Planning for Retirement - Getting Close George F. McClure IEEE Region 3 Director IEEE Annual Meeting 2007

Are You Ready? First Baby Boomers turn 62 in 2008 But few are financially prepared to retire with 65% to 85% of pre-retirement income –35% of Early Boomers ( ) at risk –44% of Late Boomers ( ) –49% of Generation Xers ( ) Ratio varied, marital status, hsehold income Ref.: 2004 Survey of Consumer Finances

Median Nest Egg Household heads approaching retirement: –$60,000 in 401(k) + IRA balances –Defined Benefit (DB) pensions add to that, but fading fast –Most of working age have no other savings

Boomer Retirement Attitudes Trivent Retirement Survey, 2,500 polled Money #1 concern for 71% Health issues #1 for 13% No formal retirement planning for 59% –Used an advisor: 16% –Rest did own serious calculations Harris Interactive poll, 2006, ages 45-64, not retired, population-weighted, 95% confidence

Why More Boomers Will Work Fewer covered by DB pension plans Rapid decline in retiree health benefits (no ERISA mandate to provide them) Better educated (37% grads vs. 22% pre-war) Better health; work less physical Need to augment the retirement nest egg –Delaying retirement by 3 years can add 30% to retirement income

Boomer Obstacles to Saving Starting late in life to save/invest – 35% Health care/health insurance cost – 32% Salary too low – 29% Credit card debt – 28% Cost of housing – 27% Medical problems – 22% Paying for college – 16%

Planned Retirement Activities U.S. travel, to new places – 45% Spend more time with children, grandchildren – 39% Take up hobby, craft, activity – 23% Travel outside the U.S. – 21% Volunteer more – 20% Move to lower cost area – 15%

Working in Retirement 43% plan to keep working –39% will need the money –30% want to keep busy –16% expect work will make life easier –13% will need the health care benefits One wifes quote: I married him for better or for worse, but not for lunch.

What Kind of Work? 43% - Enjoyable, to keep busy 20% - Whatever earns a good income 11% - Whatever provides health insurance 7% - Meaningful, e.g., non-profit work 5% - Challenging or risky; new business? 14% - Not sure

Personal Assessment How is your health? Good genes? –20% chance of 30 years in retirement –Joint life even longer, esp. if spouse younger IRS life expectancy at age 70: –Single life: 17 years –Joint life: 21.8 years (more if spouse younger) –Minimum distribution over 27.4 years SSA Table: Personal calculator:

When to Draw Social Security? Early, at age 62 (25% reduction – going to 30%) Normal, age 66, 67 if born 1960 or later Late, to age 70 (add 8%/year past normal retirement) – no increase past age 70 Break-even at age 81 (with 5% return) Benefit at age 70: 65% higher than for age 62 Spousal benefit grows, too, if delayed Your mileage may vary- see calculator at

Earnings Penalty Policy shift: encourage seniors working Earnings penalty eliminated above normal retirement age Early retirement earnings penalty: $1 for every $2 above $12,960 (2007)

How Are You Doing? First milestone: save twice annual salary Max out on tax-deferred savings Employer matching is found money It gets easier later Use a financial retirement calculator to point the way Spend less at Starbucks

Savings Vehicles Employer deferral plans: $15.5K, indexed IRA: $4K + $1K catch-up (if >50) Tax-efficient mutual funds Variable annuities – aim to grow then convert Self-employment: SEP $10.5K

Planning and Calculators Work out a retirement budget Figure income replacement ratio (80-90%?) Compare assets with needs – – p=pr&ut=B21http://personal.fidelity.com/retirement/index.html?refh p=pr&ut=B21 – seven/retirement_planning_calculator.htmlhttp:// seven/retirement_planning_calculator.html – ityhttp://nationwide.com/nw/nrri/index.htm?wtgo=retirabil ity

Getting to Medicare Eligible at age 65; elect Part B for doctor visit coverage If still employed, Medicare becomes secondary insurance Part B premiums are means-tested now Medicare assigns reimbursements to procedures – Diagnostic Related Groups Not all physicians accept assignment Financial Advantage offers Medigap plans

Long-Term Care Not covered by Medicare Means tests for Medicaid coverage, not feasible for engineers (5 year look-back) Growing emphasis on home health care Look at family history, own health Financial Advantage offers LTC plans and information

Rolling Over Trustee-to-trustee transfer avoids tax risk Cash out after-tax 401(k) contributions Sell long-held matching stock for cap gain Isolate the transfer (separate IRA) if you may go back to another job Track nest egg investments monthly New issue: asset allocation –Life cycle funds?

Nest Egg Management Strategy Draw on taxable assets first, wait on IRAs Both can add to IRAs if one has the income to cover it: 2 X $5K this year For lifetime income, consider annuities –Single life –Years certain –Joint lifetimes (cover both spouses) Reverse mortgage another possibility

At 70-1/2 Begin minimum required distribution (MRD) – Ref. IRS Pub. 590 If self-employed or younger spouse income can continue to add to Roth IRA Can safely draw ~4%/yr. from nest egg If larger MRD than needed, convert part to after-tax saving; reinvest tax-efficiently CRT charitable deduction can reduce tax

Pitfalls Withdrawing too much too soon Taking cash distribution before age 59-1/2 –10% penalty –Exception: take as stream of payments Contributing less than the maximums Making IRA contributions late

Pluses Self-employment in retirement –Possible tax-deferred account addition –Expenses can include health benefits, LTC premiums Lower retirement AGI may permit more Roth conversions (no MRDs required) If beneficiary for IRA is grandchild, may stretch out withdrawals for over 40 years The second million- easier than the first

To Dig Deeper Stanley & Danko, The Millionaire Next Door, 1996 [over 1 M sold] Thomas J. Stanley, The Millionaire Mind, 2000 The American Association of Individual Investors Center for Retirement Research, Tax Hotline, monthly newsletter Bottom Line Retirement, monthly newsletter, ibid. Bottom Line Personal, monthly newsletter, ibid. Jonathan Clements, Getting Going, regular feature columns, [may be accessible online without subscription. Also writes books on money management.] Money management tools, Questions, comments? [Put Scottsdale in subject