Manage Your Own Money

By Daniel J. Clemons

Racing Toward Retirement – Table of Contents

Sadly, only 18 people out of 100 at age 65 are able to retire and live off their pension and Social Security benefits.  Of the 18, two will be financially independent.  Sixteen per one hundred will not live to age 65.  Sixty-six people will continue to work, live with their children or be supported by their children, room with friends, or be supported by welfare or other social programs.


When the daily grind ends, retirement begins.  We work most of all our lives for the opportunity to do what we want to do.  Financial independence allows the retiree to focus on life’s pleasures of travel, engage in hobbies, and be active within the community.  Retirement for the baby boomer is not about bingo and ice cream socials.  Baby boomers like my good friend Bill Porter has a big budget for bait.  Bill finds his fun fishing off the Florida Keys in his Blue Bayou.  Only economic freedom will allow us baby boomers to find their fun sailing blue waters or flying blue skies.  If I’m not flying in my Cessna 172, I’m thinking about going flying.  My head is in the clouds most, if not all, the time.  I rode my airport bicycle over to my good friend Gary Houston’s hanger today.  He just couldn’t wait to show me his new Garmin Transponder that squawks a number and altitude on an aircraft controller’s radar.  Anxious to try it out, we hopped in his beautiful Lark Commander and disappeared for two hours.  Our fellow Musketeer Salvador Corona is always reminding us that “we are all 62-year teenagers.”


How much money will you need to retire?  That is very easy to figure, so get your calculator out.  When we are working our income funds our monthly budget.  Retirement income from all sources needs to be large enough to fund our budget when income from our employment ends.  So let’s say we have a monthly budget of $4,500 or $54,000 annually.  Divide $54,000 by .065 to find out that you will need $830,769.23.  This amount will need to earn a portfolio rate of return of 6.5% interest to yield $54,000 each year to cover an annual budget.  If plenty of golf is your game, make sure you have that covered in your retirement budget as well.


If you want to impress your friends and family ask them what their monthly budget is.  Multiply the number times 12 to get the annual budget.  Divide the number by an interest factor of .065 and press equal.  That is all there is to find how much you’ll need for retirement.  You can of course subtract any fixed pensions or Social Security before making the calculation.  For example, if your Social Insecurity statement says you can expect to collect $1,600 a month at 62 then a calculation would go like this.  Annual budget, minus annual Social Security, divided by .065 to get to the additional amount needed to fund your budget.  So, how do you know when you can retire?  You can retire when all your income sources are equal to your budget. 


Now you know why doing a budget is so doggone important.  Budgets and Retirement go hand-in-hand.  Other items to include in your retirement budget are reserves to purchase big-ticket items like your next car.  Be sure and include a generous amount for travel, hobbies, and all the fun things you plan to do. 


Last but not least, leave plenty of room in your budget for medical care because if you don’t wear glasses now, you soon will.  Get as many crowns installed while you have dental insurance to pay for it.  Why do I use a conservative 6.5% distribution rate?  I want some room for years in which your portfolio returns are less than 6.5%.  If your returns are greater than 6.5% then you will have room in your budget to cover increases in the cost of living.  If you wanted to be really conservative, use 5.5%.


I never advised clients to use distribution rates higher than 7%.  Retirement is all about accumulating enough money to pay for the things we need.  If the distributions rate is too high we face the danger of running out of money before we run out of birthdays.  Some of my retired clients were asking for their investment accounts to earn double digit rates of return to fund their budget.  I sent them letter after letter, year after year, informing them when they would run out of money to fund their budget.  One of my clients started retirement with a million dollars.  His budget was about $125,000 a year, which translates into a distribution rate of 12.5%!  I could never get him to adjust that down.  He ended up going back to work at age 72.  The Social Security Administration is quick to point out that Social Security pays for 40% of retiree’s budgets.  You will have to come up with the rest.


Does our Asset Allocation change after we are retired?  I say yes.  If you are a growth investor before you retire, I think you should become more conservative in your retirement.  I like balanced accounts best with 40% to 50% invested in yield from fixed interest investments such as bonds and real estate investment trusts and 50% to 60% invested in growth mutual funds.


It was rare to find a client with half their money in the market and the other half in bonds.  Unless you are a widow, financial advisors are reluctant to talk about bonds because money stays in bonds for long periods without generating a new commission.  The problem with having too much money in a tax-qualified account is that it gives you few choices when it comes to tax planning.  You could live off principal for short periods in order to defer taxes into the next year if your capital is positioned properly.  Plus, when you pay cash for a new car, taxes are added to the price of the car.  A withdrawal of about 130% is needed to pay for the car and the taxes on the money that purchased the car.


Do I prefer the traditional IRA or do I prefer the Roth IRA?  I am so glad you asked.  I prefer the Roth IRA because tax savings from traditional IRAs end up being spent.  For a person in a 25% tax bracket, a $3,000 traditional IRA contribution means your tax refund, assuming you get one, will increase by $750.  It vanishes into thin air never to be seen again.  We are all guilty of spending the tax savings provided by traditional IRA deductions.


