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The Chapters of Retirement

The five phases of life after 50 & the considerations that accompany them.

The journey to and through retirement occurs gradually, like successive chapters in a book. Each chapter has its own things to consider.

Chapter 1 (the fifties). At this stage of life, retirement becomes less like a far-off dream and more like a forthcoming reality. You begin to think about when you can retire, and about taking the right steps to retire comfortably.

By one measure, men have their peak earning years in their mid-fifties. Data from the Federal Reserve Bank of New York shows the median male worker earning 127% of his initial salary at that time. The peak earning years for women are harder to statistically gauge, as some women leave the paid workforce for years-long intervals. In inflation-adjusted terms, earnings actually peak earlier in life. PayScale estimates that on average, pay growth for women flattens at age 39 (at a median salary of $60,000), and at age 48 for men (at a median salary of $95,000). So by the fifties, many people are receiving raises to keep up with the cost of living, but essentially earning the equivalent of what they made a decade or more ago.1,2

During your fifties, you may contend with “lifestyle creep” – the phenomenon of your household expenses growing along with your pay raises. These increased expenses may include housing costs, education costs, healthcare costs, even eldercare costs. Despite these financial strains, the inflow of new money into retirement accounts must not cease; your retirement plan assets should not be drawn down through loans or withdrawn too early.

Chapter 2 (the early sixties). The anticipation builds at this point; you start to think about the process of retiring and the precise financial and lifestyle steps involved. You also begin to think about the near future – not only what you will do next, but how you will do it.

According to the Center for Retirement Research at Boston College, the average American man now retires at age 64, the average American woman at age 62. So the reality is that the early sixties coincide with retirement for many people.This reality is worth noting in light of the difference between Americans’ envisioned and actual retirement ages. Last April, a Gallup poll asked pre-retirees when they expected to leave the workforce: 37% saw themselves working past 65, 32% before 65, and 24% at 65. The same poll asked older, retired Americans when they had stopped working full-time, and 67% of those respondents said they had done so before 65.3,4

You may have to act on your plans to volunteer or start an encore career earlier than you think. If you do not have a set plan for the next chapter, a phased retirement may give you more of an opportunity to determine one.

This is also a time to dial down risk in your portfolio, especially if a bear market occurs right before you retire. You have little time to recover from a downturn.

Chapter 3 (the start of retired life). The first year or so of retirement is akin to a “honeymoon phase” – you have the time and perhaps the money to pursue all kinds of dreams. The key is not to spend wildly. Lifestyle creep also affects new retirees; free time often means more chances to spend money.

The good news is that you may spend less than you think. Transportation, insurance, housing, clothing and food costs may all decline. The common view is that you will need to live on 80% of your end salary for a comfortable retirement, but in a 2014 T. Rowe Price survey of retirees, the average respondent was living on 66% of his or her pre-retirement income. Eighty-five percent of those retirees said they were maintaining their standard of living with less money.5

Chapter 4 (the mid-sixties through the late seventies). This is when some people get a little restless. It is also when some people find their retirement savings growing disturbingly smaller. You may get bored with all-leisure, all-the-time and want to volunteer or work on your own terms, health permitting. You may want to adjust your retirement income strategy or see if new streams of income can be arranged.

Chapter 5 (eighty & afterward). The last chapter of retirement is one frequently characterized by the sharing of legacies and life lessons, a new perspective on the process of living and aging, and deeper engagement (or reengagement) with children and grandchildren. This is also the time when you should think about your financial legacy, and review or update your estate plan so that when you leave this world, things are in good order and your wishes are followed.

Before and during your retirement, it is wise to keep in touch with a financial professional who can guide and consult you when questions about income, investments, wealth protection, and wealth transfer arise.

Warmest Regards,

april-signature

Citations.

1 – marketwatch.com/story/peak-earnings-for-men-come-in-their-early-50s-2015-06-18 [6/18/15]

2 – fastcompany.com/3025564/how-to-be-a-success-at-everything/when-are-your-high-earning-years-how-much-you-should-make- [1/30/14]

3 – crr.bc.edu/briefs/the-average-retirement-age-an-update/ [3/15]

4 – gallup.com/poll/182939/americans-settling-older-retirement-age.aspx [4/29/15]

5 – news.investors.com/investing/073014-711065-people-adjust-to-lower-income-in-retirement.htm [7/30/14]

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Estate Planning for Your Digital Assets

Have you addressed this issue?

Social media and email accounts. Creative works, photos and keepsakes kept on home computers, the cloud or external storage drives. E-commerce accounts. Domain names. Bitcoin. These are all examples of digital assets. You will manage them closely as long as you live – but what will happen to them once you die?

