Steve Vernon, an actuary and a research scholar at the Stanford Center on Longevity, has a surefire solution for bear scares. “Nothing helps sleeping at night more than knowing you have a fixed stream of income that won’t be impacted by what’s going on in the markets,” he says. The key is to maximize your guaranteed sources of income.
Settle on a Social Security strategy
You can start receiving Social Security at age 62, but if you delay until age 70, the payout will be 76% higher. “Even if you are going to tap other assets to live off before age 70, you still come out ahead delaying Social Security,” says David Littell, co-director of the retirement-income program at the American College of Financial Services. What if you don’t have enough income to cover your needs until 70? Couples have an option. The higher wage earner can delay until 70 while the other spouse taps benefits earlier.
Get the basics covered
Take a small piece of your retirement savings and buy yourself guaranteed income. For example, $100,000 in an immediate fixed annuity these days would entitle a 65-year-old male to a lifetime monthly payout of $555, and $535 for a 65-year-old woman. (Women’s longer life expectancy is the reason for the difference.) That’s the equivalent of an annual withdrawal rate in excess of 6%.
Stick with a single-premium immediate annuity. Since payouts are based partly on market interest rates—which are still low—start with a small contract now and buy in intervals over a few years. You can get quotes atImmediateAnnuities.com.
If you’re five to 10 years from when you want the payouts to start, look into a fixed deferred annuity. You pay your premium today and designate when you want the income to begin.
Turn down the lump sum
Many private-sector employers, eager to shed traditional pension obligations, have been offering employees the option of taking lump sums today. Vernon recommends sticking with the pension’s annuity payouts, as you’ll have a hard time safely creating as big a guaranteed stream of income from a lump sum.
Just because you have a Ph.D. in economics doesn’t mean you know how to invest for retirement.
Alicia Munnell, the director of Boston College’s Center for Retirement Research, was a member of the president’s Council of Economic Advisers for two years before joining Boston College as a professor of management sciences in 1997. Before the council, she was assistant secretary of the Treasury for economic policy for two years. That was after working for the Federal Reserve Bank of Boston for two decades. That was after getting her Ph.D. at Harvard.
But taking responsibility for your own investing is “too hard,” she says. Like everyone else out there, Munnell, 72, is nervous about whether she’s doing the right thing. She did make a couple of smart financial decisions in her early 50s that firmed up her financial footing. They had nothing to do with stocks or bonds.
Now Munnell tries to help people learn from her mistakes by talking about them as often as possible. The “not-so-smart things,” she calls them.The situation
Munnell and her 76-year-old husband, Henry Healy, a lawyer, both still work. She analyzes retirement issues, works on papers, writes a retirement blog, and suggests changes to policy. You don’t get rich in academia, but “you get in benefits what you don’t get in salary,” she said. She loves working and has no plans to stop, though she has broadened her interests in recent years. She’s taken up duplicate bridge, plays in tournaments, and daydreams more about such things as cruises down the Danube.
Munnell says that like many people she probably has too much money in cash—she guesses she has a third in cash, a third in stocks, and a third in bonds. She’d have much less in stocks if her son weren’t a private wealth manager at Goldman Sachs. “He probably got us out of hoarding our money under the mattress,” she said. “He only intervenes when he’s kind of horrified.”Smart thing No. 1
One Sunday in the mid-1990s, when she was around 50, Munnell began to wonder about how much she and her husband were spending and how much they might have to live on in retirement. This was after she worked in the Clinton administration and was back in Boston looking for a job. She looked at their earnings, savings, and mortgage payments to get a rough idea. The result: a “mind-boggling mismatch” between the money they needed to maintain their present and future lifestyles.
One of the couple’s major assets was a stately home on Boston’s Beacon Hill. It was a “huge single-family house with six bedrooms and a garden,” Munnell said. “We could’ve had people living upstairs and would never have known it.” She and her husband talked with a financial planner she knows from her work at the center, who emphasized that they had a budget constraint and needed to set up their budget to reflect that. In other words, get rid of the house.
Then, one day, someone just showed up at their house to buy it. “Normally I would have said no,” Munnell said. “And we could’ve been fine in that house for a good number of years. But because I did that [budget] exercise, I took advantage of the opportunity when it arose.” The couple still lives on Beacon Hill, but in a co-op, and they have no debt on either that or a house they own in Vermont.Smart thing No. 2
Working longer is a solution to inadequate retirement savings that Munnell is passionate about. It helps you postpone taking Social Security and get a far bigger monthly benefit, and it allows tax-deferred retirement savings to grow. What both of her smart retirement moves have in common, she stressed, is that neither had anything to do with investment options.
