Retirement Minus 5 to 10 Years: 10 Key Questions

Barbara O’NeillRutgers 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 Red Zone” (5 Years Before to 5 Years After)

What is YOUR greatest retirement HOPE and your greatest retirement FEAR?

Who are your retirement ROLE MODELS…good and bad?

We’re in a “New Normal” and Need to Adjust 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 Upward Mobility 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?

• How much money do I (we) need?

• What is my (our) projected income and expenses?

• Where and how should I (we) invest?

• How long will my (our) money last?

• Where do I (we) want to live?

• What do I (we) want to do?

• Where will I (we) get health insurance and how much will it cost?

• What can I do to make up for lost time and/or money?

• 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

• Increase retirement savings

• Spend less and pay off debt

• “Moonlight” for additional income

• Invest more aggressively to try to earn a higher return

• Preserve lump-sum distributions

• Work longer before retiring

After Retirement

• Trade down to a smaller home

• Move to a less expensive location

• Work after retirement

• Reverse mortgage or sale-leaseback of home

• Make tax-efficient asset 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 after make 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)