Retirement Financial Planning A. Importance of visionB. Introduction to the Prosperous Retirement C. Stein's Model of Three Stages D. A proposed financial projection planning spreadsheet including:
F. Additional tips for doing retirement financial planning G. Conclusion To successfully plan for your retirement, picture the retirement you want and then plan for it. Forget the numbers. Use your imagination. Assume you'll have at least 50-60 hours extra each week. How do you want to use those hours? Construct a detailed picture of the way you want to live. For example, you say you want to volunteer. Where? Doing what? Do you volunteer now? What can you do now so your dream of volunteering will become reality? Part of your retirement planning may be trying out the activities you've always wanted to do before you do retire to see if it's what you really want to pursue. Start with your initial vision - then keep working with it. Remember: your vision, your dreams drive your financial planning. B. Introduce the Idea of a Prosperous Retirement Michael Stein, a nationally known CFP and author of The Prosperous Retirement: Guide to the New Reality, has worked with thousands of financial planning clients over the past 40 years. He motivates people to become more actively involved not only with the financial part of retirement planning but with the very important non-financial areas, too. Before presenting a retirement planning model in his book, Stein traces the history of the concept of retirement. A non-working, or mostly non-working, retirement was only for the wealthy until the 1960's. Before then, when most people were unable to work, they lived a very modest life for a very few years. Now all that's changed for many people. Stein points to what he calls the "new retirement." That's "when the focus of daily activity shifts from economic productivity to self-actualization or chasing one's dreams." He calls this Prosperous Retirement. It's not about having lots of money; it's about maintaining the lifestyle you decide you want. What you want can be as simple or as extravagant as you can imagine. But obtaining a Prosperous Retirement takes active planning and making realistic estimates of anticipated expenses and incomes. Starting now before you retire, and continuing throughout retirement work with your estimates as you substitute real figures for the projected numbers in your plan. Continue to project into the future based on your changing reality as time goes on. C. Stein's Model of Three Phases of Retirement Stein says there are three phases in the Prosperous Retirement: 1. Go-go or Active Phase.
When I heard Stein speak, he referred to this phase as somewhat like a
second childhood but without parental supervision. He indicates this is can
be one of the most active and most enjoyable times of life as you pursue
athletic, philanthropic, intellectual, spiritual, and hobby interests. In
the first phase of retirement, this is where it all comes together.
Retirees often say they are busier than ever. So, what are you going to do in retirement? What have you always wanted to do? What do you want to try? In other words, how will you fill the hours you now use in income production? Do you want to work part-time, either getting paid or as a volunteer? What will you do with your free time? Who will you do it with? What are you doing now to develop each interest? Where will you live? If you move, how will that affect your expenses including taxes? What medical risks are you likely to face? Who else are you now or do you anticipate being financially responsible for, either completely or partially? By the time you retire, will all of the children be financially independent barring any unforeseen circumstances? Are you now or will you likely have to help support a parent or other relative in the future as you move towards and into retirement? If you are part of a
couple, how does your retirement vision mesh with your spouse's? Do you
know what his/her vision looks like? What will you do together? What will
you do separately? What will you do and where will you live if you become
single either through death or divorce?
