The Hard Times Guide to Retirement Security

Practical Strategies for Money, Work, and Living

Mark Miller

• Publisher: Bloomberg Press
• Year: 2010
• ISBN:
  9780470908341
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

A timely guide to overcoming the retirement challenges we all face

The Great Recession has placed a wake-up call to America's baby boomers. Many have not saved enough for retirement and have not taken a hard look at how many post-work years they may need to finance.

Written in a straightforward and accessible style, The Hard Times Guide to Retirement Security tackles the tough questions about retirement in the new post-crash economy. Page by page, it puts retirement in perspective by touching on important issues such as insuring against the risk of outliving your assets, recalibrating damaged retirement portfolios, managing the risk of health-care expenses in retirement, and career strategies for workers who are 50 years old and up.

• Reveals how to boost lifetime income through better planning, and working just a few additional years
• Offers advice on how to hire a financial advisor whose first loyalty is to you, not Wall Street
• Discusses why you should rethink housing in the wake of the real estate crash
• Offers detailed advice on career reinvention, the 50+ job market and midlife entrepreneurship

Engaging and informative, this practical guide provides the strategies needed for a truly fulfilling and secure retirement.

CHAPTER 1

Rethinking Retirement in Hard Times

THE TIMING COULDN’T BE WORSE: The largest generation in our history is approaching retirement age during the worst economic downturn since the Great Depression.

Before the economy crashed, many baby boomers had been holding on to vague notions that retirement would somehow work itself out through their good luck in real estate, in the stock market, or by inheritance.

Whatever the reason, most Americans before they retire have paid little attention to the huge life transition that is coming. We don’t have a good idea of how much we need to save for retirement; only 44 percent of workers responding to one survey said they had tried to calculate what they would need, and an equal number simply “guess at how much they will need” for a comfortable retirement.¹ Another survey of Americans 56 to 65 years old showed that almost half of the respondents underestimated the amount of retirement income they would need, and nearly 70 percent overestimated how much they could draw down from their retirement savings annually.² Sixty percent underestimated their odds of living beyond a given average life expectancy. Meanwhile, about half of Americans file for Social Security benefits too early, often cheating themselves out of hundreds of thousands of dollars in lifetime benefits. Only half of all working adults participate in a workplace retirement-savings program. And the average U.S. household has managed to save just $60,000 toward retirement.³

Now the crash has ushered in a new economic reality that will be with us for years to come. Real estate values and retirement portfolios are depressed, and job security has evaporated. And even though the economy surely will recover, we’re not likely to see the type of sharp bounce-back that characterized the end of many previous recessions. That means anyone planning to leave the workforce in the next five to ten years will be retiring into an economy that looks much as it does today.

The need to build retirement security has never been greater. But one of the main obstacles is the current concept of retirement—the idea that people should stop working in their early sixties and take it easy. The number of years that you’ll have to fund after you stop working is one of the most important variables affecting retirement security. Paying for retirement has become more challenging in light of recession-ravaged 401(k)s and plunging housing values. And those resources must be spread over a rising number of years. American life expectancy has been expanding at an astonishing rate. An American man turning age 65 in 1940—just a few years after Social Security was enacted—could expect to live an average of another 11.9 years; by 2006, that number had jumped to 16.5 years. For women, the corresponding life expectancy had jumped from 13.4 years to 19.1 years.⁴ Those are just average figures, which means that half of us will live much longer. And the Social Security Administration projects that average life expectancy will keep rising in the decades ahead.

That’s good news, of course—but how will we pay for all those additional years of retirement?

The idea of quitting work at a predetermined age dates back to nineteenth-century Germany, where the first system of social security was created in 1889. The system was funded by mandatory contributions from employers and employees, and citizens would be eligible to receive benefits at age 70, an age that was later reduced to 65.⁵ The German system later served as a role model for the U.S. Social Security system that President Franklin D. Roosevelt created during the Great Depression. FDR envisioned Social Security as a response to that era’s widespread poverty, signing it into law in 1935 as part of broader legislation that provided for unemployment insurance, old-age assistance, and aid to dependent children. Like the German system, our Social Security law pegged 65 as the age when Americans could retire and begin receiving benefits. That set the stage for widespread expansion of private pensions after World War II, especially in unionized industries such as the Detroit carmakers. By the 1950s, the idea that people should be able to quit work and adopt a leisure-centered lifestyle after age 65 had gained widespread acceptance—and it’s been with us ever since.

That approach no longer seems sustainable. The economic downturn, coupled with increased life expectancy, points toward longer working lives for older Americans. That won’t be easy to achieve in a weak economy with high unemployment rates, but staying on the job even a few years beyond traditional retirement age can make a tremendous difference in achieving long-term retirement security.

There are no magic bullets or easy solutions to the problem of retirement security. Yet in my work as a journalist covering retirement and aging, I’m often struck by the wealth of good ideas that experts have identified for achieving a satisfying, secure retirement—even in hard times. These aren’t get-rich-quick investment gimmicks, schemes to make millions working part-time from your kitchen table, or come-ons to retire cheaply in Central America. Rather, the best ideas focus on basic blocking and tackling—getting the most from the financial tools already at hand, and making smart decisions about work and lifestyle.

This book explores ways to achieve long-term retirement security, which I define as reliably generating income to support a retirement that could well last 25 years or more for you or your spouse. The generation of Americans now approaching retirement needs to begin focusing on what lies ahead. Boomers need to get smarter—quickly—about retirement.

