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Beyond the 80% Rule

Christine Benz

Christine Benz: Hi, I'm Christine Benz for These days a lot of retirees are thinking about calibrating and recalibrating their retirement plans, and it's a challenging time. Here to discuss that issue with us is Mark Miller. Mark is a retirement specialist, and he's also the author of a new book called "The Hard Times Guide to Retirement Security." Mark, thank you for being here.

Mark Miller: Hi, Christine. Thanks for inviting me.

Benz: One thing I really like about your book, Mark, is that it's very holistic. You don't just discuss the investment planning aspect of retirement, but you discuss working longer, health-care costs, the whole gamut of topics. One of your main themes for this book is you need a plan, and it needs to encompass a lot of different things.

One issue you tackle is this issue of income replacement, and a lot of people have been inculcated in this 80 percent rule, that you need to be replacing 80 percent of your current income. You think you should actually take another look at that and maybe not just stick with that 80 percent rule.

Miller: Definitely. An economist that I interviewed recently on this subject referred to this, the rule of thumb "replace 80 percent of your income." He calls that the rule of dumb. I think in a hard times economy, it's appropriate to step back and look at it fresh. By which, I would say what you need to do is start by getting an accurate handle on your current budget. It's a painful exercise for a lot of us because there's a lot of detail, but really get a handle on what you're spending, then think ahead to retirement.

The problem with the 80 percent rule is your expenses could be higher or they could be lower. It depends on what you anticipate. For example, the cost of commuting goes away, or the cost of business clothing goes away.

So some things go away, but then on the other hand, you might want to travel more. Really build as best as you can a budget and get a sense of what you think you're going to need in retirement. That 80 percent rule hasn't served us well. It's also what drives a lot of the online calculators that you can use to do the what-if scenarios. It's not a great way to go.

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Benz: Now another topic that you cover in the book is this topic of debt reduction. I think we both know one of the best things pre-retirees can do for themselves is to start paying down any debt that they have on their books. Why do you think that's so important?

Miller: It's a key thing to do, especially if you're looking at retirement say 5, 10 years away. You still have a lot of time to address this question. So much of our mindset over the last few decades around retirement planning has been around the investing side, and that's important. That's a key component, as we know. But we've not really paid as much attention to debt, which of course is one of the problems that got our economy where it's at. Our credit card debt is a big one. If you're carrying balances, this is a no brainer because of the onerous interest rates and the way that can just build up on you.

The other to think about is mortgage debt. Both of these are things that when you think ahead to retirement, having less debt or no debt is a great way to just reduce expense and improve your monthly cash flow. It's less dollars going to pay interest and more dollars that remain available to you.

So, if possible, get on a plan to get rid of your mortgage. Attack credit card balances first. The mortgage thing surprises a lot of people because we tend to think "Oh well, mortgage rates are so low," and then you get the tax break, which brings the effective rate down.

But the way I think about that is as you get close to retirement, you should have less and less of your money in stocks and more and more in fixed income.

Benz: Higher returning investments, right.

Miller: The age appropriate investment close to retirement is probably a CD or some fixed income.

Benz: Maybe, or some stocks, some bonds, but definitely coming down.

Miller: Absolutely, so some stocks. But you look at that spread between what you're going to earn on a CD, maybe one percent these days, versus an after-tax rate on a mortgage. It might be four percent. It's still a major spread, so you still come off better by getting rid of that debt. Think about it's a great time to refinance a mortgage. Rates are rock bottom right now. Maybe reduce the length of the mortgage. If you can, get from a 30 to a 15, so you're on a path to get rid of the mortgage by the time you retire.

Benz: Especially while you're still working. One other thing you tackle in the book, and I thought it was a great area, is how to find an advisor, and some things to look for, some questions to ask.

Miller: The Boomer generation coming up towards retirement has not done a great job of planning. That's just a fact. Sometimes we're a little penny wise, pound foolish about this, not wanting to spend a little money for some expert advice when that expert advice could serve you so well over a long period of time going forward. It can be appropriate to get a financial planner's help, and the area I advise people to focus there is the area of so called fee-only planning. There are lots of different types of planners who are compensated in a lot of different ways.

Benz: It's confusing.

Miller: It's very confusing. A lot of them are compensated on commission basically, so there's a bias towards products that they need to sell. What I like about the fee-only approach is the independence of that and the neutrality. I think the fee-only planner is more likely to give you the whole look. They're not just focused on investment, but they look at issues like debt, insurance, where you are with your housing, and your overall plan. This is an area people should be thinking about seriously.

Benz: You and I both agree on the other thing, which is that people should ask whether an advisor is a fiduciary, because we think that's an important thing.

Miller: To me this is amazing, that we actually have people out there giving financial advice who don't have a legal obligation to the client. I just can't believe we're still doing that. It's disappointing that it looks like the financial reform bill isn't going to reform that aspect.

Benz: Mark, thanks for the helpful pointers. Obviously a lot of topics covered in your book and a lot of very action-oriented advice. We appreciate you sharing it with us. Thanks.

Miller: Thank you.

Benz: Thanks so much for watching. I'm Christine Benz for