Monthly Archives: October 2011

Will You Need 135% of Your Salary in Retirement?


This was a question an economics professor posed on his blog, and the response was huge and varied. But looking at the number, it seems far-fetched in this day of economic uncertainty. As much as the number seems a bit on the higher, it may actually be true for some of us considering the lifestyle one is living. As I have always said there is no magic number that will apply to all retirees, the only thing such a statistic is supposed to perform is give you guidance as you re-examine your circumstances and decide what is best for you. The only major issue is that a lot of would-be retirees wait until the last few years before retiring to start cracking the numbers. T o make it easier on yourself, the earlier you start the better. The following article by Robert Powell is basically a response by different experts on the issues raised by the author of the blog post.

It is the mother of unanswerable questions in the world of retirement planning. How much of your current salary will you need after you retire?

The replacement ratio rule of thumb suggests you might need 75% of your current salary from a variety of sources — be it Social Security, personal assets (a 401(k) and IRA, for instance), earned income (yes, you’ll likely be working in retirement), and the like — to enjoy the same standard of living while in retirement as before.

But according to research conducted by Dan Ariely, people need 135% of their final income to live the way they want in retirement. The reason for this astounding difference has to do largely with the way Ariely, a professor of economics and behavioral finance at Duke University, did his research.

Instead of asking people to ballpark how much of their final salary they will need, he asked the following questions: How do you want to live in retirement? Where do you want to live? What activities do you want to engage in? And similar questions geared to assess the quality of life that people expect in retirement.

Ariely then took the answers and “itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement.” Using those calculations, he found that people want to retire to a standard of living beyond what they currently enjoy. (Who wouldn’t if money were no object?)

Ariely didn’t respond to emailed questions about his blog post. But I am fond of Ariely’s body of work and have quoted him often.

Needless to say, Ariely’s blog has the financial-advice community up in arms. For one, he suggested in his blog that financial advisers are getting paid far too much (1% of assets under management) to help people build a nest egg that’s “60% too low in its estimation.”

Two, he criticized the use of those ubiquitous risk-tolerance questionnaires that label investors as aggressive, moderate or conservative. His research showed that people cannot accurately describe their attitude toward risk and as a result, questionnaires about risk attitude are essentially useless.

From my perch, however, the questions that Ariely’s research raises have to do with the current salary replacement ratio. How much of your current salary do you really need to replace in retirement? Is the salary replacement ratio a good or bad rule of thumb? If it’s a bad rule of thumb, what’s a better way to determine how much you need in retirement? And, what are the pros and cons of that “better” method?

How much is enough?

Experts say it’s very hard to estimate with any precision how much income you’ll really need in retirement.

“In some ways, life after retirement is relatively inexpensive,” said David Laibson, an economics professor at Harvard University. For one, the expenses associated with working, raising a family and maintaining a home prior to retirement are typically much less after you retire.

“On the other hand, life after retirement is also a time when expenses might be high,” he said. For instance, costs associated with travel, leisure and health care might rise.

“At the moment we don’t know which argument wins the day. Do we need more income in retirement or less? It’s really hard to say,” Laibson said.

Some — including Stephen Utkus, a principal with the Vanguard Center for Retirement Research — say that 75% is as good a number as there is.

A good reference on this, he said, is a series of studies produced by Aon Consulting and Georgia State University, which put the replacement ratio at 81% for those with a final salary of $50,000 and 84% for those with a final salary of $150,000.

“They make the rational point that when you are retired, you aren’t making large 401(k) contributions, aren’t paying payroll taxes… and living expenses are lower,” said Utkus. “Hence 75%, or thereabouts.” Read the 2008 Replacement Ratio study (PDF).

Adjustments are needed

But the oft-quoted 75% replacement ratio — while good — needs to be tweaked based on one’s income, said Peng Chen, CFA charter holder and president of Morningstar’s global investment-management division.

The typical amount of money one needs to maintain the same standard of living in retirement as before is roughly 100% of one’s income after taxes and 401(k) contributions, Chen said.

“This make sense, as that is pretty much how much one is spending today in the U.S.,” Chen said.

But that’s the average. The salary replacement ratio is closer to 100% or even higher for lower-income households (as they get subsidies) while the ratio could be 80% (or lower) for higher income households, as wealthier people do not spend all of their income, Chen said, citing government survey data.

Looking for a ballpark estimate? “My personal view is that households should generate enough retirement income to replace about 75% to 100% of their pre-retirement income,” said Laibson. “This estimate is as much art as science.”

A good or bad rule?

Experts say the salary replacement ratio is neither a good nor bad rule of thumb. “It’s a quick way to come up with a ballpark estimate,” Chen said.

Like every rule of thumb, it has pros and cons. On the pro side, it is easy and everyone understands it, he said. On the con side, Chen said, it’s not very accurate, especially at the individual level.

Others agree. “Replacement-rate calculations are overly simplistic and potentially inaccurate because they often are based on methodologies limited to replacement of preretirement cash flow after adjustment for taxes, savings, and age and/or work-related expenses,” wrote Jack VanDerhei, a Temple University professor, fellow at the Employee Benefits Research Institute, and author of a 2006 research report on the subject.

“One of the biggest weaknesses of replacement-rate models is that one or more of the most important retirement risks is ignored: investment risk, longevity risk, and risk of potentially catastrophic health-care costs.” Read VanDerhei’s report, “Measuring Retirement Income Adequacy” (PDF).

Consider, for instance, just the risk of outliving your assets. Saving to replace your salary for life based on life expectancy is very different from saving to replace your salary to age 95. In the living-to-life-expectancy scenario, you might need to accumulate a nest egg of, say, $500,000 while in the living-to-age-95 scenario, you might need a nest egg of three times that or $1.5 million.

