Updated November 21, 1998
We did it -- we retired, sold our condominium, and have gone to full-time living and traveling around the country in an RV. All our assets are in our rig or in our financial and retirement accounts. It took some soul searching, but we decided that for us it was the best thing to do, and it was time to do it.
I cannot offer financial advice, but I can tell you of our logic in planning for retirement and why we have decided to retire to full-timing in an RV as our new way of life. But remember, what works for us may not work for you; do your own planning.
Let's assume you are planning to retire and go full-time on the road. The first thing to do is to pick the time when you want to retire so you can get ready. You probably will want to compare several scenarios to see what the financials look like for retiring at various ages.
I retired just after I turned 61. I had planned on retiring a year earlier, but the company I worked for put the arm twist on me, and I stayed to help (and get the stock price back up where it belonged). My Type-A lifestyle and a small heart attack convinced me I should not wait any longer, so in October I gave notice of my intention to retire the beginning of April, 1998.
There are three key factors to be considered in making the decision of when to retire.
For me the key factor was health insurance. I had a pre-existing heart condition that required health insurance coverage or it could lead to emptying my retirement nest egg. With the current state of the US health care industry, purchasing new insurance that covers pre-existing conditions is like winning the lottery. You must be a member of an insurance group, such as that of your employer, for such coverage. Medicare covers pre-existing conditions, but it is not available until you are 65 years of age. Some companies extend their health coverage to their retirees, which is great. Those with military service have extended benefits, but those without some kind of benefit extensions are left high and dry.
Luckily for those of us not covered by the military or a large company retirement program, the US Government now requires that companies offer to provide COBRA and Super-COBRA benefits for their departing employees. COBRA says that employees who are terminated or retire from a company can receive up to eighteen months of the company's insurance coverage, provided the employee pays the monthly cost of such coverage. Super-COBRA provides that persons who retire after the age of 60 may receive COBRA benefits until they reach the age of 65 and become eligible for Medicare. However, the monthly premium the former employee must pay goes to 150% after eighteen months and to 200% after thirty-six months. It is costly, but at least you can guarantee coverage if you pay the premiums on time.
If you and your spouse are 65 or older, you have access to the Medicare plan. You will still need some kind of supplemental coverage. Since I am still a comparative youngster, I will not discuss Medicare in detail.
The second factor is your desired lifestyle in retirement. Alice and I both enjoy RVing, and doing it full-time does not bother us, in fact we look forward to it. We do not require a home base to keep our "stuff", nor must we be near our grandkids, other family, or friends all of the time (in fact they are scattered over the US). Full-time RVing is our preferred lifestyle. This is not true of lots of folks; they try to do RVing, but they are not happy unless they have a home to go to. It is a personal choice, and it can change over time.
Another aspect of lifestyle is how richly you live as a retiree. There are some with huge nest eggs who leave their $375,000 motor coach each day to go play a round of golf at a world class golf course and eat at gourmet restaurants. They tow a Mercedes. There are those like Alice and me with moderate nest eggs who use our Golden Eagle to visit National Parks, and who visit and play games with neighbors in the family lodge. We treat ourselves to a dinner out a couple of times a week or so, but mostly we prepare our own meals and eat in. Then there are those with small nest eggs who simply enjoy life around the campground and live frugally but contentedly with their lifestyle, working as they travel and watching their costs very closely. All sorts of lifestyles are found on the road.
We have met people covering the full range of lifestyles in our travels, and interestingly they all get along together and enjoy each other's company. Your lifestyle and how fast you want to spend your nest egg depends upon you, and on the road most everyone lets you do your own thing. They only expect courtesy, good neighbors, and a wave as you drive by.
The third factor was how long the nest egg will last. Well, that depends upon how big it is to begin with and how fast you spend it. Interestingly enough, the limiting point becomes when you expect to die.
One of the most fearful questions most retirees have (or at some point will have) is, "will my spouse and I die before our money runs out?" There is a fear of living beyond the time your finances can support you. Life expectancy tables can tell you the "average length of time" a person of your specific age will live, but there is no guarantee you will live that long or even die that soon. If you reach that average age still kicking, you will find the statisticians have tacked on several more years of life expectancy.
We are all faced with a good bit of uncertainty. What to do? Alice and I are taking my Dad's advice and "plan to finish spending it all the day we die." We have a financial model (spreadsheet) that we use to project how fast the nest egg disappears depending upon its size, its earning power, our expected retired earnings, and our rate of spending. If the model shows that we have enough to last for our expected lifetime, we believe we have enough to retire.
The life expectancies for Alice and me at this point is around 25 years. At the present time our financial model indicates we have enough of a nest egg to last that long. As time goes on during retirement, we will continue to test our financial model and make adjustments as needed. If our projected financials show funds are lasting longer than that, we can increase our spending rate; if they do not appear to last long enough, we can cut back on expenses and/or augment our income with part-time work. That is the best way I can suggest to have something left when you die.
There is one important rule to remember: the earlier you retire, the bigger your nest egg must be if it is to last your lifetime at a given style of living. The thing to do is go figure.
I will show you the model we use a little later, but to get started you must first estimate what your net assets will be when you retire. If you are already retired, determine what it is now. Your nest egg includes:
The total of these, less the cost of starting retirement (you have to buy a rig sometime) as well as any outstanding liabilities (like a mortgage on that summer cottage or the RV rig), is the amount on which you must base your financial future for the rest of your life (unless you expect to win the lottery or come into a big inheritance).
In our case, we completed our purchase of the truck and trailer before retirement and have no current mortgages or other long-term debts. We are planning on spending everything we have (sorry, kids) and only play the lottery if it is over $100 million. Our nest egg is now in IRAs, 401ks, savings accounts, and stocks. With our current lifestyle, it should last until we are in our mid-eighties. We may need to cut back on our current lifestyle sometime in the future to stretch it out a bit.
