Henry Hebeler and AutoPilot

[haha]

In another thread someone mentioned this man. I can't remember who did so. There is also a website www.analyzenow.com. The website mostly tries to sell his book and spreadsheet. Anyway, I got his book from my library and read it. The title is JK Lasser's Your Winning Retirement Plan.

I think it is quite useful. He is not the world's easiest guy to understand style wise. Nevertheless, he goes into detail in areas that are less covered by many of the guru types that I know about. Several things stand out in my mind after a first reading.

One, he knows a lot of older people, and he knows what can go wrong in a long retirement. This is kind of sobering.

He also understands the unique advantages of a COLA pension. Better than a faithful wife, IMO. And for most of us, social security is our one and only chance at COLA. This SS COLA, and the fact that SS can't be pissed away, attached or outlived, and on one's death will go in it's entirety to a surviving spouse as long as he/she lives without any extra cost or give-up to get this feature make it more important than many of us realize. He advises thinking long and hard before taking early SS. I have 21 months to go for full SS, but unless I need it then I will wait longer, maybe until 70. In fact, I think I would take apart time job if I could find one, to enable me to do this. Since I have no other pension of any type, this larger SS would give me an anchor to windward if heavy seas roil my portfolio.

I am not bothered by the idea that I may die and not get to collect all or any of the money I paid. This is what I categorize as a "sunk cost". What counts is what is best going forward. He suggests valuing SS or any COLA pension as the product of the annual payout in today's $ times one's life expectancy. The key point is that one doesn't need to discount to a present value. The COLA and the discount rate can be set equal.

He doesn't use the acronym SWR, or any of the other arcane permutations of that term recently discussed on this board. But he does develop a similar concept of a fraction of one's starting portfolio. It seems that in the examples it is centered on 4%. (Go figure!)

He also gives a lot of attention to annual adjustments. This is what he calls "Autopilot". He presents an algorithm which comes up with 2 figures for one's spending in the year to come. One number is just last years number, times 1+CPI inflation. The 2nd amount is derived by a 2 step process which I think is too complicated for me to attempt to present. It tries to smooth out the effects of large changes in one's investment portfolio, without ignoring those changes altogether. Then you use the lesser of the 2 amounts as your withdrawal limit.

There are many other nitty gritty details that he discusses equally carefully.

I like the book, and would recommend it to anyone who still has some questions about how best to proceed, whether in preparing for retirement, or surviving retirement once there.

Mikey

 

[Cut-Throat]

He advises thinking long and hard before taking early SS. I have 21 months to go for full SS, but unless I need it then I will wait longer, maybe until 70. In fact, I think I would take apart time job if I could find one, to enable me to do this.

I think most of us have thought long and hard about this. The only way delaying SS makes sense to me is if you are still working. But drawing down the nestegg to delay possibly more in the future is taking control away from yourself and giving it to the government (and I'm a flaming Liberal).

If this is done during a bull market you could be hurt even more! - The words "a bird in the hand is worth more than 2 in the bush" speak loudly here.

I've never seen anyone delay it, except if they were working!

But, I do have an open mind - If you can mikey share with us his thoughts on this.

 

[John Galt]

Great googly mooglies; taking a part time job to get
you to a point where you can get "full" SS
benefits Man, unless you love the PT work,
don't do it! Tell you what..................even if I was
going to get LESS than 75% of my full benefit amount,
I would still draw at 62. In fact, let's say they would
let you draw 50% at age 50. I would still take the
money. Some of you people act like you are going to
live forever. You won't, and you may even find yourself wishing you had died. Waiting until you can get
"full" benefits Unless you are happy doing what you do and don't need the money, it's a sucker bet IMHO.

John Galt

 

[haha]

The words "a bird in the hand is worth more than 2 in the bush" speak loudly here.
I've never seen anyone delay it, except if they were working!
But, I do have an open mind - If you can mikey share with us his thoughts on this.

Cut-Throat,

He devotes about 5 pages to this, and I really don't think I can do it justice. But overall, his thoughts are similar to mine. While I agree with your sentiment that a bush in hand is always to be desired, it can be worth waiting.

At my age , my payment would increase at a rate of .6% per month, for every month I delay between my full retirement age and age 70. This is 7.5% per year. Cash is returning at best 2-2.5 % now, so it seems to me that I get more bang with waiting.

