Chapter Two

2. Bypassing the Roadblocks

Begin at the beginning and go on ’til you come to the end; then stop.

—Lewis Carroll

This is not your grandparents’ retirement.

It promises to last far longer. A baby boy born in 1935, the year Social Security was founded, could expect to live sixty years, seven short of the time needed to collect a check. A baby girl was expected to survive until 64.1 Back then, Social Security really did address the “risk” of living a long life.

A baby boy born in 2015 can expect to live until 78. A baby girl is projected to reach 81.2 Today, if a couple both reach 65, one person can expect to live until age 93. There’s a one in four chance that one will live until 97.3

This couple, if both call it quits at 65, needs a plan to generate real, inflation-adjusted income for thirty years!

Longevity is the reality we all face. On balance, this is a good thing, of course, but all silver linings have clouds. I recall my grandfather’s quip, “If I knew I was going to live so long, I would have taken better care of myself.”

The question you must ask: Am I prepared to finance a thirty-year retirement? How much should I “take care of” my finances to make these years financially healthy?

Shockingly, many don’t think they need to take such care. Nearly one in two Americans expects to be retired for fewer than twenty years. Sixteen percent expect to live less than fifteen years after saying goodbye to paid employment.4 A recent survey found that more than half of respondents had no idea how long they’d live. This is the most accurate response.5 It also dives directly to the core of the problem: planning in the face of uncertainty. After you’ve pondered your longevity, ask yourself this: Is the government prepared to finance your retirement for thirty years?

You’ll probably come up with, Well, maybe. Its two main programs for middle-class support are Social Security and Medicare. Each is struggling with its own issues of aging. According to the 2018 Annual Report of the Social Security Trustees:

Cost is projected to exceed projected income throughout the projection period…To illustrate the magnitude of the 75-year actuarial deficit, consider that for the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.78 percentage points to 15.18 percent, (2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of about 17 percent applied to all current and future beneficiaries, or about 21 percent if the reductions were applied only to those who become initially eligible for benefits in 2018 or later; or (3) some combination of these approaches would have to be adopted.6

Bottom line, if no action is taken—and there’s nothing pending—the trustees project a nearly 25 percent reduction in benefits will be required in 2034.

Are you prepared for a 25-percent cut in pay?

You need a plan if Uncle Sam uses any of the strategies available to erode the real value of your Social Security.

When I changed careers from professional writing and advising people on personal finance as a hobby to professional financial advising and writing as a hobby, my mother sent me an editorial cartoon depicting a squirrel couple who’d brought their nuts to a financial advisor. The caption: “If you take a late retirement and an early death, you just may make it.”

Don’t let this be your script.

To avoid this fate, you must understand and avoid the roadblocks that prevent financial success. In fact, you must execute financial jiu jitsu, turning the power of the roadblock into your strength. These roadblocks are:

• Taxes
• Not saving enough
• Inflation
• Taking too much risk
• Not taking enough risk
• Unexpected human problems
• Procrastination
• Failing to plan

Roadblock 1: Taxes

I like to pay taxes. With them I buy civilization.

—Oliver Wendell Holmes Jr.

I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.

—Arthur Godfrey

To state the obvious, you don’t want to overpay for civilization.

Taxes are certainly unavoidable and necessary, they do purchase many great things, and this is not an anti-tax or anti-government screed. This section is merely designed to point out that our tax system is called a “code” for a reason. It does offer us many choices on when and under what conditions we pay our fair share of taxes. If we choose wisely, our fair share may just be a little bit less than if we stayed on automatic pilot.

Ponder this: When would you prefer to pay your taxes: now, later, or never? To help answer this, consider you invest $100,000, earn 7 percent annual return, and face a 27 percent combined marginal income tax rate (22 percent federal plus 5 percent state).

The never-taxed option is of course the best, and it’s no surprise that, like red wine, it gets better the longer one delays. If you are never taxed, after twenty years, the initial investment has nearly quadrupled to $386,968. The person who deferred taxes for later but must settle up after twenty years will have $309,487. If you pay taxes along the way, you will accumulate $270,945.

So, the order is an easy-to-grasp hierarchy. Never is best, followed by later. The last option is pay along the way.

If we change the assumptions, this clarity gets cloudy. The higher the tax rates, the more value in deferring taxes. Yet many people move down brackets at various points in their lives. In these years, pay as you go may be the way to go.

Taxable investment accounts, for example, are currently nearly tax-free for people in the 10- and 12-percent federal tax brackets. The rate on dividends and capital gains is zero. That’s right. Zero! That’s my favorite tax bracket.

Standard advice proffered by gurus is maximize pre-tax accounts prior to using other investments. This is often wrong given today’s tax code, a financial version of the medieval bloodletting to restore a patient strength. Now, as back then, it can kill the patient.

Consider the fate of a college graduate who elects the pre-tax option on his first employer’s retirement plan. Given his starting salary, he defers taxes at less than 15 percent, saving a mere $150 for every $1,000 he invests. Yet when it comes time to withdraw, he pays double the tax on the way out due to his higher income.

One of personal finance’s great ironies is that while we’re working, we love pre-tax retirement plans, as they save us taxes, and we dislike taxable investments, as they generate money for Uncle Sam. Once retired, however, the roles are reversed. Retirement plans generate taxes—and may force us to pay more for our Medicare premiums—while taxable accounts are far more tax friendly.

It’s called the tax “code” for a reason. Taking time to crack the code and apply it to your personal situation can save you thousands of dollars in unnecessary taxes. If you feel guilty for outsmarting the system and not paying enough, you can always send extra to Uncle Sam and your state capitol. I doubt you will, however, as a charity will likely be a better choice.

Roadblock 2: Not Saving Enough, Spending Too Much

It’s easier to spend $2 than it is to save $1.

—Woody Allen

You must break the law to retire comfortably—Parkinson’s Law. Cyril Northcote Parkinson, a British historian, stated “Work expands to fill the time available for its completion.”7 The financial translation: one’s expenses expand to consume all available income.

Break the law! Drive a wedge between income and expenses. In your working years, set a goal to save 10 to 20 percent of your income. You can start low and increase percentage every year at annual increase time. Pay yourself now and later at the same time.

The ease of execution fluctuates with the stages of life.

When we are young and starting out, it is often our easiest time to drive this wedge and create the habit of saving. This is why I love working with young people. After all, bad habits are hard to develop but easy to live with. Good habits are harder to develop, but much easier to live with. Saving and investing a significant portion of income is just such a habit.

I often pull out my financial calculator to show astonished parents that if their just-graduated child invests 10 percent of their $50,000 starting salary for ten years and never invests another dime after a decade, then this alone is enough to provide for the non-Social Security portion of retirement.

Many of us move from lower income but lower obligation...