1. I couldn’t agree more with your answers, Fritz. Are you a retirement expert or something? The biggest retirement fear for Mrs. Groovy and me was the sequence of return risk. We sacrificed a lot to retire and we didn’t want to blow it in the first five years and be forced back to gainful employment. So we entered retirement with a very conservative 40/60 stock-bond allocation, and we have meticulously kept track of our spending ever since we said adios to work in October of 2016. And thankfully the retirement gods have been very kind to us. For the first three years of retirement, our annual spending has averaged $40K and our annual income–between pension and dividends–has averaged $48K. On top of this, our net worth has increased by $300K. How’s that for moving one’s retirement from “good to great”?! Great post, my friend. Cheers.

   1. Good to great, indeed! A “great” example of how to do it right. Sure, the markets have been favorable, but I suspect your plan would have buffered if even if the opposite had been true. It sure is nice to have a few years of strong markets early in retirement, let’s hope it continues!

      Sincerely,

      The non-expert.

2. Fritz,

   I find it interesting that the 10 most common retirement questions are all related to finances. Yet, the one thing I’ve consistently heard from recent retirees as the biggest challenge they’ve encountered is finding purpose in retirement. I wonder if retires had the ability to go back and rewrite their top 10 retirement questions, if “How do I find “purpose” in retirement?” would be among their new top 10 retirement questions.

   I feel very fortunate to have several things that will give me “purpose” in retirement. However, I can’t even begin to tell you the number of people I know who are my age or even older that have the financial side of retirement worked out, but they keep working simply because they fear the thought of having no “purpose“ in retirement.

   It would be interesting to see where finding “purpose” would fall if you asked retirees: “Looking back on the 2 – 3 years before you retired, what questions do you wish you had asked about retirement?”

   Take Care,

   Tim

   1. Fritz, Mr. Groovy, and Tim,
      These are all excellent comments. Kudos. But I have a different concern. For too long, retirement advice has been directed at individuals. Many of us (no news here) are married. Retirement calculations should be created for both audiences. And so, how much should a couple have saved for retirement? Broken down, how much should a couple have saved when its members have no debt?
      Best wishes, larry

      1. Larry, the math really does work the same whether your single or a couple. It all comes down to having 25+ times your annual spending. Obviously, your spending is higher as a couple, so your savings needs to be higher. The debt issue isn’t as important as you’d think, since it automatically gets figured into your annual living expense calculation (e.g., “no mortgage” = lower expenses than if you still have to make a house payment).

         Also, the importance of talking together to ensure you’ve incorporated both partners’ dreams into your retirement planning is a major difference between couples vs. singles. Hope that helps!

         1. Hi Fritz,
            Your reply does help. I’m still a little confused, tho. I can see 25+ times if a person lives in a high-cost city, but for those of us who don’t, the number strikes me as a bit high. If I retire at 67 plus two months and assume that our retirement accounts remain exactly where they are today, my wife and I will have a yearly income almost 50% greater than we do now. Yes, we’ll be adding medicare as a cost, but our retirement accounts won’t be at 25+ times. We don’t get to that level until we include our real estate holdings in the mix.
            best, larry

   2. You’re spot on, Phil. I address exactly that issue in my book. I think most folks THINK their biggest issue is going to be money, and only realize after they enter retirement that the bigger issue is Purpose. I suspect the 10 Most Common Questions are a bit biased since they’re coming from financial planners, but it is indicative that most people worry about money the most when they’re making the decision on when to retire.

      Great point about asking retirees about “what do you wish you had asked”. As I found out in my One Retirement Question project, every retiree mentioned Purpose, while only two mentioned finances. Telling, indeed, and the reason I focus so many of my posts on Purpose.

3. I always look forward to your weekly blog post. This one was really good. Thank you!

4. Q4 — a year before you retire? Sequence of return risk starts ramping up ~5 years before you retire. You should really plan your pre-retirement glidepath somewhere between 5-10 years before you retire!

   1. Valid point, FiP. Most folks don’t get serious enough about retirement that far out to capture this nuance, but ideally you would begin filling Bucket 1 as many years prior to retirement as you plan to buffer with Bucket 1. If you’re planning 3 years of liquidity, you should be putting one year of expenses into cash in the third year before you retire. I suspect most folks have a mix of bonds by the time they’re 5-10 years from retirement, so I’d be less concerned about getting that specific with Bucket 2 until a year out, but if they’re 100% equity then your argument would also apply to Bucket 2. Thanks for the good addition to the discussion.

5. Our biggest concern is how to account for the unknown cost of healthcare in our projected budget. I am surprised that did not show up.