Your other point about taking it out of my hands and putting it into the governments hands also is a bit different from how I see it. What I am doing is taking it out of low returning cash investments and turning it over to the government. It could also be seen as a portfolio question- SS payments is money that if it is fiddled at all, it will probably be by fiddling the adjustments to the COLA. The same fiddle will be applied to TIPs in all likelihood.

It is more judgment and divorce proof.

It is also a hedge against stupid behavior on my part. Some mornings I wake up and think, man I could use another $million. How many shares of that $1 gold stock would I have to buy, if it went to $20, like it did in '94? What, only 50,000 shares? Why didn't I think of this earler

Of course you guys may not have these kind of problems.

M

 

[John Galt]

I must have seen too many friends, neighbors,
classmates, and contemporaries die. This stuff
about planning for what to do when you are 80 or 90
leaves me not cold, but incredulous. It's nuts people!
Don't do it. Have a plan in case you survive that long,
but don't count on it. In fact, expect that you will soon exit this troubled planet. All else is folly and moot.

John Galt

 

[Cut-Throat]

It is also a hedge against stupid behavior on my part. Some mornings I wake up and think, man I could use another $million. How many shares of that $1 gold stock would I have to buy, if it went to $20, like it did in '94? What, only 50,000 shares? Why didn't I think of this earler

Of course you guys may not have these kind of problems.

I take it you either did not read Berstein's "4 Pillars" or have forgot it?

 

[unclemick]

Hebefer was an engineer, worked for Boeing, lived/lives in the Pacific NW. Me too once upon a time. I'll take Bernstein - if I only had two choices. Heh.heh!

Engineers often suffer under the illusion that the ability to calculate implies control.

 

[cute fuzzy bunny]

While I agree with your sentiment that a bush in hand is always to be desired, it can be worth waiting.

Wow. Once again I demonstrate incredible restraint.

 

[John Galt]

It's not an "illusion". The ability to calculate
(in its broadest sense) is the ultimate control.
Of course, I'm not talking just numbers, but risk
assessment. etc etc. Anyway, I strive for maximum control over my life and circumstances and have achieved it to a large extent.

John Galt

 

[unclemick]

Oh and in my case - no problem rolling the dice - one yr one month to SS and when I invest it in hobby stocks I know my pass/fail line is 7.5%/yr. Now - what was the name of that $1 gold stock? - no guts no glory.

 

[Cut-Throat]

Wow.  Once again I demonstrate incredible restraint.

Yes, I saw this too. It is sooo ripe that I think Mikey intended it!

 

[unclemick]

Ah - go ahead - jump in!

On a more serious note - 7.5% may prove to be a tough bogey - and I may 'chicken out' a year from now and take Hebeler much more seriously - after assesing the investment climate then.

 

[cute fuzzy bunny]

All I know is that i'd get rid of the damn bird in my hand asap.

 

[Nords]

Ah, that would be me.  

Mikey,

I've flogged Hebeler's book for its mention of Social Security widows.

Hebeler's point is that their deceased spouses drew SS as early as possible, but-- unlike your first comment-- they DID manage to piss it away before they prematurely died, leaving their dearly beloved spouses with a much smaller survivor's benefit. I'm going from imperfect memory here, but I believe Hebeler claims that if the working spouse had waited until age 65 that the surviving spouse would be collecting a 25% bigger check each month. (I guess age 70 would be even better.) In some cases, that 25% was the difference between buying their prescription medication and turning the electricity back on.

Here's where we bring our spouses over to the monitor and let them make the call. We have two choices here, and we have to decide who we trust more to look after your spouse's interests-- you or the U.S. Gummint. (Because they're here to help you too.)

1. Let the Treasury keep your money (they don't really keep it, but that's another debate) and hand it out to you later-- age 65 or even 70. You'll get more money, but you'll have to live at least 14 more years to make up for what seems, even to me, to be an exceptionally nuclear case of deferred gratification. Your spouse needs to know that the advantage to this choice is that you won't be tempted to piss this money away on the next Bre-X (or Microsoft!). I'd call this the "blissfully ignorant & irresponsible pensioner" choice.

2. Grab every penny as soon as you hit 62 and keep on grabbing until you wake up dead. Fence it off in a money market until you have enough to buy a CD and then, eventually, an I bond.

