Retirement Info: "Ready to Retire? + When the Nest Egg Cracks" + Worksheets...
Ready to Retire? (Will You Be Ready?)
washingtonpost.com
When the Nest Egg Cracks:
washingtonpost.com
Retirement Worksheets--SmartMoney.com:
university.smartmoney.com
Social Security-- Benefits Planner:
ssa.gov
Taxation:
irs.ustreas.gov
"How to Retire Happy" by Stan Hinden:
shopping.yahoo.com
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Rearranged for emphasis & ease of reading.
>>>Will You Be Ready?
By Stan Hinden
Special to The Washington Post
Sunday, January 14, 2001 ; Page H01
This article is excerpted from "How to Retire Happy," by Stan Hinden. © 2001 by Stan Hinden. Reprinted by permission of the McGraw-Hill Cos. All rights reserved.
On the face of it, the arithmetic of retirement is fairly simple. It's a matter of income vs. expenses. The key question: Will your monthly income be sufficient to cover your monthly expenses?
As you prepare to retire, you will hear a great deal of discussion about how much of your working income you will need in retirement to maintain the same lifestyle. You will hear financial advisers and others suggest that you will need about 80 percent of your regular income when you retire. That figure seems to assume that your living expenses as a retiree will be lower than they were when you were working full time. Well, maybe yes and maybe no.
The 80 percent rule hasn't worked for my wife, Sara, and me. If anything, our living costs in retirement are higher than they were when we were both working. It makes sense if you think about it this way: When we retired, we did not relocate to a less-expensive community, as did some our friends. We stayed in the apartment that we moved into a few years before we retired. So our mortgage and condo fees have remained about the same. Our food bills also are about the same -- although I don't understand why, since we're both dieting most of the time. It's true that we eat more restaurant meals than we used to -- probably because we're home more and have more free time.
As for clothing, I haven't bought a new suit in some time -- I don't need them much for business anymore -- but there's been an increase in the amount of casual clothing that Sara and I have bought in recent years. Moreover, we still drive two cars. Sara and I have talked about going to one car to save on the cost of insurance, gasoline and repairs. But we both concluded that it wouldn't work. We are always going in different directions, and we just need the freedom that two cars provide.
Yes, we do save some money because we're not commuting to work every day -- but not that much. We probably use the same number of gallons of gas visiting our local shopping malls.
Other expenses, such as our electric and telephone bills, have either remained the same or gone up. For instance, Sara and I both have cellular phones for highway emergencies and the convenience of being able to stay in touch. But that's $50 a month that we did not spend a couple of years ago.
Our budget also has changed when it comes to entertainment. Going out to dinner with friends is the top leisure-time activity. We also subscribe to several local theater groups and regularly attend their shows -- something we didn't have time for when we were working. In addition, we go to the Kennedy Center when community groups organize theater parties and bus transportation. The usual price is $50 or $60 a ticket.
Our retirement savings, I confess, took a big hit when we began to travel after we retired. We had both worked for many, many years and felt that we were entitled to enjoy some of the pleasures that go with retirement. So we took several cruises. Our cruise to Scandinavia and Russia was memorable -- but the cost of our trip was about $15,000, in part because it included a week of sightseeing in London.
My point is that when you are planning your retirement, it is foolhardy to think you will be happy living like a pauper. You don't live that way now, while you are working. And there's no reason to plan to live that way when you retire.
At the very least, make sure that your income and your expenses -- adjusted for the factors I have mentioned -- allow you to have the kind of lifestyle to which you have become accustomed. Remember, too, that you will want to have some fun in retirement. But the cost of fun will be extra.
If your arithmetic shows that you can keep your lifestyle and also have some fun, then you can afford to retire.
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To get started, take a sheet of paper:
... On one side, list all the items of monthly income that you expect to receive when you retire. Add them up.
... On the other side of the paper, list all of your monthly expenses and add them up.
... Then compare the numbers to see whether you have enough income to cover your expenses.
If you do have enough income, you're off to a good start.
If you don't, you have to go to the next step, where you have two basic choices:
... You can raise your income OR
... lower your expenses.
