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Audio: Cafe Owner Sends Workers to See the World

Excerpt: David Ford owns Y.J.'s Snack Bar in Kansas City, Mo. After an employee has been on the job one year, Ford buys that worker a roundtrip plane ticket to a destination of his or her choice. He tells Scott Simon he wants people whose 'taste for the world is alive and vibrant.'

Spending During Retirement: Realistic Estimates for Replacement Ratios

"[R]eplacement ratios compare costs for the first year of retirement to the year before. Hopefully, your retirement will last longer than a year and it is unlikely that if you decide to travel the world at age 65, for example, you will still be flying at 85.... Even if the retirement you envision requires a 130% replacement ratio, that increase won't last forever and probably won't require doubling your pre-retirement savings target, though it will increase it."

Expense Risk in Retirement

"The most you can lose of your savings is 100% of your portfolio, but you can have unexpected expenses far greater than your savings -- a medical catastrophe, for example.... Most retirement research assumes that you will only spend a 'sustainable' amount of your savings portfolio ... but in reality, you will spend whatever life costs. Spending a sustainable amount of your portfolio is 'retirement savings insurance', not bankruptcy insurance."

The Risk of Retiring (or Being Retired) Early

"[A]lthough no healthy person knows how long he or she will live, retiring early increases the expected length of retirement and the number of years we spend in retirement is the greatest unpredictable determinant of retirement cost.... [R]etiring early ends savings contributions when they will typically be greatest.... [R]etiring early means drawing down savings until Social Security benefits or pension income kicks in. This places additional stress on savings early in retirement that increases the risk of outliving your savings."

Going It Alone with Retirement Planning Software

"Many so-called retirement models concentrate almost solely on investment results. Those are investment models, not retirement models. A comprehensive retirement plan will consider many factors including Social Security maximization, annuitization, life insurance, estate planning, taxes, and others."

Mean Reversion of Equity Returns and Retirement Planning

"Do stock returns exhibit long-term mean reversion? That's an economist's way of asking if stocks get safer the longer we hold them.... As retirees, we have to ask some follow-up questions ... Does mean reversion equate to less risk? If we believe they do mean-revert, what impact would that process have on retirement plans? How would its impact compare to other factors of retirement planning? How should a retiree bet on mean reversion?"

Unraveling Retirement Strategies: Floor-and-Upside

"The basic idea behind floor-and-upside is that a retiree devotes some of her retirement funding assets to building a lifetime stream of income and the remainder to an investment portfolio to provide liquidity and the possibility of increasing wealth over time.... [S]ince most Americans are eligible for Social Security retirement benefits, most Americans have a 'floor.' ... [I]magine that you are 85 and your upside portfolio balance just went to zero ... What is the least amount of income you could have remaining that would not make your life an economic misery?"

Why the Retirement Train Wrecked

"[L]ife expectancy at birth has increased from 47.3 years in 1900 to 68 years in 1950 to 78.2 years in 2009.... A second contributor has been the stagnation of middle class incomes over the past 30 years.... A third contributor to the train wreck is medical cost inflation.... A final contributor ... has been under-saving by Baby Boomers.... Corporations stopped pooling retirement risk for us and left us to handle it on our own. This put a tremendous savings burden on the middle class. Costs went up dramatically while incomes remained flat, so there wasn't much left to save. We enjoyed longer lifespans so retirement costs even more. Most of us had no idea this was transpiring."

The Ideal Strategic Retirement Planning Process

"The typical retirement plan report is centered around a spreadsheet that purports to anticipate our future wealth annually for the next three decades despite all evidence that such forecasts are well beyond human capabilities.... [A]nalyzing a retirement plan using such a projection as the central assumption is unwise. We end up with retirees looking at their plans and saying, 'Wow! In thirty years, I'll still have $10,264.32 in my bank account! I'm set.' "

Adding Risk to the Retirement Income Model, Part 2

"[If] you are willing to take more risk of a lower standard of living in late retirement, of not reaching late retirement, or of not encountering many large, unexpected expenses, you can increase your spending in early retirement. Spending won't depend solely on your income and expenses, it will also depend on your risk tolerance."