“One was controlling your spending, and the other is a labor force decision,” she said. “If I have a message, it’s that I’m stymied like everyone else about how to invest my money, but for one reason or another I made good lifestyle decisions that saved me.” The not-so-smart stuff
Most of Munnell’s mistakes involved using retirement savings for current lifestyle needs. When she worked at the Boston Fed, she had a defined-benefit pension plan, now a coveted rarity. When she left that job to work in Washington, she asked a neighbor there whether she should take her benefits in a lump sum. He said yes, that she could invest it and make more money than if she left it in the defined-benefit plan.
Wrong. She spent it all. She wasn’t buying anything particularly lavish, but she and her husband were maintaining two homes. “I should have just left it in there, and it would have turned into a meaningful amount,” she said.
She also tapped the money in her 401(k) plan at the time, albeit from her after-tax 401(k) savings. “I used my after-tax account like a bank account,” she said. “I was a little cavalier. I’d tell anyone else not to touch it, ever.”
Another, smaller regret is moving money out of the government’s thrift savings plan. She wanted to consolidate her accounts in one place to get a better feel for her asset allocation. “I’m not happy I did that,” she said. “It has such low fees.” The bottom line
Munnell spends a lot of time thinking about other people’s retirement rather than her own. She worries that a whole cohort will arrive at retirement without enough money to live comfortably. Instead of fretting over whether you should be in stocks or bonds, she recommends people focus on the things they can control, like their lifestyles.
For many people, that won’t be enough, and Munnell says a lot needs to be done on the policy front. That’s why she keeps working.
The happiest workday is Friday, according to a recent study by the fitness tracker company Jawbone. And people are happier on weekends than they are during the week. In other words, people are happier when they’re not working. Many of us have, for one reason or another, dreamed of early retirement. A TIAA-CREF survey from 2014 suggests that the biggest regret of retirees is that they didn’t retire sooner. Maybe our career has plateaued, the workplace has developed a poisonous atmosphere or we are just sick and tired of the job. Some of us have early retirement thrust upon us when we are downsized out of a job for the benefit of someone else’s bottom line. Whether by choice or chance, retiring early is easier said than done. But don’t be scared. It may be the key to a happier life. If you hate your job, or if your company is in trouble, the smart move might be to take matters into your own hands, decide whether you can retire early and then map out a way to do it. Here are four clear routes to early retirement, and one road hazard to avoid.
This is the most obvious path to early retirement, but for many of us also the most unrealistic. Nevertheless, there are still a few people who enjoy a generous defined-benefit pension that kicks in after 20 or 25 years of service. This might be enough by itself to enable you to retire. Or maybe you had a good career, lived frugally and built up a substantial retirement nest egg. I know one accountant who retired at age 49. She made a good salary and saved a lot of money. And since she was a financial professional, she was confident she could manage her money. Due to her hard work and diligent saving, she is enjoying life these days.
2. You have another career in you.
Technically, this is not retirement. But it solves the problem of hating your job and wondering how to extricate yourself from a bad work environment. One friend of mine who was a production manager at a struggling printing company held a secret desire to become a teacher. He saved up some money, did his research and at age 54 jumped ship to enter a fast-track program designed to train mid-career individuals to become math and science teachers. He left work in November, started the program in January and was teaching middle school science by August.
My brother-in-law took a retirement package from his computer company when he was in his mid-50s. He had a daughter in college and a son still in high school, and I asked him how he could afford to retire with those responsibilities. He smiled and replied, “The secret? A working wife.” His wife had worked when she was younger, took off a dozen years to raise their two children and was more than ready to go back to work – at what turned out to be a very convenient time. But he is not the only guy who’s enjoying early retirement while watching his wife go off to work every morning.
4. You’re prepared to seriously downsize your lifestyle.
Some people scoff at professionals who advise us not to retire until we have $1 million in our retirement accounts, or until we can replace 80 percent of our pre-retirement income. If you’re prepared to sell your home, move to an area (even overseas) with a low cost of living and just enjoy life rather than try to keep up a middle class lifestyle, you can retire with much less money. It’s a serious adjustment, but for some people it’s the right thing to do.