If you are single, do you pool your finances with someone else now? Would you consider doing so in the future? For example, I have two sisters. If I happen to be widowed at some point in the future, and either one or both of them are also single, I would possibly consider living with them. Developing contingency plans such as these are also important. Thinking about the “what-if's” and “if-when's” of life helps make them less scary and impossible if and when they do happen. Stein's First Rule
of Retirement 2. "Slow-go" or Passive Phase. Eventually we decide we've had enough of going and doing. We'll be ready to eliminate all but just a select few of our outside activities. We become more “home-bodies” as we age. We become more reflective about life. While there maybe health concerns that limit our involvement, becoming less social is a natural part of this life stage. It doesn't mean we become hermits, just more selective about what we do and when, where, and how we do it. This may be the time to seriously pursue intellectual discovery. What have you always wondered about? What do you want to leave as a legacy - to your family, your community and to the world? My Dad is in this stage now. With an urgency, he is actively doing the genealogy research he and my mother began in the five years before she died. This also may be the
time when we start giving away possessions as we prepare for moving to
smaller living quarters, a common occurrence of this stage. But the Passive
Phase doesn't mean you stop all activity outside your home. If you've
always traveled, you may limit the number and length of your trips. You may
do different traveling. Instead of biking across
This phase lasted 10-15 years in the past but that length will depend on (1) when you retired, (2) your health and (3) your life expectancy. Stein says the budget for this stage typically declines 20-30% but that decline is often masked by inflation. As you plan for the Passive Phase, what activities from the Active Phase will you continue to do? Are there other activities you might add? Will you stay in your home? If you move, where? What services or assistance might you need in the later years of this stage? 3. "No-go" or the Final Phase. This phase is defined by the need for medical and, perhaps, nursing home care. It typically lasts 1-3 years or less, but for some people, the final stage could stretch even longer. Stein advocates using long term care insurance to manage the uncertainty of the length of this stage by helping to cover the potential costs of this stage. To plan for the No-go Phase, think about: Where will you live? Who will help you? What activities might you still do? Do you have a will, living will, health care power of attorney, durable power of attorney now? How do you plan to keep these updated throughout your life? Every time your situation changes, these are just some of the financial and legal documents you need to update. One more often difficult question: Have you thought about your funeral? Does your family know what you want? While we all like to think we'll live a long time, we never know when life will end. For me, what helps me accept the uncertainty of how long I'll live is to plan for a long life, and to know, that if my life is shorter, I've done all I could for those I leave behind. That gives me peace of mind. Discussion of
Stein's Model 1. I add a fourth phase, Transition Phase, at the front end of Stein’s model. This is the first year or so when you're making that switch in your identity and in the major focus of much of your waking life from University employee to .... whatever. I encourage you to think about this time. Think about the potential challenges of going through the transition to retirement. But also think about celebrating by doing something special to mark your transition to the rest of your life. Travel someplace you've always wanted to see, fix up the house or build a new home, do a special community project, have a special reunion of family and friends. You decide what you're going to do to celebrate. During transition time you're getting used to your new life - and you begin to create your new identity. 2. A caution: the model is based on Stein's experiences over past decades with both retirees and pre-retirees. What do longer life expectancies mean for the model? The Active and Passive Phases may expand as people live longer. 3. Physical and mental
health significantly impacts how long a person stays in the Active Phase
but personality also plays a part. Drawing on my Ph.D. work about how
personality factors affect financial behavior, and with all other factors
equal, I would predict introverts have shorter Active Phases than
extroverts. Introverts live a reflective lifestyle already so may move into
the Passive Phase perhaps easier and sooner than their extroverted friends
-- and spouses.
Which brings the idea of negotiation and compromise, especially for couples, to mind. My spouse and I have very different personalities. I'm very much the introvert and he's just as much the extrovert. As we plan our retirement our personalities play into our discussion and ultimately our decision. Even the way we're planning is significantly impacted by our personalities. As you might have guessed I'm a planner. My spouse is a do-er. We're both dreamers but in different ways. I like to dream as I plan, making plans a reflection of my dreams. He would rather just start doing something and let it happen. I think you can guess some of the compromising we've done, are doing, and will continue to do all our lives. 4. My spouse is also
almost 7 years older than I am. When thinking about the phases of
retirement, we realize that we may not always be “in sync” with
each other although with him being older and the extrovert, I suspect it
will be easier than if I was the extrovert. So part of what couples do is
to continue to appreciate, support and encourage each other to live their
own lives, but not always in tandem. We don't live in tandem now. Another
example: my godmother was 10 years younger than my uncle. When Uncle Pat
retired from the railroad, he was content to putter around their farm. But
Aunt Ellen wanted to travel. He said “go ahead.” So she went
with her sister to
D. Retirement Financial Planning With a Spreadsheet What is the number one question people want to know about financial planning for retirement? "How much money will I need?" As a typical economist, I always answer "that depends" but that’s really the only correct answer. We all would like to think of retirement planning as a logical or rational decision making process where there is one best, magical answer that works for everyone. But retirement planning is not a “one-size-fits-all” exercise. It's more intuitive and more holistic where there could be several best answers for you. Bottom-line: it's your choice and it depends on your situation - your values, preferences, wants, needs, what you want to do, etc. You decide your own retirement. The best way to get an estimate of how much money will be needed for retirement is to develop a spreadsheet describing factors related to the answer to that number one question. I will describe the spreadsheet my spouse and I are using to plan the finances for our retirement. This spreadsheet is a modification of the one proposed by Stein in his book. A bit of encouragement for anyone mathematically intimidated. The model looks like a lot of figures and it is. But I really encourage you to do whatever you can with this or a similar projection tool. At least try to model your financial retirement projections mathematically. Since we are dealing with money, this is really the most concrete way to plan, and the best way to get an answer about how much money you're going to need in retirement. This is a spreadsheet. Put in on your computer or to do it with paper and pencil. · There are 7 components to this financial projection as noted in the spreadsheet on
the third line. They are:
1. Who
is included in the plan by age (column 2)
2.
