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Newsletter for January 2017
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Things to Know About Money Before Youíre 60
by Dan Kadlec
by Dan Kadlec
You still have time for changes that can make a difference.
Youíve been hearing and reading about this thing called retirement for a lot of years. Well, itís finally on your doorstep. All of your financial planning has brought you to this point, and while you still have time for changes that can make a difference, for the most part it is time to start contemplating a retirement lifestyle based on what you have not on what you hope to have.
Certainly, you may choose to work another 10 or 12 years, if you are healthy, enjoy what you do, and have kept up your job skills. But, ready or not, most folks retire in their 60s even if what they retire to includes some kind of a paycheck.
Now is the time to take a thorough accounting of your assets, and estimate your expenses going forward. Donít overlook health considerations; they may prevent you from working as long as you like. Nothing needs to be set in stone right now. Working longer or part time should remain an option right up to the moment you call it quits. But there are many important factors to consider. Here are 10 things you should know about money before turning 60:
1) How much longer you expect to work
Ok, this is the big one. No other single decision will have more impact on your retirement security than choosing the date you will quit work, give up your income and begin to draw down your savings. Most current retirees called it quits before turning 65, Gallup found. But the average age of retirement has been ticking higher, and today 37% of workers say they expect to work past age 65 up from just 14% saying that in 1995.
Those closest to age 65 are most likely to project working past that age, Gallup found. This probably reflects a sober assessment of the costs of retirement and the benefits of staying on the job among those closest to the big moment. Working longer allows you to build more savings and delay the moment you start spending down what you have put aside, ultimately shortening the period that you will be drawing down assets. T. Rowe Price estimates that a typical 60-year-old couple that stays on the job to 70, rather than retires at 62, would nearly double their monthly income in retirement.
Working longer also keeps up your connections, which is good for your health. In a Bank of America Merrill Lynch survey, pre-retirees were asked what they thought they would miss most in retirement, and their top response was a paycheck. But those already in retirement said what they most missed was the social connection of a workplace. That may help explain why 72% of pre-retirees say their ideal retirement includes some work so long as they have flexible hours or can launch a new business or whole new career, according to the Merrill Lynch survey.
2) The best time to take Social Security
Millions of retirees make poor decisions about when to trigger this important benefit. Individuals leave an average $100,000 of lifetime Social Security benefits on the table and a typical married couple misses out on $250,000, according to Financial Engines, a benefits manager. Next to choosing a retirement date, choosing when to take Social Security benefits may be the most important financial decisions still in front of you.
Social Security remains a staple of most peoplesí retirement income. Despite constant talk of its demise, the trust fund is not scheduled to run out of money until 2034 and even then the program would be able to pay 79% of scheduled benefits for another 55 years. Social Security lifts 15 million seniors out of poverty and is the sole source of income for nearly one in four recipients. Changes almost certainly are in store but this bedrock retirement benefit is not going away.
Without a traditional pension to fall back on, Social Security may be your only source of income that will never run out. So it is critical to get the most you can. In general, you will do that by waiting as long as possible until age 70 before claiming. Why? Your monthly benefit rises 6% to 8% every year you delay between age 62, when you become eligible for early benefits, and age 70, when you must begin collecting.
But not everyone should wait that long. If you are in poor health or have few other resources you may be better off claiming the benefit as soon as possible. But try to wait at least until your full retirement age (66 or 67, depending on when you were born). That leaves you with the most claiming options, like filing and suspending and start-stop-start. Unfortunately, even the Social Security customer reps donít always make the best recommendations about such options or always know the rules. So for help choosing the best strategy for you, try the tools atsocialsecuritysolutions.com, T. Rowe Price, maximize my social security.com and social security choices.com.
3) How much guaranteed income you have
If you are fortunate, Social Security is only one of your sources of guaranteed lifetime income. Many workers approaching age 60 today still have a traditional pension or even two, if they have worked long stints at different large employers. Get a handle on your total household monthly income from these sources.
To learn about your Social Security benefit at age 62, at full retirement age, and at age 70, register with the Social Security Administration here. Ask the human resources department at your employer and former employers for a statement of pension benefits. Ideally, guaranteed lifetime income the kind that can never run out and is not subject to market swings would cover all your fixed expenses in retirement. If it does not, consider working longer, scaling back your lifestyle, or finding more guaranteed income.
An increasingly popular option for additional income is a fixed-income annuity, which is an insurance contract where you pay a large up-front premium and get monthly income for life, or for some shorter designated period. For an estimate of how much income you can purchase, go toimmediateannuities.com. You will see many choices, including options for an annual inflation adjustment and annuities with survivor benefits.
Fixed-income annuities are very different from, say, a government bond, which provides secure income but at a very low interest rate and which carries the risk of your principle getting whacked if interest rates rise quickly. Dividend stocks pose problems too. At this age, you want to be decreasing the amount of your wealth thatís invested in the stock market. (A decent rule of thumb is to have 110% minus your age in stocks.) Rental income can be an attractive source of income but comes with many potential headaches, including repairs and deadbeat tenants.