Road hazard. If you retire before 65, the age you become eligible for Medicare, make sure you don’t go without medical insurance. My friend the teacher stayed on COBRA for the nine months he was out of work, then signed up with his school’s medical plan. My brother-in-law had his own retirement medical insurance, and his wife’s new job covered the kids. And now, of course, you have the option of buying insurance through your state’s health insurance exchange due to the Affordable Care Act. Finally, don’t retire just to get out of a job. Have a vision of what you’ll be doing once you leave the workplace – whether it’s launching a new business, starting a new hobby or embarking on a road trip. You will probably have to watch your expenses and live a more modest lifestyle. You might be poorer, but you’ll probably be happier.
Written by Tom Sightings of U.S. News & World Report
Bora Paloka, a 65-year-old former hairstylist in New York City, is not living the type of retirement her husband and she had always imagined. For the past five years, the couple has been using welfare money to cover basic monthly expenses, and to make matters worse, the credit card debt she entered retirement with has ballooned.
Saving enough money to retire comfortably has long been the goal of the American worker as pension plans have disappeared. But now an added wrinkle complicates the scenario for those like Paloka: retirees are increasingly entering their golden years with crippling debt.
Households headed by those 75 or older saw debt double to $27,409 in 2010 compared to $13,665 in 2007, according to the Employee Benefit Research Institute (EBRI). And it’s not just mortgage debt that poses the problem: credit card and student loan debt are stifling retirees’ plans for leisurely days on the golf course followed by 5 o’clock margaritas.
Coping with this sort of debt does not leave Americans in a solid position to exit the workforce: 82% of workers aged 60 and older expect to or are already working past age 65, according to the May 2015 survey of the Trans American Center for Retirement Studies. Among them, 56% believe they will not be able to afford to retire because of their income or health benefit requirements.
Of course, for those forced into an early retirement, the obstacles increase: life expectancy has lengthened, and the typical consumer needs to be able to cover costs incurred during 30 plus years of retirement.
The best way for Americans to tackle debt in retirement is to develop a strategy and time line so they can attack the most troublesome debt first. It’s also important for them to consider taxes, retirement portfolio withdrawals and income streams so that they don’t outlive your money or leave heirs with outstanding loans.
Prioritize Your Debt
If you have multiple debt burdens, choosing which obligation to attack first is important.
Tackling high interest credit card debt, whether the charges were for a necessity or indulgence, is a must, according to Michael Conway, CEO of Conway Wealth at Summit Financial Resources in Parisppany, N.Y. If a retiree has multiple credit cards with debt owed, he should first pay off the one with the highest interest rate and then work his way down. This is what personal finance experts call “the avalanche method.”
Next up, take care of student loan debt, a pesky phenomenon that’s increasingly rearing its ugly head into retirement for many Americans. With education costs only increasing each year, student loans now make up a large portion of retirees’ total non-mortgage debt, according to the study by Limra Secure Retirement Institute: individuals aged 65 to 75 have six times the student debt compared to 25 years ago.
Financing a college education for yourself or your children is a priority to most looking to increase earning potential over a lifetime, but luckily, this debt can move down your list of priorities because of the low interest rates on education loans — typically from 1.5% to 8.8% for private loans and currently 3.86% for federal loans.
Student loan consolidation can simplify your bill to one streamlined payment and give you more time to pay off the loan. When choosing whether to consolidate a loan or not, retirees should compare their current monthly payments with the monthly loan payment for the consolidated bundle and ask whether they can afford to pay loans for the next couple of decades.
Mortgages are the big X-factor when considering entering retirement with debt. Generally speaking, it’s safe to pay the monthly amount owed on your mortgage while you tackle paying off your credit card and student loan obligations; once you’re squared away on those debts, you can work toward paying your house off in full. That’s because with a fixed mortgage, prices remain the same and don’t increase with inflation. That decreased urgency to pay off the debt, coupled with the fact that homeowners get a tax a break on their mortgage interest payments, makes this debt more palatable and less destructive to a retiree’s bottom line. To boot, the mortgage you took out will appreciate in value and is considered good debt, as opposed to bad debt, the money you charged to take that weeklong trip to Cancun. (That exception for mortgage debt is an adjustable rate mortgage, an ARM, which should be paid off sooner rather than later, because of the increasing interest rate over time).
The option of refinancing your home in retirement can cut down your monthly costs and help in your quest to paying off your mortgage. Lower rates come through from changes in market conditions or an improved credit score. But caveat refinancer: refi does have costs and fees like a 3% to 6% refinancing fee on your principal balance.
