4/24/2014 3:15 PM ET|
8 retirement questions for 50-something couples
Your golden years are right around the corner -- are you ready?
As an economist, MIT prof James Poterba can run a regression analysis and assume a can opener (see footnote 1 below) with the best of them. After all, he is president of the National Bureau of Economic Research, the wonky organization that officially determines when U.S. recessions start and end. But Poterba, who has studied savings behavior and retirement for decades, also has a knack for turning what economists know (and don’t know) into insight for the rest of us.
Earlier this month, during a speech at a Washington retirement conference sponsored by the Investment Company Institute (the mutual fund companies’ trade group), the 55-year-old Poterba set out eight questions he’s come up with to help 50-something friends, neighbors and relatives think about whether they’re saving enough for retirement. Considering the answers in your own case could help you figure out whether you need more or less savings than one or another rule of thumb calls for. Fidelity Investments, for example, suggests you should have five times your salary in 401ks and IRAs by age 55. That’s unrealistic for low earners who will be relying primarily on Social Security, but might be too low if you have Methuselah genes and plan to retire at 62 to travel the world.
Here are Poterba’s questions, along with a few of his insights and my two cents worth of advice.
'When will we retire? Will we control that choice?'
The good news for retirement security is that the labor force participation rate of those aged 65 to 69 has been steadily climbing since 1985; Poterba’s calculations show that much of the average increased life expectancy at 65 is actually being spent in extra years of work, not retirement. But the second part of his question—about control—is crucial too. Those nearing retirement typically say they plan to work longer than they end up doing. So a little slippage is normal. But being forced, by layoff or ill health, to stop working years before you planned is likely to land you on rocky financial ground in retirement. Fifty is a good time to take a hard look at your industry and career prospects. If they’re not so hot, amp up your savings. (Yep, fellow print journalists, that means you.) It’s also a fine time to refresh your skills and your contacts and to start a side-gig that can help you switch careers or become self-employed if you lose your job. (Some smart—and tough–advice from Kerry Hannon on job hunting over 50 is here.)
'How long will we live?'
Forget average life expectancy. One of the most striking slides in Poterba’s presentation showed just how much male life expectancy at 65 has diverged by income. For men turning 65 in 1977, the top half of lifetime earners could expect to live an average of 15.5 years, versus 14.8 years for the bottom half. By 2006, male life expectancy at 65 for the top half of earners had risen a full six years to 21.5 years, while the bottom half had gained less than a year and a half, creeping up to 16.1 years on average. But don’t just generalize based on your earnings. As I wrote in January, your personal life expectancy is the essential number for retirement planning. Take some time to run the Living To 100 individual life expectancy calculator (which includes detailed questions about your family history and present health) as well as this couples calculator for joint life expectancy.
'What will we do when retired? Municipal golf course or country club? Early-bird specials or four-star restaurants?'
Some of the most interesting research has to do with retirement spending patterns. Spending “falls at the moment of retirement by about 10 percent,’’ noted Erick Hurst, an economics professor at the University of Chicago Booth School of Business. It’s not just that work related costs (commuting, new work clothes, dry cleaning) disappear. Hurst’s research shows retirees substitute time for money; for example they shop more for bargains and spend more time cooking. They don’t cut out tablecloth restaurants, but they do cut back on fast and convenience food. Bottom line: they live just as well, if not better, but for less. Yet not every couple spends less. Michael Hurd and Susann Rohwedder of the Rand Center for the Study of Aging have found that the wealthiest quartile of retirees actually increase spending—anywhere from 7 percent to 18 percent depending on how it’s measured—as they travel and make other expensive uses of new leisure time.
Note, however, that even retirees who start-out spending big reduce their consumption outlays as they age—and not because they’re short of cash. (Indeed, those 85 plus increase their giving to charity and relatives, Hurd noted in an interview.) So while financial planners used to routinely assume you needed your income to grow with inflation each year—and most planning software still does—practitioners are now adjusting their models to assume spending declines after 75, reported Stephen Utkus, director of the Vanguard Group’s Center for Retirement Research. “It’s much more practical. It recognizes that consumption declines with fragility and aging,’’ he observed.
'How much of our retirement should we expect to live together? How much less do widows need?'
