Sometimes when it comes to financial advice, you don’t want a lot of fluff. You just want someone to tell you like it is – straight and to the point. Not a whole bunch of “maybe this, maybe that”. That aspect is what I loved about the Smartest Retirement Book You’ll Ever Read by Daniel R. Solin – definitive and conscience advice!
So far I’ve already written two separate posts highlighting pieces of advice in this book. But there’s actually a lot more to it. Solin has JAMMED PACKED this book full of useful knowledge. The information it contains could be appreciated by both newbies as well as intermediate/advanced investors. Here’s some of the more important tidbits you can take away from The Smartest Retirement Book:
Asset Allocation Models:
If you think you need to be a wizard at picking out stocks to have a successful retirement, think again. Early on in The Smartest Retirement Book, Solin tells you to not even bother with individual stocks (p.14). His advice: Construct a simple investment portfolio using these great low cost Vanguard funds (p. 16):
- Total Stock Market Index Fund (VTSMX)
- Total International Stock Index Fund (VGTSX)
- Total Bond Market Index Fund (VBMFX)
Read more about this strategy in my post: Asset Allocation Models from Author Daniel Solin
Retirement Income Planning Using an Appropriate Withdrawal Rate:
One of the cruelest ironies of saving for retirement is blowing it all too quickly by taking too much out early on. Should you take out 4 percent each year, or could you possibly take out more and still be safe?
Solin dives deep into the 4 percent rule for retirement withdrawal rate. He starts out by commenting on the traditional route – starting with a 4.15% withdrawal and then increasing this each year to compensate for inflation (p.79). If you have 60 to 65% stocks, you might be able to make this work for the next 30 years.
But another spin on the 4 percent rule comes from investment advisor Michael Kitces. By examining the ten-year average P/E ratio of the market, you may be able to predict with some confidence what the market will do over the next 15 years. Depending on how we think the market will perform could mean being “safe” with a rate as high as 5.5 percent (p. 81-83). Read more about this strategy in my post: Retirement Income Planning with Author Daniel Solin
One final variation on the 4 percent rule comes from William Bengen. Bengen devised a floor-to-ceiling strategy in which withdrawals were dictated by whether we are in a bull market (higher withdrawals allowed) or bear market (lower withdrawals recommended). This strategy had a 91% of 30 year success given a portfolio of 63% large-cap stocks and 37% intermediate-term bonds (p. 84-85).
Drain Your Accounts by the Order of Tax Consequence:
This is one piece of information I may return to for a separate post all its own. Along the same lines of knowing the consequences of the withdrawal rate you choose, it’s also extremely important to know what the tax consequences are for each of your retirement funds.
The Smartest Retirement Book suggests one strategy for stretching your money is to drain your accounts in the following order (p. 90-91):
1) Post-tax accounts (where you can pay lower taxes on the withdrawals)
2) Deferred retirement accounts like a traditional IRA’s, 401k’s, etc (because the money will grow greater tax free)
3) Roth IRA (where the money grows tax free and you pay nothing on the withdrawals)
More Great Advice:
As if that’s not enough, here are some more tips that Solin offers in the Smartest Retirement Book:
• Have a 2-year cash cushion to give yourself the courage to invest in stocks and beat inflation (p. 9).
• Index funds receive superior returns due to low cost, better diversification, tax advantages, and the nature of their low cash holdings (p. 22-23).
• You can ignore ETF’s because they are not as good as your low cost index funds (p. 28)
• If you want to invest in bonds, just buy a low cost index fund (p. 36). You can ignore treasury inflated securities (TIPS) because of lower returns, higher volatility, and the risk of deflation (p. 40).
• If you’re looking into annuities, go with immediate annuities (p. 60) or try a charitable gift annuity (one issued from a noble non-profit agency) (p. 63).
• Variable annuities are a bad idea because of the long-term commitments, big fees, and the taxes that either you or your heirs will have to pay (p. 65-66). Equity-indexed annuities are also bad news (p. 70).
• For most employees, rolling over their 401k into an IRA is the best move because of lower fees and better choices (p. 97).
• If you are a high income earner, converting from a traditional IRA to a Roth IRA may be a good way to avoid having to take minimum withdrawals and leave tax-free money to their heirs (p. 99)
• Don’t get punished with a “reverse hold-up”. When the government says it’s time to start taking minimum required distributions (MRD’s), you had better start or the penalties will be significant (p. 101-104)!
• If you can do it, wait until age 67 to start taking your maximum social security (p.110). Not only will it be better for you, but it will also leave more money for your spouse after you pass away (p. 114).
• If you’re lucky enough to get a pension, elect to take the monthly payments over cashing it in for one lump sum (p. 121).
• Reverse mortgages are generally bad and should only be used as a last resort (p. 145).
• If you retire before you will qualify for Medicare, you might have some costly options to consider (p. 158).
• A shorter long-term care policy with bigger benefits is usually your best bet for care when you’re older (p. 166).
• You need a will before you die (p. 174). Also, you need to have your estate in order to help your loved ones avoid probate court (p. 178). To really leave your loved ones something special, designate a Roth IRA to them (p. 181).
• Don’t be impressed with so-called phony retirement specialists (p. 192) or free seminars (p. 195). The motive is usually to sell you something and make a commission; not actually help you. To avoid a Bernie Madoff type of scandal, chose someone who uses a reputable independent custodian of the money (like Fidelity or Charles Schwab) and tries not to out-perform the market (p. 198).