12/22/14

Why You Need to Plan Your Retirement Lifestyle

Thinking about your desired retirement activities can motivate you to save more and invest appropriately.  Your chosen retirement activities will determine how much you need to save.

 

Who has time to dream about the future when there isn’t even enough time to focus on the present? That’s why many people jump into retirement without really knowing what they will do all day. Planning is hard work and can be time-consuming, but you need to make time to do it. Thinking about what you will do in retirement is not an activity you want to shortchange. Here is why planning how you will spend your time in retirement pays off.

Planning your retirement days puts you in the right frame of mind to retire. Retiring to a good life is much more pleasant than retiring from a bad career. Too many people quit because they don’t want to deal with the nuisances of the everyday grind. If you can’t find a solid reason to get up to go to work every day other than the paycheck, then it’s time to find a new job, not necessarily time to retire. By laying out what you will do in retirement, you are putting the focus on the possibilities of retirement life instead of the negative aspects of the workplace.

Daydreaming, or retirement dreaming, helps motivate you to work harder toward the goal. Saving money to fund future expenses is hard. One way to mitigate the feeling of sacrificing is to visualize your golden years. What would you like to do in retirement? You might want to golf, go out with friends, play bridge or all of the above. Not every fun activity will cost a ton of money, but you do need a bit saved so you won’t have to worry about where every dollar is going to come from. Think of how much the lifestyle will cost, and save enough to fund that dream life. Saving money isn’t a sacrifice, but a down payment on your future lifestyle. You don’t lose the sum you put away. Someone who saves is actually gaining more financial security in the future.

Coming up with a plan will help you foresee potential issues. Many people start slowing down in retirement. You might develop lower energy levels as you age, and perhaps choose to sit around instead of getting up and being out and about. Even if no catastrophic health problems surface for years, your quality of life can suffer as you get older. However, when you have a plan laid out, there will be fewer empty squares on your calendar. Maintaining a social calendar will prompt you to stay more active. Planning some activities and social engagements for retirement will give your days more meaning and leave you more satisfied.

Your chosen activities will determine your budget and help you come up with a retirement number. Once you know how your days will generally be filled, then it’s much easier to estimate how much to save for retirement. Figure out your typical annual expense and multiply that by 25 to come up with a good starting point. This amount should allow you to safely withdraw four percent of your portfolio annually, adjusted for inflation, for the rest of your life. Of course, you can also reduce your withdrawal rate or skip the inflation adjustment if there is a significant dip in market performance in retirement. You can’t fully foresee all the risks you will face in retirement, so the only reasonable plan is to stay flexible.

Like most activities, you will notice that the more you think about retirement, the easier and more pleasant the exercise will get. Once you start your plan you will naturally make appropriate adjustments to secure a more comfortable retirement.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

12/15/14

Retirement Age: Is 70 the New 65? – An upcoming book on the retirement crisis suggests rethinking the ‘normal’ retirement age.

Many studies suggest that Americans are not saving enough for retirement and that a retirement crisis is looming. Alicia Munnell, director of the Center for Retirement Research at Boston College, has co-authored a book entitled “Falling Short: The Coming Retirement Crisis and What to Do About It”, due out in January. She spoke to Morningstar.com about the book’s major themes, including rethinking what is considered the normal retirement age.

Morningstar: We hear the term “retirement crisis” a lot these days, yet what that term actually means can vary widely. Tell us how you would define the retirement crisis that we currently face?

Alicia Munnell: I’m not sure we are facing it right now. It’s going to occur as most people retire on their 401(k) accumulations, which are going to be inadequate.

Morningstar: So, basically, is it how much people are saving for themselves that you see as the main area of crisis, or is it something larger?

Munnell: It’s a much larger problem. I hope the strength of the book is that it takes a broad look at retirement savings. Basically, the need for more retirement savings has increased because people are living longer, face rapidly rising health-care costs, and at the same time the sources of retirement income–Social Security and employer-sponsored plans–are decreasing [in terms of providing that income]. Then, you put those two [the need for more retirement savings and what people are actually saving] together and you just have a mismatch, and the gap between the two is going to grow over time.

Morningstar: So, is the problem more due to people’s current savings rate or to this increase in life expectancy?

Munnell: I think it’s probably equal [in that you have] growing retirement needs because of increased life expectancy and rapidly rising health-care costs and low returns on assets, all things which would make you think that people are going to need a bigger pile [of money]. Social Security is also going to provide relatively less [for some retirees]. … As the full retirement age increases and goes from 65 to 66 to 67, the amount that you get at 65 decreases. It goes as an actuarial adjustment, but it’s equivalent to a cut in benefits. So, it can manifest itself one of two ways: Either you wait until the new retirement age to get your benefit, in which case you get [the full] benefit, or you take your benefit when you would have otherwise and you get a smaller amount.

