HAARPing on AARP

A chemist, a physicist & a statistician went hunting.  They came across a deer.  The chemist aimed and fired way to the left, missing the deer.  The physicist aimed and fired way to the right, also missing.  The statistician shouted, "We got him!"  (Thanks to my old friend David Salminen for reminding me of this classic joke.)  It perfectly illustrates the hazards of relying on tips from financial entertainers, a lot of whom appear in AARP Bulletin.

But I have to say the "5 Steps to Retire Happy" article was actually pretty good (until Step #5, which I"ll discuss below.)  To their credit, Bulletin editors drew from a stable of authors instead of relying on one writer's stream-of-consciousness.  Here are their 5 Steps:

1. Ask these key questions:  Am I ready to retire?  What will I do when I retire?  How will retirement change my life?  What role will my children play?  How do I cope with the downside of retirement?  Can I afford to retire? 
   I wholeheartedly agree with Stan Hinden, the author, that often these "soft" questions are the most important.  Life is more than a math problem.  If we do great math but you're still unhappy, what good have we done? 
   Let me just say this though:  There is no substitute for Q&A sessions with an experienced, holistic, fiduciary adviser who is registered in your state of residence.
2. Educate yourself.  Allan Roth lists some excellent books to read.  But it is also essential to take classes in your state of residence because tax regulations, product availability and estate planning statutes can be very different.  A generic, national market publication could send you down the wrong path.  (This is an unabashed plug for my highly rated Retirement Success classes!)
3. Save all you can.  This actually goes hand in hand with #4.  Excellent article by Carla Fried.
4. Avoid a nasty tax surprise.  If you can reasonably predict that your tax bracket will be lower in retirement, then by all means save in "Traditional" retirement accounts.  A lot of us however, due in part to our good savings habits and also doing work we love until we die, will continue to pay more in taxes.  In that case, better to plow after-tax dollars into Roth IRAs and even do conversions, especially before age 70.
5. Make your money last.  Here's where I take issue with Jane Bryant Quinn; she asks the wrong question:  "How much [i.e. what percent of your assets] can you safely withdraw from your nest egg each year?".  I especially adore the phrase (referring to the 4% withdrawal rule), "It's too early to know the 30-year outcome for people who retired in 2000 . . ."  I never would have guessed.
   The "expert" withdrawal rates quoted in the article range from 2.5% to 5.5%, over a 100% difference! 
   What is a reader supposed to do with that??  I side with Wade Pfau, professor of retirement income at The American College, (from which I received my ChFC designation) who suggests the 2.5% figure plus future inflation increases.  But who has $2,000,000 to work with to meet a $50,000/yr. budget?
   My main issue with this 5th article is that it fails to deal with, or even mention, the #1 risk of market-based (stocks & bonds) income sources:  Sequence of returns risk.  If you need 5.5% of your assets to live on at the same time the market is experiencing double digit losses- possibly several years in a row like in 2001 -it could be impossible to recover.  In the Wade Pfau article it is pointed out that the standard "4% rule" will result in retirement failure for 1 of 3 retirees, a completely unacceptable ratio.
   There are ways, however, to enable 5-6% withdrawal rates with no risk of running out of money and without surrendering your principal to a third party (like AARP suggests you do in the full page annuity advertisement right after their article)  But these solutions vary wildly from state to state.  There is no substitute for a customized analysis of, and plan for, your retirement by a legal fiduciary practicing in your resident state.