   1. Andrea, I was surprised by that, as well, though it should show up when folks calculated their expected spending in retirement. In our case, we assumed $2500/month for private insurance. I should have included a link to that article in the post, so rectifying that now:

      Here’s the post I wrote about healthcare in early retirement: Health Insurance In Retirement: Unsolved.

      1. Fritz

         Great insight into healthcare. I have no idea how much to budget for healthcare-4 years from retirement. Husband will have Medicare I will have to buy a policy. Currently I have $20,000 budgeted for medical but that may not be enough! Thoughts?

         1. That’s a tough question, Cathy. I did a google search when I was at that stage of my planning and bumped up my estimate from the average cost for private insurance “just to be safe”. I suspect your estimate is close to average, though there are a wide variety of factors to consider. Since I tend to be conservative with my planning, I hedged most of the estimates in my analysis. Spend some time with Google, then decide if you’d rather be conservative, realistic or aggressive. Your $20k is a lot more realistic than what some folks use, though I suspect you’ll find yourself closer to ~$25k if you’re going with private insurance.

            1. Fritz, I had $25,000 budgeted at first and bumped it down to $20,000. I will adjust back up as it is big fear.

         2. That is our exact same situation – we are also 4 years out, and I will need a policy for me. I also found out it depends on which state, and even county, we are living in at the time. I played around with the government site to find healthcare and think I need to budget $24k. It is not just the premiums but the deductibles, co-pays, uncovered costs, etc.

      2. Fritz,

         Thanks for the reply! I look forward to seeing what choices you make after the Cobra runs out. We hadn’t seriously considered Cobra for us, as my husband will be eligible for Medicare, but maybe it is still the best option for us for those first 18 months.

6. I think Tim makes a very valid point. I had an interesting conversation with my dentist yesterday. She is about to retire, and has absolutely no worries about whether she will have a purpose in retirement, but her brother has struggled with this aspect. We both commented that we know several other men who also have struggled with this. Without the ‘job/title’, I have heard some say that they felt they had less standing/self respect.
   So I agree, while the finances underpin everything, the social side is also very important, and can’t be left to the last minute.

   1. Erith, it’s surprising how many folks do struggle with this element in retirement, and it’s a major focus in my upcoming book. If I were to write a post titled “The 10 Questions Everyone SHOULD Ask”….I’d have a much stronger focus on the Purpose issue. My book has only 1 chapter on the finances, the balance of the book is focused on the “softer” issues of retirement planning. In my view, they’re more important than the financial, though it’s also important that the financial element has been given strong due diligence before folks make the decision to retire.

      1. The key word is indeed ‘should’. I look forward to reading your book.

         1. So do I! Wink. I just received the first mock up of the cover, and the first page layout for the book. It’s coming together better than I expected, and I can’t wait to hold my first copy in the coming weeks!

7. Fritz, great list of questions and answers! One question… In your answer to Q4 you state “Begin positioning your portfolio a year before you retire, including a sufficient cash cushion to mitigate Sequence of Return risk.”

   Wouldn’t you be taking a risk waiting that long to position your portfolio, particularly the cash bucket? If there’s a market correction just as that year starts then you’re locking in your losses.

   We’re 5 to 7 years from retirement and I’m trying to determine our best path to our retirement cash goal, The conclusion I’ve come to is that we should give ourselves the same length of time as the cash bucket is supposed to hold, at a minimum, and for essentially the same reason.

   If we decide we want 2.5 years of cash on hand at retirement to ride out any market downturn, then at least 2.5 years before retirement is when we need to start building up cash. I’m actually going to start moving funds into cash 3.5 years out using monthly ‘payments’ into our cash accounts. The extra year will allow me to pause the build up if the market corrects in that time. While I don’t want to build up cash too early, I also don’t want to get burned by being too late.

   I’d love to hear your thoughts on this plan.

   1. Lenny, you’re absolutely on the ball, and your question is spot on. Rather than repeat myself, I’d encourage you to scroll up and read my answer to FiPhysician above. You should absolutely begin transitioning now by moving 1 year of expenses into cash each year between now and retirement, depending on how big of a buffer you’re planning on putting into Bucket 1. Ironically, I wrote my response to FiP before I got to your question, and you’ll see my response to him is exactly how you’re looking at it.

      As I said, you’re spot on.

8. I am looking for suggestions.
   If I have 600,000 dollars total to allocate for retirement, and I need to take 3,500 dollars per month, is there anything that is safe and would generate that amount of money? Vanguard VSIX or something like that??
   Would anyone buy an annuity?
   Help. Thank you.