Length of plan (column 1)
3. Anticipated
expense budgets including Desired Budget, Basic Budget, Special Expenses
Budget, and Total Budget (columns 4, 5, 6 and 8)
4.
Anticipated income taxes (column 7)
5. Anticipated
income including earnings, Social Security or Civil Service, pension, income
from retirement income asset pool and total income (columns 9 through 16)
6. Retirement
income asset pool categorized as tax-deferred assets, tax-exempt assets,
and taxable assets with beginning balance, anticipated earnings, and portion
for budget for each as well as total assets (columns 17 through 29)
7.
Anticipated savings or the difference between the amount of asset earnings
minus the total portion used for the budget (column 30)
· The time line goes down the page in the first column. · For each component there is an initial numerical value on the top line and a modifier on the second line. 1. Who's included in the plan and how old are they? Starting with today, who's included in your financial planning. Do you have children at home or in college that you support? What about parents or other relatives either now or in the future? On the third line of the spreadsheet, starting with the second column, list each person's name and current age. Ages for each person are the initial values for the column, and are noted as such in the top line. Since the plan will be done on a year-by-year basis, the modifier for age in line 2 is one for one year. 2. How
long to plan for Thing about two time periods to include in the plan: (1) when will retirement start? and (2) How long will it last? A. When to retire: When will you
"graduate" from UNL? My spouse and I have three retirement dates
in mind: (1) the earliest I can retire from UNL; (2) the latest I hope to
retire; and (3) the most-probable date (somewhere in between). Once we determined
these three dates, retirement became more than just an abstract concept for
us. Just keep any dates flexible as you do your planning.
For your spreadsheet, I suggest you use the most probably date as your anticipated date of retirement. Then, if things go better than you expect and you want to, you can use your earliest date. If it doesn’t go as well as you think, eventually your earliest date may go by. Then re-set your three dates. Or you may use another benchmark such as the total amount in your asset pool to determine when you do leave UNL. B. How long
retirement lasts is determined by the life expectancy of each person in
the plan. Develop a range of at least three life expectancy numbers for
each person by using available tools on websites to help you make your best
guess such as the life expectancy calculators and life expectancy tables
like this one TABLE 1.
Look at the figure for yourself. How many years is your life expectancy? What will your age be? What year is that? Do the same for anyone else in your plan. Just remember that any life expectancy tables are average life expectancy. This means half of us will live longer and half will not live that long. Also, consider family health history, your current health and health maintenance routine. If longevity is part of your legacy, it's smart to plan for longer than the average. To determine how long your plan will be as you think about it today, determine who in the plan will live the longest into the future, then add 50% for planning purposes. For example: using some
of the life calculators and tables, my life expectancy ranges from 21-31
more years, and my spouse's from 21-25 years. Mine is longest so adding 50%
to 26 (the midway point in the range) makes it 39 years so our timeline today
extends 39 years into the future. Each year or so you may want to
re-calculate life expectancies and change your total time line if that
seems appropriate.
