Financial Planning for Women
Retirement Minus 5 – 10 Years:
10 Key Questions
Barbara O’Neill, Ph.D., CFP
Rutgers Cooperative Extension
Jean M. Lown, Ph.D.
FCHD Dept. Utah State University
$ is only part of preparation
• Relationships
• Health & fitness (SSHW)
– http://njaes.rutgers.edu/sshw/
• Meaningful activities
• Books:
– What color is your parachute for retirement?
– You don’t need a million dollars to retire well
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Are you Ready to Retire?
• What does it mean to be “ready?”
• Retirement Readiness Rating (HO)
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Objectives
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Describe the “Retirement New Normal”
Describe the “Retirement Grief Cycle”
Identify retirement planning errors
Pose10 critical retirement planning
questions
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Welcome to first half of
“Retirement Red Zone”*
• 5 Years Before to 5 Years After Retiring
– “The 10 years before retirement and five years after make up
the riskiest period of your financial life.” Money Magazine (October 2008)
• What is YOUR greatest retirement HOPE &
greatest retirement FEAR?
• Who are your retirement ROLE MODELS… good
and bad?
*Prudential investments
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We’re in a “New Normal” and Need to
Adjust BOTH Mentally and Financially
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New Normal Retirement
Challenges
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Slow economic growth
Flat/decreasing incomes; high unemployment
Reduced employer retirement income benefits
Reduced employer retirement health benefit
Social safety-net programs being downsized
May need to work longer before retirement and/or
downsize lifestyle
• Lower housing values
• Low returns on savings and investments
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Sobering Statistics
• 45% chance that one spouse in a 65-year old couple will
live to 95
• A couple can expect to spend $295,000 on health
insurance & out-of-pocket medical expenses (EBRI)
• 30% of unmarried women 65+ live solely on Soc. Sec.
– 13% of age 75+ in poverty (vs. 6% for men)
• 72% of pre-retirees say they plan to work
– Only 12% of retirees actually have jobs
• 25% of women 55-64 have a health problem that limits
ability to work
• “About 50 million at-risk middle American households”
Journal of Financial Planning, July 2009
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Common Retirement Planning Errors
• RPS (Retirement Planning 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 planning help when needed
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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”
*Elisabeth Kubler-Ross
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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 & 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?
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How Long Could I (We) Live?
• Live too long and you risk running out of
money
• Die young and “you can’t take it with you”
• Medical advances are keeping people alive
longer (CDC Data, 2000 to 2007):
– Death rate from heart disease decreased 19%
– Death rate from cancer decreased 5%
• But… obesity, diabetes taking away gains
• 2/3 of retirees underestimate average life
expectancy… 42% by 5+ years (Society of Actuaries)
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Life Expectancy Reality Check
• Enter “Life Expectancy Calculator” into
Internet search engine
• Try at least 3 different calculators
• Look for calculators with questions about
lifestyle factors
• Social Security calculator is too basic;
based on averages
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How Much Money Do I (We) Need?
• “It depends” (many variables)
• Retirement savings calculators
– http://www.choosetosave.org/ballpark
– http://njaes.rutgers.edu/pubs/publication.asp?pid=FS431
• General Guideline: For every $1,000 in
monthly income
– 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
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What is My (Our) Projected Income?
• Social Security
– 2010 statement or get an online benefit estimate
• Pension
• Retirement savings and investments
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401(k), 403(b), 457 plans
IRAs
Annuities
Investments
• Income generated by home equity
– Reverse mortgage or rent
• Employment
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What are My (Our) Projected
Expenses?
• 75% of average U.S. retiree’s budget:
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Housing
Transportation
Food
Medical
Entertainment
Pay off mortgage, vehicle, & credit cards before retiring
Percentages (e.g., 75% of income) may not be accurate
Much better to do a current and projected spending plan
Do a “test-drive”: Consider living on estimated
retirement income BEFORE you retire
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Where and How Should I (We) Invest?
• Tax-deferred employer plan (e.g. 401(k) plan)
• IRA or supplemental retirement annuity
• Earmark a portion of raises for retirement
savings
• Make catch-up contributions starting at age
50
• Include equities in your portfolio to hedge inflation
• Assess your investment risk tolerance
• Reduce your risk level if you’ve accumulated the
principal you need to produce adequate income
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More Thoughts on Investing
• You could live 30-40 years
– Inflation averages 3%; prices double in 24 years
– 4%: prices double in 18 years
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Diversify your portfolio: different asset classes
Common guideline: 110- Your Age = % in stocks
Consider dividend-paying stocks & mutual funds
Immediate annuities for guaranteed income
Track your net worth and asset allocation annually
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How Long Will My (Our) Money Last?