135% isn’t the number

While the experts quibble over whether the replacement rate is 75%, 100% or somewhere in between, they generally agree that 135% is not the right number.

“As for Ariely’s survey, one of the principles of behavioral economics is there is a difference between what people say and what they do,” Utkus said. “I don’t buy his study’s conclusions at all. I’d be curious to know: Were all of the people who wanted to retire at 135% of income saving 30% of their income each year…in order to achieve that goal? Probably not. So it’s just a wish list, nothing more.”

Others are of the same mind-set. “One shouldn’t glibly reject Ariely’s 135% number, but there are quite a few reasons to be skeptical of that calculation,” Laibson said.

“When economists do their best to work through these issues, we generally conclude that your annual income in retirement should be a bit lower than your annual income before retirement,” he said. “I use the word ‘should’ in the sense that an optimizing household would save enough during their working life so their income in retirement is a bit lower than their income before retirement.”

Another expert said it’s not reasonable to try to replace 135% of your current salary. One couldn’t cut spending and save enough now to generate that sort of income later, said Wade Pfau, an economics professor at the National Graduate Institute for Policy Studies in Japan.

“There are just too many trade-offs in getting to the point where a 135% replacement rate is feasible,” said Pfau, who wrote a blog and a paper on the subject. Read Pfau’s blog post responding to Ariely.

No magic number

There is no single, correct replacement rate, VanDerhei and others said. In fact, there’s really no substitute for doing precisely what Ariely did: crunching the numbers. It’s not quick, but it’s more accurate than any rule of thumb. According to Chen, individuals should look at their own spending habits to decide how much of their salary they’ll need to replace.

This is easier said than done. “Most people do not start to think about how they would live in retirement until they are close” to it, Chen said, “and this type of financial planning has to be done a number of years before that.”

Others criticize the use of salary replacement ratios altogether. “Ariely’s calculation is as bad as what he’s criticizing,” said Larry Kotlikoff, an economics professor at Boston University and president of ESPlanner, a financial-planning software company that uses the economic concept of consumption smoothing in its calculations.

“What people want or need is irrelevant. The only issue of relevance is what they can afford to spend on a sustainable basis. The goal is not a number,” he said. “The goal is a smooth living standard through time. If financial planners haven’t gotten this straight by this point, they should hang it up. They are disserving their clients using a methodology that not a single trained economist would endorse.” You can get a free version of Kotlikoff’s planning software here.

Maximum utility

Ariely raised another point in his blog that is at the crux all things money. In essence, he asked: How do we use our money to maximize our current and long-term happiness? And that of course prompts the question: Just how the heck is one supposed to do that?

“This is definitely the crux of the question,” Chen said. “I am not sure anyone knows for sure, just like everything in life. This not only touches on how much you should save for tomorrow or spend for today, but also on how much you should work to generate more income, or relax and enjoy life.”

For his part, Utkus said the key to striking a balance between saving more now to spend more later, and spending more now to spend less later is this: One, “we need some amount to make us feel secure (in other words, happy), and it’s not unreasonable that is something like a 75% replacement ratio as a starting point.”

Second, we know that many affluent individuals want a more active lifestyle when they first retire. “If they aren’t willing to shift their consumption patterns — from Westin Resorts to the Ramada, from [first class] to flights in economy on Tuesday — then, yes, they’ll need 100% or more,” Utkus said. “But few actually seem to act on this desire by saving the requisite amount.”

Three, at the other extreme, it’s probable that many individuals can be just as happy with less (except for those with low incomes) because they can make choices about living on less.

Said Utkus: “Happiness is broadly tied to intangible elements beyond financial security…such as family and social relationships, purpose of life, spirituality, and so on.”

4 Percent Withdrawal Rate May Be Too High for Today’s Retirees


We all have different lifestyle, and therefore the idea of coming up with a ‘one-size fits all’ rule will not augur well with a lot of people. For example financial experts have always recommended a 4% withdrawal rate for retirees, but should this rate be applicable to all situations regardless. A lot has changed since the economic recession of 2008, and many investments are not giving investors the kind of return that would allow them to withdraw 4% of their portfolio without the risk of running out of funds during their retirement. As the cost of living increases faster than the return from investments, every person, with the help of a financial advisor, should assess their financial situation before deciding the best withdrawal rate applicable to them. The 4% rule should be used merely as a guide, and not be followed blindly. The following article by Steve Vernon, demonstrates why the 4% rule may not be applicable to today’s retirees.

A recent paper has called into question the generally accepted rule that four percent is the amount you can safely withdraw from IRAs, 401(k) accounts, and retirement savings to generate reliable, lifetime retirement income. While analysts and financial planners have long advocated the four percent rule, or some variation of it, it may no longer make sense in today’s environment.

Before we dig into the conclusions of this paper, let’s briefly review the four percent rule, which goes like this:

  • Invest in a portfolio balanced between stocks and bonds
  • Withdraw four percent of your account in the year you retire
  • Give yourself raises for inflation each year thereafter.

By using this method of generating retirement income, the theory goes, the odds are very low that you’ll outlive your retirement savings for periods of retirement that are up to 30 years long.

One common analytical argument for the four percent rule goes like this:

  • Look at every possible 30-year retirement period in the past, for as many years for which reliable, historical investment data is available.
  • Assume you invested in a specific asset allocation between stocks and bonds and earned historical rates of return.
  • Calculate the safe withdrawal rate for each of these periods, given the specific asset allocation.