The modifier on line 2 for this column is one since planning is done on a year-by-year basis. 3. Expense
Budgets What are your budget
expenses likely to be in retirement? As a family economist and an Accredited
Financial Counselor, I suggest the best way to estimate retirement expenses
is to start with what you spend now. Percentages such as 70 or 80 or 90% of
your current expenses ignore individual situations. If you do the work
involved in coming up with developing your own expense budget, your
planning will be more concrete and more on target for you.
There are two worksheets to help you estimate what your retirement expenses will be: (1) Projection of Annual Desired Retirement Expenses and (2) Critique of Beginning Desired Retirement Budget. Inflation is the modifier for the initial desired retirement budget so deal with today's figures and let inflation play out on the spreadsheet as the modifier for each succeeding year. The first worksheet,
Projection of Annual Desired Retirement Expenses, starts with your current expenses.
For each expense category, write down what you spend now. Don’t know
what you spend? Then you need to back up one step and keep track of your spending
for at least two months. Also gather information about expenses from your
checking account records, current bills, credit card bills, and other records.
Account for as much of your income as you can.
Once you know your current expense totals for each category, determine if expenses are likely to increase, decrease or stay the same the day after retirement. Examples of those that may increase include health care costs, long-term care (unless you have long-term care insurance), insurance coverage based on your age, relocation costs, and travel, leisure, and entertainment costs. Costs that may decrease include college tuition payments, commuting costs, work-related expenses, dry cleaning and other clothing expenses, eating lunch out, housing costs (if you pay off your mortgage or move to smaller quarters), contributions to retirement plans, perhaps car maintenance costs, and possibly income taxes. What is likely to stay the same? Really any expense could fall into any of the three categories of change. Your plans and decisions will determine what will increase, decrease or remain the same after retirement. Consider expenses at the beginning of each of the four phases in retirement: (1) Transition Phase; (2) Active Phase; (3) Passive Phase; and (4) Final Phase. Think about your life timeline and how expenses may change forms the basis for what you'll need as income, and in turn, what you need for an asset pool to produce the income you need. Analyze Expense Patterns 1. Essential vs. discretionary expenses. Discretionary expenses can be eliminated if push comes to shove. Separate all expenses into these two categories. Be careful: a category like food may include eating out. You decide what portion of each category is essential, and what is optional or discretionary. Another way to think about this is that needs are essential while wants are discretionary. 2. Inflation-free expenses
vs. inflation-driven expenses. Inflation-free expenses are those that
are fixed in amount and not affected by such as the principal and interest
portion of a mortgage payment, insurance premiums, and contracts for fixed
payments. Since these payments are already set, inflation will not have an
affect on them. Separate your expenses between these two categories.
3. Legal-based vs.
peripheral expenses. Legal-based expenses are those that have built-in legal
consequences if you don't pay them. They are even more binding than
essential expenses since negotiation or modification of these expenses usually is
impossible. Peripheral expenses are those things not essential to your
retirement lifestyle such as vacations and trips, gifts, and eating out all
the time. Again, note the total of your expenses in each of these
categories.
Reduce the impact of
inflation on your total expense budget by reducing or eliminating
inflation-driven, discretionary and peripheral expenses.
Realize that the usual measure of inflation, the overall Consumer Price Index, masks variations within budget categories. For example, in 2006 the overall cost of health care rose 4.0% but hospital services jumped 6.4%, and drugs and supplies, 3.6x%. The market basket of goods and services used to compute the CPI does not reflect your own expense patterns. For example, if you spend more for health, your personal inflation index would be higher than the CPI. Think about what your personal consumer price index is now and how it may change in retirement. That will help you decide what percent to use as the inflation modifier for expense projections. How Many Dollars Do
I Truly Need to Exist? Straight Arrow vs. Guided Missile Expense Planning The traditional way of
looking at how inflation affects expenses is represented by a straight
line, moving upwards as time progresses. Stein calls this “straight-arrow”
expense planning. If we apply straight-arrow planning to both the Desired
Budget and to the Basic Budget and do this for all of the years of expected
retirement, we usually see quite a difference in the total amount needed. But
Stein says what really happens is that at the end of the Active Phase,
expenses typically go down as people shift from their Desired Budget and
more to living on their Basic Budget. So what is ultimately needed in later
retirement is a smaller amount than straight-arrow planning would indicate.
