How one economist is minimizing risk in his own retirement

Money is everything in retirement. It's medical care. It's insurance. It's travel, philanthropy, housing, food. It's life. I'm not saying you have to have a ton of money, but you do have to pay close attention to what you have.

Jim Kane, 75, pays attention.

An economist by training, Kane loves spreadsheets, projections, data and plans. He flooded me with information after we began a dialogue about a month ago. He'd contacted me about his personal formula for financial peace of mind. He calls it his balance sheet.

“When I was thinking of retiring, everyone talked about investments,” Kane said. “I knew that was important, but we turned that on its head. We set net worth goals to give us comfort and a sense of security. Then we let those goals guide our spending.”

It isn't a radically different approach to money, but it is a disciplined one. It's also a guide to his life.

“I think of it as a conceptual framework and approach,” Kane said.

Kane and his wife want certainty and peace of mind. They also want to have fun. They love to travel: Patagonia, Jordan, Moscow, Thailand, Bali and Australia's Great Barrier Reef. They are headed to Europe this summer. Kane likes to go skiing at least three times a year out West. He and his wife eat out twice a week. They are selling their home in leafy McLean, Virginia, and moving to Florida's sunny Atlantic Coast.

To make sure the good times keep rolling, the Kane household balance sheet has quarterly targets over a five-year horizon. In other words, the five-year financial plan gets a regular checkup every three months.

The balance sheet monitors total assets, including home, retirement funds, annuities, cash, taxable savings and long-term care insurance.

There's also a column for liabilities, which at this moment amount to 6 percent of net worth. I would call that a very healthy debt level. Liabilities include a home-equity credit line, an auto loan, accounts payable (outstanding bills) and, wisely, a reserve to cushion emergencies and pay for non-routine events and opportunities.

“We hardly ever touch the reserve fund,” Kane said.

The assets on the balance sheet provide three types of revenue.

The first is what Kane calls “certain or fixed” income: Social Security, annuities and a pension. Fixed income covers about 40 to 45 percent of their annual household spending.

The second type of income is called “predictable.” That's another 40 to 45 percent of the revenue stream and includes all the dividends from investments, both tax-deferred and taxable accounts.

The predictable income is wisely diversified. One-third is in bonds and bond funds (Fidelity High Income, Fidelity Strategic Income and Fidelity Capital and Income). Another third is in high-dividend stocks and stock mutual funds (Verizon, Vanguard High Dividend and Fidelity Strategic Dividend). The last third is in mutual funds with high-growth stocks (Fidelity Contrafund and Wells Fargo Discovery).

The bond funds last year yielded 4.93 percent in total returns; the stock dividend account, 6.65 percent; and the high-growth stock funds, 8.36 percent. Most of those gains are transferred into the Kanes' checking account to pay their living expenses.

The third and final type of income is called “at risk.” That's income created when the Kanes liquidate mutual funds or stocks. Even in an upmarket year, they may sell assets to fund trips or house projects.

Their standard of living varies, based on the performance of their investments. When the stock market is flush, they can take a trip to Europe and ski trips out West. If the market drops, they need to tighten.

“We scale our expenses up or down during the year, particularly larger discretionary expenses like travel, based on the three sources of income,” Kane said.

Kane said his career encouraged his attention to detail. He has a doctorate in economics from the University of Pittsburgh, and he worked at several jobs — including one with a Cambridge, Massachusetts, consulting company — that he said had a big influence on how he thinks.

“The culture emphasized creativity and excellence, and that results in a lot of attention to detail,” Kane said. “Over the years, that just became incorporated in my personal life and the expectations I set for myself.”

Kane started thinking about retirement early on. He bought long-term care insurance through an employer while he was in his 50s. He put together a 401(k) nest egg that reached into the seven figures.

By his mid-60s, he and his wife, Olga, who had worked for an international nongovernmental organization, came up with the balance sheet. “We said: ‘What will we be comfortable with when we are 70 or 75? How much did we want to have?” Kane recalled. “That's what got us started.”

Then the detail gene kicked in, and he took a notebook and knocked off retirement issues one by one.

First was health care.

He spent a year digging into medical insurance, costs, long-term care, Medicare, Medigap. He canceled redundant policies. Bought more insurance. He created an emergency fund.

“We could make great financial plans, but a medical emergency could mean disaster,” he said.

Next was finance.

The Kanes centralized bank and investment accounts. They studied Social Security, examining online access and calculating the best time to begin taking benefits. They sold shares and bought annuities. Kane liquidated 10 percent of an individual retirement account to buy an annuity that would provide guaranteed income to him and his wife for the rest of their lives.

“We wanted security,” he said. “If the market goes to hell, I will still have the $750 a month from that annuity.”

Lastly, they tackled legal stuff: power of attorney and medical directives, defining the authority of each spouse to make decisions for the other. Kane's only child, a daughter who lives in Oregon, also has a role in his medical decisions and is provided for in his estate plan.

“The whole legal, medical and financial is all integrated,” Kane said. He has a name for that, too: infrastructure.

The infrastructure is a way to reduce risk. It doesn't eliminate risk, but it increases the odds against dying in penury.

“You also have to assume that things will not go to plan,” Kane said. “You need to have infrastructure in place to handle what life brings.”

As you prepare to enter the last chapter of your life, you have to expect it to unfold in exciting, interesting and sometimes disappointing ways.

It's kind of like college. You save for it and plan for it, then it happens.

“In college, you have to decide what you're going to do, and you have to manage your financial resources to get through it,” Kane said. “It's the same in retirement, with one important difference: You can flunk out of college and still recover. If you flunk retirement, it's much less forgiving.”