10/28/2011 7:03 PM ET|
5 retirement strategies to ignore
What if things never return to 'normal'? They might not, so you'll need contingency plans to handle the unexpected -- and if you don't need them, so much the better.
You just can't count on normal anymore. I was thinking about this recently when an earthquake hit and I had to duck for cover under a desk while in a meeting in Washington, D.C.
Being from California, I am used to and fully prepared for earthquakes, but not necessarily when I am in D.C. Most D.C. residents were taken by complete surprise when they felt the earth shake in their city. They were fully prepared for a whole host of other things, including the threat of a hurricane and the ever-present concern about another terrorist attack. You just can't be prepared for everything.
Pre-retirees, however, need contingency plans in case the economy doesn't turn around and "normal" doesn't return. Retirement preparedness is changing in that some tried-and-true strategies retirees have used in the past may not work anymore. (Are you saving enough for retirement? Find out with MSN Money's calculator.)
Retirees used to count on getting a decent interest rate on certificates of deposit or being able to sell a home for retirement income. Unfortunately, we can't count on them now.
We certainly can't prepare for every possible scenario, but here are five scenarios to consider making contingency plans for in retirement.
1. Interest rates remain low for extended time
Retirees used to get income by staggering the maturities of long-term CDs or bonds so that one came due every year. This strategy of "laddering" five-year CDs or bonds used to mean enjoying the best of both worlds, with higher rates from the longer maturities and some liquidity from having one come due every year. However, retirees planning on using that strategy going forward may be sorely disappointed if five-year CD rates stay around 2%.
One alternative for income is dividend-paying stocks, many of which are paying 3% to 4% or more. In addition, these dividends tend to grow faster than inflation. There used to be a trade-off between getting a higher income now from a bond or a growing income from stock dividends. While they aren't covered by the Federal Deposit Insurance Corp. like a CD, they can provide more income both now and over the long run.
2. Home prices remain low
Many retirees plan to use their home equity by taking a home equity line of credit or a reverse mortgage to pay for care in an assisted living or skilled nursing home if needed. Unfortunately, much of that home equity may have disappeared in the current housing market. As an alternative, consider purchasing a long-term-care policy while you are healthy enough to qualify. Many policies cover home care as well as skilled nursing facilities, and some policies even pay for custodial care rendered by a family member. This way you won't need to rely on recovering home prices that are unlikely to rise as fast as long-term-care costs.
3. Your home won't sell
Along with home prices being down, there may be the similar problem of not being able to sell the home at all. Hindsight is 20/20, and I am sure there are plenty of homeowners who are kicking themselves for not selling their homes when they could have, instead of waiting for the perfect time or the perfect price. If your retirement plan is contingent on being able to sell your home, make sure you also have a plan B and manage your retirement plan around that possibility, since you may not be able to sell exactly when you want to. Keep in mind that if you rent out your home, you can still benefit from the $250,000 (or $500,000 if you are married filing jointly) capital-gains tax exclusion if you lived in the home two of the previous five years.
4. Your job gets eliminated
Nothing can throw a wrench in a retirement plan faster than a job being eliminated or a "forced" early retirement. This is especially true if you had planned on socking away a lot of money for retirement only after your kids finish college and you expect to be in your highest earning years. Instead, consider having your kids take on a bigger role in paying for their education by applying for scholarships, grants and loans. They have 40 years to pay them back, but you won't be able to get scholarships or grants for retirement. After all, your best earning years may be right now.
5. Your company-sponsored retiree health care plan goes away
Some companies are eliminating or reducing their employee health insurance benefits for retirees. The expense is so unpredictable that companies just can't afford to offer it anymore, but the same problem rings true for retirees. It's best to plan around the premise that company-paid or -subsidized retiree health insurance won't be available at all. That may mean you or your spouse will have to work at least part time at a company that offers health insurance until you qualify for Medicare at age 65.
If you still have a lot of time until retirement, check to see if you have access to a health insurance plan with a health savings account. You can make pretax contributions to the account, and funds used exclusively to pay for qualified medical expenses are not taxed. Funds not used for qualified expenses are subject to income taxes, and if used prior to age 65 they are also subject to a 10% additional tax.
I have found that when a project goes smoothly, it is usually not due to luck. On the surface things look smooth, but behind the scenes the team has contingency plans A, B and C ready just in case. The housing market may return to a place where selling your home at a decent price isn't an anomaly. The job market may turn around as employers feel more confident in hiring staff to grow their businesses. Health care may not be as expensive as feared. On the other hand, there could be some other random event we haven't considered -- you know, like an earthquake in Washington, D.C.
