Monthly Archives: November 2011

Savers’ Impatience Hinders Retirement Goals


If there is one thing that prevents people from achieving their financial goals, apart from financial illiteracy and lack of financial resources, is impatience of many savers. A research conducted by National Bureau of Economic Research early in the year showed that majority of people prefer short-term gratification over long-term strategies that are bound to have an impact at a later date. If majority of the people would stay focused on their retirement goals, maybe the financial crisis would not have such a devastating effect on their lives. As Robert Powell illustrates in the following article, sometimes we are our own worst enemy if we cannot be patient enough with the long-term goals we have laid down for ourselves.

Few would argue that we have a retirement crisis in America. What people might debate is how we solve the problem.

Slowly but surely, however, researchers are producing work that offers much-needed insight into how we can reduce the severity of the problem. Case in point: A working paper just published by the National Bureau of Economic Research, on two explanations for why consumers have trouble with financial decisions.

“One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations, such as computing compound interest, which could cause them to make suboptimal financial decisions,” wrote Olivia Mitchell, the director of the Pension Research Council, and Justine Hastings, an economics professor at Yale University, in their paper, “How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors.”

“A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs.”

In other words, people generally don’t much know, if anything, about money. And two, consumers — even when they are financially literate — sometimes can’t help themselves from making bad decisions. It’s the way we are wired. The lizard part of our brain overrules the more rational part when it comes to things financial. The lizard part of the brain says that the joy of spending (or not saving) today is greater than the pleasure of having a nest egg later on.

“Impatience or present bias seems to be an inability to plan for long-term consequences,” said Stephen P. Utkus, a principal with the Vanguard Center for Retirement Research. “It may be a learned trait from family and peers, or it may be inherited. There is some evidence from neuroeconomics that impatience may be related to certain brain structures.

“The argument is that the executive function of the brain, the prefrontal cortex, sometimes has difficulty executing long-term plans — either perhaps because the prefrontal cortex might be deficient in some way, or because more automatic and visceral processes in the brain overrule it,” he said.

Others agree. “We have a natural tendency to avoid things that make us feel uncomfortable, said Bill McClain, a principal with Mercer. “If you feel like your retirement situation is hopeless and you don’t understand it, you will put it off.”

So what lessons can be learned from the latest paper on the subject? What can consumers, lawmakers, plan sponsors, plan providers, and other interested parties do to solve the retirement crisis? The answer lies in part with more education and more automatic features in plans. Basically, more learning and more tricks that overcome our innate behavior.

Financial education

In a world where a growing number of people are being asked to save on their own for retirement, where defined-benefit plans don’t exist, and Social Security will pay out just 70% percent of the projected benefit, it’s time to make financial education a mandatory part of the school curriculum, starting in kindergarten and straight through 12th grade.

To be fair, there is debate on this issue. “Financial literacy is correlated with wealth, though it appears to be a weaker predictor of sensitivity to framing in investment decisions,” wrote Mitchell.

Other experts agree that more financial education is necessary but they also say it’s not the end-all be-all. “Financial literacy, while important and lacking, is necessary but not sufficient,” said Michael Falcon, head of retirement at J.P. Morgan Asset Management. “We have some behavior biases that are so strong that they make us make bad decisions.”

And for many people, or at least those who are not predisposed to saving, the only way to overcome those biases is to make sure we continue to add auto-everything to retirement plans, auto-enrollment, auto-escalation, and auto-rebalancing. “It is the most effective means that we have for driving retirement behavior,” said Falcon.

With auto-enrollment, for instance, experts said participants can use inertia to their benefit. “Once you enroll in a workplace retirement plan, you’re likely to stay enrolled,” said Jamie Kalamarides, the senior vice president of retirement strategies and solutions at Prudential Retirement. “Participants should view the arrival of their monthly statement as a positive reminder of the investment they’re making in their future.”

Others, meanwhile, say Mitchell’s paper reinforces the notion that behavior is both innate and learned. “Education and literacy on a particular issue is important,” said Utkus. “The paper reminds us that the world isn’t simply ‘all behavioral’ — people also need better training and education to make good decisions. You can’t solve every financial or health problem through defaults or framing.”

Policymakers, take note

Still, until the day comes when everyone is financially literate, auto-features will need to become more rather than less common. Yes, there are some people who for whatever reason don’t yield to the impatience and can figure out, people who, as Falcon put it, are “dialed into” saving for retirement and doing the right thing.

Said Mitchell: “The forward-looking plan for and then implement a wide range of investments in themselves and their future.”

But for the vast majority of Americans, Mitchell said, “Our results imply that it may be useful to facilitate decision making, particularly among the less-educated, as well as to facilitate people committing to and carrying out long-term financial decisions.”

In other words, Mitchell said plan sponsors and policymakers “seeking to enhance employee participation in, and contributions to, retirement saving programs would do well to invest in product simplification and better marketing, clearly describing to their workers the costs and benefits of different funds as well as the importance of fees in this decision.