Have you talked about it with those you love? In a recent survey of baby boomers, antivirus software provider AVG Technologies found that only 16% of respondents had thought about what would happen to their digital assets after their deaths. A mere 3% had alerted or prepared their loved ones in regard to this issue.1

If you have a will or a revocable trust, you must plan for the transfer and/or administration of digital assets just as you have for tangible assets. Your digital assets may or may not be of great financial value, but they need protection against exploitation as well as abandonment.

Distributing digital assets is part of fiduciary duty. That is what makes articulating your wishes so important. A financial professional or financial firm acting in a fiduciary role on your behalf has an obligation to distribute your digital assets – but many social media and e-commerce websites will not readily allow this without the permission given by the user or his or her heirs.2

How about social media & email accounts? Facebook has a legacy contact feature for its users. You can appoint a custodian for your page after you are gone: your legacy contact will be able to respond to friend requests, change your cover photo and profile picture, and write a notice of your memorial service or funeral; he or she will not be permitted to log in with your password or username, read messages sent to you or modify your account settings. Alternately, you can simply tell Facebook that you would like to have your account immediately deleted at your death. Google has an Inactive Account Manager option that will let you leave instructions for what should be done with your Google Drive docs or Gmail account once you are deceased.3

As for LinkedIn, a loved one fills out an online form on behalf of the deceased, which is reviewed by LinkedIn pursuant to getting in touch with that person. The notifying party will need to supply your name, profile URL, email address and date of death plus information on the company you last worked for and a link to your obituary. Twitter handles accounts of the deceased in similar fashion, and it can also remove images in a person’s account per request; the Twitter account is frozen at death, with access barred even to immediate family.4,5

Computer files. Your executor or trustee should be provided with the location of your computers, tablets or e-readers after your death and the passwords to them if you have set password protection. Locating backups may also become crucial. Remember that annual fees for antivirus programs and website hosting may no longer need to be paid; the executor or trustee will need to be informed about those user agreements.

E-commerce accounts. Most of us have eBay, iTunes or PayPal accounts, all with monetary value (with a PayPal account, the value may reach into the five-figure range). Moreover, these accounts can serve as pathways toward our banking and credit card information.

What if your idle e-commerce account is hacked after your death? What if the account balance is drained or the cybercriminal uses the account to go on a shopping spree? What if your username and password could be stolen and used at other websites you have accessed? These what-ifs need to be considered – and addressed during your lifetime and in your estate plan.

Domain names. How can you keep a website going after you die? One way is to pay for a decade (or more) of hosting or domain name ownership with such URL longevity in mind, and letting your trustee or executor know just how to renew the agreement. Only that trustee or executor should have access to that knowledge – unless you want business partners or a future owner to know how the arrangements work.

Bitcoin. You can create a copy of your Bitcoin wallet file for a trusted beneficiary, or arrange Bitcoin transfer to your beneficiary dependent on multiple signatures or the signature of an oracle server, or at a specific date. Or, a wallet file may be divided into component pieces for different heirs, with the heirs having to unite the components to form the Bitcoin wallet.6

Does your will or trust need amending? Language regarding your digital assets is essential. At the very least, you want to tell your executor or trustee where digital assets are stored. Even better, the amendment should give your executor or trustee the authority to administer, archive, alter or destroy digital assets in addition to the power to direct them to heirs or other named beneficiaries. That means turning over your online passwords to your executor or trustee at your death, or having them access password management software used to create them.

Warmest Regards,

april-signature

Citations.

1 – globalnews.ca/news/1940177/digital-wills-should-we-start-including-a-digital-legacy-clause-in-our-wills/ [4/15/15]

2 – tinyurl.com/kbno2wu [5/11/15]

3 – cnet.com/news/facebook-to-allow-legacy-contacts-for-when-you-die/ [2/12/15]

4 – help.linkedin.com/app/answers/detail/a_id/2842/~/deceased-linkedin-member—removing-profile [11/3/14]

5 – support.twitter.com/articles/87894-contacting-twitter-about-a-deceased-user-or-media-concerning-a-deceased-family-member [5/18/15]

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Are Your Kids Delaying Your Retirement?

Some baby boomers are supporting their “boomerang” children.

Are you providing some financial support to your adult children? Has that hurt your retirement prospects?

