Retirement Planning- The New Realities
We had a great group for our November meeting in which we discussed the new realities of retirement. First, each of us discussed our vision of retirement as well as a model that we had experienced through our parents and/or grandparents. Many expressed that their parents had had to retire earlier than anticipated and that it was a hardship for them. Some had parents who adapted quite well to retirement and pursued hobbies that they were passionate about while some had parents who struggled with their newfound freedom. Job dissatisfaction and health can lead to a decision to retire early that will result in financial stress. Another common concern was health care in retirement especially in the latter years when most of the costs are incurred. Several studies show that the average retired couple will need approximately $200K in today’s dollars to cover their out of pocket medical expenses throughout the remainder of their lives and that does not include long term care.
Trends in Retirement
Baby Boomers will redefine retirement because they will be healthier, live longer and be more active; they might want to consider a phased approach to retirement where they work longer or part time but still enjoy activities on their “bucket list.” Since there are higher rates of depression and substance abuse for Baby Boomer retirees than their corresponding non- retirees they should be prepared and set a plan for engaging in social and meaningful activities.
Retirement planning is ultimately a math equation that depends on the time you are accumulating funds, how aggressively those funds are invested, how long you withdrawal funds in retirement and how much you spend in retirement. This is a complex and difficult puzzle to solve due to lack of savings, overly conservative investments, unrealistic expectations regarding your spending and life expectancy and lack of vision for the future. (Focus on the present).
Safe Withdrawal rates, Safe Savings rates
I shared a chart that summarized “safe” savings rates for people who are in the accumulation phase. The purpose of the chart was to illustrate that you contributions will do the heavy lifting for you and that having a higher equity exposure will increase your probability of success if you can stomach the ongoing volatility. The new mantra is 15% is the new 10%. Most early savers will need to do more of the work from a savings standpoint due to lack of pensions, lower expected returns, and reform of entitlements (Social Security and Medicare).
Research on safe withdrawal rates was summarized. The rule of thumb is that you can withdrawal 4% from your investment accounts and not risk outliving your funds. This assumes 50%/50% large cap stock – Treasury bond mix. The withdrawal rate can be increased if you include additional asset classes and/or are willing to decrease your withdrawals subsequent to market downturns.
Social Security
We discussed the viability of Social Security in the long run and it was suggested that the program can survive with small revisions such as gradually increasing the eligibility date over time and making changes to the way the inflation factor is calculated. I shared a chart that summarized strategies based on couples ages, primary insurance amount but reinforced that there are qualitative as well as quantitative issues to consider.
The next meeting will be at Laura’s house the second Tuesday of December.
We decided to focus on financial resolutions and have an open forum to discuss terms and concepts that some of us found difficult to understand. Participants will email me their questions or terms they want to discuss. We set a goal of reading either Kiplinger’s and/or Money over the next month. You should email or bring to the meeting any questions based on the reading for me to discuss.
