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Baby Boomers: Promote world peace and friendship and improve your financial situation while you’re at it!

Here is a crazy but surprisingly sound financial planning idea.  Spend the first three years of your retirement as a Peace Corps Volunteer.  Serve your country, assist the people of a developing country, and improve your financial position by $100,000 or more.

Most retirement planning strategies focus on how you can save more for retirement.  You are saving that money to cover your living expenses during your retirement years.  What if instead you could bring your living expenses to zero during the first three years of “retirement”?   Not SPENDING $100,000 in your first three years of retirement has the same impact as SAVING an additional $100,000.   And we all know that saving an additional $100,000 is very hard to do.

Let’s say you have savings, or a pension that will generate $35,000 / year in addition to your social security income to support your retirement life style.  You and your spouse are healthy 63 year olds and you are ready to leave your jobs but you are not sure that you have quite enough socked away.  You would feel a lot better about things if only you had an extra $100,000 in savings. 

Instead of waiting until you have saved that amount of money, what if you put yourself in a situation where you did not need to spend that $100,000?  What if you could arrange your affairs so that your spending needs for your first three years of retirement were zero?  How can you do that? 

Become a Peace Corps volunteer.

Let me be clear.  You should not join the Peace Corps for financial reasons.  You should join the Peace Corps if you want to serve your country and the people of a developing nation.  As their tag line says, “it is the toughest job you will ever love”.  But if these goals appeal to you, and you are reasonably healthy and have some useful job skills, they would love to have you.

As a Peace Corps Volunteer you get free housing and comprehensive free medical insurance.  You get a stipend that covers living expenses at the local level in your host country.   You can serve with your spouse.  It is a two-year commitment, but if you have been a high performing volunteer you will be eligible to extend for a third year. You can live modestly by local standards without spending a penny of your own money.

On the home front, you have sold your car (no car insurance, no car payment), you have rented out your house, (covers your mortgage if you have one), and you have no oil bill.  The rental income from your house will cover the cost of storing your furniture.  You have no bills.  Your expenses are zero.  That $35,000 / year you were going to spend to support your retirement stays in your account.  Over three years this grows to another $105,000 in savings.  You also have deferred taking your social security for three years. When you start receiving payments the value of that check increases by about 15 % for the rest of your life.

Plus you will have contributed to the Peace Corps mission that John F. Kennedy defined in 1961 to promote world peace and friendship.   That mission seems even more important in the world we live in today.  And finally, you will have lots of stories to share with your grandchildren (who will have shifted from thinking you are slightly boring to thinking you are really cool) and you will have had one of the peak experiences of your life. 
 
Four things baby boomers can do to make our retirement years more financially secure.

In my last column I wrote about the fact that many baby boomers are facing retirement with less than they hoped for in retirement savings.  We are also facing record-low interest rates so funds allocated to bonds are generating very modest returns.  So what can we do about it?

Saving a bit more or spending a bit less is always a good idea.  Unfortunately we don’t have that much time left in our working careers, so small changes in savings and spending rates now will have a relatively small impact on our life styles during out retirement years.   Are there any things we can do that will have a bigger impact?  I have a few ideas.

The simplest idea is to work a few extra years at your current job.  This has a big impact.  Every extra year that you work, is also a year that you do not take any income from your savings.  So it’s a double win.  If you are between 62 and 70 and your earned income allows you to defer the start of taking social security, it also increases the amount of your future social security checks by about 6% for each year you defer. 

Even if you do not want to stay in your current job you might be able to accomplish this work extension by thinking in terms of an “encore career”. Perhaps it means working 3 or 4 days a week so it will feel like a half-step into retirement.  Making  $20,000 or $30,000 per year for the first five years of your “retirement” is equivalent to having an additional $100,000 to $150,000 in savings.   It’s hard to save that amount in a few years, but you might be able to earn that amount over five years in an encore career.

Current bond yields present a real challenge to folks who are looking to live off the income from their investments.  When bond yields were at more normal levels (6%-8%), it was common to advise people in their 60’s to allocate 50% or more of their portfolio to bonds.  This generated a nice chunk of income and kept half of their principal away from the risks of the stock market.

Unfortunately for the retiring baby boomers interest rates are close to record lows.  The current yield of a ten-year US Treasury bond is a measly 1.8%.   This looks depressingly close to 0% to me.  To make matters worse, when interest rates go back up, as they inevitably will, the market value of that bond will drop.   So if you need to sell your bonds before maturity you will experience a loss of principal. 

Consider buying income-producing real estate as an alternative to bonds.  Yes, it’s more work, but what the heck, you’re going to be retired and you might be looking for something to do.  When it comes to real estate, record low interest rates are your friend.  You can buy a two or three family home in Portland right now and rent it out and achieve a 6-7% current yield after expenses.  Your total return will be even higher if real estate prices climb over the time you own the property.

My third suggestion is to not give up on stocks.  Yes they are volatile over the short term, but over every twenty-year period since 1934 they have out performed risk-free returns like CD’s and money market funds.  And chances are, you are going to be around for the long term.  A 60 year old today has a life expectancy of at least 25 more years.   Your expenses will go up over that time period so you need to see some growth of your principal.   Even if you have only 20% or 30% of your assets in stocks it will lower the risk of your outliving your money.  And with the relatively low exposure you will be able to psychologically handle the occasional down drafts in the stock market.

My last idea?  Travel to a developing country, meet new people, learn a new language, while serving your country and adding to your retirement savings. How? Join the Peace Corps.  You will have the experience of your life.  And as long as you are healthy, they welcome volunteers at any age.  In my next column I will show how joining the Peace Corps could generate a $100,000 plus swing in your financial circumstances.  Stay tuned.