A Retiree’s Worst Nightmare


One of the biggest mistakes retirees make is relying solely on the stock market for all their monthly income.  In years when the stock market produces no return at all, retired investors are forced to live on principle alone.  Retirees interested in an abundant and steady income have to deal with financial advisors who sometimes sell investments that don’t produce any income at all.  Couple that with bad investment decisions and their unwillingness to adjust your exposure to equities in a down market and you have a recipe for Financial Failure.


Selling shares for monthly income is the opposite of Dollar Cost Averaging.  You sell more shares when the market is down and fewer shares when the market is up.  Your average share cost is higher than the price of the average share sold.


The workaround for this problem is to use the Predictor to sell enough shares at market peaks that can provide monthly income over the nest 6 months to 9 months.  In addition to that, I would like to suggest using a balanced asset allocation that would put 40 to 50% of assets in bonds to provide a steady income uncorrelated to the stock market.  It is unlikely that today’s new retirees will have guaranteed monthly pension from their last employer.  More than likely retirees will be transferring assets out of a 401k plan to an IRA account upon retirement.  If the retiree were unable to manage a portfolio of bonds then an immediate annuity would be the best choice.  I saw many of my retired clients make this mistake.  All felt that it was easier to adjust their retirement income than to adjust their budget.  Selling shares in a bear market for income is not a good idea.  The best use of mutual funds in retirement is to provide income and a hedge against erosion of principle due to inflation.  A retiree’s worst enemy is inflation.


 Table of Contents


Forward – by Daniel J. Clemons


Chapter 1 – Fighting Financial Failure


     ·       A 10% Path to Prosperity


Chapter 2 – Balanced Budgets Build Wealth


     ·       An Easy to Use Budget Sheet

     ·       A Smarter Home Mortgage – A Path to Prosperity


Chapter 3 – February’s Balance Sheet


     ·       Jay Leno’s Personal Path to Prosperity


Chapter 4 – Getting Long The Market


Chapter 5 – Introducing a New Technology to Manage Money


     ·       The Magic Inside Microsoft Money


Chapter 6 – Picking Portfolios with Promise


Chapter 7 – Finding Funds at


     ·       My Favorite Mutual Fund Screen

     ·       The 50 By 40 Path to Prosperity


Chapter 8 – Portfolio Construction Explained


Chapter 9 – How Asset Allocation Works


     ·       Mutual Fund Choices Within Each Objective

     ·       Help for the First Time Investor

     ·       Dollar Cost Averaging

     ·       How to Figure a Portfolio Rate of Return


Chapter 10 – Trouble with Technical Analysis


·       Something Very Important to Know


Chapter 11 – The Mighty Commodity Channel Index


Chapter 12 – The Predictor


·       Weekly Chart of the S&P 500

·       The Bullish Percent Index

·       Would the Predictor Have Worked in 2005?

·       Taking a Look at The Big Picture

·       A Chart That Produces Less Trades

·       Another Power Packed Indicator with Punch

·       Now Try Your Hand at The Predictor

·       How to Create The Predictor on Your Computer


 Chapter 13 – Bonding With Bonds


·       Gaining an Interest in Bonds

·       Searching for Bonds Made Easy

·       Do Bond Ratings Really Matter

·       Buying the Best Bonds

·       Building a Bond Ladder

·       Determining the Direction of Interest Rates

·       Fanning the Flames of Fear

·       Managing Your Risks

·       A Short Conversation on Taxes


Chapter 14 – Racing Toward Retirement


·       A Retiree’s Worst Nightmare

·       Are Retirement Annuities a Good Idea?


Chapter 15 – Ways to Save on Insurance


·       Auto and Homeowners

·       Life Insurance


Chapter 16 – Creating Your Estate Plan


·       Will a Will Work

·       When You Need a Will There is a Way


Chapter 17 – Designing a Trust to Last


·       College Incentives

·       Wedding Provisions

·       A New Home Purchase

·       Ways to Pay Principal From a Trust



Chapter 18 – How Trusts Work


·       Are Trusts Easy to Manage

·       The Cost of a Trust

·       Who Selects the Successor Trustee

·       Trust Design – Are Attorney’s Savvy

·       Do Banks Know Enough About Trusts

·       Reviewing Your Trust

·       Basic Estate Planning Documents


Chapter 19 – Miscellaneous Thoughts About Money


·       Stop Loss Orders

·       Story Stocks and Rumors

·       Investment Time Horizon

·       Limited Partnerships

·       Manage Your Own Money “To Do” List

·       My Favorite Money Websites

·       Financial Fun Quiz

·       In Summary

·       Acknowledgements


Inside Back Cover by Marlo Zeller



Manage Your Own Money


 A nuts and bolts guide for

             the do-it-yourself investor

                      and investment professionals


By Daniel J. Clemons



© 2008 Daniel J. Clemons


  all rights reserved




















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