4Q2017 | Ages 50+
Fifty Years Old and Counting
“Retirement”, that’s a funny word these days, isn’t it? I am a 56-year-old financial adviser working with this 50-something age group with their biggest question in mind: “When can I retire and what does my income look like with the savings I have?”
The fact of the matter is that “retirement” looks so different than it did years ago. My grandparents retired around the age of 62 and had full social security and a pension from various employers. My parents also retired “early”, with a bit of a cut to their social security and a pension from the state (mom) and a pension from a printer’s union (dad). At 83-years-old, dad had suffered through one reduction after another. Year-to-date he has lost over $1,200 per month between the government’s increases to Medicare, as well as watching his pension benefits whittle away due to the pressure on unions over the past many years. But as usual, they say we will adjust… They do have some savings and have been frugal about how they withdrawal their money. Also, they both work. Mom at the senior center in the kitchen when she feels like it; imagine working in the senior center at age 83… one of the best employees I might add. And dad, a freelance photographer and writer, also when he feels like it which is most of the time… It is his passion!
Why do I tell you this story? It’s because it is important in this day and age to know the options you may have in retirement. There are really only three options. The first, retire on a lump sum of money pulling about 4% off annually to replace the income you are now living on for the rest of your life. Second, reduce your life style spending according to the lump sum or other income resources you have. This is done when enough has not been saved. We generally do not see this happen; someone willing to reduce their lifestyle. Or third, continue working longer until you can retire, or work part time to fill the gap that is missing from your income. Which would you choose?
Let’s go into some detail on the first solution: retire on a lump sum. For every $1,000,000 you save, you can faithfully pull off 4% or $40,000 without the lump sum disappearing on you. This is all pre-tax money, or before tax money. This is only an approximation of course. We are hoping that your money is earning anywhere from 5 – 7% to still have a chance to grow. See what the Social Security Administration has to say about life expectancy. By the way, I generally calculate a life expectancy of about age 90.
The Social Security Administration maintains a life expectancy calculator that will tell you the average number of additional years a person with your date of birth and gender can expect to live. Using this calculator, a 65-year-old woman born on January 1, 1951, has a life expectancy of 86.7 years. And if she makes it to age 70, her life expectancy increases to 87.8 years. A man the same age has an average life expectancy of 84.4 years.1
So, ask yourself this question, “Am I saving enough to get to my income level goals, and how do I figure out if I am saving enough?” Another question you should be asking yourself, “Is $40,000 pre-tax dollars enough for me to live on with social security at age 67?”
We all know the sooner we get started, the better. Maybe what you don’t know is the leverage we have once we get older. When your kids are out of the house, your home and expenses have reduced, you may be close to having your home paid off, and the maximum contribution inside a 401k is $18,500 per year, what matters more: a comfortable retirement or working the rest of my life?
Let’s talk about our second option: reducing our lifestyle. Have you done the math on this? We are only about ten to seventeen years away from retirement, and you know how time flies! Not to burst your bubble, but most people think that by having a mortgage paid off when they retire will be their saving grace. Have you looked at the cost of healthcare lately? Your social security will be subsidized every year for the cost of Medicare and the insurance maze that follows can cost quite a bit more. My parents pay $700 for part A, B, D and so on. To budget for the cost of health care taking over your house payment is a wise decision.
We generally see most individuals and couples not willing or not being able to reduce their lifestyle. Financial commitment to car payments, house payments, second homes and any other debt obligations are not things that go away easy. There are those that have prepared though to do just that, reduce their spending habits. To live a simple life style in retirement is never bad. To achieve this plan, do the math way ahead of time and know your numbers before you get there. I have worked with many that know they do not want to do what they are doing today for the rest of their lives. The homework was done on household expense, debt obligations, saving that had accumulated and income gaps that needed to be filled. Budgets with expectations of inflation were calculated as well. They understood that if the reduction did not happen that the outcome would not be a positive one. Their goal was achieved only because of the homework and savings they had. Saving In this case was not used to live on but used for emergency situations that could not be avoided. They were even able to continue to save in retirement as well.
Option 3? Work longer. This option is quite prevalent in today’s society. People are living longer and are choosing to work longer. Those in a position who have a passion for their work also do not see a reason to leave what they are doing. Don’t get me wrong, the older they get the more flexibility they want in their schedule too. One fact we do see today is because people are working longer, the options for the younger generations to move up into positions is decreasing. Those higher positions may not exist in some companies. Also the older we get the more health related challenges come up. With this comes more pressure on the employer for health care costs etc. Employers now are taking the initiative to make sure their employees can save and retire by offering a retirement plan, implementing resources for their employees to learn, and offering a match for an incentive for the employee to invest. Why leave money on the table, right?
Or you can work a part time job to supplement the gap created by not saving. What is that gap? Do you like the option to possibly have a job that you have dreamed of, but in a part time capacity, so you can enjoy some free time? This is a viable solution to not having the proper savings for retirement. Many cannot imagine not doing anything in retirement. Volunteering for your favorite charity or church may turn out to be that next part time job that supplements the income lost.
Did you know for every year you do not take social security your “benefit” goes up by 8%? Have you taken the time to get your social security statement off the government web site? Lastly have you done the math on the impact it may have to defer your benefit or look at taking a spousal benefit at the time of retirement? Click here to find your statement.
At the end of the day the resources you have within your own company offering a retirement plan could be your best planning tool. Take the time to talk with an advisor and do the math. It never hurts to plan and create a strategy that works ahead of time!
1. US News By Emily Brandon, Staff Writer |March 21, 2016.
Securities offered through Cambridge Investment Research, Inc., “Cambridge,” a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Prime Capital Investment Advisors, LLC. “Prime Capital,” a Registered Investment Advisor. Prime Capital doing business as Qualified Plan Advisors, “QPA,” 6201 College Blvd., 7th Floor | Overland Park, KS 66211 | p: 913.491.6226 | f: 913.491.3214 | primecap-ia.com | Cambridge and Prime Capital are not affiliated.
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