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Pinpointing the Percentages
Are you saving enough for retirement? If you aren't asking yourself that question, plenty of companies are. When it comes to retirement and how much you will need, planners often disagree on how much is enough. Imagine doing this for a time in the distant future when no one is sure how much will actually be enough.
Pre-retirement surveys are sprouting up everywhere. They are asking about your lifestyle and what you plan on doing when you retire. And while the respondents to these questionnaires are mostly the ones who can see retirement as something that is close at hand, everyone should be asking the same thing.
Making it doubly difficult, even when retirement seems near enough to grasp, far too many variables enter into the equation to make the determination of "how much will I need" as easy as answering a few simple questions.
For the sake of this discussion, retirement will mean the point when you draw solely on your retirement savings to help you with day-to-day expenses. Granted, that is the drawn down version of what many feel retirement should be. For the sake of this discussion, we will leave leisurely activities out of the equation.
Despite everyone's best efforts, the younger worker is not likely to prioritize retirement in their current spending/savings plans. Which is too bad. They do, and there is a good deal of evidence to back this claim, forfeit some of the best years for saving. With compounding and a long horizon in which the equity markets can grow, the younger investor will benefit over the one who begins late. But there are houses to buy and kids to raise.
Those late-to-the-game savers tend to try to catch-up by socking away larger amounts in their middle years while taking greater risks with that savings. Although they may subscribe to the current thinking that we will work much longer than any previous generation, once you hit that benchmark age, retirement or at least a significant and permanent retreat from a full week¹s work begin to look increasingly attractive.
There have been attempts at defining how much is enough as planners and brokerage houses roll out new tools. The most popular post-work guidelines suggest you will need anywhere from 70% of your pre-retirement income to 85% and then to my suggestion of calculating the need for 100% or more of what you are making now for later. All of us could be right and as many could be wrong.
The 70 percenters all believe that retirement will present fewer liabilities as we age. This group should be entering retirement with no mortgage, a home in relatively good repair, no debt or at least a manageable amount, affordable health insurance benefits, and limited travel ambitions. This plan also assumes that property taxes and insurance will remain stable based on pre-retirement levels. This group, in order to succeed, needs inflation to remain tame.
But taxes, insurance and inflation are not likely to be more affordable once your working income ceases. Health insurance, the conversation of choice among seniors I found out during a visit to a hospital-bound elderly relative, could also become a hot topic that has no monetary target. In other words, you cannot determine today what that coverage will cost in ten years. And this dire news does not account for possible changes to your coverage.
The 70 percenters would be wise to take advantage of every option available including their IRA. A recent piece of legislation allows retirees to rollover their IRA in the newer enhanced
HSA, a consumer driven health savings account. This permits savings that was growing tax deferred to be free of taxes once it is put in the plan. Be aware of the stipulation that comes with such a rollover. That money, once it is moved, can only be withdrawn for medical reasons.
But if that group was counting on that savings for income, what will they do now? You will find that the 70 percenters often make assumptions that are not based in reality.
Often, too often in fact, the 70 percenters will count their house as an asset. In the back of their minds, they look at the equity built up in the property as a sort of safety net. The two things they fail to understand with that thinking is that equity is equity until it is tapped; then it becomes debt.
In many instances, the 70 percenters fail to recognize the cost of that debt in terms of interest rates and pay back periods. But more importantly, will the lending institution lend you the money on your diminished income? Probably not. And although you may trot out all of your accumulated savings as proof you can pay back the loan, why borrow only to accrue unnecessary interest.
The 70 percenters will often cite a pension as part of their plan. This added boost to their financial picture is only as good as the pension. If you have questions about your pension, the lion's share of which are under funded in this country, you have the right to ask if it is insured and if you ask in writing, they must respond with your plan¹s funding condition.
The Pension Benefit Guaranty Corporation acts an insurer guaranteeing that pensioners will get something should the underlying plan fail. The shock for most people, who have accumulated the majority of their pension dollars in the later years of their career, comes when they realize that the PBGC has an income cap of $47,652 for retirees aged sixty-five in plans that terminated in 2006.
Fidelity is suggesting that an 85% pre-tax retirement income is the best goal. The company feels that health insurance is the greatest risk to any retirement plan. That factor alone could impact savings more than many of us anticipate. Worried that a retiree¹s inability to pay for good health care coverage could have a devastating effect on a retirement income perceived to be adequate.
After a recent appearance on a local television show, I was stopped and asked the same question most fifty year olds seem to be asking these days: "should I buy long-term care insurance?".
The daunting truth is probably yes. And the reality is probably no. If you consider the fact that you have a one in three chance of ending up in a nursing home, even briefly, as good odds, you probably shouldn't get it. But you should save for the possibility. Factor in an additional $100,000 above and beyond what you have set aside for retirement income. As mentioned earlier with the 70 percenters, rolling this into a health savings plan at retirement is a good idea.
While the premiums for long term care insurance might seem considerably lower in your fifties than in your late sixties, you should also consider your resources. Is your home elder-friendly? Now would be a good time to rethink those stairs and discuss the possibility of not being able to use them.
Will you have family to help you recover from some of old age's maladies? In many instances, a family member will step in and help. But you should consider this fact: one in twenty seniors aged sixty-five or older ends up in a nursing home for more than five years.
People who believe that 85 percent of their income will be adequate can only really make that claim if they currently live on exactly that amount. These folks max-out 401(k) plans, hold investments outside of retirement accounts and realize that where you live is shelter foremost with downsizing or reverse mortgaging as the last resort rather than part of the plan.
Determining what the industry calls a income replacement ratio can be difficult. Worksheets and calculations can be made at a wide variety of sites across the Internet. But how well they jive with your outlook is unknown.
The best thing to do would be to start the discussion now. Don't look at rainy Monday mornings as a good reason for retirement. But by all means, discuss how you envision your post-work years. Can you afford it on your current take home pay? Remove your mortgage (but not your cost for taxes, insurance and upkeep) and ask yourself could you afford it now?
Factor in your health (and to a limited degree, the health of your parents) and try and determine those costs, which could rise almost 100% over the next ten to fifteen years.
Now determine your hopes, desires and aspirations. Is there enough money left over to do those special things right now? If not, after taking all of those other expenses into account, then you are not saving enough.
And lastly, take the government out of the equation. While many count on something from Social Security, suppose it wasn't there. Could you face old age without Medicare or Medicaid?
Do your best to save as much as possible now. Ignore the percentage targets set by planners. No calculator can determine everything you will need or not.
Do not plan on working later in life. There are only a select few who can or will try to do this because they want to. A far greater number of us would just as soon cease and desist. If you think it is possible and something you might consider, start the job search today. The doors for late life job seekers are not as wide open as they were when you were twenty.
Beginning to save as if you will need every dime of your current take home pay, possibly more and doing it now will make the future just a little less complicated.
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