AFCPE 2011 Retirement Workshop
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AFCPE 2011 Retirement Workshop

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Retirement Workshop at AFCPE 2011

Retirement Workshop at AFCPE 2011

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AFCPE 2011 Retirement Workshop AFCPE 2011 Retirement Workshop Presentation Transcript

  • Retirement Minus 5 to 10 Years: 10 Key Questions Barbara O’Neill Rutgers Cooperative Extension oneill@aesop.rutgers.edu
  • Workshop Objectives• Describe the “Retirement New Normal”• Describe the “Retirement Grief Cycle”• Describe common retirement planning errors• Answer 10 critical retirement planning questions
  • 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?
  • We’re in a “New Normal” and Need toAdjust BOTH Mentally and Financially
  • 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
  • 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)
  • 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
  • For Some, the Dream of UpwardMobility Appears to be Slipping Away
  • Five Stages: How People Receive “Bad News” (Elizabeth Kubler-Ross DABDA Model)
  • 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”
  • 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?
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Where Do I (We) Want to Live?WSJ Article (3/21/11): BIG issue among couples; communication is key
  • 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
  • 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?
  • 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)
  • 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)?
  • 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
  • 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
  • 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
  • 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/)
  • 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)