Because of this shift to more basic living and because you determine what
you spend at least to degree, he calls this “guided-missile”
planning. One caution: Stein is a
believer in purchasing long term care insurance to provide for such expense
if needed.
Whether or how much you buy entirely into Stein's guided missile idea, it can help you decide how much you'll need in a retirement asset pool. Don't Forget Lifestyle
Creep If there is not much
difference between your Desired and Basic Budgets, consider shifting some
inflation-driven expenses to inflation-free expenses. Then if income is not
as high as you expect, you can more easily adjust.
4. Specific Expenses Discussed A. Housing. What state, community and in what kind of housing you choose to live in each of the four phases of retirement will impact how much money you'll need. Many Baby Boomers have indicated they want to age in place similar to what current retirees have done. If you want to stay in your home, take a critical look at your house. Are the doors wide enough for a wheelchair? Do you have slippery floors? What needs to be replaced in order for you to stay in place? Plan for any additional expense necessary to make your home appropriate as you age. Perhaps you'll stay in the same community but move to different housing. Some people do this to tap the equity in their pre-retirement home, moving to smaller living quarters, and investing their profits to add to their retirement capital base. Are you planning to
move to a different community? A different state? Commonsense advice
includes living in your selected location for more than just a vacation.
Especially be there when it's not the tourist season such as July in
Consider what a move will do to all taxes you pay especially income and property taxes. Will there be a difference in what it costs to license and operate a car? Start to explore alternative locations now. Of those who do choose to move at retirement, a study done by Robert A.. Jud and Associates Inc. says half will return to their original location around age 75 because they miss their families and are less likely to enjoy the new climate year-round that led them to move in the first place. Some retirees achieve the best of both worlds by becoming "snowbirds" or "summer-birds" and live part of the year in one location and the rest in a second location. B. Credit Debt. You may have the goal to be debt-free when you retire. That's a personal decision depending on how comfortable you'll feel with a mortgage in retirement but you might want to reconsider according to Stein and other financial experts. Think about interest on the debt you have. Good debt has interest with tax advantages such as mortgage interest. Bad debt just adds to the cost of something. If you spend part of your asset pool at retirement to pay off the mortgage, you'll have less flexibility with your finances because that money will no longer be in your "pool" to grow. Having a mortgage payment is also one way to make a greater portion of your Basic Budget inflation-free. C. Replacement of Big
Ticket Items. In the Special Expense Budget of the spreadsheet, you may
want to note when you plan to replace large ticket items such as vehicles
or home appliances. Information about replacement of common big-ticket
items is includes in the Replacement of Big Ticket
Items information
sheet. It includes the average expected years of life for various
big-ticket items according to various research studies. Note when you
bought something and when you plan to replace it. By using the present
price and an inflation index or a financial calculator, you can calculate
the estimated replacement price. Include these replacement costs in the Special
Expense Budget column of the spreadsheet.
Also, in this column will be planned expenses for special trips and celebrations such as when you celebrate a birthday or an anniversary. Or maybe you want to take your family on a trip to Disney World. Make that expense part of the Special Expense Budget for the year you want to go. D. Health Insurance. Medicare does not kick in until age 65. If you plan to retire before 65, think about your health care coverage between when you retire and when you turn 65. If you're on the University's plan, you can continue coverage but you will pay the total premium. If you have Federal Blue Cross, the federal government continues to pay their portion, and you will pay essentially the same portion of the premium you are now plus any increases. E. Long Term Care Insurance. 90% of all people who
enter a nursing home between the ages of 65 and 94 stay less than 4 years
for an average of 2 ½ years according to Consumer Reports magazine. Since 50%
of all people who reach 85 eventually need some long-term care, consider
your chances of living that long.
Consider potential tax
breaks for long term care insurance premiums of "qualified"
policies. These premiums can be deducted as medical expense up to $3,530
(as of 2007). However, medical deductions must reach a 7 ½% of AGI before
any can be deducted. Also, consider plans for your estate. How much of your
estate would you be willing to use for long term care expenses?
