The US Department of Justice has established the Elder Justice website, at www.justice.gov/elderjustice/. The introduction of this website is further proof of the serious issues, financial and otherwise, that are facing the growing number of senior citizens. The site contains information to assist victims and family members, prosecutors, researchers and practitioners in combating elder abuse and financial exploitation.
A recent study (there must be whole industries of people who prepare recent studies) from Northwestern Mutual reports that Millennials, also referred to as Generation Y, plan to work beyond age 65 in much larger numbers than their elders. Given that this cohort is people now ages 18-34, I would take with a large grain of salt what they say are their plans 30-45 years in the future. One of their reason for planning to work longer is that they have little confidence in the future of Social Security. That’s not an unreasonable position, given the failure of our elected officials to consider minor changes to the Social Security program that would ensure its survival. Nevertheless, as people get closer to normal retirement, which most people think of as age 65, they tend to shorten their work horizon. Currently, the average age at which people retire is under 65. There’s no way of knowing what people will think of as normal retirement 30 years from now, but the advice will always be the same in preparation for it: save more, spend less.
More thought is being given to the idea of where to live in retirement. Although many still depart for the warmth of southern climes, others feel they want to stay where they have been. Is this a good idea? It often is, but, according to an article in Wealth Management, there are some questions to ask:
1. what will it cost to live in my home, including any remodeling to accommodate decreased motor skills?
2. is there adequate transportation available if I can’t drive?
3. how much will in-home health care cost?
4. will I be able to get to doctors, sports and entertainment venues and other social situations after I retire?
A recent article in US News offers four simple rules for maximizing retirement plan investments:
1. contribute enough of your own income to max out the employer match, if there is one.
2. research investment options, such as low cost, diversified funds.
3. don’t take early distributions.
4. start saving for retirement as soon as possible.
It’s a measure of readiness for retirement, but, unlike other measures of readiness, it’s not just based on financial status. A report from the Goldenson Center at the University of Connecticut lists four non-economic factors entering into a determination of retirement readiness: your level of job satisfaction; your health status at retirement; the level of financial planning you have done; and your level of adaptability. The health point is a very good one: if you’re healthy at retirement, your costs for health care will be less and your ability to continue working in a part-time job will be greater. Adaptability refers to being able to do other work after retirement, like consulting. Of course, retirement is primarily about money, but not wholly. Health is important, as are the other factors. I would add another unmeasurable factor: your ability to find other interests, things to do after retirement, that enable you to live a satisfying life.
An organization called the MIT AgeLab has produced some very interesting research on the challenges and benefits of the retirement process, and I think you would find a visit to their website useful. Google MIT AgeLab. An article that appeared in a local publication recently, written by a representative of the Hartford Funds and using research from the MIT AgeLab, asks three simple questions that will help to define the success of your retirement, or the lack thereof:
1. Who will change my light bulbs? Who will take care of those minor and not so minor household chores that I could do when I was younger?
2. How will I get an ice cream cone? Will I be able to get to stores and offices as easily when I am older?
3. Who will I have lunch with? That is, my friends move away or pass on, I’m not in an office with co-workers any more, and my children might be far away. Who will I talk to?
A survey taken by the Insured Retirement Institute asked if participants would like their benefit statements to contain an estimate of the income their account balances would produce at retirement. The answer, of course, was yes. The US Department of Labor is planning to propose a rule that would require that defined contribution plans (those in which you have an account balance rather than a promised benefit) contain such estimates, and this survey apparently shows support for the idea.
There are several points to make here. One is the familiar point that when you read a survey, it helps to know who’s asking. The Insured Retirement Institute is an organization that represents sellers of annuities. Nothing wrong with that, but when a group that likes annuities asks if people would like to know what annuity income their account will buy, perhaps we can be a little skeptical.
But a second point is that there is little guidance given to retirement plan participants as to whether they are saving enough for retirement and how their retirement account balances will replace their working income after retirement. With a defined benefit plan, you know what the retirement income will be; but with the steep decline in such plans, most workers will have to determine what kind of retirement they will have based on a lump sum in their retirement accounts. That will be very difficult for most of them.
The survey adds that people like the idea of using online retirement calculators. These calculators can be very helpful, but their value depends on the value of the information inputted. And, the quality of online calculators varies widely. And, further, there could be a tendency to rely too much on the estimates provided, as if they were guaranteed amounts, which they are not.
So, yes, the idea of providing estimates of retirement income is a good one, and online calculators can also be helpful. But what is really needed is financial planning advice for individuals with retirement accounts based on their specific circumstances. This might result in buying an annuity or in some other investment vehicle. Provide education; provide it on an impartial basis, without trying to sell one particular type of asset; and encourage retirement plan sponsors to offer low cost financial and retirement planning advice to participants.
Another difference between the more traditional defined benefit plans and today’s more prevalent defined contribution plans, including 401(k) plans, is that with the latter you approach retirement with a lump sum of money, and you have to determine how you will withdraw it. In effect, you need to make some kind of a guess as to how you will make the lump sum last throughout your retirement years. By contrast, with a defined benefit pension plan, you receive a monthly benefit, which you know you will receive for the rest of your life. That kind of benefit makes planning easier. But fewer people have such plans, as compared to the prior generation. What to do?
First, you need to avoid the “illusion” that because you have a large retirement account, you need not worry about the amount you withdraw. This lump sum must last your remaining lifetime, and perhaps that of your spouse. A large lump sum might permit only a small annual distribution, if it is to last a lifetime.
How do you determine how much you can withdraw? Unfortunately, while there are some guidelines, like the oft-quoted 4% per year, there is not enough guidance to deal with each individual’s specific circumstances. It can’t be that 4% is the right number for everyone at all times. What’s needed is more retirement planning tools and better access to skilled advice. There are many financial planners, but many of them earn a living by selling products, and that might color their advice. Just my opinion, but I believe that financial planners who charge a flat fee are a better source of advice. Again, every general statement is subject to many exceptions.
It’s apparent that people are retiring without a clear idea of what to do next, and this can result in financial problems. What’s needed is more discussion and concrete planning as to how those facing retirement can get reliable advice on how to budget and plan for a secure retirement.
An article on the website fredreish.com describes a problem facing baby boomers who are about to retire. Many of them have participated in employer-sponsored retirement plans, and in those plans they have chosen their investments from a menu of funds selected by the plan’s administrator. But if they retire and roll over their retirement account balances to an IRA, they’re on their own. They must choose from the vast universe of investment opportunities. They might get advice, but they will generally pay for it, and often at a higher cost than was charged in the retirement plan. Many boomers are investment-savvy, but most aren’t. A few serious mistakes can make a big difference in retirement. Employers would be well-advised to allow retirees to keep their retirement funds in the plan. This might require some changes in how funds are permitted to be distributed, but a little more complexity in the plan would be a small cost to help retirees maintain what they have built up over their careers.
Not exactly, but a recent article in an insurance industry publication, The National Underwriter, tells the results of a survey taken among older individuals in end-of-life care. They were asked what they regretted. Here are the top five answers:
5. I wish I had let myself be happier.
4. I wish I had stayed in touch with my friends.
3. I wish I’d had the courage to express my feelings.
2. I wish I hadn’t worked so hard.
1. I wish I’d had the courage to live a life true to myself, not the life others expected of me.