Go back to that Living to 100 calculator. Compare results. A woman’s usually longer life expectancy, coupled with the fact that men are at least four years older in a third of U.S. marriages, makes this a big issue for many couples. Think about strategies to maximize the surviving spouse’s welfare, without preventing you from enjoying your early retirement years together. Pay particular attention to Social Security claiming strategies for couples and to survivor’s benefits; if a higher earning husband waits until 70 to collect the largest possible Social Security check, his widow will get that bigger Social Security monthly check in place of her own smaller benefit. As I wrote recently, if you plan to move to the outer suburbs or a rural area for retirement, consider how an 80-something or 90-something widow will get around if she stops driving or cuts back drastically. Look for a suburb that allows high-density apartments, as well as single family homes; that way she can downsize and address both budget and transportation limits—without having to leave her social networks behind.
'What will government transfer programs look like?'
“If you’re in your 50s today, and you’re thinking about a life expectancy which has a reasonable probability of taking you out until your 90s,’’ said Poterba, there’s a “material risk” that these programs could be changed. He didn’t speculate about what those changes will be, so I will. For one thing, middle and upper income seniors will be required to pick up a bigger share of Medicare costs. Already, couples with adjusted income above $170,000 and singles earning more than $85,000 pay additional premiums ranging from $42 to $230 extra per person a month. For those now under 55, House Budget Committee Chairman Paul Ryan (R-WI) would convert Medicare into an income based “premium support” or “voucher” program, which would end up requiring seniors to pick up a greater share of rising costs.
As for Social Security, it remains (at least this election year) a political sacred cow. In their Fiscal 2015 budget proposals, both Ryan and President Barack Obama backed away from earlier “chained CPI” proposals that would have reduced yearly inflation increases for beneficiaries. I consider big changes to Social Security for those already over 55 unlikely. Still, without tax increases or benefit trims, Social Security (under its current budgetary treatment) will be able to pay just 77 percent of promised benefits when its “trust funds” are exhausted in 2033, Chief Actuary Steve Goss noted. So the better-off could well see some cuts. To put that in perspective, in 2013 the highest-income quartile of seniors got just 18 percent of total income from Social Security, Poterba calculates. By contrast, he noted, the poorest fourth of seniors relied on Social Security for 85 percent of their income.
(Side note: The Obama Administration has said it is looking into limiting the “aggressive” strategies better off couples use to maximize their Social Security take. Goss confirmed at the conference that the “file and suspend” strategy is the target and that any change would take Congressional action—meaning it can’t be done suddenly by regulatory fiat, which is the way the Social Security Administration suddenly killed the “do-over” strategy in 2010.)
'Will our children support us? Will we support them?'
For higher income folks, Poterba said, “this may turn out to be a very important question, because what they would like to do for their children may be much beyond consumption for themselves.” Okay, maybe you’re ready to cut your Millennials loose. But some boomers, Poterba observed, are still also asking themselves “`What if my parents need long term care in their 90s?’” Indeed, boomers who earned and saved equal amounts could face very different retirement prospects based on whether they have to help support their parents or receive an inheritance from them.
'How will we pay for health or long-term care?'
That, as Poterba’s question suggests, is a big issue. But for my money it is best addressed as part of an overall saving and spending plan, not by going out in your 50s to buy long term care insurance. UCLA economics prof Kathleen McGarry noted that while out of pocket spending is large in the last year of life, it increases with income. It is unclear, she said, how much of it is in fact discretionary—representing, for example, a preference for staying at home with paid health care aides to avoid having to enter a nursing home. Meanwhile, new research by Rohwedder, Hurd and Pierre-Carl Michaud projects that a higher share of the population will enter a nursing home before death, but for shorter average stays, than previously thought. That more predictable, but smaller, expense suggests buying LTC insurance makes sense for fewer people and strengthens the case for self-insurance (that is, saving for nursing care), Anthony Webb, an economist at the Center for Retirement Research at Boston College, said in an interview. With current LTC policy holders facing the possibility of big premium increases and the market for new LTC policies shrinking, better off folks might instead consider buying deferred fixed annuities to cover the possibility of late in life long term care costs. As William Baldwin explains here, if you’re still healthy at 60, you can buy a deferred fixed annuity that starts paying you at 80, whether you need long term care or not. In essence, you’re buying a combined longevity/LTC insurance policy–not an ordinary investment.
