The Hard Times Guide to Retirement Security E-Book

Mark Miller

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg
• Sprache: Englisch
• Veröffentlichungsjahr: 2010

Seitenzahl: 314

Beschreibung

A timely guide to overcoming the retirement challenges we all face The Great Recession has placed a wake-up call to America's baby boomers. Many have not saved enough for retirement and have not taken a hard look at how many post-work years they may need to finance. Written in a straightforward and accessible style, The Hard Times Guide to Retirement Security tackles the tough questions about retirement in the new post-crash economy. Page by page, it puts retirement in perspective by touching on important issues such as insuring against the risk of outliving your assets, recalibrating damaged retirement portfolios, managing the risk of health-care expenses in retirement, and career strategies for workers who are 50 years old and up. * Reveals how to boost lifetime income through better planning, and working just a few additional years * Offers advice on how to hire a financial advisor whose first loyalty is to you, not Wall Street * Discusses why you should rethink housing in the wake of the real estate crash * Offers detailed advice on career reinvention, the 50+ job market and midlife entrepreneurship Engaging and informative, this practical guide provides the strategies needed for a truly fulfilling and secure retirement.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Acknowledgements

CHAPTER 1 - Rethinking Retirement in Hard Times

Money

Work

Living

Money

CHAPTER 2 - The Great Wake-Up Call

Resources

CHAPTER 3 - Getting the Most from Social Security

Is Social Security in Trouble?

Maximizing Your Benefits

Understanding Spousal Benefits

Paying Attention

Resources

CHAPTER 4 - The Old-Fashioned Pension on Life Support

Safety

What You’ll Get and When

Resources

CHAPTER 5 - Income Annuities Another Way to Get a Guarantee

The Role of an Income Annuity

Sorting Out the Annuity Market

How Much Should You Annuitize?

Safety

Taxes

CHAPTER 6 - Resuscitating the 401(k)

How We Got Here

What Now?

Younger Investors

At or Near Retirement Age

CHAPTER 7 - Managing Your Health-Care Expense Burden

Health-Care Risk: A Closer Look

When You’re 65: Welcome to Medicare

How Will Medicare Change in the Years Ahead?

Health-Care Shocks: The Preretirement Years

Long-Term Care

Resources

CHAPTER 8 - Taxes and Retirement

Walking Out the Door: Pension Decisions

Required Minimum Distributions

Roth IRAs

Social Security and Medicare Taxes

Resources

CHAPTER 9 - Coping with Post-Bubble Real Estate

The Real Estate Wake-Up Call

Aging in Place

Universal Design

High-Tech Aging

Age-Friendly Communities: The Beacon Hill Village Model

Moving and Downsizing

Reverse Mortgages

Resources

CHAPTER 10 - How to Hire a Financial Adviser

Alphabet Soup

Hiring an Adviser

Resources

Work

CHAPTER 11 - How Working Longer Helps

Fraying Thread No. 1: Social Security

Fraying Thread No. 2: Pensions and Retirement Savings

Fraying Thread No. 3: Health Benefits

Fraying Thread No. 4: Housing

How Working Longer Helps

Resources

CHAPTER 12 - The Fifty-Plus Job Market Good News, Bad News

The Good News

The Bad News

CHAPTER 13 - Six Rules for Job Hunting

Job Hunting

Rule No. 1: Package Yourself as a Solution

Rule No. 2: Skill Development Matters

Rule No. 3: Network, Network, Network

Rule No. 4: Make the Cultural Connection

Rule No. 5: Second Verse—Not the Same as the First

Rule Number 6: Practice Interviewing

Resources

CHAPTER 14 - Fifty-Plus Entrepreneurs Launching a Lifestyle Business

Another View of Risk

Finding the Right Idea

Taking the Leap: Steve Vernon

Taking the Leap: Al Brown

Resources

Further Reading

CHAPTER 15 - How to Hire a Career Coach

Group Retreats and Boot Camps

Support Networks

Life Coaches

Career Counselors

Resources

Further Reading

Living

CHAPTER 16 - Making a Difference Encore Careers

Teaching

Health Care

The Federal Government

Green Careers

Not-for-Profit Careers

Resources

Further Reading

CHAPTER 17 - Volunteering in Retirement Getting Engaged

Donna Miller: Learning to Appreciate Small Changes

Jeri Leedy: “Be Selfish about It”