You can plan to supplement the income and withdrawals from your nest egg with Social Security (both you and spouse), from any retirement annuity you will receive, and possibly from part-time work after retirement.
You will probably be faced with paying income taxes on some of the income you receive and spend. Withdrawals from tax deferred accounts, dividends and interest, and earned income above a certain amount are taxed by the Federal government, and depending upon your domicile, maybe the State government of your choice.
You should check with the Social Security Administration to determine what you can expect as income for you and your spouse at the date you expect to start taking it out.
Alice and I had been planning to start taking Social Security at age 62, rather than waiting until later. We had been told that even though the benefits would be higher if we waited, it would be over eight years before we would make up what we would be losing if we waited until we were 65 to start. There was simply too much uncertainty in retired life to wait that long.
Then we checked into the penalties for starting Social Security before age 65 and found that they could be substantial. Most importantly, capital gains count against you if you are less than 65. We decided that we should complete the sale of all the founder stock we had and get the money into conservative investments before considering taking Social Security.
At this point we do not need to work to supplement the nest egg, but we might find it a fun thing to do for a couple of years. We are looking into working in National Parks during a season, or being a campground host for a while. Of course, I am also writing a book -- maybe it will sell!!
We did a detailed listing of our expected expenditures to estimate our monthly cash flow and cost of living. We are now using that list as the basis for our budgeting and day to day accounting.
Our current average out-of-pocket expenses, apart from big time purchases, are projected to be $2,800 per month. This is high for some, low for others.
The detailed breakdown for each category is shown at Expense Detail.
Not included in these expenses are taxes or any big-time expenses like upgrading or replacing a rig. You need to anticipate these in your estimates.
I suggest you develop some form of Retirement Nest Egg Model that can be used to project what your Nest Egg will do in the years after retirement. You may find my Nest Egg Model of interest. It is done with a spreadsheet program (Excel in my case), and I can use it to record historical data as well as ask "what if?" questions.
The idea of the model is to project into the future the size of the Nest Egg. If it is invested, there will be some appreciation in capital growth or accumulated earnings. Over time you will have to take funds from it to pay for living expenses or to make big time outlays, like a new rig or a gift to a grandchild.
Of special interest is the date at which the projected Nest Egg reaches zero. How old will you be on that date? Is that long enough away for you to risk quiting work and going into retirement? Can you change the model by working longer to build a larger Nest Egg? What happens if you work part-time and have some earned income during retirement? Can you reduce the level of your living expenses enough to make a significant difference? Can you delay the purchase of a new rig for a few more years?
On the other hand, is the Nest Egg large enough that it keeps growing faster than you can spend it? Should you plan on moving into a more luxurious rig? Should you plan for some cruises during the years? Should you increase your cost of living by eating out and playing golf more often? Should you be putting your Nest Egg into a trust to protect your heirs from large estate taxes when you and your spouse pass away.
The idea is to play with the model, building in different assumptions to see what might happen as you take different options starting and during retirement.
A word of caution. The Nest Egg Model does not tell you what will actually happen. It only projects the value of your Nest Egg if everything remains as you said it would. It does not tell you anything about the risks involved. Interest rates may go up and your investments may be worth more. Inflation may rise, and the value of your investments may plummet. You or your spouse may suffer major health problems, causing a large drain on your resources and changing your lifestyle dramatically. You may win the lottery. Think of the model as only a tool. It is not fact nor is it a true prophet. Take whatever it says with a big grain of salt. But by using it you can have a better picture of your trends.
This is a big question for someone contemplating retirement: do you sell your home, leave your kids and grandkids and friends, dispose of (or store) all your "stuff," and become one of the "semi-affluent homeless" people who wander, lost, around the country, unable to explain to people where you really come from. Or do you keep your old house so it is always there to come back to.
We gave up our home base. In fact, we don't even have things in storage. We sold or gave away most all of our "stuff" including a major collection of thirty pieces of original fine art. Every physical thing we own is now in our truck and trailer. We still have the same old family and friends, but now we drop by to visit with them from time to time (yearly, maybe).
We are a couple who has the personality to do this, but not everyone is like us. We have met enough people on the road to know not everyone can do this. Sometimes it tears their guts out to not have a place "to go home to." They require a grandkid fix every week or so. They find some excuse why they cannot continue. There is nothing wrong with them, they just require a fixed home. We met one couple a few weeks ago who after a couple of years on the road were selling their rig and buying a home in Bend, OR. The husband was adament about it; he had to have a place to stay. The wife was crying; she loved the travel. Be careful, this question can break a marriage.
However, there is a downside to having a home base and traveling: it can almost double your living expenses. The home you leave to travel still is an expense. You may still be paying on the mortgage, and the equity in the house is not earning interest. (I do not suggest you depend on the appreciation in value in your house; it may go up, but it may also go down.) There will be utilities, taxes, gardner, general upkeep, and insurance, and you will probably leave a car there to use when you come back by to use the house from time to time.
Even if you rent it out (in which case it is no longer your home, but someone else's) it will still cost. You might break even, but I doubt you can become rich from renting out your residential house.
One way to find out if you are suited for the RV lifestyle is to try it for some time. If traveling in an RV works for you, keep doing it, but if it doesn't, go home. It is a personal choice you must make alone.
So, those are some of the factors to consider when deciding when and how to retire, as well as some ideas for how to consider them. Hope they are useful. And for those of you who are already retired, keep in mind that you should be continuing to plan on how to stay in retirement and to live the most satisfying life you can.
Retirement: You earned it, you deserve it, but if you don't plan for it, you may lose it.
In the meantime, here are some useful links to retirement information you might want to check out.