These issues are partly why Fidelity Investments recommends putting up to 30% of your savings in fixed-income annuities. They pay month in and month out no matter what.
4) Your safe withdrawal rate
Not everyone can secure sufficient guaranteed lifetime income. This is especially difficult without a traditional pension. If you fall into this category, you will have to take charge and make the money in your 401(k) last. Increasingly, employers are building low-cost guaranteed lifetime income options into their plans. So look for that option and consider converting a portion of your nest egg.
But if you must manage savings on your own, or you have 401(k) assets beyond whatís needed for fixed expenses, the trick is drawing down the account at a pace that gives you good odds of not outliving your money your so-called safe withdrawal rate.
One common strategy is withdrawing 4% of your 401(k) balance each year, and adjust for inflation annually. This gives you a good chance of not running out of money for 30 years. But there are no guarantees; a long period of low returns might exhaust your nest egg early. T. Rowe Price looked at the 4% rule for anyone retiring Jan. 1, 2000 and found the Internet bust and financial crisis would have laid waste to their finances. The following 10 years, a portfolio of 55% stocks and 45% bonds drawn down by 4% a year plus inflation would have fallen by a third and you would have had only a 29% chance of your money lasting 30 years.
To play it safe, financial planners today recommend dropping the withdrawal rate to 3% or less. But even that is not certain to last. Another strategy is dividing your nest egg by your remaining years of life expectancy and withdrawing that amount each year. You can find your life expectancy at 65 and beyond here.
5) When to accelerate debt repayment
One lingering effect of the financial crisis is that more workers are entering retirement with more debt. Some of this is a result of the mortgage refinance boom of the early 2000s, when boomers took advantage of low rates but wound up taking out cash or extending the length of their mortgage. Others bought new or second homes somewhat late in life and financed it with a 30-year mortgage.
The percentage of homeowners age 65 and older carrying mortgage debt increased from 22% in 2001 to 30% in 2011, according to the Consumer Financial Protection Bureau. Among those age 75 and older, the rate more than doubled, from 8.4% to 21.2%. Seniors are also carrying more credit card debt, according to the National Center for Policy Analysis, and even student debt, according to the Federal Reserve Bank of New York.
Debt is one of the key things keeping many from retiring as they had planned. So targeting your debts should become a focus in your pre-retirement years. Now is the time to create a pay-down schedule. This is never easy because it almost always requires that you cut spending. But the sooner your debts are gone the more freedom you will have to retire when and how you want.
If your main debt is credit cards, start by paying off the one with highest interest rate and then moving to the next, being certain to use all savings from the retired debt to accelerate payoff of the next card. Some planners prefer the momentum method, where you pay off the card with the smallest balance and then move to the next smallest balance, using this momentum to stay focused.
The momentum method may be best applied to multiple forms of debt say credit cards, medical debt, a car loan, student debt, and a mortgage. You may be able to work your way to nothing but mortgage debt fairly quickly. With a mortgage, consider making two extra payments a year or arrange for automatic monthly payments higher than what is owed.
6) Whether to let your term life insurance lapse
Young families tend to choose term life insurance over whole life policies for good reasons: Theyíre less expensive and, if you shop wisely, your term policy will expire around the time you no longer need it. But life happens. Your calculations may have been off. Approaching age 60 is a great time to look at your policy and decide if you should lengthen it, let it go, keep paying to expiration, or replace it with another policy.
After years of paying for this insurance it may seem frightening to let it go. But term life is different than whole life insurance. There is no cash value. You have not been building value in this policy over the years merely paying for a large benefit should you pass away early. There is nothing there to hang on for if you no longer need the coverage. So in thinking about term life in your late 50s, think about why you bought the coverage in the first place. You may no longer need the coverage if:
∑ Your kids are grown and self sufficient;
∑ You have paid off your mortgage; or
∑ You have saved enough to stop working.
These are the main areas that families seek to protect. In general, you want enough term life so that your spouse would be able to retire all debts immediately, pay for the kids through college, and generate enough income to live the same lifestyle. It may be a waste of money to keep paying once those are accounted for. Of course, you may have new reasons to keep a term policy, including the education or welfare of grandchildren or some other large debt. In that case you will need to do a little math.
Find out exactly when your term policy expires. On that date, you can still maintain coverage but the premium will skyrocket. If you need coverage for more than another year or two you almost certainly will be better off with a new policy, assuming good health. You may be able to convert your term policy to a whole life policy without evidence of good health.
Finally, if you still have a few years left on your policy but feel the coverage is now excessive and the premiums are too expensive, ask for a modification. Many companies will allow a one-time decrease in face value to your policy, which will reduce your premiums. This is also a wise strategy if you are healthy and buying a new policy. Odds are at this age you donít need as much coverage as you once did. So buy less face value and you may be able to hold your premiums steady.