Volunteering Abroad

From a Bookstore to the Border of Tibet

The Peace Corps

Resources

Further Reading

CHAPTER 18 - Learning and the Path to Brain Fitness

The Landscape

A Politician Learns Some New Tricks

Creativity, Learning, and Positive Aging

Writing the Great American Novel

Resources

Further Reading

About the Author

Index

Additional Praise for

The Hard Times Guide to Retirement Security

Practical Strategies for Money, Work, and Living

“Mark Miller is an all-around expert on encores, second-acts, and retirement in its many forms, as well as a gifted and eloquent writer. His new guide is as smart and resourceful as he is. Buy it, read it, and follow its wisdom to a better life!”

—MARC FREEDMAN Author of Encore: Finding Work That Matters in theSecond Half of Life

“The Hard Times Guide to Retirement is as important for the boomers to read today as Fun with Dick and Jane in l955. It is the primer for the next phase of their life. No one understands the financial implications of the future of the boomers more than Mark Miller.”

—MARY FURLONG Author of Turning Silver into Gold

“This is the retirement book you need now. Rather than vague, empty promises, it gives you the stark truth. And then explains in concise, well-written prose, what to do about it. Miller is a sure-footed guide whose advice rings with authority.”

—MARY ROWLAND Author of The New Commonsense Guide to Your 401(k)

Copyright © 2010 by Mark Miller. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rose-wood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

ISBN 978-1-576-60362-8

In memory of my parents, Marvin and Rayna Miller, dedicated activists for social justice. And with much love for Shira, Beth, and Asher, who will someday grow old, too. May they benefit from our generation’s lessons learned.

Acknowledgments

I ENVISIONED The Hard Times Guide to Retirement Security as a survey of the best thinking on a wide array of subjects—everything from Social Security and pensions to health care, fifty-plus careers, entrepreneurship, and volunteering. As such, I relied on experts in many different fields for guidance. Many were generous with their time, sharing information and research and agreeing to review and comment on chapters. My sincere thanks go to Andrew Eschtruth, associate director for external relations at the Center for Retirement Research at Boston College; Christine Fahlund and Stuart Ritter, financial planners at T. Rowe Price; Sheryl Garrett, founder of the Garrett Planning Network; Alan Glickstein, senior consultant at Watson Wyatt; Martha Holstein, ethicist at the Health and Medicine Policy Research Group; Cindy Hounsell, director of the Women’s Institute for a Secure Retirement; Marika and Howard Stone, principals of 2Young2Retire; Steve Vernon, president of Rest-of-Life Communications; and Jeff Williams, principal at Bizstarters.com.

Others who provided invaluable assistance by reviewing and commenting on early drafts of the book include Dan Cornfield, Jane Kaplan, Bob Handler, Susan and Steve Varick, and Lila Weinberg.

I’d also like to thank two other writers who coached me through this first experience with book publishing—my friends Steve Fiffer and Jane Kaplan. The advice of my agent, Lynn Haller at Studio B, also was invaluable. I’m also indebted to Stephen Isaacs, my editor at Bloomberg Press, for his guidance.

As always, my best and first editor was my wonderful and wise wife—and best friend—Anita Weinberg.

CHAPTER 1

Rethinking Retirement in Hard Times

THE TIMING COULDN’T BE WORSE: The largest generation in our history is approaching retirement age during the worst economic downturn since the Great Depression.

Before the economy crashed, many baby boomers had been holding on to vague notions that retirement would somehow work itself out through their good luck in real estate, in the stock market, or by inheritance.