It seems that the wealthier you are, the greater your chances of lending a helping hand to your kids. Pew Research Center data compiled in late 2014 revealed that 38% of American parents had given financial assistance to their grown children in the past 12 months, including 73% of higher-income parents.1

The latest Bank of America/USA Today Better Money Habits Millennial Report shows that 22% of 30- to 34-year-olds get financial help from their moms and dads. Twenty percent of married or cohabiting millennials receive such help as well.2

Do these households feel burdened? According to the Pew survey, no: 89% of parents who had helped their grown children financially said it was emotionally rewarding to do so. Just 30% said it was stressful.1

Other surveys paint a different picture. Earlier this year, the financial research firm Hearts & Wallets presented a poll of 5,500 U.S. households headed by baby boomers. The major finding: boomers who were not supporting their adult children were nearly 2½ times more likely to be fully retired than their peers (52% versus 21%).3

In TD Ameritrade’s 2015 Financial Disruptions Survey, 66% of Americans said their long-term saving and retirement plans had been disrupted by external circumstances; 24% cited “supporting others” as the reason. In addition, the Hearts & Wallets researchers told MarketWatch that boomers who lent financial assistance to their grown children were 25% more likely to report “heightened financial anxiety” than other boomers; 52% were ill at ease about assuming investment risk.3,4

Economic factors pressure young adults to turn to the bank of Mom & Dad. Thirty or forty years ago, it was entirely possible in many areas of the U.S. for a young couple to buy a home, raise a couple of kids and save 5-10% percent of their incomes. For millennials, that is sheer fantasy. In fact, the savings rate for Americans younger than 35 now stands at -1.8%.5

Housing costs are impossibly high; so are tuition costs. The jobs they accept frequently pay too little and lack the kind of employee benefits preceding generations could count on. The Bank of America/USA Today survey found that 20% of millennials carrying education debt had put off starting a family because of it; 20% had taken jobs for which they were overqualified. The average monthly student loan payment for a millennial was $201.2

Since 2007, the inflation-adjusted median wage for Americans aged 25-34 has declined in nearly every major industry (health care being the exception). Wage growth for younger workers is 60% of what it is for older workers. The real shocker, according to Federal Reserve Bank of San Francisco data: while overall U.S. wages rose 15% between 2007-14, wages for entry-level business and finance jobs only rose 2.6% in that period.5,6

It is wonderful to help, but not if it hurts your retirement. When a couple in their fifties or sixties assumes additional household expenses, the risk to their retirement savings increases. Additionally, their retirement vision risks being amended and compromised.

The bottom line is that a couple should not offer long-run financial help. That will not do a young college graduate any favors. Setting expectations is only reasonable: establishing a deadline when the support ends is another step toward instilling financial responsibility in your son or daughter. A contract, a rental agreement, an encouragement to find a place with a good friend – these are not harsh measures, just rational ones.

With no ground rules and the bank of Mom and Dad providing financial assistance without end, a “boomerang” son or daughter may stay in the bedroom or basement for years and a boomer couple may end up retiring years later than they previously imagined. Putting a foot down is not mean – younger and older adults face economic challenges alike, and couples in their fifties and sixties need to stand up for their retirement dreams.

Warmest regards,

april-signature

Citations.

1 – pewsocialtrends.org/2015/05/21/5-helping-adult-children/ [5/21/15]

2 – newsroom.bankofamerica.com/press-releases/consumer-banking/parents-great-recession-influence-millennial-money-views-and-habits/ [4/21/15]

3 – marketwatch.com/story/are-your-kids-ruining-your-retirement-2015-05-05 [5/5/15]

4 – amtd.com/newsroom/press-releases/press-release-details/2015/Financial-Disruptions-Cost-Americans-25-Trillion-in-Lost-Retirement-Savings/default.aspx [2/17/15]

5 – theatlantic.com/business/archive/2014/12/millennials-arent-saving-money-because-theyre-not-making-money/383338/ [12/3/14]

6 – theatlantic.com/business/archive/2014/07/millennial-entry-level-wages-terrible-horrible-just-really-bad/374884/ [7/23/14]

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Are Americans Growing More Optimistic About Retiring?

Pragmatism seems to be replacing pessimism, at least.

Is it okay to retire today? Many baby boomers shelved notions of retiring during the past few years. Layoffs, the decline in home values, the crushing bear market of 2007-09 – those memories were just too fresh, and their economic effects were still being felt by many households.

In 2015, boomers seem a bit less hesitant to begin their “third acts.” In this year’s CareerBuilder retirement survey, 53% of workers older than 60 indicated they are postponing their retirements. That may not seem a statistic worth celebrating, but five years ago 66% of respondents to the survey said they were putting off leaving work.1

Retirement may not mean a “clean break” from the workplace: 54% of this age group told CareerBuilder that they would try to work at least part-time when retired. In fact, nearly one in five said they planned to continue working 40 hours a week or more. These boomers cited two compelling reasons to keep a foot in the office: household financial pressures and the employer-sponsored health insurance they could count on between ages 60 and 65.1

Two other recent polls echo the findings of the CareerBuilder survey. Last year’s United States of Aging survey (a joint project of the National Council on Aging, USA TODAY, United Healthcare and the National Association for Area Agencies on Aging) found 89% of respondents 60 and older certain that they could enjoy and sustain their quality of life as seniors. While 49% worried that they might outlive their money, this was down from 53% in the 2013 survey.2