Morningstar: One of the more intriguing ideas in your book is recalibrating the American mindset to view 70 as the new normal retirement age as opposed to 65, as it has been for many years. Can you discuss how you arrived at this idea?

Munnell: So, 70 is actually the age [at which] you get the highest benefit under Social Security. Your benefit is actuarially adjusted up to that age. After 70, you should grab your benefit because you don’t get any further increases for delaying. So, I don’t think the message is even out there that that’s the age at which you get your full benefits. We should tell people because that might affect their plans. But educating people on how much you gain by delaying claiming is a really important step that could be taken.

Morningstar: You also recommend that people take a serious look at working longer, presumably working until they reach that full retirement age of 70.

Munnell: I think, if possible, that’s what people should do. Of course, not everybody can do that. But I think for those who are healthy and can do their jobs well–and that’s an increasing number of people–they should keep in the labor force and keep working until 70.

Morningstar: There will certainly be those who won’t be too pleased to hear you advocate that we all work an extra five years, especially toward the end of our lives. What would you say to those people?

Munnell: I’d say a lot of things. I’d say, first of all, I understand perfectly well that some people are simply not able to work longer. But for those who can, then the choice is either you work longer, you retire on less, or you save more.

Morningstar: We’ve talked a lot about the income side–delaying benefits, working longer. Should people be prepared to spend less in retirement?

Munnell: Those are the three logical possibilities, right? If you’re finding you’re going to have a shortfall in retirement, you can either live on that shortfall or you can save more or you can retire later. Those are all ways to solve that problem. I think that the ideal thing would be to be a little bit more frugal in retirement and work a little bit longer and save a little bit more. But I think it’s important that you mentioned that–I’m talking about five years [of working longer]. So, we’re not talking about people working into their 90s. So, this is sort of a manageable solution to a very big problem.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

 

12/8/14

Are you heading toward a retirement crisis?

More people are worried about retirement than they need to be. The reasons for this conclusion? Depending on the information you’re seeing, anywhere from 29 percent to 70 percent of Americans are at risk for an insecure retirement. Yet 92 percent of respondents to a PBS survey already believe there’s a retirement crisis, while other surveys show large numbers of people lack confidence about being able to afford their retirement.

Clearly, a large number of people should be worried about their retirement, but there’s debate about exactly how large that group is. It’s also clear that some people who are worried might end up doing just fine. The most important question for you: Are you confronting a retirement crisis, given your unique goals and circumstances?

The various measures of retirement readiness all make critical assumptions regarding your age at retirement, the amount of retirement income needed for a secure retirement, the impact of medical and long-term care expenses, and how you deploy your retirement resources and home equity. These assumptions have a significant impact on the conclusions drawn from this information.

For example, most measures of retirement readiness assume you’ll work full-time until age 65, then retire full-time at that age. They don’t consider the possibility that you’ll work beyond age 65, either part-time or full-time. However, retirement readiness measures from the Employee Benefit Research Institute (EBRI), Boston College Center for Retirement Research (CRR), AonHewitt and Fidelity all show alternative measurements that conclude many people can significantly improve their retirement readiness if they work until age 70 instead of 65.

All retirement readiness measures also make an assumption about the amount of retirement income that’s needed to live comfortably. Some measures assume you need an income that replaces a specified percentage of what you earned before retirement, such as 70 percent, 80 percent or 85 percent. Other measures attempt to estimate your after-tax income before and after retirement, and assume you need to maintain the same after-tax income in retirement, adjusted for inflation.

A paper from RAND assumes that most people reduce their spending in retirement compared to preretirement. To say the obvious, measures that incorporate higher spending needs in retirement will calculate more pessimistic results compared to measures that incorporate lower spending needs.

Other assumptions have a critical impact on conclusions as well. For instance, the EBRI study shows how unexpected medical and long-term care expenses expose many people to the risk of running out of money in retirement. Also, some studies assume you’ll buy an annuity at retirement, while others assume you’ll invest and draw down your savings. One study assumed you’ll take a reverse mortgage to help finance your retirement.

A recent article in National Affairs by prominent retirement experts Sylvester Schieber and Andrew Biggs debates the assumptions made by the various measures of retirement risk. In particular, the authors point out that people’s consumption patterns can substantially change in retirement due to common life events, such as no longer having dependent children or paying off the mortgage. They also assert that some retirement risk measures understate the retirement resources that are available to the population at large, thereby overstating the number of people at risk.

In support of their conclusions, they mention the RAND study, which concludes that only 29 percent of the population is at risk, and they cite other studies by researchers at the University of Wisconsin, Brookings Institution and Urban Institute that arrived at similar findings.