7) Your future out-of-pocket healthcare costs
A quarter century ago two-thirds of large companies offered retiree health benefits; today that figure is just one-third, reports Allianz Life Insurance. With routine healthcare costs rising 4% to 5% a year, just one in nine pre-retirees are confident they will be able to foot the bill. Little wonder that health problems top the list of worries for those planning to retire.
Many retirees fail to take these out-of-pocket expenses into full account and wind up shocked and ill prepared. They assume that Medicare and Medicaid will take care of them. But even those programs have considerable lifetime costs for co-pays and deductibles. Total out of pocket healthcare expenses for a healthy 65-year-old couple will run $266,589 (not counting dental and vision), reports Health View Services. That figure jumps to $463,849 for a 55-year-old couple retiring in 10 years. Other estimates are somewhat lower. Fidelity puts the 65-year-old couplesí costs at $245,000. But letís not quibble. Itís a lot of money.
To better prepare for these expenses, consider buying insurance to supplement Medicare, such as Medigap and Medicare Advantage. You might also dedicate the income stream from a pension or Social Security to cover this cost. And you stand a good chance of cutting this bill substantially if you eat right and stay fit.
8) Whether you need long-term care insurance
Now for the bad news: The lifetime healthcare costs mentioned above do not include the potentially crushing end-of-life care needs that you and your spouse may require. The average 65-year-old is projected to need three years of long-term care about two years of in-home care and one year in a facility, according to the Department of Health and Human Resources. For an idea of what that costs, consider that the average cost of a nursing home is $77,380, according to the Genworth 2014 Cost of Care Survey. Even assisted living, where you get just some one-on-one help and basic medical care, averages $42,000 a year.
Deciding whether to buy long-term care insurance to guard against these costs is a difficult and personal decision. Only one in three policyholders ever make a claim. At age 65, a man with long-term care coverage stands a 32% chance of tiring of the payments or otherwise letting the policy lapse, and a woman stands a 38% chance, according to the Center for Retirement Research at Boston College. Many donít spend enough time in a facility for their policies to kick in.
Still, for some couples long-term care costs run to $700,000 or more, possibly much more, and Medicaid picks up the tab only after you are all but broke. One rule of thumb: If your net worth is less than $200,000 you do not have enough assets to protect; if your net worth is more than $2 million you can probably cover these costs put of pocket so why spend up to $5,000 a year as a couple for 20 or 30 years?
Yet that leaves a lot of people in between who would benefit most from the coverage. If you decide you want it, generally the most cost effective time to purchase is before age 60 or possibly within a few more years. By age 65 the premiums are rising steeply. So now would be the time to pull the trigger.
9) Where you will live in retirement
For a lot of retirees, downsizing is at least part of the solution to making ends meet. A smaller home in a cheaper location is one of AARPís top suggestions for strapped seniors. You can find just about everything you want in dozens of cool, fun, culturally rich, and relatively inexpensive communities. Start with Moneyís annual list of best places to retire, which takes into account such concerns as access to healthcare, property taxes, public safety and senior-friendly activities.
If you are going to uproot, first spend plenty of time scouting a new area and living there for a test period first. Sometimes a place just doesnít feel right once you are there no matter how attractive it seemed when you visited the first time.
Moving isnít for everyone, of course. It may take you away from family and friends and familiar surroundings. Nine in 10 pre-retirees say they prefer to remain in their home after quitting work, according to AARP. Yet that poses certain problems. Fewer than 25% of homeowners age 55 or older have a bedroom and full bathroom on the first floor, a way to get into the house without steps, and no steps between rooms, according to the Joint Center for Housing Studies at Harvard University.
In other words, your home may not be age friendly. Some important features can be retrofitted into a home for a few thousand dollars, including the installation of railings and grab bars. Basic modifications to a one-story home run about $10,000, according to a 2010 report from the MetLife Mature Market Institute. That is peanuts next to the cost of assisted living.
ďYour lifestyle is diminished if your house isnít working for you,Ē says Louis Tenenbaum, a Rockville, Md., contractor and founder of the Aging in Place Institute. The National Association of Home Builders estimates that consumers will spend $25 billion this year on universal design no steps inside or out, no-slip surfaces, no-curb showers, lots of natural light, easy to reach storage and low lighting for nighttime mobility.
10) What you are retiring to not from
When you arenít working there is a vast world of hobbies that give your life purpose and possibly a paycheck. There is also an exploding array of volunteer opportunities near home or in far off lands. Some 4.5 million retirees are now in ďencoreĒ pursuits where passion, purpose, and a paycheck come together, says Marc Freedman, founder of Encore.org.
Plan for this transition. Donít leave a job start a new chapter. Increasingly, boomers are thinking like young people that are just getting started in life. Organizations including Teach for America and the Peace Corp have seen a dramatic rise in interest from retirees. You may have to take a class, accept an unpaid internship, or volunteer for a while all of which result in a financial sacrifice. But it is worth the price if you find a pursuit that gives your later years meaning.
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