1. Retirement Minus 5 to 10 Years: 10 Key Questions Barbara ONeillRutgers Cooperative Extensiononeill@aesop.rutgers.edu

2. Workshop Objectives Describe the Retirement New Normal Describe the Retirement Grief Cycle Describe common retirement planning errors Answer 10 critical retirement planning questions 3. 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 MODELSgood and bad? 4. Were in a New Normal and Need toAdjust BOTH Mentally and Financially 5. 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/ordownsize lifestyle Lower housing values Low returns on savings and investments 6. Sobering Statistics 45% chance that one spouse in a 65-year old couple willlive to 95 EBRI: A retiring couple can expect to spend $295,000on health insurance and out-of-pocket medical expenses 30% of unmarried women age 65+ live solely on SocialSecurity; 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 ahealth problem that limits ability to work NEFE: About 50 million at-risk middle Americanhouseholds (Journal of Financial Planning, July 2009) 7. 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 maximumadvantage of employer matching Not getting help, when needed 8. For Some, the Dream of UpwardMobility Appears to be Slipping Away 9. Five Stages: How People Receive Bad News(Elizabeth Kubler-Ross DABDA Model) 10. The Retirement Grief Cycle Denial: Not to Worry. This is just a temporary blip and thingswill get back to normal soon Anger: This isnt fair. Theyre taking away [X] Bargaining: Maybe the union can get an exemption for olderworkers so the [change] wont affect me Depression: Its hopeless. Ill never be able to retire Testing: If I adjust my spending or work a little longer, I canprobably still retire comfortably Acceptance: Ive decided to follow a new financial plan forretirement 11. Ten Key Questions You Need to Answer How long could I (we) live? Where do I (we) want tolive? How much money do I(we) need? What do I (we) want to do? What is my (our) projected Where will I (we) get healthincome and expenses?insurance and how much willit cost? Where and how should I(we) invest? What can I do to make upfor lost time and/or money? How long will my (our)money last? What steps should I (we)take between now andretirement? 12. How Long Could I (We) Live? BIG financial question Live too long and you risk running out of money Die young and you cant 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% BUTunchecked 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 13. Life Expectancy Reality Check Enter Life Expectancy Calculator into an Internet searchengine (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 14. 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 15. 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 16. What are My (Our) Projected Expenses? 75% of average U.S. retirees budget in order startingwith 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 17. Where and How Should I (We) Invest? Invest a much as you can in a Roth or traditional IRA andtax-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 youve accumulated the principalyou need to produce an adequate income stream 18. 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 70) 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 19. 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 marketdownturn 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 20. Get a Monte-Carlo Analysis Uses historical investment performance data to estimateprobability of not running out of money A CFP can do it for you or you can use an onlinecalculator (Search Monte Carlo Calculator) Check assumptions and beware of GIGO 21. Where Do I (We) Want to Live?WSJ Article (3/21/11): BIG issue among couples; communication is key 22. 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 parentsto 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 23. 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? 24. 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 andprivate 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) 25. More About Retiree Health Insurance People with better health habits will eventually spendMORE 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 mayeventually need LTC Consider LTC insurance or have a good alternative: Adequate defined benefit pension (with a COLA) Adequate annuity Self-insurance (assets and income)? 26. What Can I (We) Do to Make Up for Lost Time or Money?Before RetirementAfter Retirement Increase retirement savings Trade down to a smaller Spend less and pay off debt home Moonlight for additional Move to a less expensiveincomelocation Invest more aggressively to Work after retirementtry to earn a higher return Reverse mortgage or sale- Preserve lump-sum leaseback of homedistributions Make tax-efficient asset Work longer before retiring withdrawals 27. 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 28. 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