The analyses then spell out, for all of these possible retirement periods, how often a specific withdrawal rate failed (meaning you would have outlived your money). Past results have always shown that a four percent withdrawal rate has had low failure rates across all the time periods studied for portfolios that were balanced between stocks and bonds.

Another common analytical argument for the four percent rule constructs a probabilistic model that prepares 500 to 1,000 projections of investment returns over 30 years based on historical returns and potential deviations from these returns. The probability of failure (i.e., outliving your retirement savings) is then estimated under various withdrawal rates and specific asset allocations. These models deem a withdrawal rate to be safe if the estimated failure rate is below certain thresholds, such as one out of 20 (5 percent) or one out of 10 (10 percent).

Both types of analyses can be used to analyze periods of retirement different from 30 years, and as you’d expect, shorter retirement periods can generate higher safe withdrawal amounts, and longer periods lower safe withdrawal amounts.

With this background in mind, let’s now look at the paper that calls into question the safety of a four percent withdrawal rate in today’s economy.

The August 2011 issue of the Journal of Financial Planning included the paper, Can We Predict the Sustainable Withdrawal Rate for New Retirees, by Wade D. Pfau, Ph.D. This paper looked at the range of minimum withdrawal rates that were safe for various time periods, and it found significant variations.

For example, the paper shows that for a portfolio that was invested 60 percent in stocks, the safe withdrawal rate for a 30-year retirement that started in 1966 was 3.53 percent. The safe withdrawal rate remained below four percent for retirements beginning from 1964 to 1969. On the other hand, the safe withdrawal rate was over 10 percent for 30-year retirements that started in 1921 or 1922.

The paper goes on to predict safe withdrawal amounts for retirements beginning after 1980 (we won’t know the safe withdrawal rate for 30-year retirements until the 30 years are up). The model described in this paper predicts safe withdrawal rates of 2.7 percent for retirements beginning in 2000, 1.5 percent for retirements beginning in 2008, and 1.8 percent for retirements beginning in 2010.

The paper then examined the periods for which low safe withdrawal rates were required, and found some patterns. The lowest safe withdrawal rates occurred for retirements beginning when interest rates on bonds were at historical lows, when dividend yields on stocks were below average, and price/earnings ratios on stocks were at or above historical averages. These three situations describe the current economic circumstances.

When you think about it, this only makes sense. Your retirement savings can generate only three types of retirement income: interest and dividends, appreciation in your retirement investments, and withdrawals of principal. If current economic conditions are such that the first two items are expected to be below historical averages, it only follows that your total retirement income will be below historical averages.

The four percent rule is also questionable if you incur significant investment management expenses, or if your investments underperform historical indices due to active management.

Now don’t get me wrong: I prefer the four percent rule over another common method of generating retirement income from savings — that is, withdrawing whatever amounts you think you need to cover your living expenses and then hoping you don’t outlive your money. The four percent rule, or a variation of it, gives you discipline for your withdrawal and investment strategies, and it’s simple to understand and implement.

However, the results discussed in this post point to problems with blindly following a fixed withdrawal strategy over many years without taking into account the current economic circumstances, and without adjusting for your investment experience as it unfolds over your retirement. The four percent rule should serve simply as a starting point.

When it comes to generating retirement income from IRAs, 401(k) accounts, and retirement savings, we’re in uncharted territory, given the current environment and the large numbers of Baby Boomers retiring without traditional pension plans. All of these elements point to a need for holistic retirement planning, taking into account all sources of retirement income, including Social Security and continued work.

It may take time and effort to determine your initial withdrawal and investment strategies, and then monitor them as your retirement unfolds. But you’ll thank yourself when you reach your 80s and 90s with retirement savings that continue chugging along, generating the retirement income you need.

Are You Ready for a Longer, and Better, Retirement?


The rapid change of technology these days is astonishing, you purchase a gadget today and two years down the line, whatever it is that you purchase will be an outdated model. And as things change around us, we need also to move with times, take the example retirement, a lot of people don’t take into account changes that occur in the economy. The kind of lifestyle that we living now will be different to one 20 or 30 years down the line, and thus we to take into consideration the living expenses at that time, as this will help you make the appropriate contribution to your retirement portfolio so that when you retire, your standard of living is not affected. The following article by Robert Powell illustrates issues that were raised by experts on the kind of retirement of the future.

The more things change, the less they will be the same. That’s not a mistake. That’s a fact. Over the next decade, new products, technology and adviser practices will make retirement look quite different than it does today.

When things will change is perhaps open to debate. But three of the nation’s leading experts who appeared as part of a live panel discussion held in New York recently said the changes will be radical.

Joseph Coughlin, Ph.D., the director of the Massachusetts Institute of Technology AgeLab, Rick Miller, Ph.D., CFP, and president and founder of Sensible Financial and Management, and Kathryn McCabe Votava, Ph.D., the president and founder of, all offered their views on the ways retirement will change, as part of MarketWatch’s Retirement Adviser series.

Longer lives, ill-health

According to the experts, Americans will likely live longer than their forbearers. That’s the good news. The bad news is that they will likely live their lives with some sort of chronic illness, such as Type 2 diabetes or hypertension. “Here are some statistics to make you put down the chocolate croissants for a few minutes,” said Coughlin. “110 million Americans have at least one chronic disease; 60 million of us have at least two; and 20 million of us won the lottery ticket of five chronic diseases. This is your future. You are going to be living longer. You will be ill, but you won’t necessarily be sick.”

