Safety Nets or Backup Plans During ER

[flipstress]

From another thread:

But then, that's why I have multiple safety nets built into my financial approach to retirement.

want2retire, are you able to share what those safety nets are?

Do you mean lifestyle adjustments to reduce expenses? --Living in a less expensive area (including overseas), traveling less, buying less, downsizing the house, selling assets, etc.

I know one lifestyle adjustment is to increase income by working a llittle during ER although you've posted that you personally do not plan to do that.

Or do you mean more conservative assumptions so that you are trying to build a bigger nest egg and/or assuming a higher rate of inflation and/or assuming a lower investment return rate?

Or are you referring to investment styles like diversification, or holding more cash, bonds, fixed-income investments once you retire?

I'm also interested in other people's backup plans or safety nets.

 

[hellbender]

Plan A/Plan B

I'm also interested in other people's backup plans or safety nets.

Plan A: Defined benefit federal government pension. Full COLA and subsidized health benefits for life. Can live on about 2/3 of pension after reduction for survivor benefit.

Plan B: Savings/investments of a working lifetime adequate to replace pension, allowed to grow infettered.

 

[W2R]

From another thread:


want2retire, are you able to share what those safety nets are?

Do you mean lifestyle adjustments to reduce expenses? --Living in a less expensive area (including overseas), traveling less, buying less, downsizing the house, selling assets, etc.

I know one lifestyle adjustment is to increase income by working a llittle during ER although you've posted that you personally do not plan to do that.

Or do you mean more conservative assumptions so that you are trying to build a bigger nest egg and/or assuming a higher rate of inflation and/or assuming a lower investment return rate?

Or are you referring to investment styles like diversification, or holding more cash, bonds, fixed-income investments once you retire?

I'm also interested in other people's backup plans or safety nets.

Every time I think of another safety net that I can manage, I do it. For example - - I plan to have small income streams from as many different kinds of sources as possible. So far, I will have a small pension, small SS, TSP (401K), Roth, taxable funds, CD's, and a fixed lifetime annuity. None of these income sources are so big that its sudden unexpected absence would be catastrophic. And yes, diversification is important to me. Also, my planned SWR wavers between 3.5% and 4% depending on my mood - - haven't quite decided. If I had the funds, I'd be happiest with 3%.

I plan to have enough in CD's or money market to cover the difference between SS+pension and my planned income, for 10 years. That way I don't have to touch ANY of my taxable, Roth, or 401K equity funds for 10 years if the market tanks even much worse than has happened in my lifetime. Also, I will have an additional $100K in the TSP's "G Fund" which is similar, though the rest will be more aggressively positioned. I plan to let a lot of my investments just sit and grow and not get into them even if the market does well, barring the unforeseen. That way my nestegg would grow and I could eventually reduce my SWR to 3%.
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My SS, pension, TSP, and annuity should provide half again as much income in ER as I am spending now, which is not entirely minimal either. I am considering saving the difference to add to my "set aside" taxable investments.

My retirement house (in southern Missouri, which I regard as a low cost of living area) will be paid off, and I plan to buy a house that is reasonably energy efficient (with a fireplace in case heating costs skyrocket). I plan to grow at least SOME vegetables because I love fresh vegetables and they are really healthy. My house will be within walking distance of commerce and grocery stores, so that a car will be a luxury and not a necessity. I have no desire to travel. For dealing with a potential "no car" situation during icy or snowy weather, I will have a large pantry stocked with food, and a home gym; otherwise I would get a ride from Frank or else call a cab on the rare occasion that I might need to go somewhere.

There are probably more safety nets! But these are what comes to mind at the moment. I am not a person who is very much into consumerism, but I am really into security and not having to worry much.

Also, I am "trapped" into working for two years longer than I really need to, because in two years I will get lifetime medical. So, I will have a little more money than I need, given my lack of materialism. Rather than raising my planned income, the money will go into the taxable investments and CD's that I mentioned above so it will be part of my financial safety net system.

Any ideas for other safety nets for my income that I might have missed? I never want to have to work again.

 

[FinanceDude]

Just make sure your taxable and retirement accounts aren't SO conservative you underperform inflation............

Sounds pretty good to me. I will DEFINITELY move to a lower tax hell state when I retire.........

I am thinking the Ozarks area, or Albuquerque........don't know how Flagstaff Arizona is for taxes, but I LOVE that area.......

 

[W2R]

Just make sure your taxable and retirement accounts aren't SO conservative you underperform inflation............

Sounds pretty good to me. I will DEFINITELY move to a lower tax hell state when I retire.........

I am thinking the Ozarks area, or Albuquerque........don't know how Flagstaff Arizona is for taxes, but I LOVE that area.......