Whatever the reason, most Americans before they retire have paid little attention to the huge life transition that is coming. We don’t have a good idea of how much we need to save for retirement; only 44 percent of workers responding to one survey said they had tried to calculate what they would need, and an equal number simply “guess at how much they will need” for a comfortable retirement.1 Another survey of Americans 56 to 65 years old showed that almost half of the respondents underestimated the amount of retirement income they would need, and nearly 70 percent overestimated how much they could draw down from their retirement savings annually.2 Sixty percent underestimated their odds of living beyond a given average life expectancy. Meanwhile, about half of Americans file for Social Security benefits too early, often cheating themselves out of hundreds of thousands of dollars in lifetime benefits. Only half of all working adults participate in a workplace retirement-savings program. And the average U.S. household has managed to save just $60,000 toward retirement.3

Now the crash has ushered in a new economic reality that will be with us for years to come. Real estate values and retirement portfolios are depressed, and job security has evaporated. And even though the economy surely will recover, we’re not likely to see the type of sharp bounce-back that characterized the end of many previous recessions. That means anyone planning to leave the workforce in the next five to ten years will be retiring into an economy that looks much as it does today.

The need to build retirement security has never been greater. But one of the main obstacles is the current concept of retirement—the idea that people should stop working in their early sixties and take it easy. The number of years that you’ll have to fund after you stop working is one of the most important variables affecting retirement security. Paying for retirement has become more challenging in light of recession-ravaged 401(k)s and plunging housing values. And those resources must be spread over a rising number of years. American life expectancy has been expanding at an astonishing rate. An American man turning age 65 in 1940—just a few years after Social Security was enacted—could expect to live an average of another 11.9 years; by 2006, that number had jumped to 16.5 years. For women, the corresponding life expectancy had jumped from 13.4 years to 19.1 years.4 Those are just average figures, which means that half of us will live much longer. And the Social Security Administration projects that average life expectancy will keep rising in the decades ahead.

That’s good news, of course—but how will we pay for all those additional years of retirement?

The idea of quitting work at a predetermined age dates back to nineteenth-century Germany, where the first system of social security was created in 1889. The system was funded by mandatory contributions from employers and employees, and citizens would be eligible to receive benefits at age 70, an age that was later reduced to 65.5 The German system later served as a role model for the U.S. Social Security system that President Franklin D. Roosevelt created during the Great Depression. FDR envisioned Social Security as a response to that era’s widespread poverty, signing it into law in 1935 as part of broader legislation that provided for unemployment insurance, old-age assistance, and aid to dependent children. Like the German system, our Social Security law pegged 65 as the age when Americans could retire and begin receiving benefits. That set the stage for widespread expansion of private pensions after World War II, especially in unionized industries such as the Detroit carmakers. By the 1950s, the idea that people should be able to quit work and adopt a leisure-centered lifestyle after age 65 had gained widespread acceptance—and it’s been with us ever since.

That approach no longer seems sustainable. The economic downturn, coupled with increased life expectancy, points toward longer working lives for older Americans. That won’t be easy to achieve in a weak economy with high unemployment rates, but staying on the job even a few years beyond traditional retirement age can make a tremendous difference in achieving long-term retirement security.

There are no magic bullets or easy solutions to the problem of retirement security. Yet in my work as a journalist covering retirement and aging, I’m often struck by the wealth of good ideas that experts have identified for achieving a satisfying, secure retirement—even in hard times. These aren’t get-rich-quick investment gimmicks, schemes to make millions working part-time from your kitchen table, or come-ons to retire cheaply in Central America. Rather, the best ideas focus on basic blocking and tackling—getting the most from the financial tools already at hand, and making smart decisions about work and lifestyle.

This book explores ways to achieve long-term retirement security, which I define as reliably generating income to support a retirement that could well last 25 years or more for you or your spouse. The generation of Americans now approaching retirement needs to begin focusing on what lies ahead. Boomers need to get smarter—quickly—about retirement.

Money

Over the past several decades, retirement finance has become synonymous with retirement investing. But it’s worth remembering that individually controlled retirement-investment accounts haven’t always been with us. The 401(k) and individual retirement account only arrived on the scene in the 1980s. At the time, about 38 percent of private-sector American workers still participated in traditional, defined benefit pensions that were funded and managed by employers and that provided regular lifetime checks after retirement. Over the years, the balance shifted dramatically toward defined contribution plans—mainly 401(k)s—in which employers commit to a specific contribution of funds but leave employees free to manage the invested funds and make their own contributions. By 2008, only 20 percent of workers had a defined benefit pension,6 although a larger percentage of large companies still offered them.