A reverse mortgage can bring in some steady cash flow and access home equity slowly over the years. This route comes with costs, depending on the size of your loan, like upfront mortgage insurance and real estate closing costs. Mortgage insurance adds an additional 1.25% on top of an adjusted interest rate.
If all else fails, downsizing your home is an economically efficient way to save some cash for retirement and free yourself of burdensome debt. A realtor can help with costs of selling your home and buying a new cozy condo for two.
During the first year of retirement, couples usually spend the equivalent of 75% to 85% of what their income was, mainly on home, food and health-related expenses — decreasing that expenditure level as they head deeper into retirement. Retirees should look at income and tax brackets to help determine what strategy to take for monthly spending and withdrawals from retirement accounts, according to Neil Krishneswamy of Exencial Wealth Advisors in Plano, Texas.
Financial advisors would caution retirees, with credit card debt, of over-splurging in their first retirement years. Non-deductible and with high interest rates, credit card debt will financially stunt you if not paid off early in retirement. More friendly debts, like mortgage debts, can be left to simmer while you pay them off slowly throughout your 70s and 80s.
“Some people are comfortable with having debt during retirement, but it’s good to have other means to control tax burden,” said Krishneswamy, specifically referring to the trusty mortgage interest deduction.
Alternative accounts like an emergency fund for back up can soften up the debt burden for the future.
Of course, diversity of investments is key: Krishneswamy says that if all your investments are in a 401(k), then any distribution you make from investments comes from a 401(k). “If there is no flexibility, then there is a higher tax burden,” he says.
That’s why multiple streams of retirement planning vehicles are of the essence: retirees older than 59.5 can start making withdrawals from their traditional IRAs with no penalty. Withdrawals are subject to state and federal taxes but can be used toward paying down debt. Those with a Roth IRA are not subject to the same tax burden, as a consumer with such an account has already paid taxes on contributions.
In Brooklyn, N.Y., Sunny and Mary Gianetto use their Social Security earnings and tax free annuities from financial companies they invested in to stay afloat in retirement and pay off their obligations.
Sunny Gianetto retired at age 65 and his wife at 62. Now at 80 years old, Sunny hopes to exceed his monthly budget through additional earnings, because his Social Security check won’t do it alone. “The wonderful people in Washington give us a raise every year and the increase comes in January, but it’s not enough,” he said.
The Gianettos have monthly expenses of car insurance and home maintenance to pay for. “If we didn’t have the tax free investments, we would be in trouble,” Mary said. Both husband and wife try to plan smart for the future and have a monthly budget.
For people burdened by excessive debt in retirement, sometimes drastic measures like moving are necessary to find tax advantages. That can make all the difference in chipping away at the debt and moving toward a financially independent lifestyle.
Conway says to consider moving out of a state unfriendly to tax advantages, like New York with a high income tax rate of 8.82%, to a tax friendly state like Arizona, with a 4.54% income tax rate. All the better, retirees can head to states like Nevada and Florida, which have no income tax rate. Retirees may often look to migrate to warmer climates, but they shouldn’t make the mistake of moving to one of the top least tax friendly states like California- 13.3% income tax rate.
Moonlighting for More Cash: Real Talk
If you have debt, you should try to hold off on retirement, says Sergey Kuznetsov of AXA Advisors in New York City. That’s a strong opinion urging people who exit careers with debt to find a side hustle or alternative income stream.
But it’s a realist policy, given that people who retire in their 60s need to have money for the next three to four decades.
“If you want to make sure you have enough money for retirement, you have to stick to a monthly game plan,” Conway says. Therefore, individuals who are about to retire with an unpleasant amount of debt should consider working longer or seeking part time work after retirement to keep up with monthly payments.
That’s exactly the strategy Paloka has employed when trying to whittle away at her credit card debt.
Fearful that her four children will inherit her credit card debt, she began knitting for Hania Bytloi, a company that sells handmade knitwear. “I sometimes work through nights to finish the products,” she said.
With her husband selling a few books here and there, the Palokas are still unable to pay for everything and go to their children for help. “My eldest daughter helps pay for my credit card debt, but she is constantly late on the payments, which puts me back even more,” said Paloka.
There’s not a one-size-fits-all strategy here, of course.
“It’s like a little game of chess or jigsaw puzzle, and you need to ask yourself, ‘What’s the best thing you can do with your money?'” Kuznetsov says.