Retirement planning is one of the most important and neglected issues in today’s households. According to a 2012 article by U.S. News & World Report, ‘The median income for those ages 65 and older was $25,757 in 2010, according to a new Social Security Administration report. The most common retirement income level is between $15,000 and $19,999 annually… and the median Social Security payment amount was $15,701 in 2010 …The median asset income was just $1,260 (and) …The median pension received by those age 65 and older was worth $12,700 in 2010.’
HOW LONG YOU LIVE:
The average U. S. life expectancy for a male is slightly over 76, and for the average female it is slightly over 81. Moreover, studies repeatedly show that those individuals who eat healthy, exercise, and that maintain higher standards of living, live about five or more years longer than lower income individuals, and individuals who do not take care of their bodies.
Due to the fact that most Americans are living on average 15 to 20 years after they retire or significantly reduce their work hours and income, and that Social Security makes up the greatest source of retirement income for Americans, retirement planning should be focused on as soon as possible and should be maintained as a portion of the household budget.
WHERE YOU LIVE:
Many Americas downsize their homes or move to a new location to save money during their retirement years. Nevertheless, during their last years a great many enter assisted living facilities (ALF) and nursing homes unprepared. According to the National Center for Assisted Living, the 2011 national average cost in an ALF was about $35,000 and about $78,000 for a Semi-Private Room in a Nursing Home (NH). The average stay in assisted living homes is about 3 years; and the average NH stay is about 2.5 years. About 1 in 5 of the elderly are covered by and live under the terms of Medicaid. The majority of the others are barely meeting ends with Medicare and/or quickly draining their assets.
Choosing how close you live to family members, or with family members, will affect the happiness and funds of all parties involved. Likewise, looking at retirement communities, assisted living housing, or the possibility of cohousing with family or an elderly acquaintance are realities for today’s elderly population. In addition to considering retirement locations, long term care insurance plans should be considered by many during their retirement planning.
HOW YOU LIVE:
Most Americans are financially forced to change their standard of living during retirement. Although people do slow down as they age, the elderly that are able to, tend to travel or vacation more often than younger adults, and they tend to give more to their children, grandchild, and charities. And as stated early, those that exercise, eat healthy, and maintain happiness, self-worth, and have a desire to live, significantly live longer and are more active than others that are stressed and or depressed.
Other factors that affect how you live are: the impact of taxes and inflation on retirement; the current status of short-term interest rates; level of insurance coverage (Life, Health, Medicare); the level of spending on ‘nonessential items,’ hobbies, etc.; the cost of unexpected expenses (home, auto, appliances, children and grandchildren needs, etc.); as well as changes in the household structure cost by death, divorce, marriage, or a household member moving out or moving in.
It is extremely important to construct current and future budgets focused on your current retirement needs or future retirement expectations and desires. Understanding and prioritizing retirement objectives such as standard of living, minimizing taxes, caring for a spouse and or dependents, dealing with health care costs, and estate conservation should be part of your retirement planning.
MEDICARE:
If you do not or will not received major medical health insurance from an employer or government to supplement Medicare during retirement, then it is important to include a ‘Medigap’ or a Medicare Supplement Insurance policy in your retirement planning. If you choose a supplement plan like Medicare Supplement Plan F you will typically have no deductibles to pay, no co-payments, and it will pay 100% of the Part B excess charges usually up to $1,000,000. (Plan F also has a high deductible plan that has lower premiums and which pays the same benefits after a calendar year deductible – currently $2,070.)
U.S. residents are automatically enrolled in Medicare Parts A and B. Medicare Part D covers prescription costs up to $2,970 in 2013 after a maximum deductible of $325. You should sign up for Medicare 3 months before your 65th birthday to make your coverage starts the month you reach age 65. Moreover, you should buy a Medigap policy during the 6-month period that you are age 65 and enrolled in Part B because during this open enrollment period the plans are guaranteed-issue. IT IS ONLY DURING THIS ONE TIME OPEN ENROLLMENT THAT YOU CAN PURCHASE A MEDICARE SUPPLEMENT WITH NO HEALTH QUESTIONS. Afterwards acceptance will be based on medical underwriting and your health.
FUNDS AVAILABLE:
1. Social Security: As stated earlier, the median social security payment in 2010 was about $1,308 per month. Reduced SS benefits are available at age 62. Full benefits are available at age 65 for individuals born before 1938, and at age 67 for those born after 1959.