Defined contribution (DC) plans have never come close to replacing defined benefit pensions as a source of retirement security. Simply put, the DC pension system just isn’t getting the job done, for the following reasons.

• Only 56 percent of American workers are active participants in a DC plan. One major reason is access; no law mandates that employers offer 401(k)s, and about 35 percent of workers don’t have access to an employer-sponsored plan. Choice is another factor; 15 percent of workers who have access to a 401(k) decline to participate. More than 70 percent of low-income households reach retirement age without any employer-sponsored retirement coverage .7

• Employers are cutting back on matching contributions. In 2008, one-third of employers reduced or eliminated their matching contributions to retirement accounts, and another 29 percent planned to do so in 2009.8

• On average, employees contribute 7.5 percent of their salaries,9 about half the rate recommended by most financial planning experts.

• Exposure to stocks is too great as retirement approaches. Nearly one in four investors approaching retirement age (56-65) had more than 90 percent of their account balances in equities at the end of 2007.10 That’s far too high, and older investors suffered huge losses when the market crashed in 2008.

• Investors cash out prematurely. About 45 percent of plan participants cash out their 401(k) balances when they change jobs rather than roll them over to new employers or IRAs.11 That disrupts the long-term growth of their assets. Borrowing and hardship withdrawals also are allowed under the rules, and people have been tapping into their balances somewhat more frequently during the economic crisis.

All these factors add up to woeful underperformance by the defined contribution system. In 2007—before the crash—the median amount saved by households headed by a person in the preretirement years (54-65) was $50,500—just 7 percent of total household wealth.12

It’s time to hit the reset button and pay attention to the broader array of financial tools that can help build retirement security.

Social Security

For most of us, Social Security will be the bedrock of retirement income. The program won’t disappear into insolvency anytime soon, despite the politically motivated forecasts of doom we hear from time to time. But Americans do need to get smarter about maximizing their benefits. Most don’t know when they become eligible for Social Security, how much it pays, or when it makes the most sense to file for benefits. Good planning and decision making can add hundreds of thousands of dollars to lifetime benefits for you and your spouse.

Pensions

Although they’ve been waning, defined benefit pensions remain a very big part of the American retirement-security system. Pension plans have generated a good deal of bad press in recent years because of a series of catastrophic, high-profile failures of big plans at companies such as United Airlines and Bethlehem Steel. But if you do have a defined benefit pension, it’s going to be a key underpinning of your retirement-security plan; and the best part is that it mostly flies on automatic pilot. Still, it’s important to gauge the safety and stability of your employer’s plan and the variety of benefits for which you may qualify.

Income Annuities

Americans without traditional pensions face the challenge of meeting retirement expenses with a combination of Social Security and savings. But one overlooked option is purchasing a do-it-yourself pension—otherwise known as an income annuity. Simply put, you make a single payment up front to an insurance company and begin receiving payments immediately; the price depends on factors such as your age at the time of purchase, gender, survivor benefits, and whether you want the payments to last for a fixed period of time or the rest of your life. Income annuities haven’t gained widespread popularity as financial tools for retirement, mainly because people dislike losing control of their assets and worry that they won’t “make back” the large sum of money that must be invested up front. However, used properly, an income annuity is an effective tool for covering basic living expenses and can provide effective insurance against the risk of outliving your money.

Recalibrating Portfolios

Are you one of those people who have been stuffing unopened 401(k) statements into a file drawer? Well done! While denial isn’t much of an investment strategy, the key to coping with the market crash is taking a long-term view. The goal is to make sure your retirement nest egg lasts many years into the future. If you’re younger than 50, you’ve got time for the market to bounce back; the key here is to keep saving and to keep your portfolio balanced through use of tools such as target date funds, which automatically shift to a more conservative investment mix as retirement approaches. For older investors close to retirement—or already retired—the challenge is more difficult because it involves some belt tightening. The most effective strategies call for delaying your retirement and adjusting your rate of annual withdrawals.