“And to the extent that parents, teachers, doctors, and other leaders can teach the young to curb their impatience, this could have important and very positive long-term effects on a wide range of outcomes over the lifetime.”

Living In Retirement


You have finally taken the big step, and you are officially a retired person. In the kind of financial environment we are facing, retirement is something  that has been pushed to some future date. Reason being that the economic situation we are facing globally, has left a lot of uncertainty about the future. But retirement doesn’t have to be a scary period of your life, in fact it should be the most enjoyable, since you’ll finally enjoying the fruits of your labor after all those years of active employment or otherwise. But before you make the big leap, it s always advisable to look at your situation first before you hand in your resignation letter. The following article by illustrates some of the questions that you are bound to ask yourself in retirement.

Can I afford to retire?

To step off the corporate treadmill in your 50s or early 60s and maintain anything close to your standard of living, you need a seriously big retirement kitty.

How serious? You’ll likely need assets worth 10 to 16 times your salary by the time you leave your job. A 45-year-old making $120,000 who hopes to retire at age 60, say, should already have nearly $700,000 set aside. (See the Retire Early calculator.)

You can get by with less if you’ll have other sources of income. If that same 45-year-old has a typical old-fashioned check-a-month pension, for example, he might need only $432,000 in savings to be on track. If you expect to hold down a scaled-back job for your first decade of retirement, you can also get by with less.

If the combination of Social Security, pensions and prudent draws from your savings is enough to cover the expenses on your retirement budget, then you’re pretty much home free. Let your retirement adventures begin!

I’m retired. Now what?

Congratulations! Hopefully you’ve done enough planning in your working years, and by this point you’ve got it all figured out. But if not, you’ve got quite a few decisions to make.

Start by figuring out what type of lifestyle you want in retirement, and how much money you think it might cost you. Create a retirement budget that includes everything from essentials like food, utilities and housing costs to the nonessentials that make life more enjoyable, such as travel and entertainment. And don’t forget that you’ll undoubtedly run into unexpected expenses – medical bills that aren’t covered by Medicare, a roof that needs fixing or a car that’s got to be replaced – and that your living costs are likely to rise along with inflation over the years.

From here, you’ll need to figure out how much money you should be withdrawing, and which accounts to tap first. You’ll also want to look into collecting social security payments. You’ve also got some decisions to make about your home. Do you plan to relocate? Downsize to a smaller home?

If you don’t think you’ll have enough to sustain the lifestyle you want, you may have to consider other options like scaling back your retirement plans, taping your home equity for income, working in retirement, or even delaying your retirement by a few years.

When can I start withdrawing my money?

Now that you’re not working, you’ll probably want to start tapping your retirement money. But you can make the most of your nest egg by withdrawing from taxable accounts first, and leaving any money you have in tax-sheltered retirement accounts for last. For more see When should I start withdrawing from retirement accounts? and Working in retirement

When can I start withdrawing from retirement accounts?

Well, clearly you need to start tapping those accounts when you need the money to live on. But let’s say you have some of your retirement stash in tax-sheltered accounts like 401(k)s and IRAs, and some of it in regular investment accounts.

Your best strategy in that case is to tap the regular investment accounts first. That way, your money in the tax-sheltered accounts will keep right on growing without Uncle Sam taking his cut. If you spent the money in your IRA or 401(k) first, you’d keep getting taxed on the amount in your regular investment account, eroding its value.

How much should I withdraw from retirement accounts?

Most people also have to dip into savings to bridge the gap between what Social Security and pensions, if any, provide and what’s needed to cover retirement expenses. At that point, the issue comes down to how much you can reasonably draw from your nest egg each year to close that gap. Generally, to avoid going through your savings too soon you’ll want to limit your initial draw to about 4% of your savings and then increase that dollar amount for inflation each year (although, this 4% rule is a guideline, not a carved-in-stone commandment).

How long can I leave money in my retirement accounts?

It depends on what kind of account you have.

If you have a traditional IRA, when you turn 70 ½ years old you must begin making a required minimum withdrawal from it each year. The amount of the distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.

With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older.

The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k). Not so with Roths.

Should I work in retirement?

If you’re worried about making your money last your lifetime, then continuing to bring in some cash through a job, even if it is part-time, can be a huge help. Let’s say you take on some work that gives you enough income so you’re able to reduce your IRA withdrawals by $15,000 a year for 10 years. (As we mentioned, if you are over 70 ½ years old you must make a required minimum withdrawal each year. But we’re talking about reducing your non-required withdrawals that exceed that minimum.)

Okay, so you delay making that $15,000 IRA withdrawal for 10 years and thus keep the money growing tax deferred at an 8% annualized rate. At the end of that 10-year stretch, your IRA will have nearly $220,000 more in it than it would if you had been withdrawing $15,000 a year instead.