Health-care will be more expensive than anticipated

And being ill will come with some health-care costs that you weren’t anticipating or imagining. And all of those costs are unlikely to be covered by insurance, they’ll be out-of-pocket. For instance, managing Type 2 diabetes might require the use of telehealth services, which will help you stay in the workforce or age in place, but that service won’t be covered by traditional retiree health insurance plans. In the future, you might call your local telecommunications provider to check your glucose level every single day as well as talk to a coach who can help you manage your illness.

Coughlin noted, for instance, that major pharmacy chains are now providing visiting nurse services and equipment care to the home, and that grocery stores are now providing nutrition services geared specifically to your needs as you age with specific chronic disease categories.

“It’s going to also be a matter of how much is it going to cost you to manage that illness so that you can stay in the game to either work, visit a grandchild, or whatever it may be,” said Coughlin. “So the new cost of health care, we haven’t even begun to imagine, but the new services that are coming out there, are going to be all out-of-pocket. They are not going to be covered right away by government, if at all.”

Some health-care costs could decline

Votava agreed that some health-care costs that aren’t covered by Medicare today might be covered in the future if it costs the government less than the existing alternative.

“Telehealth and some of these other technologies have the potential to bring down health-care costs,” said Votava. “We’re really undercapitalized in health care overall using technologies. Every other industry has put more technology in and then gained more productivity out of it; but overall, yes, people are going to spend more of their pocket than they think that they will, but some of these things that aren’t covered yet today will be covered in the future, because it’s more economical to help a person stay at home and not be the rotating door in and out of the emergency room.”

Novel services will emerge

To be sure telehealth has been around for years, but the experts also predicted new and different services will emerge as the baby boomer march toward and into retirement. “The people that want equality of life, the folks, frankly, the mass affluent and affluent market, especially who have been used to a high quality of life and expect to have that quality of life diminish a little bit over time because they’re aging, because that’s the nature of aging, are going to be looking for the novel services,” said Coughlin.

For instance, Coughlin said, point-of-decision technology will play a big role in helping people decide whether to spend today or save for tomorrow. One such app that exists today shows the price of an item being considered for purchase and what that amount of money could translate into, in terms of monthly income in retirement, if it was saved to the participant’s 401(k) plan.

Expectations will be high

As the experts mused about the future, they also suggested that a large gap will develop between expectations on the part of baby boomers and reality. Coughlin referred to the baby boomers as “Generation Expectation.” Boomers believe they that they are going to live fundamentally better than their parents. “There will be a medicine,” he said. “There will be a policy. There will be a service to help me live longer, better.”

But the boomers haven’t addressed how they’re going to fund it. “They haven’t addressed how they’re going to be able to arrange their lives and their cars and their houses and the like to be able to pay for it, but that gap between expectations, as to what it’s like for me to age vs. my parents and grandparents, is going to be a major tension point with financial analysts and planners and the product manufacturers out there, not to mention the politics of it in the background,” said Coughlin.

Financial adviser as storyteller, psychologist and expert extraordinaire

The experts also said that financial advisers of the future will look nothing like financial advisers of today. The financial adviser of tomorrow will be an expert in Medicare, not just modern portfolio theory. They will storytellers and psychologists, not just people who rebalance a portfolio once per year.

For instance, Miller said, financial advisers in the future (though some do this today) will help clients sort through the retirement risks, rank the risks in terms of importance, because some of them are much more important than others, and some of them are much more insurable than others. What’s more, they will “encourage people to think about things that are uncomfortable, to think about what they aren’t going to think about on their own,” said Miller.

Miller also said financial advisers of the future will help couples sort through and plan for the notion that one of them, usually the wife, will outlive the other 99% of the time. “One of them is going to end up living alone,” said Miller. “You have to have a plan for that. You have to know, have some idea how that’s going to work, whether there will be enough resources and the like. But I think it’s unrealistic to expect individuals to do all of this detailed planning… on their own”

Coughlin, for his part, agreed that financial advisers will evolve into something other than what they are today. “The future of practice management is going to have to be being more of a storyteller and psychologist and not just being able to drive the models,” he said. “That’s going to be a major part of the job, but the other part of it is to make it simple.”

As psychologist, financial advisers will need to have in-depth conversations with their clients. “They’ve always broken out in hives to talk,” said Coughlin, who noted that financial planners can build plans to manage retirement risks, but are not well equipped to have a deeper discussion around health for instance. “I would suggest that in addition to the products that we need to think about, in addition to the amount of money that we need to plan how to keep the standard of living that we now enjoy or maybe a little less, we need to really get into the head of the client far more in terms of what’s actually going on behind the scenes that are going to provide some sort of statistical assessment as to what that risk is,” said Coughlin.

Coughlin also suggested that advisers who can tell stories that elicit emotion and inspire people to act will be more the norm than the exception. At the moment, financial advisers have a tough go of getting people to plan for something that might happen at age 85, and that’s made all the more difficult given the velocity and the complexity of daily life today.

Said Coughlin: “So we’ve got to be good storytellers to get that emotion, to make us relevant, responsive and realistic for what the consumer needs today to plan for tomorrow.”

5 Questions Every Worker Should Ask Before Retirement


Now that you are the point where you finally call it quits, and you have done all the maths, you’re confident that your portfolio can sustain the kind of lifestyle you had always dreamed of. A few years into retirement, things start taking a turn for the worst, and before you know it,  you’re broke. It has been repeated time and time again that even before you take the plunge, it is always advisable to sit down and reassess your position before retirement. Reassessing your position before retirement can be compared to checkpoints in a race, that usually guide the driver on whether are on the right track or you have completely lost it. The following article by Kayleigh Kulp, has five questions that every worker should take time to answer before retirement.

