1. Retirement Minus 5 to 10 Years: 10 Key Questions Barbara O’Neill Rutgers Cooperative Extension firstname.lastname@example.org
2. Workshop Objectives• Describe the “Retirement New Normal”• Describe the “Retirement Grief Cycle”• Describe common retirement planning errors• Answer 10 critical retirement planning questions
3. Welcome to First Half of “Retirement RedZone” (5 Years Before to 5 Years After)What is YOUR greatest retirement HOPE and yourgreatest retirement FEAR?Who are your retirement ROLE MODELS…good and bad?
4. We’re in a “New Normal” and Need toAdjust BOTH Mentally and Financially
5. New Normal Retirement Challenges• Slow U.S. economic growth• Flat or decreasing incomes; high unemployment• Reduced employer retirement income benefits• Reduced employer retirement health benefits• More talk about adjusting social safety-net programs• May need to work longer before retirement and/or downsize lifestyle• Lower housing values• Low returns on savings and investments
6. Sobering Statistics• 45% chance that one spouse in a 65-year old couple will live to 95• EBRI: A retiring couple can expect to spend $295,000 on health insurance and out-of-pocket medical expenses• 30% of unmarried women age 65+ live solely on Social Security; 13% of age 75+ in poverty (vs. 6% for men)• Disconnect: Only 12% of retirees actually have jobs; 72% to 80% of pre-retirees say they plan to work• 25% of women and 20% of men age 55-64 have a health problem that limits ability to work• NEFE: “About 50 million at-risk middle American households” (Journal of Financial Planning, July 2009)
7. Common Retirement Planning Errors• RPS (Retirement Postponement Syndrome)• Banking on unsure things – Profit on sale of a home or business – A certain investment account balance – An inheritance• Counting on an “econo-retirement” – Spending by retirees often increases – Go-go, Slow-go, and no-go phases• Not saving as much as possible and taking maximum advantage of employer matching• Not getting help, when needed
8. For Some, the Dream of UpwardMobility Appears to be Slipping Away
9. Five Stages: How People Receive “Bad News” (Elizabeth Kubler-Ross DABDA Model)
10. The “Retirement Grief Cycle”• Denial: “Not to Worry. This is just a temporary blip and things will get back to normal soon”• Anger: “This isn’t fair. They’re taking away [X]”• Bargaining: “Maybe the union can get an exemption for older workers so the [change] won’t affect me”• Depression: “It’s hopeless. I’ll never be able to retire”• Testing: “If I adjust my spending or work a little longer, I can probably still retire comfortably”• Acceptance: “I’ve decided to follow a new financial plan for retirement”
11. Ten Key Questions You Need to Answer• How long could I (we) live? • Where do I (we) want to live?• How much money do I (we) need? • What do I (we) want to do?• What is my (our) projected • Where will I (we) get health income and expenses? insurance and how much will it cost?• Where and how should I (we) invest? • What can I do to make up for lost time and/or money?• How long will my (our) money last? • What steps should I (we) take between now and retirement?
12. How Long Could I (We) Live?• BIG financial question – Live too long and you risk running out of money – Die young and “you can’t take it with you”• Medical advances are keeping more people alive longer• CDC Data, 2000 to 2007: – Death rate from heart disease decreased 19% – Death rate from cancer decreased 5%• BUT…unchecked obesity, diabetes taking away some gains• 2005 Society of Actuaries study – 2/3 of retirees underestimate average life expectancy – 42% by 5+ years• Why do we underestimate longevity? “Familiarity Bias” – We know more 30-69 year olds who die than 70-100 year olds
13. Life Expectancy Reality Check• Enter “Life Expectancy Calculator” into an Internet search engine (e.g., Bing, Google)• Try at least 3 different calculators• Look for calculators with questions about lifestyle factors• Social Security calculator is very basic; based on averages
14. How Much Money Do I (We) Need?• “It depends” (many variables)• Compare some retirement savings calculations: – http://www.choosetosave.org/ballpark/ (ASEC Ballpark Estimate) – http://njaes.rutgers.edu/pubs/publication.asp?pid=FS431 (Rutgers)• General Guideline: For every $1,000 in monthly income, you need $300,000 in savings ($300,000 x .04 (4%) = 12,000 ÷ 12 = $1,000) based on 4% withdrawal rate – $2,000/month ≈ $600,000 – $3,000/month ≈ $900,000 – $4,000/month ≈ $1.2 million
15. What is My (Our) Projected Income?Five possible sources for most people:• Social Security (get an online benefit estimate)• Pensions• Retirement savings plans and investments – 401(k), 403(b), 457 plans – IRAs – Annuities – Taxable and tax-free investment accounts• Income generated by home equity – Reverse mortgage – Rent• Employment
16. What are My (Our) Projected Expenses?• 75% of average U.S. retiree’s budget in order starting with the highest amount – Housing – Transportation – Food – Medical – Entertainment• Try to pay off mortgage and credit cards before retiring• Percentages (e.g., 75% of income) may not be accurate• Much better to do a current and projected spending plan – http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf• Do a “test-drive”: Consider trying to live on pre- retirement income BEFORE you retire
17. Where and How Should I (We) Invest?• Invest a much as you can in a Roth or traditional IRA and tax-deferred employer plan (e.g. 401(k) plan)• Earmark a portion of raises for retirement savings• Make catch-up contributions starting at age 50• Maintain some equities in your portfolio to hedge inflation• Assess your TRUE investment risk tolerance – http://njaes.rutgers.edu/money/riskquiz/• Reduce your risk level if you’ve accumulated the principal you need to produce an adequate income stream
