Saving for Retirement

This article was published in Fortune recently by me:

Retirement can be a scary thing.  There are a multitude of concerns, some that are controllable and others that are not.  The top question is will there be enough money to last a lifetime. If the answer is yes, then the second question is, how to protect what has been saved? Other concerns include health care, children and grandchildren education costs, travel, taxes, and living arrangements.

              According to the Health and Retirement Study (2014) done by the Institute for Social Research there is a gap in income for people age 55-65 of $20,000- to $200,000 and over 65 an average income of $30,000.

              Thus there are major concerns among pre-retirees and retires when looking at how they will create consistent income that will last their retirement.  There are four major ways income can be obtained in retirement.

1. Social Security – This is the main source of income for over 63% of retirees. Some people do not think they have a choice of when to take Social Security and so out of a perceived necessity they take it at 62 or at full retirement age. The recent continuing resolution, passed November 1st 2015 made some significant changes for those who had options on when to take their social security. The most significant change was the elimination of the strategy called “File and Suspend”. What this did was when you hit full retirement age you could file for your benefit and immediately suspend it, letting your benefit grow at 8.5% per year until age 70, while still taking spousal benefits and getting some income. To learn more click on link “Social Security”. If you are turning 66 before May of 2016, you might still be able to qualify, and will need to consult an advisor.
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3. Pensions – Most government workers, civil service and government employees, some manufacturing employees, and most union workers still have pension plans. Although companies are finding the cost of these plans to become unmanageable and some governments are defaulting, like Illinois, as they have underfunded pension payments for decades.
4. Investments and interest - Most Defined Contribution plans, like a 401(k), 403(b), or Individual Retirement Accounts, are designed and operated as investment accounts, and communication with savers is framed entirely in terms of assets and returns. Asset value is the metric, growth is the priority, and risk is measured by the volatility of asset values.  
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6. Annuities – Unfortunately they are not always used right and can be an expensive piece of your portfolio, costing as high as 4% annually in fees, making it necessary for you to get a 10% annualized return to maintain your principal. Here are the two most popular types:
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1. Fixed Indexed Annuity – There is generally a floor in return, a stop-gap. In addition, as with a variable annuity, there is a potential opportunity for gains if the stock market rises, since a fixed indexed annuity's return is also tied to the performance of a benchmark index, such as the Standard & Poor's 500.

1. Variable Annuity – You will pay several charges when you invest in a variable annuity. Typically the charges range from about 3%-4% Be sure you understand all the charges before you invest. These charges will reduce the value of your account and the return on your investment. Often, they will include the following:
   1. Surrender charges
   2. Mortality and expense risk charge 
   3. Administrative fees 
   4. Underlying Fund Expenses 

Everyone is different and may need personalized advice.  The ways to get this advice vary, including financial planning, do it yourself, and robot advisors.  How you want that advice is dependent on you and what you want.  Financial Planning tends be comprehensive in nature, looking at budgeting, to risk management, to investment, tax and wealth transference planning.  Some may choose to do it themselves, but may not understand or be aware of every piece of information.

When planning for retirements, understand where income is coming from, how much is needed, what fixed (healthcare, housing, food, taxes), variable (travel, long term care, insurance) and what other factors might cost or earn you money in retirement.  Understanding these factors will start to create clarity towards planning for retirement.

Reference:

Health and retirement study, University of Michigan http://hrsonline.isr.umich.edu/sitedocs/databook/HRS_Text_WEB_Ch3.pdf