   1. Sho, there’s a lot of meat on that bone, and more than I can consume with a short response. The short answer is “no”. Using the 4% SWR, the most you can safely withdraw is $24k/year (600k * 4%), or $2k/month. If your spending needs are $3500/month, you’ll need to increase your savings to ~$1M before you’d be safe to consider retirement.

      I’d suggest your focus should be on increasing your savings rate, diversifying your investments as I outline in my Bucket Strategy posts, and doing a deeper dive on your retirement readiness. Based on the limited info provided, it looks like you still have a few years to go…

      1. Thank you for responding. If I may ask another question, would you be able to recommend a specific investment that is safe and yields 4% with quarterly payouts?
         Thank you again.

         1. Afraid not. Welcome to the reality of a low interest rate environment. I’m not aware of any “safe” investment that yields 4%. The reality is that “safe” investments are yielding ~2% at the moment, and I don’t expect that will change anytime soon.

            1. Thank you so much for answering. If that is the case, then would you recommend I buy an annuity……I am thinking of saving up until I can buy an annuity for $130,000 dollars, and I want it to pay out between 500 and 600 dollars per month. What would your response to that be? Would it just be better to put my money in an interest bearing bank account?

         2. Ironically, I just came across this in Kiplinger’s, relevant for your situation. I would suggest you read the entire article here, but this piece from Item #9 is particularly relevant:

            Unfortunately, this is not an optimal time to buy an immediate annuity. Payouts are tied to interest rates for 10-year Treasuries, which are historically low. You may want to wait until interest rates are higher to purchase an immediate annuity, or use a laddering strategy, which involves making smaller annuity purchases periodically—say, every three to five years. If interest rates rise, you’ll capture them. Plus, the annuities you purchase in your later years will pay more no matter what happens because payouts are higher for older investors. To get an idea of how much you’ll need to invest to get a specific monthly payment, go to immediateannuities.com.

9. Great article Fritz and your related posts are invaluable!
   I agree with Tim and Erith’s observations about finding purpose in retirement. During our working years, our “purpose” is doing our job each day and paying the bills. It provides structure and fills our days. After we retire, finding meaningful activity eludes lots of folks. Often, they no longer feel important and suffer a loss of identity. It sounds like your upcoming book will be spot on!

   1. Ironic you mention loss of identity, I have a section about that exact topic in my book. I agree 100% that the focus on purpose is the real driving behind creating a great retirement. Thanks for reiterating it’s importance.

10. Another great article, Fritz! In looking through the comments see fair amount of energy going to “purpose”. Can’t tell you how many times I have heard “I’m bored” from retirees. When we refer to buckets, I like to also include buckets for “purpose”. Hence how I end up with lots of volunteering initiatives, keeping active in the local chamber of commerce, one of the reasons I started by own business /continue to do part time consulting…. and still have as much time for play and travel as desired.

    What have I learned from those who are bored? They need to get off their butts! It is never too late to get involved – follow your heart / follow your passions!

    ps. Last but certainly not least, is the importance of exercise and staying in good health!

    1. Mark, great point about creating “buckets for purpose”. You’re certainly one who lives that principle, and I treasure your friendship. Looking forward to seeing you on the Pickleball court later today!

11. Hi Fritz.

    This is one of the best round-ups capturing all the questions (and providing a veritable cornucopia of resources to digest and implement)

    I am looking forward to setting aside at least an afternoon of the upcoming weekend to enjoy all the linked content.

    Thankyou so much!

    Shaun

    1. Shaun, thanks for your kind words, this one took some effort to compile and I’m pleased to know you’ve found it to be valuable. Enjoy that afternoon of reading!

12. Hi Fritz,
    Excellent post and excellent format. Will be certain to direct friends who are contemplating retirement to this post.
    Quick observation – shouldn’t the end of answer to Q3 “to ensure you outlive your money” be “to ensure you don’t outlive your money” ?

    1. You pass the test, Mr. P2F! ARGH…no matter how much time I spend on editing, it seems those sneaky gremlins always find a way through. Thanks for pointing it out…correcting that error now.

13. Thank you Fritz. I join the chorus of comments here – this post is a great resource for a summary of answers to the most common retirement questions along with links for further research.

    As you know (and I am guilty of.), we can spend countless hours in our retirement researching the answers to these questions, but the truth is, the answers usually come down the simple, summarized one or two paragraphs like those you have written in this post.

    Read these answers, implement them, then move on to more rewarding endeavors of retirement life.

    I am reminded of the quote-
    “A month in the laboratory can often save an hour in the library.”

