Does Your Retirement Plan Fit?

Last week on the Daily Show with Jon Stewart, Charles Barkley, basketball star turned sportscaster offered his thoughts on retirement. Granted, professional athletes are hardly the poster boys and girls of those seeking to retire. They have made huge sums of money in a relatively short amount of time and retirement usually means a second, perhaps third career managing that money, be it a car dealership or real estate investments or sportscaster.

So they aren't usually who writers such as me profile as "retirees". But he did make one comment that was noteworthy: "I was bored out of mind by the third month of retirement". (I'm paraphrasing of course but it was as close to the quote as I intend to get.) We spend so much of our time and mental effort focusing on the goal of retiring at whatever age we pick, that we seldom realize that for many of us, a whole lifetime may await us when we retire.

I know what you are already thinking: yes, you might live for an additional twenty or thirty years after retiring but they are hardly years of increasing quality. And as one well-to-do acquaintance recently suggested: "rich people never retire". So when I suggest that whole lifetime awaits you in retirement, the suggestion either falls on deaf ears or scares you more than you want to admit.

In reality, you will live at least an additional ten years after whatever date you pick to retire. While 75 or 80 doesn't seem to be that old, at least in the conversations I have overheard, it is. You are not the person you once were and the mechanized hum of that inner world of you is not humming along the way it did when you were forty. In fact, when you were forty you barely heard it. At sixty, your insides send you regular messages. At eighty, I imagine its a cacophony of sounds.

So have you asked yourself what retirement will really be like, beyond the dreams you may have harbored for most of your life? Have you equated what your body has told you about those dreams in some sort of altered wish? 

Probably not. What you may have thought would have been the ideal place to retire, the ideal lifestyle to live, may no longer be what you are capable of doing.

So you should try it on for size. First, the dream place. Warm climates attract your tired bones with thoughts of heat and sun and outdoor activities you may have enjoyed for week long vacations while you were working. Resort living is not the same as permanent residency. Many warmer, resort like climates offer an enticing postcard view of how you might end your days. But proximity to good medical care - even if you think you are healthy - should be a consideration.

Hawaii, for example is warm and tropical and part of the US. Medical care there is good. But the cost of living on the islands, and that includes medical, food and utilities, is almost twice the cost of living based on the whole of the contiguous US. Accumulate a month's worth of vacation and spend it in your dream locale before you retire. 

Many resort locations have rentals that are more residential and less beachfront. Families often seek these places out in the hopes of saving a few bucks. Compared to what it might cost to live there full-time, you will get a fairly accurate picture of the day-today expenses.

I have been an advocate for second careers for as long as I can remember. So try your second career out now. You may like where you live. It is close to friends and family, places you are familiar with and activities you enjoy. So take a month off and stay at home. Mr. Barkley said that by month three he was going crazy. And he had a good sum of money put away to indulge in whatever whim passed his way. You won't have that luxury - you'll be on a fixed income. A month should be enough on the average income to understand what you can do and what you can't afford to do. It will also give you the chance to work at career two.

Which brings me to the last part of my try it on for size. Your income will be fixed. Although in reality, it will be diminishing, which is fixed with minuses. Inflation, taxes and insurance will play a much more major role when it comes to your income. Yes it might be the same amount each month but each passing month will take a little piece of it. Try this concept on for size.

You could do a lot of positive things for yourself in 2012. But pretending to be retired, if only for a month, will give you some clear understanding of what retirement, at least the early years of it, will be like. Doing it while you are working gives you time to alter the course and embrace a new life while still living in your old one.

The Choices aren't so simple

Never one to shy away from jumping into the fray, which is a little different than jumping to conclusions, I have bumped into more than one conversation about the wisdom of drawing on retirement income too soon.  These folks argue that everyone should plan on working longer (and not just to rebuild retirement accounts - or in many cases, build them from scratch) because they are going to live longer. That sort of argument makes me cringe.

Truth is, not all of us do what we want to do, like what we do and simply can't see ourselves spending one more day doing it beyond the point we have to.
But when it comes to Social Security Benefits and when to draw them, something entirely different comes to mind. Bruce Bartlett offered his opinion on early retirement with several other invited guests in the August 21 New York Times. Mr. Barlett, who is former Treasury Department official in the George H.W. Bush administration and columnist for The Fiscal Times, continued that argument at the blog WallStreet Pit claiming limited space in the paper didn't permit him to make two other points on the topic. (You can read those added opinons here.)