Health Care

If you’re over age 65, Medicare provides an important health-care safety net. But the economic crisis has forcibly retired millions of Americans in their fifties and sixties, leaving them without health insurance. Even for those on Medicare, health-care costs are eroding spending power and economic security; out-of-pocket expenses for people in retirement have jumped 50 percent since 2002.13 Health-care expense poses one of the most important risks to retirement security, so it’s important to understand how to navigate the system and mitigate expense risk.

Taxes

Yes, you’ll still owe taxes in retirement. Your income may well be lower, which will lighten your income tax burden, but several new factors come into play that affect your tax situation; these concern retirement savings, Social Security, and any continued income from continuing to work. You’ll need to make a number of key tax-related decisions starting the day you retire.

Real Estate

Older Americans have a higher rate of home ownership than any other demographic group, and we’re just beginning to come to terms with a housing market that has changed for the foreseeable future. In some parts of the country, prices are down more than 30 percent from their peak, 14 and the impact on boomers has been dramatic. One recent study suggested that 30 percent of Americans ages 45 to 54 are “underwater” on their mortgages—that is, they owe more than their homes are worth and would need to bring cash to a closing.15 With today’s high unemployment rates, sagging incomes, and rising foreclosure rates, we’re not likely to see a strong rebound in housing anytime soon—and that’s a challenge for anyone who needs to sell for retirement-related reasons. But planning for your housing needs in retirement brings into play a number of lifestyle considerations that have little to do with the current market. Is a move right for you, or can your current residence be adapted to serve your needs? What role can technology play in your retirement dwelling? Can you cut your expenses—dramatically—by paying off the mortgage before you retire?

Advice

Even before the economic crash, the boomer retirement knowledge gap was large, and the need for smart planning has only become more acute in hard times. Do-it-yourself planning certainly is an option, but a little help from a professional adviser can be well worth the time and money. The rationale for hiring a trustworthy adviser is simple: Money spent now could make a big difference in helping you achieve a secure, happy future retirement. But finding a savvy adviser is a big challenge; almost anyone can hang out a shingle and start handing out advice. Planners may have any number of certifications or titles attached to their names, but none are required. So you’ll need to understand the various types of advisory services that are available and how to interview and hire an adviser.

Work

Working in retirement: It sounds like a contradiction in terms. But most boomers weren’t envisioning a retreat from work at retirement age even before the economy crashed. Boomers have been telling just about anyone who would listen that they want to reinvent their careers and forge a new style of aging centered around an active, engaged, and productive lifestyle. Those aspirations are consistent with the boomer generation’s history of rebellious behavior (in their youth, at least). But rising longevity and the chance to live a greater number of healthy, productive years are additional factors making the “bonus round”16 an opportunity that is too enticing to pass up.

Here’s the problem: Most boomers don’t have a clue how to pull off this type of profound life transition. The personal upheaval associated with career transition can’t be overstated, especially for those grappling with an unexpected, premature job loss. Sorting out the choices can be daunting, and many of us don’t know how to get started. Many also feel additional pressure to “get it right” because this may well be the last career switch.

Work Longer, Not Forever

Working even a few years beyond what you’ve planned can pay a surprisingly large bonus in retirement security. Age 66 is the normal retirement age (NRA) for most people, as defined by Social Security, but about half of all Americans don’t wait that long. You can avoid the early-filing benefit reductions imposed by Social Security by working until your NRA. At the same time, you can keep contributing to your retirement-savings plan, building additional balances that can be put to work in the market. And every additional year of working income is a year in which you’re not supporting yourself by drawing down retirement balances. The upshot is that staying on the job a few additional years can boost your income in retirement by one-third or more.