I kind of like some of the mildly aggressive type of investments too, so I think I will be OK with inflation. Also, I will keep track of how I am doing relative to inflation to make sure I'm doing OK and re-evaluate a few years into ER if necessary. I want to have the real value (relative to cost of living) of my nest egg increasing as I age, rather than decreasing, at least up to age 87 or so.

Edited to add: even with the CD's, money market, and G Fund, I will still be at a 60/40 asset allocation (60 equities, 40 fixed). So it should hopefully keep up with inflation.

 

[Moemg]

I have a lot of pading in my retirement budget so if the market tanks I would just travel less .I also have a large waterfront house that I could hopefully downsize and release a good chunk of equity . I don't lose any sleep over it .I have survived all kinds of financial set backs and I'm sure I'd survive again .

 

[W2R]

I have a lot of pading in my retirement budget so if the market tanks I would just travel less .I also have a large waterfront house that I could hopefully downsize and release a good chunk of equity . I don't lose any sleep over it .I have survived all kinds of financial set backs and I'm sure I'd survive again .

Sounds like a good plan!! At the saying goes, "I've been rich (well, middle class, in my case), and I've been poor. Rich is better!" I don't ever want to go hungry again, or have to go back to work either.

 

[ziggy29]

I have a lot of pading in my retirement budget so if the market tanks I would just travel less .I also have a large waterfront house that I could hopefully downsize and release a good chunk of equity . I don't lose any sleep over it .I have survived all kinds of financial set backs and I'm sure I'd survive again .

I tend to simply be overconservative with my assumptions about ROI and inflation. I use 3% real return while I'm working and a 2% real return in retirement for planning. I figure there's a very high chance I'll do better than that long-term, so if I can "make it" with these projections, I should be in good shape.

 

[W2R]

I tend to simply be overconservative with my assumptions about ROI and inflation. I use 3% real return while I'm working and a 2% real return in retirement for planning. I figure there's a very high chance I'll do better than that long-term, so if I can "make it" with these projections, I should be in good shape.

Sounds like that would work!! I am probably over-thinking my financial plan, but that is just the way I do things. Or overdo things.

 

[donheff]

DW and I planned our retirement dates and portfolio to allow us to live fairly large while maintaining two houses. We also wanted to be sure that we never, ever have to return to work. We view our weekend house as a luxury to be sold if Mr. Market goes south and stays south. If the market falls off the edge of the earth, we will both sell the weekend house and constrain our travel. I am privileged to have a Federal pension so dog food isn't in the picture unless the country is destroyed by war or equivalent calamity. That is not the kind of black swan I bother planning for.

 

[flipstress]

Thanks to all for sharing your plans for a buffet of ideas.

I am not very close to retiring but leaning towards a bare-bones one in 6 to 7 years. I like my job and my boss now, but I don't know how it I will feel in 6 to 7 years. Maybe I can bear to work more so I can have a bigger nest egg.

I will have a local government pension but it will be small because I've only been with my government position for 4 1/2 years. It will be even smaller if I retire before 55, which I won't be in 6 to 7 years. So I really don't know if I will wait until 55.

I guess my backup plan for now is to work a little bit during retirement if I can scrounge up a part-time IT job.

I could also retire to the Philippines although that is not in my ideal plan right now.

 

[RunningBum]

#1 has been to build up a buffer so I can take less than 4% of my savings, much less when SSA and a small pension kick in.

#2 would be to cut expenses. Right now I'm paying about $3K for a ski/golf membership, that's a big cut back I could make, along with cutting or reducing my satellite TV plan, for example.

#3 is to downsize the house. It's at a resort and real estate can move slowly here, so I'll have to watch for needing to do this and not wait until I really need the money. My house is at least 1/3 of my total worth so it gives me a considerable buffer to buy or rent a smaller place and still replenish the nest egg.

I really don't think I'll need to resort to #2 or #3, unless we have another 10-15 days in the stock market like the next two, which is going to wipe out #1!

#4 would be to go get another job. Last resort for me.

$5 would be to go live with other family,though they're probably looking for the reverse from me before that happens!

 

[W2R]

Several have mentioned downsizing the house, or selling a second home. Are you at all concerned about getting a low amount depending on the ups and downs of the housing market?

Maybe the value of the home in question is so large that that really won't make much difference if you get a bazillion dollars or half a bazillion dollars(so to speak). Either one would tide you over.

But what if it doesn't sell? The liquidity issues would bother me. Maybe you could get a mortgage to help you through tough times, or maybe a renter (if you want to be a landlord). Hmmm.

 

[Rich_by_the_Bay]

Several have mentioned downsizing the house, or selling a second home. Are you at all concerned about getting a low amount depending on the ups and downs of the housing market?