Ameriprise Financial recently released the findings from its poll of 1,000 retirees aged 60-73; the respondents had retired within the past five years and possessed $100,000 or more in investable assets. Generally, they were happy about retiring: 76% reported feeling “in control” of their choice to leave work, and 75% indicated they were “very satisfied” with retirement life. For a slight majority of respondents, the transitionwas reasonable: 53% said they had been healthy enough to retire, and 52% said they were emotionally ready when they made the move.3

How many of them had retired by choice? An encouraging 51%; just 15% said they retired as a result of job loss, downsizing or buyouts.3

Remember, retirement may start unexpectedly. No one is invincible, and as the Employee Benefit Research Institute (EBRI) discovered in a 2014 study, health or disability reasons prompt 61% of retirements. Workforce downsizing and eldercare responsibilities were the two other most-cited motivators, but only 18% of respondents cited either of those factors. In surveying 1,500 retirees last year, EBRI also learned that 49% had exited their careers earlier than they had anticipated – in fact, 35% of them had retired prior to age 60. An unexpected retirement may also upend some household financial assumptions – turning to the Ameriprise study, we see that while 28% of those respondents reported spending less in retirement than they thought they would, 22% are spending more than they expected.3,4

If you were to retire two years from now, would you be ready for that transition? Would you hold up financially if events forced you to retire today? If you are within ten years of your envisioned retirement date, it might be prudent to revisit your savings strategy and retirement plan to double-check your retirement readiness.

Warmest Regards,

 april-signature

Citations.

1 – nbcnews.com/business/careers/could-2015-be-year-retirement-party-n308871 [2/19/15]

2 – usatoday.com/story/news/nation/2014/07/15/aging-survey-research/11921043/ [7/15/14]

3 – benefitspro.com/2015/02/03/retired-boomers-in-control-happy [2/3/15]

4 – tinyurl.com/qc67lyd [2/10/15]

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Examining the Retirement Account Shortfall

Why aren’t we saving as much as we should?

We know that qualified retirement plans and IRAs are prime long-range savings vehicles; we use them to accumulate assets and invest for the future. So why aren’t some of us amassing the retirement nest eggs that we should?

Why did retirement account balances decline from 2010-13? Looking at Federal Reserve data, the influential Center for Retirement Research at Boston College noticed something unsettling. In that period, the average 401(k)/IRAs balance of a household headed by someone aged 55-64 fell $9,000.1

Wait a minute – haven’t we just witnessed a raging bull market? How could this be?

Moreover, why was the average aggregate 401(k)/IRAs balance of such a household just $111,000 at the end of 2013? These were baby boomers nearing retirement age.1

During 2010-13, the S&P 500 jumped 56%. On that factor alone, the average total retirement account balance for these households should have swelled to at least $187,000 from the 2010 starting point of $120,000.1

That wasn’t the only factor in play, however. The CRR’s Alicia Munnell – a nationally respected authority on retirement accounts and retirement saving – has pinpointed some reasons for the shortfall.

Leaks, loans, fees, interruptions & foreignness. At MarketWatch, Munnell looked at a mock 60-year-old who could have enrolled in a 401(k) plan in 1982. (That was when those retirement accounts first emerged.)  This hypothetical boomer was plainly average, earning Social Security’s average wage for 31 years while deferring 6% of salary into the account.2

This boomer’s investment allocation? Right down the middle, a 50/50 mix of equities and debt instruments. Throw in a 50% employer match during those 31 years, run the numbers using real-life returns across those 31 years, and our theoretical boomer should have amassed $373,000 by the end of 2013. That is 3.36 times as much as the household average noted by the Fed in its 2013 Survey of Consumer Finances – and for an individual aged 55-64, the average total 401(k)/IRAs balance was even lower at $100,000.2

Even over 31 years of saving, a $273,000 disparity in retirement assets is too large to attribute simply to the lack of an employer match or a portfolio’s allocation. Munnell sees other dynamics promoting the gap.

Do investment fees come into play? Oh, yes. In Munnell’s example, fees are the big culprit. Investment expenses (based on data from the Investment Company Institute) eat up $59,000 of the potential balance over these 31 years. So that takes $373,000 down to $314,000.2

Loans and other withdrawals exert an effect. The CRR finds that 1.5% of retirement plan assets “leak out” annually. Putting that 1.5% to work in the example, these leaks cut the mock boomer’s total 401(k)/IRAs balance further to $236,000.2

Too many people don’t (or can’t) contribute steadily to retirement plans, so Munnell calculates a 30% non-participation rate into the equation. (Since 2000, Vanguard has consistently reported that level of non-participation in its workplace retirement plans.) That leaves $165,000.2

Finally, there is foreignness. It took a while for IRAs and 401(k)s to be fully embraced as default retirement savings vehicles; in the 1980s, contribution rates were lower as a byproduct. Munnell chalks up $65,000 of lost gains to that historical factor to arrive at the average individual total 401(k)/IRAs balance of $100,000 cited by the Fed.2