Corporate America after Age 50

If you think you’ll want to stay in the mainstream business world, working as a Wal-Mart greeter isn’t your only option. But the employment outlook for older workers is mixed at best. Employers say they value older workers’ experience, knowledge, and loyalty; and it’s clear they are prized in some fields of work. But it’s just as clear that employment security is eroding for older workers and that age discrimination is a major hurdle to staying employed. Success in the workplace depends on getting a realistic handle on corporate attitudes toward older workers and understanding where the best opportunities lie.

Job Hunting

Keeping or finding a job is challenging for anyone in tough economic times, but it’s harder if you’re over age 50—a reality that is colliding with older workers’ intention to stick around. Experts in human resources—as well as successful older job seekers—assert that it can be done. But in this economy, older workers will need to adopt new strategies for staying employed and selling themselves after age 50.

Starting a Business

Many boomers who want to keep working will wind up launching their own businesses. In some cases, that will mean launching full-blown companies requiring significant start-up capital, office space, employees, and all the accompanying headaches. Others will start “lifestyle businesses”—small ventures that can be launched with minimum capital and that balance work, play, and other pursuits. Lifestyle businesses can be started without much start-up capital—a big plus in a difficult economy. Still, these businesses may not generate much revenue immediately. That means lifestyle entrepreneurs need to maintain an adequate cash cushion to fund their living expenses while starting up.

Living

Hard times require belt-tightening, but the new retirement won’t all be about money and work. With the country facing economic, environmental, educational, and other simultaneous crises, boomers are weighing the legacy that they will leave to the next generation and looking for ways to give back—a trend that is playing out in their careers and in the way they spend free time.

Encore Careers

Before the economy crashed, millions of midlife adults already were starting new careers in fields where they hoped to make a positive social contribution in areas such as teaching, health care, government, and the not-for-profit world. The tough economy hasn’t really forced people to give up on the dream of second careers with meaning; if anything, their resolve seems to be growing. These “encore careers” can be found anywhere there’s a clear social need that fits your passions and interests. But some fields have surfaced as clear early adopters of the encore career concept. Best of all, they’re fields that are growing and hiring.

Volunteering and Public Service

The number of older Americans volunteering their time has never been higher. The impulse toward public service and civic engagement is partly a response to the terrorist attacks on September 11, 2001, and natural disasters such as Hurricane Katrina and the 2004 tsunami. 17 The recession also is a factor; out-of-work Americans have been volunteering at record levels as a way to keep busy and engaged while they hunt for paid positions. They’re learning that volunteering offers a chance to learn new skills, feel valued, and leverage the skills learned in previous jobs. There are other benefits, as well; one study of volunteers found that volunteers had better mental and physical health, were more physically active, and had higher self-esteem as a result of their participation.18 The trend encompasses work being done here at home and abroad. A wide range of not-for-profit, charitable organizations and businesses has sprung up that cater to the “voluntourism” market. Some older Americans have even made the commitment to join the Peace Corps.

Lifelong Learning

Heading back to the classroom has long been popular as an enrichment activity in retirement. Adult learning can transform lives and lead to new careers, but it’s also becoming clear that there’s a link between learning, health, and general well-being that stems from keeping the brain challenged. The options include self-directed programs at Lifelong Learning Institutes as well as traditional continuing education and educational travel.

The aim of this book is to offer a realistic assessment of how the emerging economy will affect the generation of Americans now approaching retirement, as well as help readers boost their retirement IQs by showcasing the best thinking I’ve been able to find in my reporting on retirement and aging. The result, I hope you’ll agree, is a comprehensive guide to strategies for building retirement security in hard times.

Chapter Notes

1 Ruth Helman, Craig Copeland, and Jack VanDerhei, “The 2009 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer,” EBRI Issue Brief, no. 328 (April 2009) (www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4226), accessed September 2009.

2 MetLife Mature Market Institute Retirement Income IQ Test.

3 Alicia H. Munnell, Francesca Golub-Sass, and Dan Muldoon, An Update on 401(k) Plans: Insights from the 2007 SCF (Chestnut Hill, MA: Center for Retirement Research at Boston College, March 2009).

4 Social Security Administration, 2007 OASDI Trustees Report (www.ssa.gov/OACT/TR/TR07/V_demographic.html), accessed September 2009.

