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Financial Planning for Women Retirement Minus 5 – 10 Years: 10 Key Questions Barbara O’Neill, Ph.D., CFP Rutgers Cooperative Extension Jean M. Lown, Ph.D.

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Presentation on theme: "Financial Planning for Women Retirement Minus 5 – 10 Years: 10 Key Questions Barbara O’Neill, Ph.D., CFP Rutgers Cooperative Extension Jean M. Lown, Ph.D."— Presentation transcript:

1 Financial Planning for Women Retirement Minus 5 – 10 Years: 10 Key Questions Barbara O’Neill, Ph.D., CFP Rutgers Cooperative Extension Jean M. Lown, Ph.D. FCHD Dept. Utah State University

2 $ is only part of preparation Relationships Health & fitness (SSHW) – Meaningful activities Books: –What color is your parachute for retirement? –You don’t need a million dollars to retire well 2

3 Are you Ready to Retire? What does it mean to be “ready?” Retirement Readiness Rating (HO) 3

4 Objectives Describe the “Retirement New Normal” Describe the “Retirement Grief Cycle” Identify retirement planning errors Pose10 critical retirement planning questions 4

5 Welcome to first half of “Retirement Red Zone”* 5 Years Before to 5 Years After Retiring –“The 10 years before retirement and five years after make up the riskiest period of your financial life.” Money Magazine (October 2008) What is YOUR greatest retirement HOPE & greatest retirement FEAR? Who are your retirement ROLE MODELS… good and bad? 5 *Prudential investments

6 We’re in a “New Normal” and Need to Adjust BOTH Mentally and Financially 6

7 New Normal Retirement Challenges Slow economic growth Flat/decreasing incomes; high unemployment Reduced employer retirement income benefits Reduced employer retirement health benefit Social safety-net programs being downsized May need to work longer before retirement and/or downsize lifestyle Lower housing values Low returns on savings and investments 7

8 Sobering Statistics 45% chance that one spouse in a 65-year old couple will live to 95 A couple can expect to spend $295,000 on health insurance & out-of-pocket medical expenses (EBRI) 30% of unmarried women 65+ live solely on Soc. Sec. –13% of age 75+ in poverty (vs. 6% for men) 72% of pre-retirees say they plan to work –Only 12% of retirees actually have jobs 25% of women 55-64 have a health problem that limits ability to work “About 50 million at-risk middle American households ” Journal of Financial Planning, July 2009 8

9 Common Retirement Planning Errors RPS (Retirement Planning Postponement Syndrome) Banking on unsure things –Profit on sale of a home or business –A certain investment account balance –An inheritance Counting on an “econo-retirement ” –Spending by retirees often increases –Go-go, Slow-go, and No-go phases Not saving as much as possible and taking maximum advantage of employer matching Not getting planning help when needed 9

10 The “Retirement Grief Cycle”* Denial: “Not to Worry. This is just a temporary blip and things will get back to normal soon” Anger: “This isn’t fair. They’re taking away [X]” Bargaining: “Maybe the union can get an exemption for older workers so the [change] won’t affect me” Depression: “It’s hopeless. I’ll never be able to retire” Testing: “If I adjust my spending or work a little longer, I can probably still retire comfortably” Acceptance: “I’ve decided to follow a new financial plan for retirement” *Elisabeth Kubler-Ross 10

11 Ten Key Questions You Need to Answer How long could I (we) live? How much money do I (we) need? What is my (our) projected income and expenses? Where and how should I (we) invest? How long will my (our) money last? Where do I (we) want to live? What do I (we) want to do? Where will I (we) get health insurance & how much will it cost? What can I do to make up for lost time and/or money? What steps should I (we) take between now and retirement? 11

12 How Long Could I (We) Live? Live too long and you risk running out of money Die young and “you can’t take it with you ” Medical advances are keeping people alive longer (CDC Data, 2000 to 2007): –Death rate from heart disease decreased 19% –Death rate from cancer decreased 5% But… obesity, diabetes taking away gains 2/3 of retirees underestimate average life expectancy… 42% by 5+ years (Society of Actuaries) 12

13 Life Expectancy Reality Check Enter “Life Expectancy Calculator” into Internet search engine Try at least 3 different calculators Look for calculators with questions about lifestyle factors Social Security calculator is too basic; based on averages 13

14 How Much Money Do I (We) Need? “It depends” (many variables) Retirement savings calculators – – General Guideline: For every $1,000 in monthly income –Need $300,000 in savings ($300,000 x.04 (4%) = 12,000 ÷ 12 = $1,000) based on 4% withdrawal rate –$2,000/month ≈ $600,000 –$3,000/month ≈ $900,000 14

15 What is My (Our) Projected Income? Social Security –2010 statement or get an online benefit estimate Pension Retirement savings and investments –401(k), 403(b), 457 plans –IRAs –Annuities –Investments Income generated by home equity –Reverse mortgage or rent Employment 15

16 What are My (Our) Projected Expenses? 75% of average U.S. retiree’s budget: –Housing –Transportation –Food –Medical –Entertainment Pay off mortgage, vehicle, & credit cards before retiring Percentages (e.g., 75% of income) may not be accurate Much better to do a current and projected spending plan Do a “test-drive”: Consider living on estimated retirement income BEFORE you retire 16