You may want to consider long term are insurance if you have assets you want to protect, can afford the premium both now and in retirement, are not seriously ill or disabled, would be unable to pay out-of-pocket for care costs, or you want to protect your family from paying for your care. Bottom-line on long term
care insurance: do your homework. Whether you need it or not is ultimately
your decision.
Modifiers for all budget columns in the spreadsheet are the inflation rates for each column. Probably the inflation rate for the Basic Budget will be lower than the rate for the Desired or Special Budgets. Use your best judgment as to what that rate should be. 5. Income
Tax Planning If you will receive Civil Service benefits, remember they are taxed in retirement. Get IRS pub. 721 if you want more details. If you will receive
Social Security, remember more than half of the states tax Social Security
payments.
Some states exempt
pension income; others tax it. Consult tax professional for law in the area
where you will be living.
The modifier for this
column is the anticipated change in the percent of income to be paid for
income taxes in the coming year.
All other taxes are considered part of the expense category of the item being taxed. 6. Anticipated
income A. Earnings: What income are you currently making? Note as the initial value in the appropriate columns. What will likely happen between now and retirement? Rates of increase are noted as the modifiers. Set up the columns to reflect both your current income and anticipated income sources in retirement. A 2004 AARP survey
showed that 79% of Baby Boomers expect to work in retirement with one in
four planning to work part-time for needed income and 30% for interest or
enjoyment. 7% say they will work full-time for needed income while 15% plan
to start their own business. Only 20% anticipate not
working not at all.
Retirees with Civil
Service benefits can work without any reduction of Civil Service benefits
but will pay more in income taxes. Social Security benefits no longer
restrict how much retirees full retirement age and older can earn but
monthly limits are still in place for people who retire between 62 and full
retirement age. Use SSA website: http://www.ssa.gov for more information.
Stein says if you work full-time, you're not really retired. But he also says that if your earnings in the first five years of retirement equal one year's pre-retirement income, your required retirement asset pool will be reduced as much as 20%. Modifier for all work-related income is the anticipated raise. B. Civil Service: You can use the EXCEL worksheet at the FIRSTGOV Annuity Calculator, http://federaljobs.net/retire/annuity.htm to calculate your potential retirement annuity. Spousal survival annuity up to 55% maximum depending on salary and years of service is available for spouses. Premiums for government life and health insurance, including Federal Blue Cross and Medicare, are subtracted before you receive your check. A short formula and for
estimating a Civil Service annuity gives a good “ballpark” estimate.
The formula is: The modifier in the spreadsheet is the cost of living increase given each year. Civil Service benefits are fully indexed to inflation. C. Social Security: The full retirement age for receiving Social Security benefits is no longer
65. It is indexed to date of birth. Early benefits are available to
everyone at age 62 but remember the benefit amount is reduced for life.
If spouse of a Civil Service beneficiary has a Social Security record, the spouse will receive their benefits, but any spousal benefit for the Civil Service employee is reduced by the Windfall Provision. Modifier is the cost of living increase given each year. Social Security cost of living is the rate of inflation (CPI) minus 1. D. Pension. Enter
other pensions in the Pensions column of the spreadsheet. The modifier will
be the annual increase. Fixed pensions have no built-in increase so the
modifier will be zero.
E. Income From the Retirement
Asset Pool: Asset pool income is the amount of money you expect, or
need, to take from the asset pool each year. Several philosophies exist
about what money should or should not be taken from an asset pool for
retirement income. One guideline is to use no more than 4% of the total in
any one year. Another says to use only the earnings from the previous year.
Still another advises taking 3% of your asset pool as income the first year
of retirement and then adjusting that amount for inflation each year. Just
remember that when you do take more than what is earned, you have cut into
the base for the asset pool.
There are legal
requirements about what must be taken from tax-deferred assets. Consult a
tax adviser or IRS publications for more information.
This column has no modifier.
More discussion of the asset pool is contained in a following section of
this website.