What Do You Find Most Confusing About Retirement?

"Social Security benefits are confusing, as is the process for identifying optimal claiming ages.... I have trouble finding a good retirement planner.... Figuring out the most tax-efficient way to distribute from IRAs, Roth IRAs, and taxable accounts at the right time is just a few too many variables for me and Excel.... The potential for early retirement.... Continuity of investment and household expense management if I die or become disabled and where to find emotional, decision making, and day-to-day support in very old age, when we're less sharp and mobile."

Retirement Income and Chaos Theory

"Whether or not retirement income systems are chaotic is an important issue because chaotic systems are riskier than stochastic (probabilistic) systems. We tend to study retirement income systems with probabilities. If the systems are chaotic, they're riskier than inferential statistics (probabilities) suggests.... Retirement income studies tend to use probabilities to focus on long-term sustainability of savings as a function of market volatility alone. This approach won't catch many quickly developing expense-related crises, especially since the studies tend to ignore expense uncertainty altogether."

Retirement Advice from a Prussian Military Commander

"Plan updates often require more than having a planner calculate a new safe spending amount annually or rebalance your portfolio. The entire plan needs to be reviewed annually or anytime there is a significant change in your goals, resources or expectations."

Take Your Best Shot at a Retirement Plan

"We can look at retirement income as a portfolio optimization problem in which we try to sustain or improve our desired standard of living. The downside is that we could make it worse. Alternatively, we can view it as a risk management problem and try to minimize our risk of losing our standard of living as we age, at the possible cost of limiting our upside. Of course, nothing says we can't choose a goal in between that better fits our risk tolerance, insuring more or less downside and risking more or less upside."

HITBLITS: Charles Barkley and Saving for Retirement

"Having it and losing it seems to be heavy on the minds of many near-retirees who see record equity prices and who have lived long enough to know that bull markets don't last forever.... For most of us, losing capital after we have 'won the game' would generate a lot more pain than increasing our savings by that same amount would generate happiness. Earlier in our careers, the scenario is reversed."

The 'Future' of Retirement Planning

"if you have planned your retirement with a spreadsheet model, you should take another look, especially if your plan shows a single straight path to doubling (or more) your initial portfolio. It could happen; it just isn't likely and if it does happen it certainly won't be a smooth path. If you're using an online calculator, make sure it incorporates simulation.... But simulations have issues, too, so they're only a starting point."

Unraveling Retirement Strategies: Variable Spending from a Volatile Portfolio

"We have two basic choices in portfolio-drawdown strategies: spend a predictable amount annually and risk depleting our portfolio or spend an unpredictable, possibly painful, amount annually to avoid portfolio depletion.... Regardless of which of these strategies you choose, you will spend the amount you need to spend after retiring.... There are many variable spending strategies."

Katrina, Fukushima and Retirement Risk: When Risks Create Risk

"[R]uin appears to result most often from multiple dependent risks ... such as an illness that results in job loss and large medical bills that, in turn, generate unserviceable credit card debt that ultimately forces the household into bankruptcy.... Not only are risks difficult to quantify but they are even difficult to identify and they are often inter-dependent (not independent)."

Some Retirement Decisions Have Expiration Dates

"Claiming ages for Social Security retirement benefits range under current law from age 62 to age 70. We can delay the decision past age 70 but there is no benefit from doing so ... The expiration dates for this decision are mandated and fixed. In contrast, asset allocation decisions have no expiration date."

Ten Strategies for Using a Reverse Mortgage to Help Fund Retirement

"[S]trategic planning identifies and answers the larger problems first (What do I want to achieve? What do I want to protect? What do I want to leave to my heirs?) and only then considers the best tactics to achieve those objectives (Should I use a reverse mortgage, equities or an annuity?). Once you have identified your strategic goals, some of these [Home Equity Conversion Mortgage (HECM)] strategies might help you achieve them."