Wall Street’s recent turmoil has many investors questioning whether they will have enough to retire the way they’ve always dreamed, or to retire at all, for that matter.

Whether your post-work life is just around the corner or far away in the distance, there’s never a bad time to reevaluate your definition of retirement: what it means ideologically and financially.

“How you answer that question has very important implications about where you’re going to be and what you’re going to spend,” says author and certified financial planner Eleanor Blayney. “There’s so many demands on the dollars we thought we’d be using in our 60s or 70s. Retirement used to be a going away from the workplace. Now it has to be thought of as ‘what am I going toward?'”

When it comes to retirement planning, it is important to evaluate the big picture: desired lifestyle, trips and activities to pursue and of course, financial security and retirement.

“You have to be much more active in [retirement], you’re also at the point of life where you’re at the maximum complexity of financial issues,” Blayney says.

Deciding how much resources retirees will need and when to pull them, is tricky and people generally do a poor job of it, according to experts. Research from the Society of Actuaries shows that 49% of retirees and near-retirees plan for 10 years or less of retirement.

A certified financial planner or money manager can help investors understand complicated tax, estate and retirement demands, but before going it’s important to have a plan.

Here are five questions every investor needs to ask regarding planning for retirement:

How am I going to spend my time and how will I make it count?

It’s important to visualize your day-to-day retirement life in order to properly plan for it, Blayney advises.

“Where will I be and who will I be with?” she says. “Boredom can cost you. You pick up expensive hobbies. Sometimes our only job is how to spend our money and how to make it last.”

Practicing retirement is a good start. Before leaving the workforce entirely, Blayney suggests knocking your work schedule down gradually and observe how you spend your money and extra free time. Take the time to try out new hobbies and pursue passions.

Do I have enough to have live comfortably and have fun?

Review your retirement goals regularly. Social Security can be drawn without penalty between ages 65 and 67, depending on birth year. But Social Security can not fully fund you retirement and will require some sort of supplement either through Individual Retirement Accounts (IRAs), which can be withdrawn at age 55, pensions or 401(k) plans.

“The age at which each person can retire varies; the longer you work, the more you’ll benefit from your investments and Social Security,” says Anna Rappaport, an actuary and retirement expert. “Researchers at Boston College have estimated that many people have a shortfall in what they need for retirement but working two to four years longer will close the gap for a lot of them.”

Be sure to evaluate your income and budget for necessities, incidentals and fun money.

“Many retirees and financial advisors assume the cost of living decreases in retirement, pointing to costs to commute, meals and wardrobe,” says Mark Gianno, president of Gianno & Freda, Inc., a Boston accounting firm. “Retirees spend at least as much and often more than they did while in the workforce. Retirees have more time on their hands to pursue interests such as travel, home improvement, entertainment and hobbies.”

Should I downsize?

Housing accounts for about one-third of expenses for people aged 65 and older, according to the Mature Market Institute. Next on the list is transportation, taking up nearly 20% of total expenses. A lot of retirees want to keep their big place for a family to come home to for the holidays, but Blayney says moving to a smaller home in a more affordable city is a good way to stretch your nest egg.

If downsizing isn’t an option, or you’d like to stay in your home forever, pay off your mortgage before retirement or consider a reverse mortgage as a way to gain extra monthly income.

Also consider downsizing big, gas-guzzling vehicles or opt to keep cars longer to avoid recurring payments.

What if something happens to me or my spouse?

Consider how unfortunate circumstances could affect your lifestyle and plan for them while you’re healthy: Will you want to be near your children in the event that you get sick? Live in an assisted-living facility? Will you have enough money to take care of yourself?

Plan adequately for widowhood, Rappaport says.

“I estimate that an individual needs about 75% as much to live as a couple,” she says. “Most people think the survivor will be about as well off as before the death of his or her spouse, yet many widows have a decline in economic status after the death of their spouses. About 4 in 10 older women alone have virtually no money other than Social Security.”

What about health care?

Medicare is available to most people 65 and older, but even with government or employer-subsidized insurance, unreimbursed health-care costs associated with aging could cost as much as $200,000 over the course of retirement, according to Blayney.

Nursing homes alone can exceed $70,000 annually, Rappaport says.

Medicare covers a very large portion of acute health-care costs for those over age 65, but very little long-term care expenses. And individual insurance premiums go up with age, and insurability may be lost if the purchase is delayed. Prepare for medical expenses and coverage in advance to prevent financial ruin,” Rappaport says.

Gianno suggests transferring assets away from your control long before they may be forcibly spent for your care.

The Sandwich Generation: Caught in the Middle


I think we are all in agreement when I say that a lot of things changed after the during ans after recession, including retirement planning. Many people have been caught in the middle due to situations brought about by the recession. Would-be retirees have been forced to sit down and rethink their strategy, as more and more are being forced to take care of aging parent, kids and the general rise in the cost of living. People are digging deeper and deeper into their pockets to meet these challenges, and all this is an environment where the stock market has no clear direction of the next few months. These has brought about a generation sandwiched between taking care of their own retirement on one hand and taking of other issues that equally deserve their attention.  The following article by Kimberly Lankford illustrates ways of safeguarding your retirement while at the same time meeting essential unexpected costs.

It’s hard enough to pay your bills and save for retirement, especially during an economic downturn. But it’s even tougher when you have to juggle responsibilities, providing for your own financial needs and lending a helping hand to your elderly parents or grown children — or both. Nearly half of Americans 55 and older say they expect to provide support for aging relatives and adult children, according to the Retirement Re-Set study by SunAmerica Financial Group and Age Wave, a research group that tracks the financial and cultural impact of the graying of America. “Family assistance has become the new retirement wild card,” says Age Wave founder Ken Dychtwald.