F. Possible gifts and inheritances. What will you do with them? If they become part of your asset pool, include in the appropriate column. Total Income Column 7. Asset
Pool for Retirement Income The Nature of Your Asset
Pool Asset Pool and Inheritance
for Heirs Are there specific
assets that need or you want to leave to family members? This might be as
extensive as a farm or family business or could be a smaller asset such as an
antique car or special piece of jewelry. Do not include assets that
ultimately could not be liquidated to support your retirement in your
spreadsheet.
Use the columns on the
spreadsheet to separate assets into three categories: tax-deferred,
tax-exempt, and taxable. Tax-deferred assets are those where no income
taxes were paid on money put into the assets such as 403(b) or 401(k) plans
and traditional IRAs. Tax-exempt assets are those where income taxes are
usually paid on money put into the asset but no income taxes are paid on
the growth nor when money is taken out. Roth IRAs
are examples of tax-exempt assets. Taxable assets are those where income
taxes are paid on money put into the asset as well as the growth and when
the money is taken out of the asset. Stocks and mutual funds not included
as part of tax-deferred or tax-exempt assets are examples of taxable
assets.
Additional columns for
each category allow tracking of the beginning balance of the asset category
(columns 17, 21, 25), anticipated earnings for the year (columns 18, 22, 26),
and the ending balance (columns 20, 24, 28). The ending balance of all
assets can be tracked in column 29.
The modifier for the
asset pool columns is the annual rate of growth expected.
8. Savings Before and During
Retirement Savings is the difference between what is earned by all income
sources and what is used for budget expenses.
There is no modifier for this column.
E. Additional Topics for
Retirement Financial Planning
Estate planning Remember that the longer you live, the more involved your estate planning may be. Especially with multiple marriages, step-children and step-grandchildren, it doesn't take long for an estate to get complicated. If you're involved with any form of yours, mine and ours, make it a priority to communicate and decide together what each of your estate plans will be. Investment
planning. A. The first rule of investing is still diversification. The financial press suggests that we may need to either make our expectations more realistic or put more money than ever towards retirement or both. B. Know your tolerance
for risk. Use web-based risk tolerance calculators such as http://www.rce.rutgers.edu/money/riskquiz D. Re-balance a portfolio at least annually. Perhaps every 6 months but most financial experts recommend not more often. Timing the market is risky. Research shows if you're in it for the long haul, there's very little if any gain to be gained with trying to time the market. Remember, for some people timing is their full-time occupation. F. Once you've maxed out your 403 (b) at work, consider IRAs. Financial experts suggest maxing out your 403 (b) first and contributing to other tax-exempt and tax-deferred options for which you qualify. Then think about other investing. G. Max out
contributions to tax-exempt and tax-deferred plans even before saving for a
child's college education. You or your child can get loans or a second job
for their education; you can't get loans to pay for your retirement and
time may come when a job is not an option. If you do save for college, look
into the 529 state-sponsored college savings plan.