... Either, as I learned from personal experience, is easier said than done.
But there is another choice:
... Use your savings to help close the gap between income and expenses.
.......Using your savings is a perfectly reasonable idea.
.......After all, that's why you saved that money in the first place.
.......But you must plan your withdrawals carefully; you don't want to dig into your savings too often or too deeply.
...Your nest egg may have to help support you for 15 or 20 years.
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Sudden Changes
One of the things that surprised me about retirement was the dramatic way in which my financial situation suddenly changed. One day I was receiving a sizable paycheck. The next day, it seemed, my paychecks had stopped. Intellectually, I was aware that my paychecks would stop when I retired. But I guess I wasn't fully prepared for the emotional jolt of losing that lifelong security blanket.
In fact, there were several other major differences between working and retirement that I hadn't anticipated. Here are some of them:
• Hello, fixed income. As full-time retirees, Sara and I are now living on a fixed income consisting mainly of our monthly Social Security benefits and our pension checks. We are fortunate to have pension checks. These days, many people do not receive pensions when they retire. But even if you get both Social Security benefits and a pension check, they are not likely to increase much over time. Social Security gives its beneficiaries an annual cost-of-living adjustment, which is usually quite modest. Most pensions are not adjusted for increases in the cost of living.
• Goodbye, raises. When we were employed full time, our salaries were subject to occasional improvement. We were eligible for raises and promotions, both of which boosted our incomes. We were able to work overtime, which also increased our take-home pay. And, occasionally, we received bonuses. In short, there was a reasonable chance that we could increase the amount of money we made each year. But as retirees, we don't have those opportunities.
That means that the raises, overtime and bonuses that helped pay for our new cars and summer vacations are not available in our retirement years. We'll have to find other ways to pay for large-ticket purchases or trips.
• Health-care costs. Medical costs in retirement are likely to be higher than they were while the person was employed. While Sara and I were working, we both had company health insurance, which covered medical, dental and prescription bills. When we retired, we lost our company insurance.
Fortunately, we were both over 65 and thus eligible to receive Medicare benefits. Had we retired at age 62 -- an age when many people do retire -- we could have been without health insurance for several years. The alternative would have been to buy private insurance until we were old enough to go on Medicare. That insurance would have been quite costly -- and would have made a rather large hole in our retirement budget.
When you begin working on your retirement budget, don't forget that you probably will have to buy a secondary insurance or "medigap" policy to cover some of the expenses Medicare does not. You may have to pay for your prescription drugs as well, which Medicare also does not cover. Prescriptions are covered by a few medigap policies, but those benefits may be limited.
The bottom line is that Sara and I are spending more money on our health care in retirement than we did while we were working and had company coverage -- even though we paid for our company coverage.
Medicare, by the way, does not even pretend to cover all hospital or medical costs. We pay $130 a month -- a relative bargain -- for a secondary insurance plan from Sara's former employer that covers some of the bills that Medicare does not pay. But even so, our annual out-of-pocket expenses for health care are perhaps 50 percent higher than when we were working.
• The tax man cometh. In your retirement budget, you may need a special reserve for the money you owe for federal and state income taxes. During the years I worked, my employer always withheld money from my paycheck for income taxes. Usually, the amount of my withholding would be close to the actual amount of money I owed Uncle Sam at tax time. So it was easy to settle up with the IRS.
When I retired, I neglected to ask The Post to put tax withholding on my pension check. My Social Security check also did not have withholding. Sara and I later asked for withholding to be put on our pension checks -- but we have not gotten around to putting withholding on our Social Security checks. (To do that, fill out IRS Form W-4V, Voluntary Withholding Request, and submit it to a Social Security office.)
Initially, the effect of not having withholding on our Social Security and pension checks was that I had to file quarterly estimated income-tax reports with the IRS and my state tax office. It also meant that I had to put aside a certain amount of money each month to cover the quarterly payments. I wasn't used to doing that, and it played havoc with my efforts to balance my family budget.
