Retirement in 2014 is as risky, uncertain, and difficult to plan as it has ever been. Here are my reasons for concern about the retirement road ahead:
1. Retirement is apt to be for a longer period. A generation ago a twenty-year retirement was unusually long. My grandfather retired in 1963 at the standard retirement age of sixty-five; within twenty years both he and my grandmother had passed. Today’s retirees might need to plan for a thirty- or even forty-year retirement (check out your probability of living to age ninety). Longer retirements will require more money and much more preparation.
2. Retirement is likely to be a healthier (not just longer) and more active segment of life. This suggests more opportunity for travel, more organizational and club participation, and more involvement with several generations of family. This is all great news but likely to require more money.
3. The health-care system is constantly improving and finding more ways for us to improve standards of care, which costs more money. Paying for care and insurance premiums to offset these costs will be another layer of expense that was not considered a generation ago.
4. The monthly “payment-for-life” pension that was prevalent in the past has mostly disappeared. A shrinking portion of workers are covered by a company-provided defined-benefit plan that pays an automatic income for life. Most workers today participate in a voluntary retirement savings plan such as a “401(k)” plan. These plans transfer the burden of saving and investing to the employee. Many employees today under contribute and direct their investments in a manner that will not create adequate savings.
5. Investing is more difficult. Investment returns might be lower over the next twenty-five or thirty years, compared to the past twenty-five years. Lower investment returns of even 1 percent or 2 percent less would make a marked difference over a twenty-five- or thirty-year period. In the 1980s and 1990s it was possible to “lock in” government bond yields that were higher than today’s interest rates, but no longer. This means that it takes more of your retirement nest egg to produce presently needed cash flow, leaving less money to be invested for growth over the next twenty to thirty years.
6. Greater volatility of stock prices (actual and perceived) makes investing more difficult for everyone than it was a generation ago.
7. Inflation and income taxes may have a greater effect. Spendable retirement income could be eroded to a greater extent over the next thirty years and income tax rates (presently at multiyear low rates) might be increased for all income levels. All this leaves less for the retiree to spend, to pay basic expenses, and to support the dreamed-of lifestyle.
8. Social Security is a concern for most Americans who intend to rely on the promised retirement income benefit. The reaction of many people is to apply for benefits at age sixty-two, at a reduced rate (up to a 30 percent reduction), hoping to collect as much as possible. Applying for SSI (Social Security Income) at age sixty-two does offer the benefit of receiving payments for up to five years earlier (for those born in 1960 and later) than normal retirement; however, in the thirty-year retirement a 30 percent discount for life is very expensive.
9. If you plan to retire before age sixty-five, you must secure health insurance and understand its cost. Medicare is not available until age sixty-five, leaving most early retirees to pay the full cost of insurance.
Cheer up! There are actions you can take. Isn’t that why you are reading this book, to learn about retirement preparation?
A quick list of what you should consider:
1. Save the maximum allowed in your 401(k) or other voluntary retirement or investment account … you will need it.
2. Fund a Health Savings Account (HSA) if you are eligible and use the money accumulated for expenses in retirement.
3. Secure quality Personal Care Insurance as early in life as possible.
4. Determine if it is possible and advisable for you to create a “monthly payment for life” by investing in a fixed annuity that suits your needs. The underwriting institution should be of the highest financial strength. Be sure you understand the terms, including the probable lack of return of principal that is typical of a life-payment annuity.
5. Invest prudently and efficiently either on your own (if possible) or with a top-notch financial planner.
6. Be aware of tax-efficient investing and talk with a CPA annually about income tax changes.
7. Work longer (at least consider it unless your job is a burden).
8. If possible, wait until age seventy to apply for SSI (especially if you are healthy and have other money you can use before then).
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims-paying ability of the issuing company. Withdrawals made prior to age fifty-nine and one-half are subject to a 10 percent IRS penalty tax and surrender charges may apply.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of an investment is not guaranteed and will fluctuate.
Are You Really Ready to Retire?
If you are like many preretirees, you have some vacation days accumulated, and you’ve been thinking you can use these days to retire a few weeks early with pay. Some employers will even “buy back” unused retirement days with cash that can come in handy at the cusp of retirement.
There is one more choice that could be even more valuable to you.
Take a mini-retirement at home a year or two before you plan to retire. Find out what it is like to live at home under retired conditions. A few days or even a week is not long enough.
Here’s what I have recommended to many clients in the past: First, use almost all of your accumulated vacation days consecutively to maximize the number of days at home—three to five weeks, if possible. Next, you should plan to stay at home—no extra travel, no special stuff. This gives you an opportunity to practice your retirement and to evaluate if you are really ready to retire. Don’t stay in a hotel and go out to dinner every night. Do laundry, make your own food, clean the house, watch television, etc.
What will you do all day? Before the mini-retirement, develop a “model retirement weekly schedule.” You can use the blank schedule that I have included with this article.
At the top of the schedule your day begins with whatever time you normally walk out the door in the morning to go to work. The day schedule ends at the time you normally arrive at home at night. This exercise is going to make you think about how you will use this new inventory of time, as well as the early mornings and evenings.
The results will be very telling and aid you immensely in making a decision about whether you should “pull the trigger” on your retirement.
One man, whom I’ll call Larry, was set to retire but called me after a three-week-at-home retirement and announced that he was ready to work another three years. Rather than retire at age sixty-two, he opted to wait until age sixty-five. His reasons included:
1. His wife had not retired, and his friends were all still working. He had developed few hobbies or passions. Larry was bored.
2. Larry felt he would like to have the extra cash flow that an additional three years would allow him to earn in retirement investment income. He also would be eligible for Medicare at age sixty-five and would not have to pay for the high cost of health insurance for three years.
3. Since he had few planned activities, Larry ended up being an unpaid sitter for his grandchildren, which he enjoyed, but that was not his reason for early retirement.
Still, for others, the trial run confirms what they imagined their retirement to be—a vacation at home for life. Either way, a practice retirement is a wise use of vacation days.
Model Week Worksheet
If you’re serious about retirement, then you’re probably thinking of all the things you’d rather be doing instead of working.
You are probably also aware of a number of people that are unhappy in retirement, people who seemed to just fade away after retiring or whose ill health set them back shortly after retiring. I’ve seen this many times, and I have a few ideas that could improve the quality of your retirement.
Start by making a list of every imaginable planned activity that you think might interest you. You will be able to start writing immediately, but keep the list open and let yourself be receptive to adding new pursuits and interests to it.
Divide this list into:
A. Weekly activities after retirement (e.g., golf on Wednesday; take my daughter to lunch on Thursday) and
B. Nonweekly events (e.g., drive the Pacific Coast Highway from San Diego to Seattle or visit all the presidential libraries).
Using the weekly activities list, create a planned time use worksheet (see the worksheet example) and write in all the week’s activities, Monday through Friday. Start the day at whatever time you normally leave for work and end it when you normally walk in the door at night.
This is a challenging exercise for most people. Use it as an opportunity to build your confidence in your decision to retire … or to work longer.
Most people come back with a completely revised list of activities, some flat-out delay retirement, while others remain confident in their future plans.
In any event, give your retirement agenda some considerable thought before leaving an otherwise enjoyable career or missing out on the high-earning, high-accumulation final years on the job.
This article is an adaptation of the first two chapters of The Extreme Retirement Planning Workbook: Navigating the Next 30 Years, available at www.extremeretirementplanning.com, Amazon, and barnesandnoble.com.