H. If you got a late start, don't despair. You still have time, you're in it for the long haul. Sweep as much as you can from your cash flow into investing as soon as possible. Consider what hard assets you might sell to beef up your capital base. Remember Stein's caution about lifestyle creep. Keep your focus on your retirement goals. Any extra cash flow goes into retirement. Do what you can. Avoid temptation to bump up your lifestyle now just because you "can afford it." I. Hire the financial experts you need. Consider hiring a financial planner. The advantage, even if you know a lot about investing, is that they will motivate you to do something when, for example, the market drops. J. Do you have a system in place for tracking, reviewing and maximizing the productivity of your financial assets? Two bottom-line questions are how much cash flow or income can your investments generate, and what is the total rate of return expected on those assets? K. Use the tools you have at your fingertips. Get on the web. Keep exploring. TIAA/CREF and Fidelity have excellent websites. Find out what's out there to help you. For a quick and dirty answer, Michael Stein in his book says you'll need $206,372 for each $1,000 of monthly inflation-adjusted income at retirement at age 65. His assumptions for this prediction are the retiree will live for another 30 years to age 95; inflation will average 4.5%; retirement capital will return 8.5% before-tax; and all retirement capital will be consumed. Consider this figure only if you buy into all of his assumptions. At best, the $206,372 is a “ballpark” figure. There are at least three ways to be more precise. 1. Use any of several on-line
calculators for another quick estimate. TIAA/CREF and Fidelity websites
have them. Others include www.cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp and www.choosetosave.org/ballpark
A caution about website calculators: what are the assumptions in them? The best ones let you determine inflation, rate of return, and longevity. Always remember Stein's guided missile idea. On-line calculators tend to be based more on the straight-arrow idea, use conservative growth rates such as 3-4%, and include only average life expectancies. 2. Critics of most on-line calculators who believe they are skewed to benefit the investments industry suggest targeting a lump sum for the total amount in a retirement asset pool at 65 of 10 times your final pay. Benchmarks include one times your annual income at age 35; three times by 45; and seven times by 55. 3. For the best answer to that question, you'll have to do the work involved in setting up your own projection spreadsheet. And keep working with it throughout your retirement as you manage your retirement financially. Develop Two Answers to the “How Much” Question Develop two answers to this question: 1. ideal retirement asset pool, and 2. minimum retirement capital base. The former is what you'd need if you do not want to use any of your asset pool for income. The latter includes using all of the asset pool during your lifetime. Decide which is best for you. The Second-Most Asked Question: How Much Can I Take From My Asset Pool Each Year? This depends on whether you want to completely use your asset pool for income or not, how long you want your assets to last, and the overall rate of return you expect. Whether or not you want to leave an inheritance also plays in here. Most experts recommend not withdrawing from tax-deferred assets for as long as possible. Whether that's the best strategy for you depends on (1) the nature of your asset portfolio, and (2) your anticipated income tax rate after retirement. Consult an income tax specialist for tax planning after retirement. For a quick answer to
how much of your base you use each year, most experts seem to suggest
keeping withdrawals between 3% and 5% during the first year, then adjust
that amount annually for inflation. If that sounds too low, consider a
part-time job after retirement. Or postpone retirement so you can keep
adding to your retirement asset pool.
Another quick answer is to withdraw during the current year only the percent your asset pool earned the previous year. However, caution is advised. Set the highest figure that you will take in any one year for spending regardless of how much is earned. Leave any excess assets in the pool to continue to grow. G. Additional Tips for Retirement Financial Planning Try it out before you retire. During the last year before you retire, try living on your retirement budget for three months. And after you retire, don't forget to adjust your budget as time goes on. Planning financially for retirement now and managing it once you've retired are not passive processes. Get involved with your retirement money. It needs to be continuously monitored and revised in response to changes in your situation and in the economy. At this point in your life, resist spending or borrowing from your retirement asset pool. If you're single, especially an older single, remember you have to provide for your own future. Once you have three months living expenses in an emergency fund, max out tax-deferred contributions if you can. Consider disability insurance and long-term care insurance especially if you project that your assets may allow you to self-fund long term care for no more than three to five years. Consider who would handle your affairs if you're incapacitated. Do you have a will, health care power of attorney, durable power of attorney, etc.? Now for concluding quotes from two sources. First Stein: In noting that more
retirements fail for non-financial reasons than because of inadequate
finances, he also says attitude is extremely important.
"If you are not looking for opportunities, you will not see them. If you are looking for problems, you are likely to find them.....Of course, there will be challenges. It would not be fun if there were no challenges, but we must stay resolved to take a positive view, and be determined to stay connected and relevant. The world really can be a better place because we are here and determined to make it a better place for ourselves and everyone around us.” And Ellen Goodman once said in one of her columns: "There's a
trick to a Graceful Exit. It begins with the vision to recognize when a
job, a life stage, a relationship is over – and to let go. It means leaving
what's over without denying the validity of its past importance in our
lives. It involves a sense of future, a belief that every exit line is an
entry, that we are moving on, rather than out. The trick of retiring well may be the
trick of living well...we don't leave the best parts of ourselves behind,
back in the dugout of the office. We own what we learned back there. The
experiences and the growth are grafted onto our lives. And when we exit, we
can take ourselves along–quite gracefully."
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