By now, you should realize that any measure of retirement risk depends on making a number of assumptions that may or may not reflect your unique circumstances. But instead of becoming paralyzed by fear after reading the depressing headlines, try tapping into this anxiety to give you the motivation to investigate your own retirement readiness.

Your retirement security will depend on a number of important decisions you’ll make, such as:

  • Will you work in your retirement years?
  • Where will you live?
  • How much income do you need to support your basic living needs as well as your hobbies, travel, gifts and interests?
  • How can you best deploy your available resources, such as Social Security, your savings and home equity?
  • How can you protect yourself against unexpected and potentially ruinous medical and long-term care expenses?
  • What lifestyle steps can you take to decrease the odds of expensive medical conditions?

Nobody cares as much about your retirement security as you. Don’t wait for your employer or the government to come to your rescue, because it’s likely that they won’t. Instead, take charge of your retirement, and you’ll feel more confident. Act now to prevent your retirement crisis.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

12/2/14

The Do’s and Don’ts of 401(k) Rollovers

When you switch to a new employer, make sure to transfer your retirement account the right way.

Most of the time, your 401(k) chugs along quietly, accumulating money and future benefits.

But when it’s time to think about transferring your account to a new employer plan, you face a dizzying array of questions and considerations. These do’s and don’ts will help you roll over your 401(k) without getting seasick.

Don’t get hung up on mastering the technicalities of this process, says Tom Rankin, business administration instructor for Wake Tech Community College in Raleigh, North Carolina. “Worry less about the exact rules, and focus more on knowing how to access and look up the rules,” he says. “Understand the laws, but don’t memorize them, because they’re always changing. It’s more important to know the key questions to ask when you take a new job and when you are changing your account.”

Do ask these basic but important questions of the new fund administrator, Rankin says:

  • What are the fee structures? Low fees typically translate to higher returns.
  • What is the employer match?

How can you consistently escalate your 401(k) contributions to achieve your goals? Consider diverting a portion of each raise to your 401(k) account, Rankin says. “Keep it simple, and keep it automatic,” he says.

Don’t forget to review your account to make sure you don’t have any outstanding loans or withdrawals you will have to pay back in full before you can accomplish the rollover. It’s easy to forget you are paying back a 401(k) loan if the repayment is automatically funneled from your paycheck, financial advisors say. Get in touch with the plan administrator and find out exactly what you need to do to restore the funds so the account qualifies for a rollover.

To avoid loans against your account in the future, do insulate your 401(k) from emergencies by first seeding, then regularly feeding, a rainy day fund, Rankin says. This ensures you won’t be tempted to borrow against your 401(k) for routine situations, such as paying for a new refrigerator. Even a couple of thousand dollars can provide the buffer you need to shield your 401(k) from temptation, he says.

Do integrate your 401(k) into your estate and disability plan, Rankin recommends. Your loved ones and heirs need to know how to access the account in case you are not able to manage it. Designate someone as the executor when you set up the new account. Don’t forget about prior spouses. As annoying as it may be, you may have to get a signature and releases from a former spouse to roll over your 401(k).

Don’t overlook the special circumstances of owning company stock, says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. In some circumstances, you might be able to claim special tax breaks if you own company stock, and Internal Revenue Service rules will probably require you to sell the company stock in a certain way. Make sure to scope out the long-term capital gains implications before making a move, Piershale says. “This typically applies to people who’ve been at the same company for at least five years and typically much longer,” he says.

In fact, if you are rolling over the account because you are leaving a job you have had for a long time, take the time to review your portfolio diversification and your next stage of investing goals, Piershale adds.

Don’t assume you must take the money with you when you move to a new employer, says Lenny Sanicola, senior practice leader with WorldatWork, a benefits association based in Scottsdale, Arizona. “You don’t have to take it out,” he says. You may want to leave the account with your current employer’s fund in the following scenarios:

  • There is no 401(k) or equivalent plan at your new employer.
  • You are going to start a company or become self-employed.
  • You need to figure out how your retirement accounts mesh with those of your partner and where you may find efficiency.
  • You need to take time to review your retirement and investing plans, options and goals before redirecting the 401(k).

Take your time, Sanicola says, and don’t give in to your former employer’s promptings for closure. It’s much better to leave your 401(k) parked in a former employer’s plan than withdraw the money in a lump-sum distribution. That is the single biggest no-no, financial advisors agree. If you get a check for the funds, you will probably pay an early withdrawal penalty of as much as 10 percent, wiping out years of gains. The money will also probably be subject to regular income taxes, erasing even more gains. And the IRS will force your former employer to withhold 20 percent of the funds, which you can reclaim by filing special forms when you do your income tax return.

“Keep your hands off the money,” Sanicola says.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®