And here is something else you should be aware of when it comes to taxes in retirement: Your Social Security payments may be taxable. Ignoring the fact that you paid taxes on the money you put into Social Security for many, many years, Uncle Sam will tax up to 80 percent of your Social Security benefits -- depending on your taxable income.
Indeed, it is a good idea to talk to an accountant before retiring to find out what your tax situation will be when you retire and what effect those taxes will have on the amount of money you'll have available to pay for your living expenses.
• More about the tax man. The beauty of a 401(k) retirement plan is that it permits you to save money in a tax-deferred account for many years while you are working. It can reward you by producing a sizable retirement nest egg. But when you reach the magic age of 701/2, Uncle Sam says you have to start withdrawing money from that account and paying taxes on your withdrawals.
As you prepare your retirement budget, especially if you are nearing 701/2, remember that every dollar you withdraw from a tax-deferred IRA will be taxable. If, for instance, your taxable income is $40,000 and you take a $10,000 IRA withdrawal, your taxable income will become $50,000 and you will be taxed accordingly. So, here again, you may need to set aside money in your budget for taxes -- money you'd probably like to spend on other things.
After you're done with all these calculations, take a look at your results. If your retirement numbers show that you can't make ends meet, even by judicious withdrawals from savings, then you may have to delay your retirement and keep working until your finances improve.
Continuing to work past 65, for instance, can improve your retirement income in two ways:
First, Social Security provides a bonus for every year you work past the normal retirement age, up to age 70. The normal age for retirement is moving up gradually from 65 to 66 -- and will rise to 67 in the future. If you retired in 2000 at age 70, you would have gotten five years of delayed-retirement credit and a bonus of 22.5 percent. Thus, a $1,000 monthly Social Security check would have turned into about $1,225.
Second, if you are entitled to a pension from your company and you continue to work, your pension may improve because of your additional earnings and because of pay raises. If your retirement budget looks as if it could be tight, find out how much money you will receive both from Social Security and from your company pension if you work until age 70 -- assuming that your company will let you work until that age.
I retired at the age of 69 and found that my Social Security and pension both were considerably higher than if I had retired at 65. Waiting to retire turned out to be a big help financially.
• A comfortable retirement. A few years ago, I saw a sign in a Pennsylvania restaurant that said "Too old, too soon. Too wise, too late." I have never forgotten that bit of wisdom, because it seemed to summarize my regrets about not paying closer attention to my personal finances when I was younger.
I should have saved more aggressively during my working years.
Social Security and pensions are helpful.
But it is our savings that will make it possible for us to have a comfortable retirement.
So save as much as you can.
And when you finally sit down to draw up your retirement budget, your income will outweigh your expenses and you'll be able to say, "Yes, I can afford to retire."
© 2001 The Washington Post<<<
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>>>When the Nest Egg Cracks
Sunday, January 14, 2001 ; Page H04
Three years after I retired, I was shocked to discover that if my wife and I didn't cut down on our spending and get better results on our investments, we would use up all our retirement savings within eight years.
As you can imagine, that was extremely bad news. At that point, I was only 72 and Sara was 70. In eight years, I would be only 80 and Sara would be 78 -- not terribly old by today's standards. In fact, Sara and I have many friends who are 80 and older and still lead active, interesting lives.
The truth of the matter is that I was hoping our savings would last until we were in our nineties. But my calculations using one of those "retirement calculators" on the Internet told me we would fall far short of that goal.
Now, I'm not suggesting that if we used up our savings, we would be penniless. Sara and I are fortunate to have regular retirement incomes. Together with our Social Security benefits, our pension checks help pay for our basic living expenses. But we use our savings to take occasional vacation trips and to otherwise enjoy our retirement. Without any savings to draw upon, our activities would be very limited.
The cause of the problem soon became apparent. We were dipping into our savings too often and not earning enough on our investments to replace the money being taken out. And, of course, as our nest egg shrank, the less it earned. Although I didn't like what the computer told me, I was grateful to get the warning in time to do something about it.
