The House of Representatives just passed a two year budget deal to avoid a default by the Treasury. Next stop will be the Senate. One provision of this deal is a change in Social Security rules. Specifically, the ability to use the file and suspend method to get extra benefits will be curtailed. This is a valuable benefit, and it will still be available to people of a certain age. We’ll write more about this change as details emerge, but it’s important, if you’re nearing Social Security eligibility, to know and perhaps act on all of the possible techniques to increase your benefits legitimately.
A recent article reminds us of a scam that is still being tried: telephone callers saying they are from the IRS and demanding immediate payment to avoid arrest and imprisonment. If you won’t pay on the spot, your Social Security number is demanded. But, as the IRS frequently tells us, they don’t call people on the telephone demanding payment. So it’s a scam and you should hang up. Similar ploys involve school loan payments, and nearly all of them want your identifying numbers so they can be stolen. Never give out Social Security or bank account numbers to people who call you. Here’s a question: are there people who get up in the morning and say “today at work I’m going to try to cheat innocent people by scaring them with phony IRS demands.” Apparently there are.
An online report about retirement issues included the statement from one participant that 401(k) plans and IRAs were the worst ideas ever. Why? Because they are voluntary and it’s easy to put off contributing to them. The result, obviously, is too little saved for retirement. In an earlier era, which featured more defined benefit pension plans, employees were often, in effect, forced to save for retirement, which was in the form of a monthly check at retirement. The other problem with these plans is that the investment of these funds is left to the individual, usually someone who is not an investment expert. Again, in the earlier era, investments of pension plans were managed by investment professionals. The so-called freedom given to 401(k) and IRA participants to manage their own futures just resulted, in too many cases, in poor investment results that then resulted in inadequate retirement income. As the individual who spoke suggested, if the pipes in your home burst, would you call a plumber or try to fix them yourself?
I saw a discussion online today about trying to measure retirement income readiness. There was discussion of Black Rock’s CORI retirement index, which tells you how many dollars you need to save to produce a dollar of income at retirement. It’s a helpful number to know, even if it’s possibly a depressing one. Of course, knowing whether you have saved enough for retirement starts with knowing how much income you need in retirement, which is a process in itself: how much income for a basic retirement or a more “robust” one. One you know these numbers, which obviously differ greatly from person to person, you can determine what benefits you have to offset your income needs, such as from Social Security or pensions. What’s left is the number for which you have to save. If your income need is $75,000 per year and you have Social Security and pensions of $50,000, you have to save enough to produce the additional $25,000. The online report indicated that about $18 would be needed to produce $1 of retirement income, at today’s rates, so to produce $25,000 you would need $450,000 in retirement savings.
Some other publication has just come out with its list of the top 10 places in the country for retirement, based on criteria such as availability of health care, activities for seniors, climate, etc. I believe all 10 were fairly small towns in less populated areas. There are magazines as well that focus solely on where retirees should go. OK, it’s an idea, but it’s not ideal for everyone. One of my colleagues just mentioned a reason to stay where you are: having children nearby. These decisions should be based on the individual’s own interests. Not everyone wants to live in a small town in Kansas, although some do. One criterion that seemed to be missing from the survey was proximity to large cities and the cultural activities they offer, or living near a college campus with the opportunities that offers. The point is, retirees should start with what they want to do and whether there is family they want to stay near. Health care availability is also important, and recreational activities (although they seem to be available just about everywhere). If you’re living in a place you like, think carefully before “pulling up stakes” and moving to another part of the country just because it doesn’t snow there.
For many people who reach the customary retirement age of 65, it’s not time to sit on the porch in a rocking chair. Because of advances in health care and greater attention to developing good habits, people at 65 are physically and mentally able to do more. Call it the second season or whatever, there is a desire to remain active. It could be a second career or something related to the prior career. Or it could be charitable work or greater attention to a hobby. Studies, as well as common sense, prove that staying active is a key to a longer and more satisfying retirement.
But there is also some important personal planning to do, to ensure a successful retirement. We’ve written before about decisions relating to Social Security and Medicare, and those continue to be crucial. Planning how far your retirement income will stretch will tell you whether you can maintain your pre-retirement lifestyle or must downsize. As unpleasant as it might be to consider, it’s necessary to think about your living arrangements if you begin to experience a physical decline. Many issues to consider, but starting early and getting advice from impartial experts will go far toward making the retirement years more successful.
Numerous articles discuss the ongoing march of baby boomers to retirement, and part of that process involves succession planning for businesses. There are several steps to the planning process, and the process itself should begin at least 3-5 years before the planned sale and its aftermath. No business should be sold or transferred to family members until there has been detailed estate and tax planning, and some of that should take place years before the event. There are many things to decide, and the failure to go through a decision-making process before, during and after the succession events could mean that the business owner will waste some portion of the value he or she has built up a long wealth-building career.
Recently, the British government decided to allow people over 55 to cash in their pensions, and the result, according to the Financial Times, has been a dramatic upswing in fraudulent schemes. People have been offered pension reviews and investments with remarkably high rates of return as a way of gaining access to their pension funds, which are then stolen or lost. Although it’s an example from another country, this news makes several important points. First, if people contact you with “freebies” or incredible investment opportunities, look at them very carefully. Second, and equally important, consider carefully whether your have the expertise to manage your own retirement funds. Unless you have extensive skill and training, you’re probably better off leaving investment and retirement asset planning to professionals. Finally, if it sounds too good to be true and it’s a deal you have to sign up for NOW, better to walk away.
Among the many articles about retirement planning, a couple stand out as offering interesting “takes” on the process:
1. One study reports that retirees in better health are more likely to feel financially secure, enjoy retirement and feel fulfilled. No surprise, but worth remembering.
2. Among workers with at least $1,000,000 in investable assets, the average planned age for retirement, according to another study. But 53% will continue to work in retirement, suggesting that retirement might mean “retooling”.
3. The National Retirement Sustainability Index, which someone invented, includes as factors health at retirement, job satisfaction, the level of financial planning and the level of adaptability as contributing to a high score.
4. Another writer says it’s important to have a formal withdrawal plan at retirement, which makes sense. Factors in such a plan would include a strategy for turning on different income streams, a detailed financial breakdown for the first five years, overall budget recommendations and a specified first year withdrawal rate.
A recent article on the website Employee Benefits News offers these five trends in planning for retirement:
1. better and more data available to measure success in reaching retirement goals.
2. automatic features in promoting more saving for retirement.
3. the increased use of target date funds.
4. the coming availability of automatic IRA saving.
5. greater 401(k) disclosure.