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Answers to that, and other confounding retirement questions

I get a lot of questions about early retirement, investing, finances, planning, benefits, and more. So, I thought it would be a great help to publish a “Questions to the Editor” article.

Most of the questions below are edited, and I’m using fake names to protect privacy. There are far more questions than I could fit into a single article, so I’ll publish more periodically. Be sure to subscribe so you won’t miss the next batch. And send your questions to “Q@LifeAfterWork.Zone“

“I’m 52 and hate my job. Can I retire now?”

-Ronaldo

No, Ronaldo. That’s a bad idea regardless of how much money you have, and here’s why:

One should never make major life decisions without a thoughtful plan. Retirement is one of the biggest changes you’ll ever face in your life, and thinking and dreaming about it isn’t a plan.

Go ahead and make all the spontaneous decisions you like so long as they’re easily reversible. Learn to knit, buy a lime green couch, go on a blind date. But don’t buy a house, get a tattoo, or retire without a whole lot of planning, analyzing, and talking.

Over 40% of all retirees end up back at work because they’re bored or run out of money. They didn’t plan ahead, and even worse, the work they return to pays less because they’ve been out of the market.

Do this:

1. Calculate how much income you’ll need to live on. Add 20% to be safe. Make sure you’ll have the future income to support that. Don’t forget to add the cost of healthcare if you’re retiring early.

2. Decide how you are going to stay active. “Not working at my stinking job anymore” isn’t an activity. You need three hobbies before you can retire. You need to be active and mentally engaged, or you’ll drive yourself (and everyone around you) bonkers.

3. Make sure your partner is on board with this. Your relationship will be severely impacted if the two of you don’t align.

Get it right the first time, Ronaldo. You don’t get do-overs.

I’m 28 and want to retire from my regular job by 40. Almost half of my income goes into an equity account every month and in a year or so I can afford to start buying rental properties to generate income after I quit. Is this doable?

-Linda

I love your initiative and ambition, Linda. You’re on the right track with the idea of saving hard and building a strong passive income stream. Some things to keep in mind:

• You need a financial cushion for the times when your properties are vacant and need repairs. Be sure to account for that.
• Study up on the R/E rental business. Make sure you find the right properties in the right neighborhoods. Talk to agencies and other multi-property entrepreneurs.
• Project your revenue and costs – it’s easy to get upside down with a higher mortgage payment than your renters will pay. Don’t forget to account for maintenance, taxes, and vacancies. Be sure to use a big enough down payment to give your profit margin some breathing room.
• Recognize that while this may be considered “passive income,” it’s a ton of hard work, especially in the beginning.
• This is not a get-rich-quick business. It will take a decade or more to get it going strong.

It looks like you’re on the right track with your savings and dedication. You can do this!

My wife and I are retired in our 70’s. We have no kids, and we want to enjoy the money we have, but most of it is in our home. Do you think a reverse mortgage is a good idea?

-Paul

Paul, you’re like a lot of retirees who have a significant portion of their wealth tied up in the equity of their home. Tapping into that equity can make retirement years more enjoyable.

A reverse mortgage is a loan for people age 62 and older who have significant home equity. Lenders loan you a lump sum or a fixed monthly amount for a specific time based on the equity in your home. You make no payments to the lender, and you pay the lender back when you sell, move, or die. At the end of the term, you can continue to live in your home, but you won’t get any more payments. All the while you pay taxes and maintenance, and interest and fees accrue until it’s paid off.

Reverse mortgages have risks. Lenders charge up-front fees and higher interest rates than conventional refinances and lines of credit. Tying up a major portion of your wealth reduces your options later in life if you encounter unexpected medical bills, need to move, or require expensive long-term care for you or your wife.

Given your circumstances, Paul, a reverse mortgage might be a good option for you. I would urge you to consider other options too, such as a line of credit, refinance, or a home equity loan. These options are less costly but require you to make monthly payments. Get quotes for several options, run the numbers, and see which provides you with the lowest risk and right amount of income.

Good luck and enjoy your golden years.

We use an advisor, but I feel as though we might have missed some things over the years, and it may have cost us. How often should I see my advisor and what should I expect of him?

-Tanya

Hi Tanya,

You should meet with your advisor 2-4 times a year and carefully review the performance of your holdings. You’re paying this guy 1% to 2% of your investments every year so he should be delivering significantly better performance than you would get on your own.

Advisors rightfully claim that everyone’s circumstances are different, but there are enough commonalities that they can use a benchmark to gauge performance. If they’re not, insist that they do. There are plenty of equity and bond benchmarks, but the important lesson is to compare your advisor’s performance against the one he has chosen.

Remember that you’re the customer and they work for you! If you don’t like their performance, you can easily switch to another advisor or to self-management.

Long ago I became frustrated with my advisors who continually delivered results below their benchmarks. I moved my IRAs and investment accounts to a low-cost brokerage, and I keep my portfolios balanced between equity ETFs (Exchange Traded Funds) such as SPY, QQQ, and DIA, and bond funds like BAB, SPLB, and TMF.

IMPORTANT: This is not a solicitation or recommendation – be SURE to do your own research before making investment decisions.

Do I need to pay off my mortgage before I retire?

-Shaniqua

No, you don’t. If your retirement income can support a mortgage payment then you’re good to go.

With that said, there are some important factors to keep in mind:

• Fixed costs like a mortgage reduce your financial flexibility. Keep the fixed portion of your expenses — the ones you can’t quickly change — as low as you possibly can. In a market downturn or a personal financial crisis, you’ll want the flexibility to quickly cut expenses while you ride it out.
• Other debt payments are bad. Pay off your cars, personal loans, credit cards, and the like. And don’t sign up for new loans after you retire.

Entering retirement debt-free is ideal, but plenty of us retire with a mortgage. Enjoy your retirement, Shaniqua.

I’m retired and bored out of my skull. What do I do?

-Tony

Of all the retirement problems, Tony, this is the best one to have. Because it’s easy to solve with physical and mental activities and social engagement.

• What were your passions when you were young? Pottery? Cycling? Swimming? Guitar? Pick one or two and try them on for size. You’ll fall right back into it if you do. Like you never missed a beat.
• What do you care about? Hunger? Animals? Global warming? Find a local or online group that shares your interests and start chatting. Consider volunteering to support a cause. It’s a great way to meet kind and caring people.
• What would you like to learn? Piano? Calligraphy? Carpentry? Your local community college has affordable classes where you can meet like-minded people and learn a new skill. Make friends and learn how to cook all at the same time. What could be better?
• Don’t forget to exercise and get the heck out of the house. Go for a hike — It will lift your spirits. Guaranteed.

For those of you who fear entering retirement for the same reason as Tony — boredom, I have a simple solution for you too:

Practice.

Put a post-it note on your bathroom mirror that says ‘be retired’ and just for a few moments each day … be retired! Think about how you’d feel and what you’d do during the day if you were retired. Rinse and repeat daily, and by the time you’re ready to make the transition, you’ll have it all worked out.

Good luck, Tony.

And good luck to you all.

-Brian