17 Where and How Should I (We) Invest? Tax-deferred employer plan (e.g. 401(k) plan) IRA or supplemental retirement annuity Earmark a portion of raises for retirement savings Make catch-up contributions starting at age 50 Include equities in your portfolio to hedge inflation Assess your investment risk tolerance Reduce your risk level if you’ve accumulated the principal you need to produce adequate income 17

18 More Thoughts on Investing You could live 30-40 years –Inflation averages 3%; prices double in 24 years –4%: prices double in 18 years Diversify your portfolio: different asset classes Common guideline: 110- Your Age = % in stocks Consider dividend-paying stocks & mutual funds Immediate annuities for guaranteed income Track your net worth and asset allocation annually 18

19 How Long Will My (Our) Money Last? “It depends” on two key factors: –Future investment returns –Percentage of portfolio assets withdrawn/year Nest egg will be depleted faster if… –Rate of withdrawal exceeds rate of return Worst case scenario: severe market downturn @ beginning of retirement… selling stocks/funds for income –Nest egg is severely eroded by market losses –Withdrawals deplete it further –Need 3-5 year cash withdrawal cushion to avoid this 19

20 Get a Monte-Carlo Analysis Uses historical investment performance data to estimate probability of not running out of money –NO guarantee! –Based on past returns… future may be different A CFP® can do it for you or you can use an online calculator (Search “Monte Carlo Calculator”) Check assumptions and beware of GIGO 20

21 Where Do I (We) Want to Live? 21 WSJ Article (3/21/11): BIG issue among couples; communication is key

22 What to Do? Compare individual visions of retirement “Must have” and “negotiable” items Start the conversation early Research Studies: boomers much more likely than their parents to move Investigate taxes & living costs in other states – Take extended vacation/ “scouting” trips –Spend July-August in Tucson… 22

23 What Do I (We) Want to Do? What gives you deep satisfaction? –Meaningful relationships –Helping others –Learning new things –Devoting yourself to a cause you believe in –Applying your skills and experiences –Achievement Is work a source of great pride & self-worth? The key word is “passion” What will a “typical day” look like? 23

24 Where Will I (We) Get Health Insurance & How Much Will it Cost? Will you have access to retiree health insurance? –If so, compare the cost to a supplemental Medicare plan –Will spousal coverage end if covered employee dies? –retiree benefits being scaled back If no employer benefit, “patch together a plan” –Medicare at age 65 –COBRA a group plan 18 months before –A Medicare supplement plan –Medicare Part D (prescription drugs) State Health Insurance Assistance Program ( 24

25 More About Retiree Health Insurance People with better health habits will eventually spend MORE on health care than those with poor health! –More years of medical expenses (e.g., age 93 versus 73) –Likely to have a chronic condition in advanced old age –Likely to need long-term care (LTC) >50% chance even healthiest retiree will need LTC –Consider LTC insurance or have a good alternative –Adequate defined benefit pension (with a COLA) –Adequate immediate annuity –Self-insurance (assets & income) 25

26 What Can I (We) Do to Make Up for Lost Time or Money…Before Retirement? Guidebook to Help Late Savers Prepare for Retirement (O’Neill & Lown) Increase retirement savings Spend less and pay off debt “Moonlight” for additional income Invest more aggressively to try to earn higher return Work longer before retiring 26

27 What Can I (We) Do to Make Up for Lost Time or Money…After Retirement? Trade down to a smaller home Move to a less expensive location Work after retirement Reverse mortgage or sale-leaseback of home Make tax-efficient asset withdrawals 27

28 What Steps Should I (We) Take Between Now and Retirement? Get out of debt before you retire –Pay off mortgage (prepay principal, biweekly payments) –Eliminate consumer debt Assess available retirement benefits –Employer savings plan and health insurance (self and spouse) –Social Security (age 62, FRA, age 70) Review insurance needs –May not need life insurance if kids grown, mortgage repaid –Consider LTC insurance with freed-up premium dollars Live on less –Save cash freed up by reducing expenses –Lower the bar for retirement lifestyle 28

29 More Steps to Take Before Retirement Save aggressively –Up to $6,000/year in an IRA (if 50+) –Up to 20% of business net earnings in a SEP Diversify investments –Multiple asset classes including international investments –U.S. assets are <1/3 of world economy –Low-cost index funds and ETFs 29

30 Work Longer Boosts Social Security and DB pension benefits Provides more time to save in IRAs, 401(k)s, etc. Fewer years to withdraw money from savings Continued access to employer benefits “Retire” while still working –Test drive your plan –Live the lifestyle 30

31 More Steps to Take Develop realistic plans for retirement –Plan to work until 66-67 but save as if retiring at 60-62 –Use retirement savings and Monte Carlo calculators –Plan to create a “retirement paycheck” (e.g., annuity) Try to control your exit –Voluntary retirees 30% more likely to be happier Educate yourself –NEFE: –eXtension: security:-retirement-planning –Financial advisors CFP Board 31

32 Comments? Questions? Experiences? Decisions will affect you for 30-40 years What is YOUR PF Action Plan? Many perils outside of your control –Aging parents –Boomerang children –Health costs –Workplace ageism 32

33 Upcoming FPW March 7 (1st Wed.): You’re never too young: Jumpstart your retirement planning in your 20s and 30s (evening program at Logan Library Old Ephraim room) April 11: Taking control of your credit May 9: Great mutual funds for your Individual Retirement Account June 13: Preparing to buy your first home 33

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