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Retirement Income Planning 101

A very important and emotional question each retiree and soon to be retiree has is "have I saved enough money to last for my life and the life of those who depend on me?"  Unless one is wealthy beyond all measure, this question is certainly a valid question and one that deserves much attention before we check out of our office or cockpit for the last time.  There are all sorts of calculators available on the web to assist in the discovery of your "magic number" that supposedly insures that you will have enough to last for as long as you need it.  Of course, these calculators depend upon on all types of assumptions that may, or may not, come to past; but they are worthwhile in that they force one to consider just what one may need to meet the financial obligations of their retirement.  They also force one to face their financial situation honestly.  The one site I would recommend for a plethora of financial calculators is  If you cannot find the calculator you need at this site, you probably don't need it.  Seriously, this is an excellent site and will prove helpful for anyone planning their retirement.

A major factor in planning one's eventual retirement is determining how much one will need to spend each year in retirement.  Of course that number is best determined by establishing a retirement budget.  Once that number is determined, and that is certainly not easy, then we have to decide how we will provide for it from the money we have saved for our retirement.  If we can find a way to secure the income we need for a number of years in our retirement, we can enter retirement a bit more relaxed and with a bit less anxiety.  One way to do this is with an annuity, but with an annuity we give up control of the money used to purchase the annuity and gamble that we will live long enough for it to pay off.  We also (with few exceptions) remove that money from our estates, and it will not be available to our heirs.  Thus, I prefer another way.  One way which makes sense to me is to use an "income ladder" or "bond ladder" that will generate the amount of money each year that we need.  A bond ladder is simply a group of bonds with a ladder of maturities, or bonds that mature at different times; i. e.,a bond ladder could extend from one to ten years with a bond maturing every year.  US government "strip" bonds work very well for this arrangement.  A strip, or zero coupon bond, is a bond that has the periodic interest payment stripped out, thus they sell at a discount to face value.  It will always pay full face value when it matures however, and as a US government bond, nothing is more secure (or so say the Chinese, as they hold about a gazillion dollars worth of US Treasury bonds).  Their maturities can vary from one month to as long as fifty years.  Their price will vary, depending on the length of their maturity and current interest rates.  These bonds work best when held in a tax sheltered account like an IRA or 401k since taxes are due on "imputed interest" each year if held in a taxable account.  If held in a tax sheltered account, no tax is due until the money is actually taken out of the account to be spent.

Suppose one wants to insure that they will have $20,000 each year for the first ten years of their retirement to add to their pension or Social Security payments beginning in 2013.  The bond ladder could well look like the one I have constructed below using Vanguard"s web site.  Note that I have increased the payment as the bond ladder extends into the future to account for inflation.

Issue Coupon Maturity Price Comm Yield Accrued
Principal Net Money
Delete T Strip Int Pmt 0 08/15/2023 58.361 $40.00 4.093 $0 $20,426.35 $20,466.35
Delete T Strip Int Pmt 0 08/15/2022 61.399 $40.00 4.008 $0 $20,261.67 $20,301.67
Delete T Strip Int Pmt 0 08/15/2021 64.496 $40.00 3.921 $0 $20,638.72 $20,678.72
Delete T Strip Int Pmt 0 08/15/2020 68.582 $40.00 3.697 $0 $21,260.42 $21,300.42
Delete T Strip Int Pmt 0 08/15/2019 72.235 $40.00 3.530 $0 $21,670.50 $21,710.50
Delete T Strip Int Pmt 0 08/15/2018 76.794 $40.00 3.207 $0 $22,270.26 $22,310.26
Delete T Strip Int Pmt 0 08/15/2017 80.450 $40.00 3.000 $0 $21,721.50 $21,761.50
Delete T Strip Prin Pmt 0 08/15/2017 80.945 $40.00 2.913 $0 $21,045.70 $21,085.70
Delete T Strip Int Pmt 0 08/15/2016 84.479 $40.00 2.689 $0 $21,119.75 $21,159.75
Delete T Strip Int Pmt 0 08/15/2015 88.774 $40.00 2.246 $0 $20,418.02 $20,458.02
Delete T Strip Int Pmt 0 08/15/2014 92.612 $40.00 1.768 $0 $19,448.52 $19,488.52
Delete T Strip Int Pmt 0 08/15/2013 95.823 $40.00 1.255 $0 $19,164.60 $19,204.60
Weighted Averages and Totals 0. 8.66 yr 75.134 $480.00 3.170 $0 $249,446.01 $249,926.01


The "20," "21," "23," . . . . and so on until  "35" on August 15, 2013 refer to thousands and is the maturity value of the bond as it matures each year on August 15, beginning in 2013 and extending through 2023.  The last column of the ladder which  showed the purchase price of each individual bond did not transfer with my "cut and paste, but the price of the $20,000 bond with a maturity in 2013 was priced at $19,204.60, while the bond maturing in 2023, with a face value of $35,000 was priced at $20,466.35.  The other bonds were generally priced within a few thousand dollars of  those two.  The column ending with $480.00 was the total commission needed for the entire ladder.  The entire ladder, if purchased today, would require an investment of $249,926.01, which includes commission of $40/bond.  With that investment, one could insure an income, over those years, of $332,000.00.  During times of economic turmoil, such as 2008 and early 2009, when investors made a "flight to safety," government bonds actually appreciated about 20%.  They were one of the very few investments to actually appreciate during those tumultuous times, so they also have an added advantage in that they can act as a hedge against deflation.  A bond ladder like this would allow a retiree to leave the rest of his nest egg to grow in equities, or other investments, for the period that he is drawing from his bond ladder, assuming that his spending needs are met otherwise.  I found this concept intriguing, and I suspect I will have another close look at bond ladders at some point.  I hope this gives you something to think about as well.


Fly/Drive Safely

18 May, 2010







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    Retirementflightplans - Journal - Retirement Income Planning 101

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