Yeah, the house as a safety net is too illiquid for me, too. Imagine relying on it now during this housing bust. If you could sell it at all, you'd probably take a beating.

I'm thinking the best safety net is to minimize the cost and expenses of your fixed items such as housing and maybe cars, then use the extra cash for a nicer lifestyle. I'd rather cut back expenses and continue to enjoy simpler pleasures in a pinch than to sell the house (and don't forget that moving costs money).

 

[Moemg]

Several have mentioned downsizing the house, or selling a second home. Are you at all concerned about getting a low amount depending on the ups and downs of the housing market?

Maybe the value of the home in question is so large that that really won't make much difference if you get a bazillion dollars or half a bazillion dollars(so to speak). Either one would tide you over.

But what if it doesn't sell? The liquidity issues would bother me. Maybe you could get a mortgage to help you through tough times, or maybe a renter (if you want to be a landlord). Hmmm.

In today's market I would get a lot less for my house than a few years ago but since I have two and a half bay front lots I know it will sell eventually or I could always go with a reverse motgage if necessary or move to a lower cost of living area. Instead of getting a bazillion I'd probably get 3/4 of a bazzilion and since there is no mortgage that's a nice chunk of change .

 

[megacorp-firee]

My version of the Safety net is:
1) pension that covers about 1/2 of our retirement life and wish list (RWL) (including substantial travel).
2) 28% of our funds in income producing vehicles (preferreds and municipals), to cover 1/4 of RWL
3) 5 years of CDs and other cash equivalents to cover the other 1/4 of RWL
4) 401k funds that will generate funds to replenish rolling 5 years of CDs as well as grow with inflation (and conservatively add substantially to the total portfolio). Plans are NOT to have to touch these, ... but if times are good .. I might have to learn how to sail ... or drive a fast sports car ...
5) if things go south ... then we will cut back on substantial travel (so the 5 years of CDs may last for 7 years or so).
6) if things REALLY go south (like antartica like) live overseas where you can live like a king in relative western lifestyle comfort for about 36K/yr (24K/yr if you can live a bit more native) (Mexico, Costa Rica, Belize, ...etc. or Asia; China, if you do big cities like Beijing and Shanghai, Thailand ala Billy and Akaisha, Taiwan, ...etc.)
7) IF 6 is not possible due to health or whatever ... then really throttle back and live off of 75% of RWL. Fun things have stopped ... but what the heck ... still NOT GOING BACK TO W*RK.

 

[Khan]

Am living on small fed (semi-COLAd) pension (under $30K gross). Still building CD ladder (I retired somewhat unexpectedly). Have TSP, IRA, HSA, US Bonds that I haven't touched; SSA at 62/66/70?

As I have mentioned, this is a $400K emergency fund.

Can't really downsize from a paid for house worth $50K on a warm day.

 

[RunningBum]

Several have mentioned downsizing the house, or selling a second home. Are you at all concerned about getting a low amount depending on the ups and downs of the housing market?

I figure if I watch closely enough, I should have at least 5 years warning before I really need to sell. If the market was ok at that time, I'd put it on the market then, and hold out for a decent offer. Otherwise I'd try to wait a couple years for a better market and be a bit less picky. If a good market still hasn't come, I'd probably take what I could get, or look into a reverse mortgage. I am a bit worried about that because it's in a resort area which can be even less liquid than in a city, especially if globally warming wipes out skiing.

 

[donheff]

Several have mentioned downsizing the house, or selling a second home. Are you at all concerned about getting a low amount depending on the ups and downs of the housing market?

If downsizing is the safety net, you are very much at the mercy of the market. A second home can be quite a different situation. In our case, we built it 15 years ago so appreciation has been good. It is most likely that we will sell it for a considerable sum in a good/decent market because we find ourselves not wanting it as we age. But, if we are forced to sell because of unexpected market conditions, it is possible that we would get next to nothing. But the mortgage will be paid off as soon as DW quits working. And owning it is a considerable expense - property tax, utilities, maintenance, attendant toys and activities. We could survive OK on my pension alone if the second house was gone. So, even in a drastically down market, unloading it would work as a safety net.

 

[Spanky]

Several have mentioned downsizing the house, or selling a second home. Are you at all concerned about getting a low amount depending on the ups and downs of the housing market?

If selling low is of concern, just rent it out until the market recovers (if ever) and buy a smaller house for cheap (relatively speaking).

 

[52andout]

We always thought downsizing was an option until we started looking around. They are building lots of patio homes in our area and marketing them specifically for retirees. The price tag is almost what I could get for my well maintained much larger 13 year old home. Add to that realtor fees, moving fees and I won't come out ahead. We would have to leave this area, but this is where our life is. I have lived all over the country and except for a few places I could never afford housing and we would be too far from family (like San Francisco) we like it here. Also, neighborhood is very important to us, safety and close to amenities,medical care and entertainment are what it is all about for us.
Add to that scenario all the baby boomers that will be retiring looking to downsize.