The problem is, this sort of discussion has many nuances: fear, health, security, poverty.  Picking one over the other doesn't reduce the impact of the other.  Sixty-two has become the new retirement age because of fear (that the program will not be there after decades of contributions) and diminished retirement investments (we all know why all too well the reasons, and there are many, for that).  They take it whether they need it or not.  But many need it.

Instead of increasing the age for early retirement benefits, something Mr. Bartlett suggests as actuarially adjusted, SS could offer a program that secures those benefits at 62, sort the same way you need to sign up for medicare at 65 whether you need it or not, and guarantees the benefit without paying out anything until the person actually retires.  A healthy individual could continue working knowing that the benefit is secure and increasing each year they wait.  This would work the same way as the payback program already in place where someone begins withdrawal at 62, saves all of the benefits and then pays it back at full retirement age to receive the higher benefit.

I think the income limit currently in effect does two things: keeps the retiree from working too much which keeps the job market growing.  Benefits are only taxed once all of the income is added in and the threshold is breached - $25k for singles, $32k for married filing jointly.  Suppose a married couple calculated their taxable retirement benefits, their taxable income and the SS benefits and found they could live comfortably on $32k, they would be still well above poverty.  If they had used a Roth IRA or a Roth 401(k) to hedge against this tax issue, they could increase their income substantially without any impact on the benefit. And secondly, it taxes those that can afford to be taxed and in all likelihood, they are the very ones who will ladder their retirement income, drawing on accounts as needed - perhaps pensions first, deferred investments later and SS last.

The argument for living longer is the biggest fear most average workers have.  It is not how long you live, but how livable those years are.  While we all suggest that simply working longer is the best retirement solution, it skirts the real issue of whether they want to or if they can.  I'm guessing that only a small percentage will or could work past even the full retirement age.  Some may have to.  But if the amount of people opting for early benefits is any indication, they want to make sure of some things (getting the benefit) and worry about others as they age (whether they can or should work).

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com 

Retirement Planning: Mutual Funds vs. Annuities

Most of you who have been following my writing and reading my books over the years know exactly how I feel about annuities. I believe that they are an insurance product not an investment, and unless you have absolutely no other choice, should be avoided.

But those calls for restraint sometimes fall on deaf ears. There is, as some point out, too many attractive features despite the downside costs.

Some retirees are faced with a payout in one lump sum as they exit the work place. And because you no longer have a steady and reliable stream of income, immediate annuities provide some measure of how much you have to spend each month.

The downside risks in annuities are something to consider and if you don’t, the attraction these instruments have can be problematic. If you decide to sell the annuity, the escape fees can be sizable although they diminish over time. The costs of managing the underlying investment, which is usually a relatively conservative mutual fund, often comes with higher than industry average fees for similar funds. And should you die early, the money is gone.

There are additional downside risks, even as the annuity industry attempts to convince you that, over time and providing you live a longer-than-average length of time, you could conceivably receive up to 40% more than you would have had you invested in mutual funds without the insurance factor.

One of those downside risks is inflation. Once your income is fixed, it will never increase as time drifts past. Each year it will buy less as the dollars you receive are worth less. To offset these problems, you can of course, add riders to your policy extending the payments to a spouse in the event of your death or even protecting against that inflation factor but these cost money – which is subtracted from – you guessed it – your monthly payout.

Now the mutual fund industry has stepped up its efforts at attracting these soon-to-be retirees with a payout fund, offering regular income checks and the ability to leave the remaining balance to whomever you wish as part of your estate.

But these products come with warning from the very industry that is promoting them. They worry, that the markets could not provide the guaranteed income that the investor might expect and because of that, many fund families are suggesting that you buy an annuity any way. Another major concern that fund offering these payout investments warn about is a change in investment strategies.

Normally, a payout fund will offer a stream of income over a set period of time – 20-30 years. And while your assets may appreciate, they will drop due to regular withdrawals. The money is inheritable should you meet an early demise.

Probably the best suggestion would be to keep your money where you want it in a Roth IRA. You may face the same market-decline possibilities, but the fees (if you choose an index fund) will be considerably lower and that makes all the difference over the long-term.