5 Kenneth Silber, “From Bismarck to Bush,” Research Magazine, July 31, 2008.

6 Barbara A. Butrica, Howard M. Iams, Karen E. Smith, and Eric J. Toder, The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Boomers (Washington, DC: The Urban Institute, January 2009), p. 5 (www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html).

7 Robert Stowe England, “Principles for a New Retirement System,” Retirement USA (March 10, 2009), p. 5 (www.cpcpac.com/090310-working-paper-finalpdf1%5B1%5D.pdf), accessed June 2009.

8 Spectrem Group, “One-Third of U.S. Employers Have Reduced or Eliminated Retirement Plan Matches in Economic Crisis” (March 25, 2009) (www.spectrem.com/custom.aspx?id=96), accessed September 2009.

9 Employee Benefits Research Institute, “Average Worker Contribution Rates to 401(k)-Type Plans” (March 2009) (www.ebri.org/pdf/FFE117.19March09.Final.pdf), accessed June 2009.

10 Jack VanDerhei, “The Impact of the Recent Financial Crisis on 401(k) Account Balances,” EBRI Issue Brief, no. 326 (February 2009) (www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4192 ), accessed June 2009.

11 Alicia H. Munnell, Francesca Golub-Sass, and Dan Muldoon, An Update on 401(k) Plans: Insights from the 2007 SCF(Chestnut Hill, MA: Center for Retirement Research at Boston College, March 2009).

12 Munnell, Golub-Sass, and Muldoon.

13 Fidelity Investments, “Paying for Health Care in Retirement” (April 24, 2009) (http://publications.fidelity.com/investorsWeekly/application/loadArticle?pagename=IW090417health), accessed September 2009.

14 John F. Wasik, “U.S. Home Prices May Be Lost for a Generation,” Bloomberg News (May 4, 2009) (www.bloomberg.com/apps/news?pid=20601039&sid=aiiT.sNeq2YQ), accessed July 2009.

15 David Rosnick and Dean Baker, The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble (Washington, DC: Center for Economic and Policy Research, February 2009) (www.cepr.net/index.php/publications/reports/the-wealth-of-the-baby-boom-cohorts-after-the-collapse-of-the-housing-bubble/ ), accessed July 2009.

16 Mary Furlong, Turning Silver into Gold: How to Profit in the New Boomer Marketplace (New York: FT Press, 2009), p. 9.

17 Robert Grimm Jr., Nathan Dietz, John Foster-Bey, David Reingold, and Rebecca Nesbit, Volunteer Growth in America: A Review of Trends Since 1974 (Washington, DC: Corporation for National and Community Service, December 2006), p. 5.

18 Nancy Morrow-Howell, Song-Iee Hong, Stacey McCrary, and Wayne Blinne, Experience Corps: Health Outcomes of Participation (St. Louis: Washington University, George Warren Brown School of Social Work, February 2009) (www.experiencecorps.org/impact/for_members.cfm), accessed August 2009.

Money

CHAPTER 2

The Great Wake-Up Call

THE GREAT RECESSION HAS sent a wake-up call to older Americans.

We’re adjusting our expectations, getting sober, and starting to focus on the nuts and bolts of planning for retirement. The dramatic erosion of wealth also has prompted us to focus more on lifestyle, experiences, and personal values. “People are not just looking at what they have, but at how they will live,” says Laura Rossman, an expert on marketing to boomers and seniors. “They’re realizing that they may need to put off retirement and getting realistic about what it takes. The market drop has been severe, and no one ever expected anything like the severity of the shock. It is changing some behaviors, and people are resetting their views.”

Confidence about retirement security has plunged. The Employee Benefit Research Institute (EBRI) has been surveying Americans annually for 16 years on their attitudes about retirement. In 2009, the percentage of respondents who said they were confident that they would have enough money to retire comfortably stood at the lowest point since the first survey in 1993.1 In general, EBRI’s findings reflect a striking new sense of seriousness in attitudes about retirement.