Additionally, according to the Social Security Administration, individuals earning more than $ 25,000 per year in 2012 may have to pay income tax on up to 50% of their benefits; and those making more than $34,000 may pay taxes on up to 85% of their benefits. Married couples filing jointly may pay income tax on up to 50% of their benefits if they make over $32,000; and on up to 85 % of their benefits if they make more than $44,000.
2. Pension Income: Corporate pensions are becoming a thing of the past. Most corporations participating towards their employee’s retirements use cafeteria plans and 401K or 403B funding. Employees should take full advantage of both the tax deferral and matching funds when available. Nevertheless, the reality for most Americans is that they receive little or no pension or 401K income during retirement. As stated earlier, in 2010 the average pension income was about $1,060 per month.
3. Inheritance: Some individual are fortunate in that they will receive inheritances to supplement or take care of their retirement needs. However, most Americas will not be able to take care of their retirement and long-term care needs with Social Security, Pension Income, and Inheritances alone.
4. Long-term care insurance: The typical LTC policy provides coverage for 3 to 5 years. They currently cost about $3,400 for a 60 year old couple for a 3 year $150 daily benefit with a 100% home care benefit. However, because of low participation and high benefit payments insurer’s premiums are continually increasing. Nevertheless, a large portion of the tens of millions of baby boomers are falling into poverty each year due to assisted living, nursing home and overall long-term care cost.
5. Life Insurance: Life insurance plans can not only provide for funds for final expenses and to pay off credit cards, loans and mortgages, but also allow loved ones to maintain their standard of living. Permanent life insurance purchased by young to middle aged adults can accumulate significant supplement retirement funds, as well as large death benefits to provide for long-term care and longevity concerns.
6. Personal Funds: Individuals and couples who want to be prepared for retirement usually invest personal funds to ensure they are not solely relying on Social Security and Employer plans for their retirement needs.
7. Self-employed and Closely Held Business Owners: These individuals and their key executives should consider plans such as buy-sell, stock redemption, and non-qualified deferred compensations plans; as well as their other cafeteria plans and personal savings options.
SAVING THEORY:
90/10 Spending Ratio: A theory to prepare young adults for retirement is to adjust their spending so that about 10% of their incomes are devoted to meeting their retirement needs. Though saving for retirement should be of great importance to pre-retirement households, saving at a level that significantly stresses income earners and family members can harm relationships and reduce happiness if not addressed.
According the U.S. Department of Commerce, the nation’s average saving rate was less than 4% of disposable personal income for the first quarter in 2012.
RISK TOLERANCE AND INVESTMENTS:
The SEC normally requires a ‘suitability’ ‘customer investment profile’ before a security product can be sold. It is important for individuals and couples to understand the risk associated with various financial products before they purchase them. Additionally, for individuals purchasing vehicles using mutual funds, they should know that there are different investment divisions and choices within the fund, and that each has different risk levels or classifications. Typically, technology and cap growth funds and emerging market funds carry very high or high risk, while balanced and bond funds carry moderate risk.
Investors should determine how much of their money they are willing to invest with the chance of losses to their principal. For information on risk and returns of various financial products see the article: A Summary of Financial Products.
REAL RATE OF RETURNS:
The after-tax real rate of return in finance shows that both taxes and inflation can subtract from your rate of returns on certain investments. For example, a person paying 28% in federal taxes during a period of 3% annual inflation would actually have a real return of about – 1% on a one year CD paying 1.9%.
TAXED DEFERRED VS. TAXABLE SAVINGS:
Roth IRAs can be a very effective retirement account vehicle (if kept five years and used after age 59) because they are both taxed deferred and receive tax free withdrawals (Current contribution limits are $5,000, or $6,000 for ages 50 and above). Other powerful tax deferred vehicles include 401K, 403B, and annuities. Annuities come in many forms with various investment possibilities and guarantee rates and periods. Fixed annuities almost always are offered at rates equal to or higher than CDs for the same period of time. Additionally, variable annuities allow investments in mutual funds with multiple diversification options, and often for a fee offer contract features such as Principal Death Benefit guarantees, Investment Protection riders, and Reset provisions.
$100 per month receiving an average of an 8% rate of return annually, after 25 years subjected to a 15% federal income tax rate would yield about $78,770; if a tax-deferred vehicle was used the return would have been about $87,730. Even if the average rate of return was reduced to 6%; someone investing $3,000 per year for 30 years would see tens of thousands of dollars difference in taxed deferred versus taxable financial vehicles paying the same rate of return.
