Neely Young: "I Spent It All"

I have a friend who rewrote his will to say: “I, being of sound mind and body, bequeath my heirs nothing … I spent it all.”

I remembered my friend’s joke (I think) when I was rereading a column I wrote in 2000 on how to accumulate enough money to retire comfortably.

The idea was to have $90,000 yearly to live on, which included $50,000 from investments plus $40,000 in Social Security payments. It was easy to do back in 2000 because then your investments would average a 10 percent yearly return.

You could draw down four percent of your total retirement each year, and it would last you to your nursing home days with a good bit left to leave your children.

Today a conservative investment will bring you less than one percent. Using the same four percent withdrawal formula and considering that we are living much longer (80 is the new 70), there is a good chance you will outlive your money and not have anything to leave your children.

What to do? Here are a few suggestions from an investment advisor to avoid this retirement trap.

Remember, you should use your own advisor for any questions on this column’s suggestions.

Let’s assume that by age 65 you are ready for retirement and have accumulated $1 million in assets. You can use the following plan and apply to your own situation – plus or minus the one million.

For instance, let’s assume you sold your home and downsized into a smaller dwelling and pocked the $250,000 difference. You and your spouse have $500,000 in savings and IRAs, and your uncle Joe left you $250,000.

You figure you have 20 more years to live before the nursing home or the inevitable. You would like to retire today and have $90,000 yearly after taxes to be able to travel and live comfortably.

Here are two ways to accomplish this goal and keep your assets safe from the wild swings of the stock market. Instead of using the old goal of drawing down four percent and not touching your nest egg, you have to swallow your pride and spend your principal. As soon as possible, you have to buy a long-term care insurance program, so that the last few years in a nursing home will not eat into all your savings.

Your next step is purchase a standard $1- million universal life insurance policy. Place the maximum amount of cash allowed, or $250,000, into the policy, which, at today’s rate, pays four percent yearly, tax-free until you withdraw the amount – which should be 15 years. Both the long-term care and life insurance policies should cost a total of $10,000 yearly, more or less. Your age and health determine the cost, but the policies bring peace of mind.

Next, take the balance of the cash, or $750,000, and purchase AAA-rated government muni-bonds or Treasury bonds or other investments of your choice sold at par or hopefully at a discount.

Each bond is worth $50,000 and designed for you to draw down each year – with maturity dates spread out or laddered over 15 years. With this investment ladder, it doesn’t matter if the bonds go up or down in value as long as they pay the face amount at maturity. If the bonds pay 1.5 percent tax-free income, these investments will take care of inflation over the years.

You could, at the end of the ladder in the last five years, have high-dividend quality stocks instead of bonds. For 15 years, you will receive and draw down each year $90,000 retirement income ($50,000 in bond income plus $40,000 in Social Security).

The bond interest income should pay an additional $2,000 yearly to help adjust for inflation.

If you want to stay out of stocks and bonds, real estate is now a good investment. For $600,000, you could purchase two rental units on the Gulf at discounted prices – compared to seven years ago.

According to my friend Jimmy Boyd, who lives in the Orange Beach, Ala., area, the economy there is now strong, and two rental units would produce $35,000 yearly rental income each. Rental fees, property tax, insurance, utilities and rental management fees will total $11,184.

If you manage the property yourself, you can take depreciation, so you will net $23,816 or close to $50,000 yearly for the two units and be able to visit the beach and have a place to stay for four weeks a year, free. Or you can find similar properties closer to home.

If you begin the bond ladder program at age 65, at the end of 15 years you will be 80 years old and will have spent your cash. (Remember the will, “I spent it all.”) But not to worry, the $250,000 you placed into the whole life insurance policy you purchased 15 years before would be worth around $500,000.

At 80, you might not need $90,000 to live on, but you can start withdrawing another $50,000 yearly from your whole life policy, and on top you still have your Social Security payments.

When you withdraw the cash value amount, you will have to pay income tax, but the tax rate will be much lower. During this period if you worry about health issues, you have your long-term care policy that will pay 80 percent of the cost of home health care or nursing home expenses.

When you do go to the happy hunting grounds, your children will inherent what’s left, after withdrawals, of your million-dollar life insurance policy. So you won’t have spent it all after all!