The first thing I did was to look at some "what if" calculations. I tried several different scenarios to see what I could do to make our savings last longer. I lowered our monthly expenses and raised the earnings on our investments. That seemed to help. The revised numbers had the effect of stretching out our savings for a few additional years.
But then I realized I had told the computer I would continue to work as a freelance writer until I was 90. On reflection, that seemed to be a bit of a stretch, so I went back and told the computer I would stop earning additional income at age 80. That made the picture worse.
The calculations left me with little choice but to think seriously about how much money Sara and I could save if we trimmed our living expenses. If that's what we have to do in the next few years, we'll do it. But, frankly, it's not a happy prospect.
For many years, the common wisdom in the investment world was that stocks were suitable for younger investors but not for older investors. The theory was that once you reached retirement age, you had to become more conservative and move your money into bonds and other fixed-income investments -- which were judged to be less risky.
The thinking was that retirees had to be wary of investing in stocks because, in the event of a market crash, they would lose the savings they needed to live on and might not have time to wait for the market to return to higher ground.
During the 1980s and 1990s, that view of retirement investing was replaced by another view, which holds that retirees no longer should give up their stocks and move all their money into bonds when they turn 65.
In fact, it's now believed that it makes perfect sense for retirees to keep a significant percentage of their money in equities. And here is why:
• Longevity. The Census Bureau tells us that the average 65-year-old can look forward to 15 years or more in retirement. Many retirees live into the eighties and even nineties. This is a huge change in life expectancy for most Americans. In 1900, an average 65-year-old had a life expectancy of only a few years. In 2001, an average 65-year-old man can expect to live to about age 81. Women can expect to reach about age 84.
If today's retirees have that many years to invest, why shouldn't they take advantage of the higher returns they can get from stocks? The historical record is clear: Over the 73 years from 1926 to 1999, large-company stocks returned an average of 11.36 percent a year while long-term government bonds returned 5.3 percent a year, according to Ibbotson Associates, a Chicago research firm. By investing in stocks, it appears, retirees can improve their chances of stretching out their retirement dollars.
• Inflation. Our new and longer investment horizons mean that retirees have to worry more about inflation than they did before. Inflation has always been a concern for people who live on fixed incomes. But before the dramatic increase in life expectancy, there may have been less concern about the effects of inflation on retirees. After all, if your retirement was going to last only a few years, you didn't have to worry much about inflation. But if your retirement is going to last for 15 or 20 years, inflation can have a substantial impact on the value of your savings.
Although inflation has been subdued in recent years, it averaged 4.6 percent a year during the 22 years between 1977 and 1999, according to the folks at T. Rowe Price Associates, the Baltimore-based mutual fund company. For example, if you retired in 1977 with $20,000 in savings, the impact of inflation would have reduced your purchasing power to $7,500 by 1999.
That's why today's retirees are advised not to be too conservative in their investments. It may seem safe to put all of one's savings in money market funds, bank CDs or even government bonds. But your gains can be zapped by inflation.
Your goal as a retiree should be to develop an investment portfolio that provides:
... relative safety,
... current income for living expenses, and
... the growth of your savings.
How can you do this?
The best way is to use a mix of stock, bond and money-market instruments tailored to your special situation and needs.
While stocks suffer from more ups and downs than bonds do, you can reduce the volatility of your stock investments by:
... using conservative mutual funds, such as equity income funds, which invest in high-yielding stocks, and
... balanced funds, which invest in a mix of stocks and bonds.
... Research by T. Rowe Price shows that in falling markets, these types of funds declined less and came back faster than the overall market.
Investing is a highly personal matter involving:
... your financial needs,
... your time horizon, and
...your willingness to take risk.
That being the case, I believe it's wise for each investor to discuss his or her goals with a financial planner or investment adviser. If you are already retired, an adviser can help you figure out how long your money will last in retirement. If you are still working, an adviser can help you develop an investment plan that will help you reach your goals.
-- Stan Hinden
From "How to Retire Happy," by Stan Hinden. ©2001 by Stan Hinden. Reprinted by permission of the McGraw-Hill Cos. All rights reserved.
© 2001 The Washington Post <<< |