• “It depends” on two key factors:
– Future investment returns
– Percentage of portfolio assets withdrawn/year
• Nest egg will be depleted faster if…
– Rate of withdrawal exceeds rate of return
• Worst case scenario: severe market
downturn @ beginning of retirement…
selling stocks/funds for income
– Nest egg is severely eroded by market losses
– Withdrawals deplete it further
– Need 3-5 year cash withdrawal cushion to avoid this
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Get a Monte-Carlo Analysis
• Uses historical investment performance data to
estimate probability of not running out of
money
– NO guarantee!
– Based on past returns… future may be different
• A CFP® can do it for you or you can use an
online calculator (Search “Monte Carlo
Calculator”)
• Check assumptions and beware of GIGO
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Where Do I (We) Want to Live?
WSJ Article (3/21/11): BIG issue among couples; communication is key
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What to Do?
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Compare individual visions of retirement
“Must have” and “negotiable” items
Start the conversation early
Research Studies: boomers much more likely than
their parents to move
• Investigate taxes & living costs in other states
– http://retirementliving.com/RLtaxes.html
• Take extended vacation/ “scouting” trips
– Spend July-August in Tucson…
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What Do I (We) Want to Do?
• What gives you deep satisfaction?
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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 & self-worth?
• The key word is “passion”
• What will a “typical day” look like?
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Where Will I (We) Get Health Insurance
& How Much Will it Cost?
• Will 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?
– retiree benefits being scaled back
• If no employer benefit, “patch together a plan”
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Medicare at age 65
COBRA a group plan 18 months before
A Medicare supplement plan
Medicare Part D (prescription drugs)
• State Health Insurance Assistance Program
(www.shiptalk.org)
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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)
– Likely to have a chronic condition in advanced old age
– Likely to need long-term care (LTC)
• >50% chance even healthiest retiree will need
LTC
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Consider LTC insurance or have a good alternative
Adequate defined benefit pension (with a COLA)
Adequate immediate annuity
Self-insurance (assets & income)
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What Can I (We) Do to Make Up for Lost
Time or Money…Before Retirement?
• Guidebook to Help Late Savers Prepare
for Retirement (O’Neill & Lown)
• Increase retirement savings
• Spend less and pay off debt
• “Moonlight” for additional income
• Invest more aggressively to try to earn
higher return
• Work longer before retiring
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What Can I (We) Do to Make Up for Lost
Time or Money…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
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What Steps Should I (We) Take
Between Now and Retirement?
• 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 insurance needs
– May not need life insurance if kids grown, mortgage repaid
– Consider LTC insurance with freed-up premium dollars
• Live on less
– Save cash freed up by reducing expenses
– Lower the bar for retirement lifestyle
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More Steps to Take Before Retirement
• Save aggressively
– Up to $6,000/year in an IRA (if 50+)
– Up to 20% of business net earnings in a SEP
• Diversify investments
– Multiple asset classes including international investments
– U.S. assets are <1/3 of world economy
– Low-cost index funds and ETFs
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Work Longer
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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
– Test drive your plan
– Live the lifestyle
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More Steps to Take
• Develop realistic plans for retirement
– Plan to work until 66-67 but save as if retiring at 60-62
– Use retirement savings and Monte Carlo calculators
– Plan to create a “retirement paycheck” (e.g., annuity)
• Try to control your exit
– Voluntary retirees 30% more likely to be happier
• Educate yourself
– NEFE: http://www.myretirementpaycheck.org/
– eXtension: http://www.extension.org/pages/8633/financialsecurity:-retirement-planning
– Financial advisors CFP Board http://letsmakeaplan.org/
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Comments? Questions?
Experiences?
• Decisions will affect you for 30-40 years
• What is YOUR PF Action Plan?
• Many perils outside of your control
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Aging parents
Boomerang children
Health costs
Workplace ageism
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Upcoming FPW
• March 7 (1st Wed.): You’re never too young:
Jumpstart your retirement planning in your
20s and 30s (evening program at Logan
Library Old Ephraim room)
• April 11: Taking control of your credit
• May 9: Great mutual funds for your Individual
Retirement Account
• June 13: Preparing to buy your first home
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