(Or, How to live with your buddy IRA)

Editors Note: WordPress formatting is not for the faint of heart. So, I have also downloaded my original file into a few PDF files that you may download here:

Now that I’ve retired, I noticed that every commercial about retirement planning seems to start with a couple on a sailboat. They’re sailing in calm winds, wearing white pants and drinking Chardonnay. Apparently, that’s what I’m supposed to be doing.

But ask yourself this:  How often do you really want to wear white pants?  Do you even own white pants? If not, go get them, NOW, so that you can retire properly, or risk ridicule from all of your retired friends.

What I found is that I’m now the CFO of LarryLand enterprises (my wife is the CEO, as she will tell you). For all my years as an actuary, I’m not sure that I expected this completely (heck, I had the pants, didn’t that count?) 

This means managing the money. Not the investments – Investment Advisors can manage your assets; You must manage your money. What you have and what you need.

So, I had to go back and rethink the plan. And this is what I came up with. This is not advice. It will sound like advice but if you believe me in anything I write you are giving me waaayyyy too much credit.  What I have is an “Idea” for a framework to manage my finances in retirement. That and a LOT of generalizations.  Always dangerous, as my wife will confirm. I thought I should write this up and share it with a few of you to see if it has any merit.

What’s the Idea?

For retirement stuff, there is a LOT of investment material, a fair amount of material on your ‘lifestyle’, but really nothing to connect the two of them together.

I retired early, and I did my homework.  My thought is that you need a rule of thumb way of managing your money in retirement. I settled on this system:

1. “Understanding my Standard of Living”:  Setting up a good budget and splitting out those “Fixed” costs (pensions, loan payments, etc.) from those “Flexible” costs (interest income, clothing, vacations). As part of this, listing out what my savings amounts were and where they were invested (a LOT in IRA)
2. “Doing Some Math”:  Occupational hazard aside, I came up with 6 basic formulas to measure the Income Needed, What I needed to Earn, and What my Risk Tolerance is.
3. “Case Study“:  Based on those numbers, you can analyze where you are on the spectrum (3 “Cases”) of savings to spending.
4. “Planning for Tomorrow”:  This is the advanced (meaning optional) stuff – projecting these numbers forward to make sure that you don’t run out of money.  I found that this can happen pretty quickly.

In terms of the cases, you can think of these as 3 groups of people:

Case 1:  Fixed Income Case (Your Parents):  Your parents got regular pensions which paid for their standard of living. All savings were a rainy-day fund.

Case 2: “Some of Both” (Us):  We have some pensions that can cover some of our costs, and have some IRA money (401(k), 457, etc.)

Case 3: “Living on Savings” (our kids):  Pensions are a thing of the past; they are going to rely on their savings to retire.

Why Write This Paper

In social circles, we talk a lot about our retirement worries with our friends, neighbors, store clerks and various large flightless birds. Everyone that I know has some idea about what they have and what they spend.  BUT, for lack of a way to quantify it, I find that folks fall somewhere in this spectrum:

Retire without enough savings:  Your buddy IRA is a millionaire, and it seems like enough to retire on. Is it? No one wants to go back to working or having to cut their standard of living.

Work too long:  You never think you have enough, and work too long and spend too little in your retirement.

Both of these are really flip sides of the same thing – the fear that you’ll outlive your money. Being in one or the other really is how you react to this fear.

A bit of honesty may help:  I needed to retire.  But I also was retiring very early. I did not know where I was on the spectrum of retirement safety – I was somewhere in between. I did some homework, decided to retire, and then inflation hit 8% and the market crashed 20%. I figured out this method in the process. Things should be all right.

Along the way, I thought about my friends, family and all those conversations that we’ve had. I decided to put this out in case it might help you get comfortable that things will be all right.

We all have a secret dream for retirement. That one thing you want to do – ride on Bezo’s spaceship, go to exotic locations like Perris, California, eat breakfast, or, for purposes of this article, own an ostrich farm. Get ready, you’re about to “buy the farm” – there will be a lot of bad ostrich jokes…..

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