    1. Great quote, Bill. It reminds me of an oft-cited term we used when I was working….”Analysis Paralysis”. Sometimes, you just need to get the majority of an issue correct and move on with your life. No need to make things more complicated than they already are, right!?

14. I’m excited to read your book when it comes out, and if you’re looking for readers to review pre-launch, I’ll throw my name in the hat! 🙂

    1. Thanks, Kim. I’ve added your name to my “marketing list”, you may be hearing from my publisher in the coming weeks. I received the first mock-up of the cover yesterday, as well as the first glimpse of the page layout. It’s exciting to watch it all come together!

15. Nancy, thanks for providing insight from a retiree who’s living a great life with a strong pension. Great point about the impact of a pension, and something that’s touched on in my response to Q1 about deducting any planned income to determine your investment withdrawal requirement. You’re fortunate to have that pension, though I also realize you had to work decades to earn it! Make sure you find a way to spend some of that “extra” money, it’s time to Live Like No One Else, after all!

16. Pingback: The Sunday Best (2/9/2020) - Physician on FIRE

17. A WONDERFUL WONDERFUL ARTICLE
    Will use this at my next finance club meeting

18. Nearing retirement you need to be very concerned about SEQUENCE OF RISK. As well Bernstein says When you have won the game cash in your chips. As well Swedroe says the same using MARGINAL UTILITY OF WEALTH. I like the bucket strategy with 2 yrs cash and the next 6-8 in fixed; all to cover fixed expenses for first 10 yrs of retirement. The rest can be in equities

    1. KT, no doubt, Sequence Of Return Risk is one of the greatest risks we face in early retirement, and the reason I’ve focused so much energy (and content) on the Bucket Strategy we’re using. As you’ve hopefully read in my Bucket posts, I’m also hedged for ~8-10 years of protection without having to sell any equities. Sure, we may be giving up a bit of longer term return, but the protection against Sequence of Return risk is worth it to me. Looks like you feel the same….

19. Frizt thank you for the link to your cash flow spreadsheet. I am not a big spreadsheet person (I probably need to become one.) What is the thought behind the investment withdraw equation you use for the spreadsheet? Thanks.

    1. L, I can see why the formula in that cell may have confused you. That formula calculates “investment withdrawals” as follows:

       Spending Needs – Any Income = Investment Withdrawal Required.

       The *D8 in the formula then adds taxes to those investment withdrawals as the method I came up with to ensure the tax burden of capturing any pre-tax withdrawals was captured. The “+.02” was my manual adjustment to include the State Tax burden, as well. The formula may slightly overstate the tax obligation, depending on your tax bracket and whether you’d be withdrawing pre-tax dollars to cover expenses, but I’d rather be conservative in my assumptions and I think it’s critical to ensure folks recognize the tax implications of accessing pre-tax savings. Hope that helps.

20. Hello Fritz. Great article. Very thought provoking. Question regarding your bucket theory. I am 60 and have a pension of $300,000 annually and will get almost $4,000 monthly from social security when I start withdrawing at 70. I have an investment portfolio of a little over $10M invested in low cost diversified domestic and international stock funds (60/40 – US/International). Given I can live off of my pension income (but not fully funded/risk free) if needed during market downturn years, is it ok to stay 100 equities or should I change my portfolio mix now that I am retired?

    1. Ray, thanks for the kind words on the post. Given that your pension can cover your “essential” living expenses, it can work in effect as a Bucket 1 alternative. It’s ultimately a question of your personal risk tolerance (and realistic ability to live entirely off your pension in the event of an extended bear market), but would seem to be a viable option in your situation. Alternatively, you could tuck away ~10% in a “Bucket 2” type investment (e.g., a bond ladder?) “just in case”. It would reduce your risk a bit, with very minor impact on your overall portfolio returns. Thanks for stopping by.

21. I bookmarked this as I was reading it and then I noticed the shout-out… even more of a reason for the bookmark! Thanks, my friend!

    Excellent article and one I’ll be sending people’s way when they ask these same questions.

    In regards to your mention of moving to a low cost-of-living country, I’d add that you still want to try to have enough saved that you could still pull off living in your home country. Otherwise, if you move to another country and hate it, you’re not stuck deciding to stay in a place you don’t enjoy or moving back and getting a job you don’t want.

    1. Thanks for the kind words, Jim. You’ll be glad to know that when I mentioned your story in my book, I DID include the suggestion about having a Plan B in the event you decide to move back home. Yep, you’re in the book. 😉

       1. Now we’re talking! I knew this would be my favorite book ever! 😉

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