It seems that some here have planned already by buying that second home, but I would do more checking if that was part of my plan.

 

[dumpster56]

#1 has been to build up a buffer so I can take less than 4% of my savings, much less when SSA and a small pension kick in.

#2 would be to cut expenses. Right now I'm paying about $3K for a ski/golf membership, that's a big cut back I could make, along with cutting or reducing my satellite TV plan, for example.

#3 is to downsize the house. It's at a resort and real estate can move slowly here, so I'll have to watch for needing to do this and not wait until I really need the money. My house is at least 1/3 of my total worth so it gives me a considerable buffer to buy or rent a smaller place and still replenish the nest egg.

I really don't think I'll need to resort to #2 or #3, unless we have another 10-15 days in the stock market like the next two, which is going to wipe out #1!

#4 would be to go get another job. Last resort for me.

$5 would be to go live with other family,though they're probably looking for the reverse from me before that happens!

$5, I would NEVER live with family, NEVER!

 

[Maurice]

This is an interesting topic.

I'm in a fortunate position, in that I have already saved well beyond the minimum I would need for an enjoyable ER. That gives me lots of cushion in itself. Even though I plan on living pretty comfortably, even luxuriously in retirement, I could easily scale down on expenses without sacrificing much comfort or enjoyment.

One thing I have given some thought to is building my own inflation protected annuity of sorts. I have maxed out investments in i-bonds every year for a while. I've considered continuing that and also buying tips to essentially create an inflation-protected bond ladder that guarantees me a certain income every year from my predicted retirement age (45) to, say, 80. (actually I could only do it up to age 75 since the longest dated inflation protected bond available is 30 years, but you get the picture).

I could see putting enough in these to guarantee, say, 60k (in 2007 dollars) every year. I'd still have a sizable chunk of change in a traditional portfolio.


I've started modeling this recently, so that if I decide its a go I can have it figured out in time for the January TIPS auctions.

 

[cute fuzzy bunny]

My backup plans:

Dump the debt so my income needs are small.

Porfolio structured to produce more than enough dividends and interest to pay the bills.

Wife has a part time job that pays health care and gives us enough cash flow to fund Roths, a 401k and have some current income.

Something bad happens, I can get a part time job doing almost anything and that'd bring in enough cash to pay the utilities and food bills. Wife can add a shift or two per month to increase cash flow as well. If my wife stopped working, we could eat into a little bit of principal every year to pay for that.

We can tap our HELOC for shorter term emergency type money, we can sell the house and rent or reverse mortgage it in our old age if we need more cash flow.

I'm not particularly fearful of down RE markets, but then I know how to not be an idiot when I sell my house. I sold last month after 7 weeks on the market and made a tidy profit. There are buyers and there are buyers willing to pay for a nice house. You just have to create the situation where they want to buy yours. Its also pretty darn unlikely that I'd be forced to coincidentally sell in a down market, have no options to defer that sale for a year or two until a recovery occurred, and have no other options for income.

You know, part of all of this is not creating problems in the first place. I see a lot of people retiring a bit too early and/or create complex financial contraptions to try and get some sort of angle. The KISS principle isnt a bad idea. There are two ends to this sort of thing...one is not leaving a place for disasters to get a hand grip on you, the other is having plans for unavoidable potential disasters.

My "sell the house and rent" or "reverse mortgage" plans arent primary, secondary or tertiary. The odds of ever needing to do that are so slim its almost implausible. But its an option, and a workable one that lets me not worry about a few unlikely events.

The other thing that I think bears consideration is the relative market conditions. If the economy takes a huge dive, the market drops, and everyone is having problems...people with savvy financial skills and some assets will be far better off than people with no jobs, no money, and huge bills.

You dont need to outrun the bear. You just need to outrun the other guy.

 

[Meadbh]

Contingency plans:

#1:
I have begun building a portfolio of rental properties, working with a broker. The properties are managed professionally and buyer power allows investors to access a very competitive mortgage rate. Net rental income is taxable but mortgage interest is tax deductible. The result is a slightly positive cash flow and appreciating equity on a small downpayment. And somebody else fixes the plumbing. When the mortgage is paid off, the property will generate rental income. As property value appreciates, I could also choose to remortgage and realize a chunk of equity. Could come in handy for large expenses in RE.

#2:
Use my marketable skills to do some consulting (part time of course).

#3:
Asset allocation includes significant international equity and a little private equity.

#4:
I plan to move after RE. Depending on market conditions, I may rent, at least for a time.