A sour economy has exacerbated the squeeze on the “sandwich generation.” Seniors are struggling to cope with rising medical and long-term-care expenses just as their investment portfolios and home values are shrinking, and their middle-age children sometimes need to pitch in. Those same children, who breathed a sigh of relief when the college tuition bills for their own offspring finally ended, may also be fielding requests for help from the kids — or even a boomerang brood on their doorstep.

It’s hard to say no, and most people don’t. But that decision may have long-term implications. Even if you don’t have to raid your retirement accounts, cutting back on your retirement-plan contributions to help family members translates into a smaller nest egg.

Or maybe it’s your time, rather than your money, that’s in demand. Although it might seem more cost-effective to take time off from work to care for a relative rather than to pay someone else to do it, the long-term cost can be high. The average worker who takes time off to provide care for an aging parent sacrifices more than $300,000 in lost wages and benefits over a lifetime, says Sandra Timmermann, a gerontologist and director of the MetLife Mature Market Institute.

“You lose the accumulation of the money you could earn; you lose your 401(k) match; you lose your benefits and health insurance; and you may not be able to find a job again when you want to get back into the workforce,” she says.

Call in the pros

Roger Bacharach, 65, knows about the sandwich squeeze firsthand. A professional artist from Lancaster, Pa., Bacharach has spent nearly five decades balancing his love of art with the financial realities of raising a family. “My father always encouraged me to have a dependable source of income,” says Bacharach, who supplemented his painting sales with art-related jobs, such as medical illustrator, art teacher, and gallery and art-supply-store owner. He and his wife, Trudie, an emergency-room doctor, faithfully squirreled away money to pay for college for their two children and to fund their own retirement. But just as they were getting ready to relax and enjoy retirement, life took an unexpected turn.

Roger’s parents, Lewis and Mary Rae, had been living in Arizona for more than 30 years. But after Roger’s mother began showing signs of Alzheimer’s in her early nineties, Roger talked to his parents about moving to Pennsylvania to be closer to him and his brother. By the time his parents relocated three years later, his mother had suffered a stroke. She went to a nursing home for care; his father moved to an assisted-living facility nearby. The elder Bacharachs had saved enough money to pay their long-term-care expenses for a while, but at more than $12,000 per month, their money wouldn’t last forever.

Roger and his father assembled a team of financial experts, including an accountant, an estate planner, a bank manager and Roger’s longtime financial planner. “We got together a good team to help prepare for whatever was coming down the pike,” says Roger. They set up his dad’s investments so their nursing-home and assisted-living bills would mostly be paid for from stock dividends and laddered CDs. They also set up a trust to minimize estate taxes.

Meanwhile, Roger and his father worked together to see where they could cut costs. They scrutinized the itemized nursing-home bills for errors, and they reduced costs by more than $1,000 per month by purchasing some of his mother’s personal supplies on their own rather than paying the facility’s marked-up prices. Lewis, a former pawnbroker who could add five columns of figures in his head without a calculator, enjoyed the accounting efforts, which kept his mind nimble and saved him money. Mary Rae died at age 100 in early 2011, but Roger and his father, now 97, still go over his finances with a fine-toothed comb. Seeing how much his parents spent on their combined nursing-home and assisted-living bills prompted Roger and Trudie to buy long-term-care insurance for themselves.

Rick Rodgers, the Bacharachs’ financial planner, says that when he meets with new clients, one of the first things he brings up is whether they think they’ll eventually have to help their parents financially. “We’re siphoning off funds that would be used for our retirement to take care of our parents,” he says. “It’s a trade-off.” And working around that trade-off is a key piece of his clients’ financial plans.

Create an action plan

Lisa Green, a financial-services coordinator in Boca Raton, Fla., counts herself among the sandwich generation infantry. Her professional experience came in handy as Lisa and her four adult sisters prepared for financial challenges when their mother needed care.

Delores Green, now 78, survived a bout of throat cancer several years ago but needed care at home following hospitalization for a knee injury and subsequent infection. After her daughters took turns providing care in her home in Delray, Fla., for several months, Delores and her daughters decided that it was time to sell the house. Delores planned to move into a continuing-care community, where she could live in her own condo but would have medical care available if she needed it. Preparing the family home for sale after 40 years was hard enough, with Lisa’s sisters flying in from all over the country and using their vacation time to clean out the house. But the timing couldn’t have been worse. It was September 2008, during the darkest days of the Great Recession. Delores’s portfolio shrank, and home values in Florida hit the skids at exactly the time Delores needed a lump sum to buy into the retirement community.

Lisa’s financial-planning expertise helped the family manage this worst-case scenario. She analyzed the situation, as she does with clients, and let her sisters know exactly where they stood and the timeline for when they might have to pitch in and provide financial assistance.

She helped figure out where to find the lump sum for the retirement community and created a spreadsheet dividing her mother’s expenses into three categories: the carrying costs on her house, the monthly expenses for the retirement community and her personal expenses. “Then we could see how long the assets could last,” she says. “We knew that she had staying power for 18 to 24 months. But if we didn’t sell the house by then, we’d all have to start kicking in cash.” Lisa told her sisters that they should be prepared to contribute $500 per month each to their mom’s expenses if the house didn’t sell after two years.

Fortunately, they found a renter the following year who covered the house’s carrying costs, and they were able to sell it before the sisters had to contribute any money. Meanwhile, Delores’s portfolio turned around, too. But Lisa continues to monitor her mother’s investments and expenses so that she and her siblings will have plenty of notice if they need to help in the future.

