margaret:

That is true. We live in a global community, and the basics seem to apply everywhere. For a lot of women over 60, this is a challenging time. The bubble has burst, and they now realize that their hopes of doing better have no foundation.

As you mentioned, because of the crisis in 2008, a lot of people worldwide suffered; they lost the money they’d saved for retirement. Now the time has come to look at your costs, and try your best to keep working part time or full time and be realistic about your situation.

Allan:

On the other hand, dying with so much money is not the goal either. It’s a tradeoff between pursuing what gives your life meaning and happiness and being realistic.

Margaret:

As we discussed earlier, if you’re going to spend almost to the limit of your earnings before retirement, then after you retire you will have to keep your cost down, buy cheaper and less stuff. Fortunately, as we age, we don’t seem to want all that much anymore. I look around and think, “I don’t need another set of dishes or blue Christmas lights instead of the pink ones I have.”

Allan:

I get a lot of satisfaction out of never paying retailers for expensive things. For instance, I like to stay in nice hotels, but I always try to get them at a 50% discount. My preferred discount service provider is Priceline.

I get satisfaction out of knowing that I’m paying less than probably anyone else in that hotel. So it’s not even necessarily deferring, like staying in a flea-ridden motel somewhere. It’s getting a good price on something.

Margaret:

It’s about spending smart and using the available technology in finding great deals. You can save on all sorts of things, including plane tickets, just by knowing when to buy them. The resources are there.

Allan:

Absolutely. The web has really changed things in the past years. Some people like playing chess and Sudoku in their free time; I like doing a little research in getting a good bargain. I don’t mean buying a shampoo for $4 instead of $5, but on bigger ticket items.

Margaret:

That’s actually where you can save, on bigger purchases. Something else I wanted to mention was, when you get into this transition time, you are actually dealing with new costs as well. You not only have to manage what you’ve got, you have to anticipate a few things. Would you talk a little bit about that?

Allan:

Yeah. For instance, in the United States if you retire before 65, you’re going to have some very expensive health care to pay for. Irrespective of where you live, you will have more time on your hands to travel and spend money. So costs typically do go up when people retire early, and they are younger.

Margaret:

Also, things like travel insurance go up dramatically when you are older.

Allan:

Generally speaking, I’m not a fan of travel insurance.

Margaret:

Why not?

Allan:

I believe you want to insure for what you can’t afford to lose. For instance, if you bought a $100 electronic gadget, and they sell you an extended warranty for $30, you’re buying insurance. Should you break it the day after the warranty expired, you could probably buy it on the web for $50, so that makes the extended warranty pointless.

Life insurance, or something where your family would have to drastically change their lifestyle, is important. You want to insure for what you can’t afford to lose. Liability insurance on a car is something you definitely want in case you’re involved in an accident.

Margaret:

We said in another interview that pessimism is a powerful thing. It actually has the opposite of a positive effect. If you’re pessimistic and look for what could go wrong, then you could be prepared and change your behavior at the place where it makes a difference—like limiting your spending habits.

Allan:

Moderation is important. A couple came to me once, who were insured for every possible thing that could go wrong. Unfortunately, they would never hit retirement because they were paying so much for insurance premiums every year.

Margaret:

You were wonderful, Allan. You got us through the transition period, and I think it is now time to stop and reflect on what we’ve heard. We should think about cutting our costs and getting a budget, maybe also holding off on social security. If you can think of any resources that we can add to this particular interview, that would be wonderful.

Allan:

There is one book I want to mention. It is a hundred-page, incredibly simple book called, “Can I retire?” by Mike Piper.

Margaret:

Is it a good one?

Allan:

It’s a very good one, and it’s very simple. It’s easy to understand, and I think it would really help your community.

Margaret:

Wonderful. We’ll put a link to that in the article because that is super helpful. You’ve been great. I love your insights. Thank you very much, Allan.

Are you prepared for your transition to retirement? Would you be willing to work part-time after you quit your main job? If you have already retired, would you like to share your experience? Please join the conversation!