• Delaying retirement: People plan to work longer to secure their retirement; 28 percent said they had changed their target year for retirement in the past year, with most (89 percent) saying they were doing so to boost their financial security.

• Working in retirement: More people plan to supplement their income in retirement by working—72 percent compared with 66 percent two years ago and before the economy crashed.

• Getting serious about managing money: Among those who’ve lost confidence in their future retirement security, 81 percent said they had cut spending, and 43 percent changed the way they invest. And 75 percent of those surveyed said they are saving money for retirement, one of the highest numbers EBRI has ever measured.

Rossman sees evidence of broader changes in the way people approach retirement. There’s less focus on moving away to retirement communities—in part because of the depressed housing market, but also because of a heightened focus on intergenerational dependence.

“It wasn’t that unusual in the 1940s or 1950s to see families living together across generations. It’s hardly a new concept to have grandma in the house or kids sticking around longer. But now we’re starting to see a new openness to sharing resources and not feeling that you need to prove you have it all.”

Finally, Rossman sees a new attitude emerging about retirement. “It’s going to be an era of simplicity and new priorities—less is more.”

These new attitudes point toward a need for fresh thinking about the financial aspects of retirement security. The old approach, pushed often and hard by the financial services industry, is the income-replacement rule of thumb: To retire comfortably, you’ll need to replace about 80 percent of annual income. At best, the income-replacement method is a crude estimate. It doesn’t, for example, take into account unforeseen spending needs that could require higher sums, such as health care or long-term care expenses.

But most important, the income-replacement method is wrong for an economy in hard times because it doesn’t start with the right questions: What is the lifestyle I want? How much will I need to spend on basics? What can I afford to spend in this economy?

“The replacement ratio method is a good place to start, but it ignores major changes that can result from reduced expenses for dependent children, paying off a mortgage, or downsizing major items like your home or cars,” says Steve Vernon, an actuary and president of Rest-of-Life Communications, a retirement-education concern. “It also assumes you’ll want the same material standard of living in retirement that you had before. That ignores the possibility that you might be willing to live on less. Often, as people age, they’re less interested in material things and more interested in learning, hobbies, volunteering, and spending time with friends and family.”

A better approach in hard times is to start with a clean slate. Take the time to create a budget of foreseeable expenses, and balance those expenses against the sources of income that you can count on.

The first step is getting a precise handle on what you currently spend. You can do that by using any of the major financial-planning software tools or by tracking what you spend on a spreadsheet for a couple of months. Working with a trusted financial planner is another good way to understand your spending patterns.

Once you’ve got a good picture of current spending, subtract any regular expenses that won’t continue in retirement—for instance, the cost of commuting, dry-cleaning bills, and taxes for Medicare and Social Security. Then, you’ll need to take into account areas of spending likely to be higher in retirement. Health-care expenditures almost certainly will be higher (see Chapter 7), and if you hope to travel extensively or make other lifestyle changes, do your best to estimate those costs, too.

Housing decisions can be key in simplifying retirement income needs. Despite all the marketing hype about retirement living and stereotypes about Florida retirees, most Americans actually don’t spend a great deal of money on retirement property but prefer to stay where they are, aging in place during retirement. Those who do move stay within a 20-mile distance of their previous home, which suggests that they’re merely downsizing.2 Paying off a mortgage before retiring can be another great way to reduce your recurring expenses in retirement, even if it means using cash on hand; the interest expense almost certainly will be greater than the returns you’d earn on low-risk fixed-income investments.

Resources

Choose to Save Ballpark Estimate. This simple online worksheet helps you calculate how much you need to save. The ballpark calculator focuses on boiling down complex issues such as projected Social Security benefits and earning assumptions on your savings. Choose to Save is a project of the Employee Benefit Research Institute (http://choosetosave.org/ballpark/).

Mint.com. This free personal finance Web site (www.mint.com/) allows you to download your bank and credit card data and analyze where your money goes.

Social Security Retirement Estimator. The Social Security Administration has built a useful online tool (at www.socialsecurity.gov/estimator/) that allows you to project your personal future benefits assuming different retirement ages.

Chapter Notes

1