Heck, you could even buy corporates or junk or Vanguard stock mutual funds with it if you wanted to, but the I bond is the closest thing you'll find to a federally-guaranteed pension with a COLA.

Just keep laddering those bonds, collecting the checks, and reladdering them as much as you can. Don't touch the money-- it's not yours, it's your spouse's. The difference is that it'll be compounding for your spouse (with a COLA) instead of for the Treasury, and you won't have to win the 14-year survival marathon.

And whatever you do, don't piss it away. Then you can call this the "educated & disciplined investor" option.

Can anyone think of any other choices?

BTW, the advantage of "Autopilot" is that it doesn't require us to project 130 years of financial performance 30-40 years into the future. It just looks at last year and applies negative feedback to next year, something that usually attracts an admiring crowd of pocket-protector-wearing engineers...

And, yes, I do own a slide rule. Three of them, in fact. I know how to use them (and I'm only 43) but they haven't seen much use since I plunked down the big bucks for my trusty TI-55 III calculator. My kid thinks I stole the slide rules from the Smithsonian. I wonder how much I could get for them on eBay?!?

 

[unclemick]

Have my 32s rpn scientific and doric k&e - but my circular 4" and big K&E are pack ratted away ?somewhere?

Being single - but with two 'financially challanged', 'I ain't interested' women (mom & SO) - I've taken the Godfather route and made them an offer they can't refuse.

Basically set up three independant portfolio's over the years (in case I croak suddenly) - with a simple will for the house/junk. IRA beneficiary's set up. And three 'poor folks' is better IRS wise than one 'more richer' - heh, heh.

 

[haha]

Re: Ah, that would be me.  

Just keep laddering those bonds, collecting the checks, and reladdering them as much as you can. Don't touch the money-- it's not yours, it's your spouse's. The difference is that it'll be compounding for your spouse (with a COLA) instead of for the Treasury, and you won't have to win the 14-year survival marathon.

Nords, Thanks for your well expressed views.

Probably the circumstances in each individual case, as well as the prevailing investment options would weigh heavily in the decision. Certainly it would be unwise to sell high earnings assets, or assets that had undergone a recent bear market, to allow one to hold off on soc sec.

Luckily the decision can be made month by month, as long as one has not yet started soc sec. Once begun, there is no going back.

Right now, any shortfall from my interest and dividends can be funded by selling assets that in my view are fully priced to overpriced anyway.

Again, in my view, this is really free money. I'll spend a bit, pay some tax, and hold the rest for re-deployment at a more oportune time. My consumption will have been funded by asset depreciation that I will avoid.

As a note, I know most the theoretical problems here, but I just don't give them much credence. I know others do, many of whom have greater knowledge than me. As someone said, the blessing (and curse) of being an introvert is that you are OK with making up your own mind, and you realize that the consequences will be punched out of your ticket.

Also, what SWR and all this stuff is about is how to make your portfolio last a long time, not about how to get as rich as you can. So making a COLA annuity larger than it would otherwise be seems to be a good idea, if it doesn't incur too much opportunity cost. It would likely be impossible for me to run out of money before age 70. So if I'm dead, I don't need it. But if I live to 90 which I am not predicting but it isn't too much of a stretch for any of us, then the money will be there too.


Specifically addressing the widow thing, my wife will have a very similar entitlement on her own account as I do, so in my personal case that point is not relevant. I just pointed it out as something that had been emphasized by Hebeler.

Mikey

 

[John Galt]

Here's my deal. Right now my wife works 32 hours a
week. A very big plus. In 2 years I believe she will
be able to quit or at least cut back to minimal hours.
Then, we will live off my SS and income from invested
money which I do not plan to touch. That should give us more income than we exist on presently. If
we run into trouble (like inflation) I can liquidate
assets (real estate for example). Currently we assume no draw down of our invested base. But, at some
point we could also tap into that if necessary. For example, if I put the money in my mattress and only needed 4% per year (this is a fixed 4% based on the starting point - same amount every year), it would still take 25 years to go through the money, and that's only the money invested in bonds
and notes. Bottom line is that even in the mattress,
starting at age 62, this part of our money would last
until I was 87, and If we are alive, we still both have SS and the real estate. Of course, in a real life scenario
the notes and bonds would be earning money all the way down.