Money

Over the past several decades, retirement finance has become synonymous with retirement investing. But it’s worth remembering that individually controlled retirement-investment accounts haven’t always been with us. The 401(k) and individual retirement account only arrived on the scene in the 1980s. At the time, about 38 percent of private-sector American workers still participated in traditional, defined benefit pensions that were funded and managed by employers and that provided regular lifetime checks after retirement. Over the years, the balance shifted dramatically toward defined contribution plans—mainly 401(k)s—in which employers commit to a specific contribution of funds but leave employees free to manage the invested funds and make their own contributions. By 2008, only 20 percent of workers had a defined benefit pension,⁶ although a larger percentage of large companies still offered them.

Defined contribution (DC) plans have never come close to replacing defined benefit pensions as a source of retirement security. Simply put, the DC pension system just isn’t getting the job done, for the following reasons.

• Only 56 percent of American workers are active participants in a DC plan. One major reason is access; no law mandates that employers offer 401(k)s, and about 35 percent of workers don’t have access to an employer-sponsored plan. Choice is another factor; 15 percent of workers who have access to a 401(k) decline to participate. More than 70 percent of low-income households reach retirement age without any employer-sponsored retirement coverage .⁷

• Employers are cutting back on matching contributions. In 2008, one-third of employers reduced or eliminated their matching contributions to retirement accounts, and another 29 percent planned to do so in 2009.⁸

• On average, employees contribute 7.5 percent of their salaries,⁹ about half the rate recommended by most financial planning experts.

• Exposure to stocks is too great as retirement approaches. Nearly one in four investors approaching retirement age (56-65) had more than 90 percent of their account balances in equities at the end of 2007.¹⁰ That’s far too high, and older investors suffered huge losses when the market crashed in 2008.

• Investors cash out prematurely. About 45 percent of plan participants cash out their 401(k) balances when they change jobs rather than roll them over to new employers or IRAs.¹¹ That disrupts the long-term growth of their assets. Borrowing and hardship withdrawals also are allowed under the rules, and people have been tapping into their balances somewhat more frequently during the economic crisis.

All these factors add up to woeful underperformance by the defined contribution system. In 2007—before the crash—the median amount saved by households headed by a person in the preretirement years (54-65) was $50,500—just 7 percent of total household wealth.¹²

It’s time to hit the reset button and pay attention to the broader array of financial tools that can help build retirement security.

Social Security

For most of us, Social Security will be the bedrock of retirement income. The program won’t disappear into insolvency anytime soon, despite the politically motivated forecasts of doom we hear from time to time. But Americans do need to get smarter about maximizing their benefits. Most don’t know when they become eligible for Social Security, how much it pays, or when it makes the most sense to file for benefits. Good planning and decision making can add hundreds of thousands of dollars to lifetime benefits for you and your spouse.

Pensions

Although they’ve been waning, defined benefit pensions remain a very big part of the American retirement-security system. Pension plans have generated a good deal of bad press in recent years because of a series of catastrophic, high-profile failures of big plans at companies such as United Airlines and Bethlehem Steel. But if you do have a defined benefit pension, it’s going to be a key underpinning of your retirement-security plan; and the best part is that it mostly flies on automatic pilot. Still, it’s important to gauge the safety and stability of your employer’s plan and the variety of benefits for which you may qualify.

Income Annuities

Americans without traditional pensions face the challenge of meeting retirement expenses with a combination of Social Security and savings. But one overlooked option is purchasing a do-it-yourself pension—otherwise known as an income annuity. Simply put, you make a single payment up front to an insurance company and begin receiving payments immediately; the price depends on factors such as your age at the time of purchase, gender, survivor benefits, and whether you want the payments to last for a fixed period of time or the rest of your life. Income annuities haven’t gained widespread popularity as financial tools for retirement, mainly because people dislike losing control of their assets and worry that they won’t “make back” the large sum of money that must be invested up front. However, used properly, an income annuity is an effective tool for covering basic living expenses and can provide effective insurance against the risk of outliving your money.

Recalibrating Portfolios

Are you one of those people who have been stuffing unopened 401(k) statements into a file drawer? Well done! While denial isn’t much of an investment strategy, the key to coping with the market crash is taking a long-term view. The goal is to make sure your retirement nest egg lasts many years into the future. If you’re younger than 50, you’ve got time for the market to bounce back; the key here is to keep saving and to keep your portfolio balanced through use of tools such as target date funds, which automatically shift to a more conservative investment mix as retirement approaches. For older investors close to retirement—or already retired—the challenge is more difficult because it involves some belt tightening. The most effective strategies call for delaying your retirement and adjusting your rate of annual withdrawals.

Health Care

If you’re over age 65, Medicare provides an important health-care safety net. But the economic crisis has forcibly retired millions of Americans in their fifties and sixties, leaving them without health insurance. Even for those on Medicare, health-care costs are eroding spending power and economic security; out-of-pocket expenses for people in retirement have jumped 50 percent since 2002.¹³ Health-care expense poses one of the most important risks to retirement security, so it’s important to understand how to navigate the system and mitigate expense risk.

Taxes

Yes, you’ll still owe taxes in retirement. Your income may well be lower, which will lighten your income tax burden, but seve...

Table of contents

• Praise
• Title Page
• Copyright Page
• Dedication
• Acknowledgements
• CHAPTER 1 - Rethinking Retirement in Hard Times
• Money
• Work
• Living
• About the Author
• Index