'What return will we earn on our investments?'
Even after you consider all the big personal questions above, the return you earn will decide if savings rate X will produce your desired lifestyle Y. While you can’t alter the expected returns in the stock and bond markets, take some time at 50 (and periodically thereafter) to understand the relationship between risk and return and your own tolerance for risk. For help, talk to a pro or use sophisticated asset allocation software from Morningstar Inc. or Financial Engines—one or the other is available for free to tens of millions of savers through their workplace 401k plans. Regardless of how you do it, find an asset allocation that allows you to sleep at night and hold steady. Within a few years of the market crash of 2008, most boomer retirement investors had recovered—except those who panicked and sold out at the bottom.
Footnote 1: Well-worn joke lampooning economists’ tendency to rely on assumptions about conditions that don’t really exist. A physicist, a chemist and an economist are stranded on an island, with nothing to eat and no tools, when a can of soup washes ashore. The physicist says: “Let’s smash the can open with a rock.” The chemist says: “Let’s build a fire and heat the can until it explodes.” The economist says: “Let’s assume a can opener…’”
More from Forbes.com
VIDEO ON MSN MONEY
IA lot of comments to this article is to blame one political party or another. I abhor politics and politicians but I do not blame them for my retirement planning. When it comes to my finances I am in charge. I realize I have to deal with the economy, taxes, and social issues that are out of my control. Everyone has to deal with these same issues.
I have been working since I was in my teens and I am currently in my fifties. My parents gave me good life lessons and advice. They were to live within your means, stay out of debt, save your money, and have a rainy day fund for unexpected events. I learned those lessons well.
When I was young I was very conservative with my money. I invested in CD’s, savings and checking accounts, savings bonds, and money market funds. When I was young interest rates were much higher and I made good income from the interest. As I grew older, I taught myself how to invest in the stock market. By trial and error I became a savvy investor. In my thirties I invested in stocks, bonds, REITS, mutual funds, and other investment vehicles.
I made sure I was diversified and tweaked my investments when needed. When you work for forties years there is going to be many changes to the social, economic, and political climate. The economy will have its ups and downs. I have worked two full time jobs, a full time and part time job, and put myself through college. I have been downsized a couple of times and had to start over again. I have seen companies pension plans become a thing of the past and the growth of IRAs and 401K plans.
What I have learned is to be flexible. I took full advantage of my companies’ 401K plans and their company matches to my contributions. I try to fund my retirement by contributing the maximum amount each year. I never panicked throughout the many economic and stock market crises. I kept to my investment and retirement plan and the lessons I learned from my parents. I plan on worker for another ten years. I am on target to achieve all of my investment and retirement goals and to live comfortable when I leave the work force.
Anyone can blame someone else for their financial troubles but the truth is you are in charge of your finances. My advice to anyone is to start saving and investing when you are young, to live within your means, stay out of debt, have a rainy day fund for unexpected events, and have an investment and retirement plan.
It will not matter how much you save for retirement, The government is going to get their hands on at least half of it anyway. Save as much as you can and Live long and prosper. Oh! one more thing.....
Stay thirsty my friends!
Like it or not, for several generations our society has it setup that Medicare is the majority of everyone's retirement health care, and Social Security contributes big to retirement income.
The "conservatives" want to change this - wish we had 30 or 40 years advance notice !!!! They start by calling Social Security and Medicare "entitlements" - implying they are government giveaways. Sorry - WE have ALL put over 15 % combined annual income into these programs for OUR WORKING LIVES. Entitle that !!
Back to political party - GW Bush showed us the GOP plan. Increase spending (love it, more, more, more) and cut taxes (love it, more $$, more $$). Guaranteed to do 2 things: 1) Get a guy re-elected (we all love free stuff !!!), 2) Crash the economy.
The GOP so hates Social Security and Medicare (which we pay for - why is it THEIR problem?!), they will deliberately crash the economy as an excuse to CUT SS and Medicare. Scary people.
Best example - Iraq. Start it, spend TRILLIONS, don't pay for it !! He didn't pay for it - no new taxes to pay for it, was there? No spending cuts to pay for it, was there? No - pure DEBT.
Copyright © 2014 Microsoft. All rights reserved.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'