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As for retirement, I plan to keep my part time business for a little cash flow, the house will be paid off at 60, kids will have graduated college with no loans....have a small but growing collection of high dividend paying drips that I will convert to from reinvesting dividend to paying out at the appropriate time, a 403 B and a roth 403, wife has a defined payout pension.....
keep it simple and boring and steady with an eye to keeping your own money instead of giving it to some adviser, and look what happens you actually have some money
Sorry about all the "down thumbs" from jealous and/or unfortunate readers that perhaps overextended themselves for one reason or another. My guess is that your teacher's annuity is your ace in the hole since most people do not have fixed payment pensions now a days and are scraping by with the 0% interest rate Ben Bernanke has forced on us. Could you share with us how much that annuity contributes to your $90k annual income?
"consider having your kids take on a bigger role in paying for their education by applying for scholarships, grants and loans."
How 'bout telling your precious little darlings they'll need to WORK while they're going to school?
The new retirement plan is, plan on working until you die. Want to retire early? Die young.
Dividend paying stocks is gambling not an investment.
We all know most people cant handle 50-70% losses to principle and hopes it comes back.
Any good investment WONT go down 50% ever. That's gambling. Historically stocks go down that much and more, even dividend stocks. DVY.
The risk reward is not even close to a good investment.
The poor souls in the nikkei when it was 40,000. Same will happen in the dow down 70% and dont comeback. We have our expert in the depression, bernanke about 4 years away from us being there.
You cannot count on a company surviving to pay your retirement health care. Eastman Kokak was a VERY generous company to its employees including early retirees. It is now teetering on bankrupcy. It started cutting back on retiree health care a couple of years ago but it hasn't been enough to stem the cash outflow, so soon there may be nothing for anyone. Early retirement sounds nice but until you reach 65 so you qualify for Medicare, paying for your own health insurance is something you need to factor in before you decide to retire.
Just a little information from someone who is not paid or trying to get paid by the credit card companies.
I was forced into retirement by a disease 20 years early.
I was shorted on my retirement by a corporate raider named Icahn, for about 2k a month.
I get a PGC check for less than $700 a month.
I get SS Dis for $2,000.
I had a total of 60k in unsecured credit card and signature notes for commercial real estate projects.
I live in MO and the law is that any note that has not had a payment or a promise of payment for 4 years ceases to be a debt.
They call and take me to court but after 0ne year they have a letter telling them my situation and nothing else.
I have no wages and they can not touch my retirement savings and payments.
No Lawyer helped me with this but it is a real deal.
Works for me and a couple of banks that raised my rates now are getting what I feel they need.
If some judge decides to switch this into a secured note I will file bankruptcy and they will still get nothing.
This only works for retired folks with unsecured debt.
I am convinced I will still have to work until I am dead. Funny thing is, my stress level has gone way down now that I've accepted the fact. No more worrying about investments, or inflation. My solution is work until I am dead. No more decisions on whether or not to go on a holiday or pay down the mortgage. I'll take the holiday now, and work until I am dead. Seriously, once you accept the fact, you'll feel better. Just don't think about how you'll work when your 85 in a wheel chair. Just believe you'll be healthy enough to work until your 85. Chances are that the health care system will be shot by the time I get old, and I won't have access to medical care to get me past 75, making my plan even more likely to succeed, as working until 75 should be easier than working until 85. I am telling everyone, just ignore today's issues, live for the moment, and accept the fact that you'll be working until your dead, and you'll be happy now. Who know's, maybe we'll get hit by a bus tomorrow. Live for today on what you earn, have fun with the money now, and accept the fact that you'll be working until your dead.
I agree that stay at home moms or even moms who held jobs but put most of their energy into their children get f-ed over BIG TIME! It happened to me and I had to start from scratch to recover financially after supporting my ex husbands dreams and (although I did work most of our marriage) I spent my hours mainly taking care of our children which was my dream. Once he left the marriage I had 2 kids to raise on my own with minimal child support. It's outrageous what happens to women who take custody of the children and then watch the dads walk off into the sunset with a new life. Children suffer and the moms suffer oh and the dads complain they have to pay too much child support...losers!
We retired 3 years ago and comfortably live on about 65% of our working income.
There is a teacher's annuity, plus three IRA's and SS which provides a total of $7,500 monthly or $90,000 annually, with a paid mortgage, no college expenses and a single car payment. My point is you do not need a million dollars to retire, as our investments (the IRA's) total less than $500,000. The important factor is to having a combination of sources with as many as possible being "guaranteed." Based on the mentioned sources and a withdrawal rate of 5% on the IRA's, we would have to have 1.8 million ( x 5% annually=$90,000) in retirement savings without the mentioned annuity and SS to provide our annual income.
I still don't understand why they don't address, the rising concern of Stay-at-home parents (moms)that are blind sided by divorce after almost two decades who have difficulties finding jobs and restablishing this so called retirement fund that was spend on legal fees.
I believe it should be illegal when both parties agreed up front that one will take stay at home and take care of the family putting in dutiful years of hard work that is payless as well as thankless. Just because he filed first, he has access to all marital monies while I do not. I am scared to death about my financial future. Is there a retirement package for us moms, or is still considered marital assets? Think a bout it.
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