Hasn’t auto-enrollment worked? Thanks to federal law, many employers have been able to automatically enroll workers in qualified retirement plans at a 3% contribution rate since 2006. The downside of auto-enrollment is that some of the auto-enrolled “set it and forget it,” never increasing that contribution rate through the years. This could also factor into the lower-than-expected account holdings.1

One asterisk about all this. The CRR only studied working households that held both IRAs and 401(k)s. It didn’t incorporate households headed by retirees or households that may have rolled over workplace retirement plan assets into IRAs into its dataset.1

Regardless of these numbers, we all have to fund our retirements. Some economists and financial professionals are highly critical of the current retirement savings vehicles, but whether they like them or not, it is certain that these retirement accounts offer remarkable potential to grow wealth in the long term through equity investment and compounding. While the Center’s findings are disconcerting, the takeaway here is that consistent and early contribution, lower fees and avoiding withdrawals can make a big difference in retirement account balances.

Warmest Regards,

april-signature

Citations.

1 – fortune.com/2014/09/16/401k-balances-drop/ [9/16/14]

2 – blogs.marketwatch.com/encore/2014/09/25/why-arent-401k-and-ira-balances-bigger/ [9/25/14]

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Debunking a Few Popular Retirement Myths

Certain misconceptions ignore the realities of retirement.

Generalizations about money & retirement linger. Some have been around for decades, and some new clichés have recently joined their ranks. Let’s examine a few.

“When I’m retired, I won’t really have to invest anymore.” Many people see retirement as an end instead of a beginning – a finish line for a career. In reality, retirement can be the start of a new and promising phase of life that could last a few decades. If you stop investing entirely, you can risk losing purchasing power; even moderate inflation can devalue the dollars you’ve saved.1

“My taxes will be lower when I retire.” You may earn less, and that could put you in a lower tax bracket. On the other hand, you may end up waving goodbye to some of the deductions and exemptions you enjoyed while working, and state and local taxes will almost certainly rise with time. So while your earned income may decrease, you may end up losing a comparatively larger percentage of it to taxes after you retire.1

“I started saving too late, I have no hope of retiring – I’ll have to work until I’m 85.” If your nest egg is less than six figures, working longer may be the best thing you can do. You will have X fewer years of retirement to plan for, so you can keep earning a salary, and your savings can compound longer. Don’t lose hope: remember that you can make larger, catch-up contributions to IRAs after 50. If you are 50 or older this year, you can put as much as $23,000 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that privilege. You can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested (see above).1,2

“I should help my kids with college costs before I retire.” That’s a nice thought, but you don’t have to follow through on it. Remember, there is no retiree “financial aid.” Your student can work, save or borrow to pay for the cost of college, with decades ahead to pay back any loans. You can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money your kids may end up taking you in and you will be a financial burden to them. So putting your financial needs above theirs is fair and smart as you approach retirement.

“I’ll live on less when I’m retired.” We all have the cliché in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement may be a different story. For many, the first few years of retirement mean traveling, new adventures, and “living it up” a little – all of which may mean new retirees may actually “live on more” out of the retirement gate.

“No one really retires anymore.” Well, it is true than many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health won’t let you work 40 hours or even 10 hours a week? You could retire more abruptly than you believe you will. This is why even workaholics need a solid retirement plan.

There is no “generic” retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple or family needs a strategy tailored to their particular money situation and life and financial objectives.

Warmest Regards,

 april-signature

Citations.

1 – tiaa-cref.org/public/advice-guidance/education/financial-ed/empowering_women/retirement-myths [8/29/14]

2 – 401k.fidelity.com/public/content/401k/Home/HowmuchcanIcontrib [8/29/14]

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Adjusting to Retirement

What people don’t always realize about life after work.

If you have saved and invested consistently for retirement, you may find yourself ready to leave work on your terms – with abundant free time, new opportunities, and wonderful adventures ahead of you. The thing to keep in mind is that the reality of your retirement may not always correspond to your conception of retirement. There will inevitably be a degree of difference.

Some new retirees are better prepared for that difference than others. They learn things after leaving work that they wished they could have learned about years earlier. So with that in mind, here are a few of the little things people tend to realize after settling into retirement.

Your kids may see your retirement differently than you do. Some couples retire and figure on spending more time with kids and grandkids – they hang onto that five-bedroom home even though two people are living in it because they figure on regular family gatherings, or they move to another state to be closer to their kids. Then they find out that their children didn’t really count on being such frequent company.