Kids in need

Helping your parents is only half of the story in the sandwich generation squeeze. Two of Lisa Green’s sisters had kids attending college at the same time they were on notice that they might have to help with their mother’s bills. Likewise, at the same time that Roger Bacharach was moving his parents from Arizona to Pennsylvania, his two children were in college.

The Bacharachs had saved for years to help cover some college costs without jeopardizing their own retirement. The kids each took out student loans, too. “I told them I’d pay for part of college, but I also wanted them to take out some loans so they had some skin in the game and could start building credit on their own,” says Roger. “They’re paying them back and managing their own finances.”

After both children graduated and found good jobs — Joel as an environmental supervisor and Jordan as a teacher — it looked as if Roger and Trudie were finally finished with their kids’ expenses. But then the recession hit, and both children lost their jobs.

At Roger’s urging, both kids had opened savings accounts when they were young and added to the accounts through the years. Those savings helped them after they were laid off, and Roger gave them both a chunk of cash to help them over the rough patch. But he told them that they had to manage the money.

Joel is using his money to help pay off debt and cover his expenses. Jordan, who found a teaching job in Philadelphia and is getting married, is using her savings and her parents’ gift for a down payment on a house. Both of them met with Rick Rodgers, their parents’ financial planner, to work on their own financial plans.

Rodgers recommends that clients help their children get into the savings habit by matching their retirement-plan contributions as soon as they’re eligible. It teaches them about the importance of saving and helps them stretch the money even further.

Make a plan for helping your kids. The Merrill Lynch Affluent Insights Survey found that 82% of the affluent parents (defined as having investable assets of $250,000 or more) surveyed are either supporting their adult children or would if they were asked. And 55% say they would allow boomerang children to come back home, some even if they couldn’t pay rent. But the support needs to have limits, says Mari Adam, a financial planner in Boca Raton, Fla. “It’s becoming a big problem,” she says. “It’s interfering with the parents’ ability to retire.”

One of her clients is almost 70 years old and needs to retire soon, but she can’t because she spends too much of her money on her kids, says Adam. Sometimes the kids are in their twenties or thirties — and even their forties. A study by the National Endowment for Financial Education found that more than 25% of parents surveyed took on additional debt to help their children, and 7% had to delay their own retirement because of it.

Adam, who has two teenage children herself, recommends to clients that when their adult children need money, they determine whether it’s a short-term emergency or a chronic situation. You can help the kids financially, but set clear boundaries. “It’s very hard, and people feel guilty,” she says, but you don’t want to encourage them to sit around. “You want to encourage them to work or pay some rent.”

She recommends that the parents help by giving a fixed amount of money that the children have to budget themselves, much like the Bacharachs did, rather than just paying off their debts or covering their expenses. You may let them live at home rent-free for a certain time period, but then charge them rent after that.

“You can put that money aside for them and give it to them when they move out,” she says. They can then use the money for a security deposit on an apartment or to build an emergency fund. Or, if the children have earned income, the parents can use the rent money to contribute to a Roth IRA, which will give them a head start on their own future.

5 Checkpoints on Your Race to Retirement


Majority of retirees all walk into retirement hoping that the savings they made during their employment life will sustain them into retirement. Retirement planning is one of the most crucial pillars of financial planning, yet in many instances it is not given the attention it deserves. Planning for a successful retirement only needs one to identify the kind of retirement life they envisage for themselves, and this can only be done with regular checking of their retirement plan.Regular check-up of your retirement plan can be done with the help of your financial adviser, with the help of checkpoints that can assist in guidance of whether you are on the right track. The following article by Robert Powell illustrates 5 checkpoints that can assist with retirement planning.

Everyone likes to keep score. It’s a way of telling whether we’re making progress or not, of whether we are winning or not. But when it comes to retirement, many people don’t have a sense of how well they’re doing or even if they’re in the race.

The good news is that there are some markers, checkpoints on the racecourse so to speak, that folks can use to figure out whether they are close to the finish line. It’s not exhaustive, but here are five of the more important markers.

1. The financial capital-to-living expenses ratio

How much money do you have set aside? You’ll need, all in, at least 15.7 times your pay in your nest egg to fund your living expenses in retirement, according Hewitt Associates’ Retirement Income Adequacy at Large Companies: The Real Deal 2010 study.

Happily, part of that 15.7 will come from the net present value of your stream of Social Security benefits, which Hewitt estimated to be 4.7. Thus, you’ll need only at least 11 times your pay set aside in your defined contribution plan or other accounts earmarked for retirement. And, the “number” goes down a bit more if you have a defined benefit plan. That counts for 2.1 times pay on average. So, if you have a defined benefit plan, you’ll need just nine times your pay to fund your retirement.

One bright spot about Hewitt’s number of 15.7 is this: It reflects an explicit assumption that employees will bear the cost of post-retirement medical care, and that medical costs will increase at a rate greater than general inflation. Speaking of expenses, most experts say getting a handle on all your expenses, not just health-care costs, is a must-do for your checklist. Read Hewitt’s study here.

Other firms, meanwhile, put the number at 10 times your salary. According to a Lincoln Financial Group study, would-be retirees should aim to have at least 10 times their income at a typical retirement age. There is, however, a caveat. “While the 10X score can help people gain perspective on the need for retirement planning, it’s important to note that this is a baseline number and should only be used as a conversation starter,” said Chuck Cornelio, president of the defined contribution business for Lincoln Financial Group.

Cornelio said savers should discuss their 10 times pay number with a financial adviser to determine whether this number fits their savings needs, or should be adjusted based on their individual circumstances.