18. More Thoughts on Investing• You could have a 30-40 year time horizon• Diversify your portfolio: different asset classes• Common guideline: 110- Your Age = % in stocks – 110 – 65 = 55% (moderate risk tolerance)• Consider consolidating accounts (RMDs start at 70½)• Consider dividend-paying stocks and mutual funds• Consider low-cost annuities for a guaranteed stream of income (especially without a pension)• Track your net worth and asset allocation annually• RCE Excel spreadsheets: – http://njaes.rutgers.edu/money/default.asp#resources
19. How Long Will My (Our) Money Last?• “It depends” on two key factors: – Rate of return earned on retirement savings – Percentage of portfolio assets withdrawn• Nest egg will be depleted faster if… – The rate of withdrawal exceeds the rate of return• Worst case scenario: Retiring during a severe market downturn and selling stocks/funds for income – Nest egg is severely eroded by market losses – Withdrawals deplete it further – Should have a 3-5 year cash withdrawal cushion to avoid this
20. Get a Monte-Carlo Analysis• Uses historical investment performance data to estimate probability of not running out of money• A CFP® can do it for you or you can use an online calculator (Search “Monte Carlo Calculator”)• Check assumptions and beware of GIGO
21. Where Do I (We) Want to Live?WSJ Article (3/21/11): BIG issue among couples; communication is key
22. What to Do?• Compare individual visions of retirement• “Must have” and “negotiable” items – Clashing ideas and silent standoffs are common – New Trend: Retirement LAT Couples (Living Apart Together)• Start the conversation early• The closer to retirement, the more “real” it becomes• Research Studies: boomers much more likely than their parents to move: 20% (AARP) to 42% (Del Webb) versus 10% historically• Investigate taxes and living costs in other states – http://retirementliving.com/RLtaxes.html• Take extended vacation/”scouting” trips
23. What Do I (We) Want to Do?• What gives you deep satisfaction? – Meaningful relationships – Helping others – Learning new things – Devoting yourself to a cause you believe in – Applying your skills and experiences – Achievement• Is work a source of great pride and self-worth?• The key word is “passion”• What will a “typical day” in retirement look like?
24. Where Will I (We) Get Health Insurance and How Much Will it Cost?• Find out if you have access to retiree health insurance – If so, compare the cost to a supplemental Medicare plan – Will spousal coverage end if covered employee dies?• Many retiree benefits being scaled back in public and private sector• If no employer benefit, “patch together a plan” – Medicare at age 65 (can COBRA a group plan 18 months before) – A Medicare supplement plan – Medicare Part D (prescription drugs)• Contact local SHIP office (www.shiptalk.org)
25. More About Retiree Health Insurance• People with better health habits will eventually spend MORE on health care than those with poor health: – More years of medical expenses (e.g., age 93 versus 73) – Likelihood of a chronic condition in advanced old age – Likelihood of a need for long-term care (LTC)• >50% chance that even the healthiest retiree may eventually need LTC• Consider LTC insurance or have a good alternative: – Adequate defined benefit pension (with a COLA) – Adequate annuity – Self-insurance (assets and income)?
26. What Can I (We) Do to Make Up for Lost Time or Money?Before Retirement After Retirement• Increase retirement savings • Trade down to a smaller• Spend less and pay off debt home• “Moonlight” for additional • Move to a less expensive income location• Invest more aggressively to • Work after retirement try to earn a higher return • Reverse mortgage or sale-• Preserve lump-sum leaseback of home distributions • Make tax-efficient asset• Work longer before retiring withdrawals
27. What Steps Should I (We) Take Between Now and Retirement?• Plan to get out of debt before you retire – Pay off mortgage (prepay principal, biweekly payments) – Eliminate consumer debt• Assess available retirement benefits – Employer savings plan and health insurance (self and spouse) – Social Security (age 62, FRA, age 70)• Review your insurance needs – May not need life insurance if kids grown, mortgage repaid – Consider LTC insurance with freed-up premium dollars• Live more simply – Save cash freed up by reducing expenses – Lower the bar for retirement lifestyle
28. More Steps to Take Before Retirement• Save aggressively (until it hurts!) – Up to 6,000 in an IRA and up to $2,000 in employer plan (if 50+) – Up to 20% of business net earnings in a SEP• Invest broadly – Multiple asset classes including international investments – U.S. assets are <1/3 of world economy – Low-cost index funds and ETFs• Consider working longer than originally planned – Boosts Social Security and DB pension benefits – Provides more time to save in IRAs, 401(k)s, etc. – Fewer years to withdraw money from savings – Continued access to employer benefits – “Retire” while still working
29. More Steps to Take Before Retirement• Develop realistic plans to pay for retirement – Plan to work until 66-67 but save as if retiring at 60-62 – Use retirement savings and Monte Carlo calculators – Anticipate ways to create a “retirement paycheck” (e.g., annuity) – Take steps to mitigate “broken promises”• Try to control your exit – Stockpile cash for stock market downturns – Voluntary retirees 30% more likely to be happier• Educate yourself about pre-retirement issues – NEFE: http://www.myretirementpaycheck.org/ – eXtension: http://www.extension.org/pages/8633/financial-security:- retirement-planning – Financial advisors (CFP Board: http://letsmakeaplan.org/)
30. Comments? Questions? Experiences?Money Magazine (October 2008):“The 10 years before retirement and five years aftermake up the riskiest period of your financial life.”• Decisions made can impact you for 30-40 years• Many perils outside of your control (aging parents,boomerang children, health issues, workplace ageism)