Financial considerations come into play here as well. Keeping up a big home in retirement can cost big dollars, and if you move to another area, there is always the chance that a promotion or the right job offer could make your son or daughter relocate just a few years later. The average American worker spends 4.6 years at a given job, and less than 10% of U.S. workers in their twenties and thirties stay at the same job for a decade.1

Medicare falls short when it comes to dental, vision & hearing care. Original Medicare (Parts A & B) will pay for some things – cataract surgery and yearly glaucoma tests for people at risk for that disease, for example, as well as dental procedures that are deemed necessary prior to another medical procedure covered under Medicare. These are exceptions to the norm, however, and as people’s sight, teeth and hearing become more problematic as they age, it can be frustrating to realize what Medicare won’t cover.2

You may lose the impulse to work a little. These days, most retirees at least think about working part-time. Actually doing that may not be as easy as it first seems. It is a lot harder to get hired at age 65 than it is at age 45 – no one is denying that – and part-time work tends toward the mundane and unfulfilling. If you are able to earn income as a consultant or through other types of self-employment, you may be truly satisfied by the work you do and be able to set your own schedule, too.

Retirement income comes with income taxes. While retirees anticipate (and certainly appreciate) distributions from an IRA or an employer-sponsored retirement plan, few retirees map out a sequence or strategy intended to let them take distributions from retirement and investment accounts with the least tax impact. Generally speaking, you want to draw down your taxable accounts first, then the tax-advantaged accounts, and lastly your tax-free accounts. This way, you are giving the retirement money that is taxed least more time to compound.

Under the typical model withdrawal scenario, this sequencing a) offers the potential to reduce the tax bite from all these distributions, b) promotes greater longevity for retirement savings. The wealthier the retiree is and the higher the projected rate of return for his or her portfolio, the more sense the strategy usually makes. If a retiree has very low taxable income or large unrealized gains on taxable assets, it may not be wise to follow this rule of thumb. Health and longevity factors also influence withdrawal strategies, of course.3

Retirees also need to know something about the IRS rules for retirement accounts – if the assets are withdrawn too soon or used for an inappropriate purpose, penalties can result and tax advantages can be lost.

Retirement is a transition, but it isn’t a solution. There are people that are really eager to retire, people that come to believe that retirement will wipe away all that is dull and restrictive from their lives. Retiring often leads to a rewarding new phase of life, but it won’t solve health issues, family dilemmas or business or money problems.

You may have plenty of time on your hands. If you and/or your spouse have routinely worked 50-60 hours a week, it can be tough to come down from that once you are retired. Your urge to be productive will persist, and sooner or later, you will find ways to stay busy, contribute and make a difference. Thinking about how you will spend your time in retirement before retirement is wise, as you don’t want to risk staring at (or climbing) the walls.  

Adjusting to retired life takes a bit of time for everyone. Adjustment can become easier with a candid recognition of certain retirement realities.

 Warmest regards,

 april-signature

Citations.

1 – marketwatch.com/story/americans-less-likely-to-change-jobs-now-than-in-1980s-2014-01-10 [1/10/14]

2 – ncoa.org/enhance-economic-security/benefits-access/how-to-get-help-for-dental.html [4/17/14]

3 – tiaa-crefinstitute.org/public/institute/research/trends_issues/ti_taxefficient_1006.html [10/06]

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Couples Retiring on the Same Page

Agreeing about what you want from retirement is crucial.

What does a good retirement look like to you? Does it resemble the retirement that your spouse or partner has in mind? It is at least roughly similar?

The Social Security Commission currently projects an average retirement of 19 years for a man and 21 years for a woman (assuming retirement at age 65). So sharing the same vision of retirement (or at least respecting the difference in each other’s visions) seems crucial to retirement happiness.1

What kind of retirement does your spouse or partner imagine? During years of working, parenting and making ends meet, many couples never really get around to talking about what retirement should look like. If spouses or partners have quite different attitudes about money or dreams that don’t align, that conversation may be deferred for years. Even if they are great communicators, assumptions about what the other wants for the future may prove inaccurate.

Are couples discussing retirement, or not? It depends on who you ask – or more precisely, what poll you reference.

A 2013 survey of 5,400 U.S. households by Hearts & Wallets (a research firm studying retirement money management trends) found that just 38% of couples plan for retirement together. The fourth Couples Retirement Study conducted by Fidelity Investments (released this February) offered similar results. In that study, 38% of the working couples polled cited some disagreement on what kind of lifestyle they would retire to, 32% disagreed on how much they would need to work in retirement, and 38% hadn’t planned to manage retirement health care costs.2,3

In contrast, Capital One ShareBuilder surveyed 1,008 employed adults this winter and found that on average, couples discuss retirement 14 times a year. (There was no word on the depth or length of those conversations, however.)4

Be sure to talk about what you want for the future. A few simple questions can get the conversation going, and you might even want to chat about it over a meal or coffee in a relaxing setting. Dreaming and planning together, even on the most basic level, gives you a chance to reacquaint yourselves with your financial needs, goals and personalities.