Read the Lincoln Financial Life Stages Study here.

By the way, don’t feel embarrassed if you haven’t hit the 10X or 15.7X number. Hewitt said most employees, at least at large firms, were on track to replace just 85% of their predicted retirement income needs. So, if you have designs on hitting the number, read the Lincoln study, which also contains some tips from those who have set aside 10X pay on saving.

If you’re behind the eight-ball and don’t have time to read those tips, consider this quick rule of thumb. Russell Investments recommends that each year a defined contribution plan participant should be saving a percentage of salary equal to 30% of his or her final income replacement rate, net of Social Security income. Read Russell Investments’ What’s the Right Savings Rate report.

2. Could you withdraw just 2% per year and maintain your lifestyle?

Many financial advisers say you can safely withdraw 4% on an inflation-adjusted basis from your retirement accounts over the course of your lifetime (or least 30 or so years of retirement) without fear of running out of money. Well, a study published in the Journal of Financial Planning disputes that rule of thumb and is creating lots of debate and discussion among financial professionals.

According to Wade Pfau, Ph.D., an associate professor of economics at the National Graduate Institute for Policy Studies in Japan, the percent that you can safely withdraw and not outlive your financial capital is probably much closer to 2% than 4%.

The reason being this: There’s a new normal. The current dividend-price ratio or dividend yield and the ratio of current stock price to average real earnings over the previous 10 years, what is often referred to as the PE10 or CAPE, don’t bode well for future stock market returns. And that means retirees will likely need a new “maximum safe withdrawal rate” that’s lower than the 4% that was used when market valuations were lower and dividend yields were higher. “Although the 4% rule could possibly work out for recent retirees, it certainly cannot be considered safe in light of the unprecedented market conditions of recent years,” Pfau wrote.

Read Pfau’s paper, “Can We Predict The Sustainable Withdrawal Rate for New Retirees?” here.

By the way, one reason why you might want to dial down the withdrawal rate has to do with longevity risk, or the risk of outliving your assets. “While many people base their longevity on the average life expectancy, there is a possibility that they will live well into their 90s,” said Sandra Timmermann, the director of the MetLife Mature Market Institute. “The 85-plus population is the fastest growing age segment in terms of percentage.” See MetLife’s Retirement Readiness Workbook here.

By having a too-aggressive withdrawal rate, one runs the risk of perhaps not running out of money, but certainly having to reduce their standard of living should they live past average life expectancy. “Flexibility in taking the income stream — say in black swan-type markets — is also an important conversation,” said Thomas L. Howard, a certified financial planner with Harris Bank.

3. Can you still work?

It might seem like a contradiction, but do you have the skills, knowledge, experience and health to keep working past age 65? If not, you might explore how to get re-employed or stay employed. For some, that might mean going back to school. For others, especially those who don’t have a clue about what to do in their retirement years, it might mean reading “What Color Is Your Parachute? For Retirement!” and going to such websites as and

And don’t think that you’ll be the only person working during your retirement years. The data suggest that many folks ages 65 to 70 are still working, generating about 40% of their total income from 1099 and W-2 employment.

John F. Hochschwender, a certified financial planner with RTD Financial Advisers, had these thoughts and questions: “Is there a second career that you have always wanted to do? The question is: Can you make that happen now and would they get enough income from a career that may pay less money but be more rewarding? We have had many clients that have continued to work in new professions or in their current profession with fewer hours well into their 70s and were very happy doing it. By continuing to work part-time they also have more ‘fun’ money.”

4. What will you do?

Hochschwender also said it’s wise to start with the end in mind — your goals. “Do you have clear vision of your life in your 60s, 70s and 80s?” he asked. “Where do you want to live and what do you want to do? Many times we have discussions over multiple years until a potential retiree has enough of a vision to make it happen.”

Yes, many folks retire without having given much thought to what they might do with all their free time. According to some studies, many retirees spend their time gardening, travelling and spending time with family and friends. If you don’t have a good sense of how you will spend your free time, now would be a good to add this to your scorecard and check it off.

For his part, Will Prest of Transamerica Retirement Management said, it’s important that you are being emotionally ready to leave work and all your social and time management ties there. “Think through how this transition will affect you,” said Prest.

Others agree. “Have a retirement plan for your lifestyle,” said Timmermann. “What will inspire you to look forward to every day?”

Part of this exercise means getting a sense of who you are, what you are about and what you want to leave as your legacy — and not just the financial one. “Values dictate working, hobbies,” said Howard. “Meaning and vitality in life are important considerations for me in planning my and other’s retirement.”

5. Social Security, Medicare and employee benefits

Far too many people retire without a thorough understanding of Social Security, Medicare and their employee benefit package. For her part, Timmermann suggests that you calculate Social Security payments and the worthiness of deferring them until age 70 to get the maximum amount. “People should be aware that their payout will be reduced based on their income,” she said. And, look at what Medicare covers, calculating the costs of Medicare supplement insurance and consider other costs that Medicare won’t cover, such as dental care, eye care and long-term care.

Speaking of health care, check what if anything your employer provides, especially if you retire before becoming eligible for Medicare. “Will you need to replace health-care coverage now covered by an employer until Medicare kicks in?” Timmermann asked.

Consider also the value of working longer so that you can delay Social Security. That does three things: it helps you build more assets in your retirement accounts, it increases the amount you’ll get from Social Security, and it shortens the length of time that you’ll need to draw down your assets.

Lastly, plan for the unexpected. “Plan for the contingency that if one spouse or partner dies, the Social Security payout for the deceased spouse will be discontinued,” said Timmermann. And don’t forget to factor in long-term care needs.

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