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

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$ 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)

Objectives

• 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?

5*Prudential investments

We’re in a “New Normal” and Need toAdjust BOTH Mentally and Financially

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New Normal Retirement Challenges

• 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-Ross10

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

– 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: – 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 retire16

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

• 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

annually18

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?

21WSJ Article (3/21/11): BIG issue among couples; communication is key

What to Do?• 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?

– 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”– 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– 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) TakeBetween 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• 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/financial-

security:-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

– 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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