To start, ask each other what you see yourselves doing in retirement – individually as well as together. Is the way you are saving and investing conducive to those dreams?

Think about whether you are making the most of your retirement savings potential. Could you save more? Do you need to? Are you both contributing to tax-advantaged retirement accounts? Are you comfortable with the amount of risk you are assuming?

If your significant other is handling the household finances (and the meetings with financial professionals about a retirement strategy), are you prepared to take over in case of an emergency? When one half of a couple is the “hub” for money matters and investment decisions, the other spouse or partner needs to at least have an understanding of them. If the unexpected occurs, you will want that knowledge.

Speaking of knowledge, you should also both know who the beneficiaries are for your IRAs, workplace retirement accounts, investment accounts, and life insurance policies, and you both need to know where the relevant paperwork is located.

A shared vision of retirement is great, and respect for individual variations on it is just as vital. A conversation about how you see retirement today can give you that much more input to plan for tomorrow.

Warmest Regards,

 april-signature

 

Citations.

1 – forbes.com/sites/jamiehopkins/2014/02/03/planning-for-an-uncertain-life-expectancy-in-retirement/ [2/3/14]

2 – heartsandwallets.com/till-death-or-retirement-or-retirement-do-us-part/news/2013/02/ [2/13]

3 – shrm.org/hrdisciplines/benefits/articles/pages/retirement-couples-disagree.aspx [2/7/14]

4 – usatoday.com/story/money/personalfinance/2014/03/16/retirement-planning-couples-fight/6368967/ [3/16/14]

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Wise Decisions with Retirement in Mind

Certain financial & lifestyle choices may lead you toward a better future.

Some retirees succeed at realizing the life they want, others don’t. Fate aside, it isn’t merely a matter of stock market performance or investment selection that makes the difference. There are certain dos and don’ts – some less apparent than others – that tend to encourage retirement happiness and comfort.

Retire financially literate. Some retirees don’t know how much they don’t know. They end their careers with inadequate financial knowledge, and yet feel that they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.

Retire knowing that you’ll have to assume some risk. Growth investing is increasingly seen as a necessity for retirees who want to keep ahead of inflation.

According to data and research compiled by the Social Security Administration, the average 65-year-old man will live to be 84 and the average 65-year-old woman will live to be 86. So that’s a 20-year retirement. The SSA also notes that roughly a quarter of today’s 65-year-olds will live past 90, and about 10% of them will live beyond age 95.1

If these seniors rely on fixed-income investments for the balance of their lives, they may end up with reduced retirement income potential, and in turn a reduced standard of living. Look at the Rule of 72: if an investment is yielding 2%, it will take about 36 years to double your money. Yes, interest rates are rising – but inflation should rise with them.2

A generation ago, mature Americans were urged to gradually shift their portfolio assets out of stocks and into fixed-income investments. One old rule of thumb was to subtract your age from 100, with the resulting number being the percentage of your portfolio you should assign to equities.3

Today, retirees and retirement planners are reconsidering this thinking. As the Wall Street Journal reported recently, one study of retirement money and longevity risk concluded that retirement funds may last longer if a retiree gradually increases the stock allocation within a portfolio about 1% per year from an initial range of between 20-50% to between 40-80%. The concept here is that a retiree’s stock allocation should be lowest when their retirement nest egg is largest.3

Retire debt-free, or close to debt-free.  Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.

If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent.

Retire with purpose. There’s a difference between retiring and quitting. Some people can’t wait to quit their job at 62 or 65 – their work is “killing” them, or boring them senseless.  If only they could escape and just relax and do nothing for a few years – wouldn’t that be a nice reward? Relaxation can lead to inertia, however – and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.

A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other’s dreams are in a good place.

The bottom line? Retirees who know what they want to do – and go out and do it – are contributing to their mental health and possibly their physical health. If they do something that is not only vital to them but important to others, their community can benefit as well.

Retire healthy. Smoking, drinking, overeating, a dearth of physical activity – all these can take a toll on your capacity to live fully and enjoy retirement. It is never “too late” to quit smoking, quit drinking or slim down.

Retire in a community where you feel at home. It could be where you live now; it could be a place hundreds or thousands of miles away where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then “find your tribe” – look for ways to connect with people who share your experiences, interests and passions, and who encourage you and welcome you. This social interaction is one of the great intangible retirement benefits.

Warmest Regards,

april-signature

Citations.

1 – ssa.gov/planners/lifeexpectancy.htm [2/6/14]
2 – investopedia.com/terms/r/ruleof72.asp [2/6/14]
3 – tinyurl.com/m8akefj [2/3/14]

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It Isn’t Too Late to Save for Retirement

If you’re 40 or 50 and haven’t begun, you must make the effort.