John Galt

 

[gayl]

He advises thinking long and hard before taking early SS. I have 21 months to go for full SS, but unless I need it then I will wait longer, maybe until 70. In fact, I think I would take apart time job if I could find one, to enable me to do this.

I think there is a decided financial advantage to taking it as soon as possible. http://www.fool.com/retirement/retireeport/2000/retireeport000313.htm:

assume that the SSA has told me that I may retire now and receive $1,180 per month, or retire at age 65 and four months and receive a benefit of $1,542 per month expressed in today's dollars. Ignoring inflationary increases to the Social Security benefit, it would take exactly 14 years after receiving my first reduced-benefit check for my lifetime receipts to be less than those I would get by waiting until age 65 and four months to receive that benefit....
If my benefit increased at 2.5% annually through the years, then my age-65 lifetime benefit would begin to exceed my reduced benefits when I reached age 74 and two months. However, by investing those earlier checks until I reached full retirement age, I would have an after-tax stash of about $54,137 at age 65 and four months (my full retirement age). From that stash, I could begin taking the difference between my reduced benefit (now at $1,270 per month due to increases) and the full retirement benefit I could have received ($1,660 per month) had I waited to take that income. Then, even after adjusting for potential benefit increases, my $54,137 dollars would last some 216 months (or 18 years) before it was gone. At that time I would be 83 years and 4 months old. From that point onward, then, my lifetime benefit under Social Security would be less by taking payments at age 62.

I'm planning on drawing the MINUTE I am eligible. If I don't want to spend it (bet I will), I'll just invest or give it away

 

[unclemick]

Of course, I'm leaning torward early SS also. About next may, my last SS statement before 62 will arrive and then I'll attempt a honest due diligence based on our ER sit. My tongue in cheek ribbing of Hebler aside, I expect to give his thinking consideration in our deliberations.

 

[John Galt]

I have not read all of these posts, but Mikey,
seriously....................would you really take a part time job just so you can get more SS at age 70 That is truly sick! I just got back from a long motorcycle trip. One
bad decision and I'm "Spam in a can". There is a good chance you'll be dead before 70 (me too). Wake up and smell the coffee.

John Galt

 

[gayl]

Even if you're not dead, why would you want to delay gratification for 5 yrs? (Full SSA at 67 for me) Show me the money and let me spend it while I can best enjoy it!

 

[haha]

Holy Cow Guys, either I'm dead or a hopelessly deluded pleasure avoider.

I'll see how it goes. Right now, I am not tempted to take reduced payments. It seems the same factors apply all the way up to 70. But I appreciate all your ideas.

Mikey

 

[JonnyM]

How about going the other way?

I have the opportunity to begin receiving the equivlent of SS Benefits BEFORE 62.

Should I?

Essentially the integration with retirement is such that the calculation can "augment" the retirement allotment before age 62 in exchange for a reduced benefit after age 62. The theory is my total benefit would wash.

Would you opt, or wait 10 years for a "raise" when SS kicks in on its own?

 

[unclemick]

In my case(large private defense co.) ran the numbers at age 55 and took the reduced amount - a lot of my coworkers with less in their 401k's took it. Now looking at early SS one year, one month's time.

I think each ER has to sit down and play with the numbers versus their ER plans and make a decision. Happy with ours.

 

[gayl]

Re: How about going the other way?

Would you opt, or wait 10 years for a "raise" when SS kicks in on its own?

Are you a public sector employee? Is this an integration with a Tier 2 DBP plan where you increase your pension by having more before eligible for SSA then less once it kicks in? If so, I think it would depend on how many years you will have in retirement before eligible for early SSA from SSA.

I'm 'laddering up' so to speak ... taking ER now with my DBP plan, using the 457 as a 'raise' in 3 yrs, then IRA as another raise 3 yrs later, and drawing on my SSA as soon as able 3 yrs after that as my DBP COLA is capped at 3% per yr.

Although I don't spend money on 'ordinary things,' I have no trouble spending it on traveling. Tahoe is great this time of year and the grandsons are anxiously waiting to go Thurs AM.  8)

Called Princess Cruise Lines yesterday and tried to get their discounted rate of $1731 for 10/11 Montreal to NYC, 10 days. Clerk apologetically told me that rate had expired and offered to book one for $2300. Told her I'd pick another time or line ... she came back with a $1499 deal for balcony cabin. Not bad