 Some people start saving for retirement at 20, 25, or 30. Others start later, and while their accumulated assets will have fewer years of compounding to benefit from, that shouldn’t discourage them to the point of doing nothing.   

If you need to play catch-up, here are some retirement savings principles to keep in mind. First of all, keep a positive outlook. Believe in the validity of your effort. Know that you are doing something good for yourself and your future, and keep at it.

Starting later means saving more – much more. That’s reality; that’s math. When you have 15 or 20 years until your envisioned retirement instead of 30 or 40, you’ve got to sock away money for retirement in comparatively greater proportions. The good news is that you won’t be retiring strictly on those contributions; in large part, you will be retiring on the earnings generated by that pool of invested assets.      

How much more do you need to save? A ballpark example: Marisa, a pre-retiree, has zero retirement savings at age 45 and dedicates herself to doing something about it. She decides to save $500 each month for retirement. After 20 years of doing that month after month, and with her retirement account yielding 6% a year, Marisa winds up with about $225,000 at age 65.1

After 65, Marisa would probably realize about $10,000 a year in inflation-adjusted retirement income from that $225,000 in invested retirement savings. Would that and Social Security be enough? Probably not. Admittedly, this is better than nothing. Moreover, her retirement account(s) might average better than a 6% return across 20 years.1

The math doesn’t lie, and the message is clear: Marisa needs to save more than $6,000 a year for retirement. Practically speaking, that means she should also exploit vehicles which allow her to do that. In 2014, you can put up to $5,500 in an IRA, $6,500 if you are 50 or older – but you can sock away up to $17,500 next year in a 401(k), 403(b), Thrift Savings Plan and most 457 plans, which all have a maximum contribution limit of $23,000 for those 50 and older.2

If Marisa is self-employed (and a sole proprietor), she can establish a solo 401(k) or a SEP-IRA. The yearly contribution limits are much higher for these plans. If Marisa’s 2013 net earnings from self-employment (after earnings are reduced by one-half of self-employment tax) work out to $50,000, she can put an employer contribution of up to $10,000 in a SEP-IRA. (She must also make similar percentage contributions for all “covered” employees, excepting her spouse, under the SEP IRA plan.) As a sole proprietor, Marisa may also make a combined employer-employee contribution of up to $33,000 to a solo 401(k) this year, and if she combines a defined benefit plan with a solo 401(k), the limit rises to $47,400. If her 2013 net earnings from self-employment come out to $150,000, she can make an employer contribution of as much as $30,000 to a SEP-IRA, a combined employee salary deferral contribution and employer profit sharing contribution of up to $53,000 to a solo 401(k), and contribute up to $96,300 toward her retirement through via the combination of the solo 401(k) and defined benefit plan.3 

How do you save more? As you are likely nearing your peak earnings years, it may be easier than you initially assume. One helpful step is to reduce some of the lifestyle costs you incur: cable TV, lease payments, and so forth. Reducing debt helps: every reduced credit card balance or paid-off loan frees up more cash. Selling things helps – a car, a boat, a house, collectibles. Whatever money they generate for you can be assigned to your retirement savings effort.

Consistency is more important than yield. When you get a late start on retirement saving, you naturally want solid returns on your investments every year – yet you shouldn’t become fixated on the return alone. A dogged pursuit of double-digit returns may expose you to considerable market risk (and the potential for big losses in a downturn). Diversification is always important, increasingly so when you can’t afford to lose a big portion of what you have saved. So is tax efficiency. You will also want to watch account fees.

If you start saving for retirement at 50, your retirement savings will likely double (at least) by age 65 thanks to consistent inflows of new money, decent yields and compounding.4

What if you amass a big nest egg & still face a shortfall? Maybe you can reduce expenses in retirement by moving to another city or state (or even another country). Maybe you can broaden your skill set and make yourself employable in another way (which also might help you before you reach traditional retirement age if you find yourself in a declining industry).

If you haven’t begun to save for retirement by your mid-40s, you have probably heard a few warnings and wake-up calls. Unless you are independently wealthy or anticipate being so someday, the truth of the matter is…

If you haven’t started saving for retirement, you need to do something to save your retirement.

That may sound harsh or scary, but without a nest egg, your vision of a comfortable future is in jeopardy. You can’t retire on hope and you don’t want to rely on Social Security, relatives or social services agencies for your well-being when you are elderly.

Warmest Regards,

april-signature

 

 

 

Citations.

1 – money.cnn.com/2012/08/15/pf/expert/late-start-retirement.moneymag/ [8/15/13]

2 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13]

3 – forbes.com/sites/ashleaebeling/2013/11/01/retirement-savings-for-the-self-employed/ [11/1/13]

4 – forbes.com/sites/mitchelltuchman/2013/11/21/financial-planning-for-late-starters-in-five-steps/ [11/21/13]