Will working affect my Social Security payments?

It depends on when you retire. The Social Security Administration determines your so-called “full retirement age,” which is somewhere between 65 and 67 depending on when you were born. (Your Social Security annual statement includes your lucky date. Visit the Web site for more details.)

If you take early Social Security benefits (anytime between age 62 and your full retirement age), your payment is reduced by $1 for every $2 you earn above the annual limit.

For 2010, that limit is $14,160. The rules are more lenient starting in the year in which you reach full retirement age. Your payment is reduced by $1 in benefits for every $3 you earn above a different limit, but only for earnings before the month you reach your full retirement age. For example, if you reach full retirement age in 2010, the limit on your earnings for the months before is $37,680. (If you were born in 1944 or 1945, full retirement age is 66 years.)

Now the good news: Once you have passed full retirement age you can earn as much as you want with no impact on your Social Security payout.

When can I start collecting Social Security?

Assuming you qualify for Social Security, you can begin collecting “early retirement” payments at age 62. (Widows, widowers and disabled persons can sometimes collect sooner.)

But you will receive a much larger benefit if you can afford to delay until you reach “full retirement age” (somewhere between 65 and 67, depending on when you were born) or later – and working in retirement might allow you to do just that. For more, see What’s the best age to start getting Social Security payouts?

Where do I get my health insurance?

Once you turn 65 you are automatically eligible for Medicare coverage. That provides a base level of health insurance that will take care of a lot of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t.

For more see How do I afford health care in retirement?

Should I delay my retirement?

Maybe. Lots of people should seriously consider it. Hanging on at work for even one more year can be a great boost to your long-term security, especially if you are about to retire when the markets are inconveniently in a swoon.

Say you have $1 million in a tax-deferred account, split evenly between stocks and bonds, when you retire at age 65. If you withdraw 4% plus an inflation adjustment every year, in 30 years you will likely still have $636,200 left after taxes. But if the market happens to tank early in that withdrawal period, the outlook gets riskier – there’s a one-in-four chance that you’ll run out of money before year 30.

If you work just one year longer, though, the projections are far better. And by working three years longer you’d typically end up with $1.2 million after 30 years – and have just a 1-in-20 chance of running out of money.

Every year that you are able to earn enough money to live on allows you to leave your retirement egg untouched for another year – leaving you more money when you finally do stop working.

It depends on what kind of account you have.

If you have a traditional IRA, when you turn 70 ½ years old you must begin making a required minimum withdrawal from it each year. The amount of the distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.

With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older.

The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k). Not so with Roths.

Ultimate guide to retirement: Getting Started


If there is one group of individuals that was really hit by the financial crisis, it has to be retirees. Ok fine, we are all feeling the heat, but think about it, after 30 years of retirement planning, when the baby boomers were ready to finally call it a day in the work place, the world around them came crumbling down. All over sudden, retirement planning become an area of attention for many people who saw the need to plan for their future without relying on or having minimal government support during their sunset years. People have come to realize that it is important to have a plan of their own, even when the government can provide them with Social Security. Now, the next big issue becomes how to go about setting up their own retirement plan. Well, it’s not as complicated as most people think, and actually it’s a simple process as is perfectly illustrated in the following article that was published on the website

When should I start saving for retirement?

The answer is simple: as soon as you can. Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. That’s because the sooner you begin saving, the more time your money has to grow. Each year’s gains can generate their own gains the next year – a powerful wealth-building phenomenon known as compounding.

Here’s an example of what a big difference starting young can make. Say you start at age 25, and put aside $3,000 a year in a tax-deferred retirement account for 10 years – and then you stop saving – completely. By the time you reach 65, your $30,000 investment will have grown to more than $472,000, (assuming an 8% annual return), even though you didn’t contribute a dime beyond age 35.

Now let’s say you put off saving until you turn 35, and then save $3,000 a year for 30 years. By the time you reach 65, you will have set aside $90,000 of your own money, but it will grow to only about $367,000, assuming the same 8% annual return. That’s a huge difference.

Where should I save my retirement money?

Tax-favored retirement accounts such as individual retirement accounts (IRAs) and 401(k)s are the best places to save for your retirement. The different types of plans have different features, but most of them allow you to defer taxes on the money you save and the returns you earn within the account.

“Tax deferral” means that the amount you contribute escapes the usual income taxes until you start withdrawing the money years later. As a result, more of your money can earn investment returns over time – an enormous advantage over ordinary taxable accounts.

The plans have other advantages as well. For example, many employers will match part of their workers’ contributions to employer-sponsored retirement plans such as 401(k)s.

How should I invest the money?

To build a nest egg large enough to see you through retirement, which may last 30 years or more, you’ll need the growth that stocks provide.

The stock market returned 9.8% a year on average between 1926 and 2009, versus just 5.4% for bonds, according to research firm Ibbotson Associates. Given stocks’ superior returns over the long haul, most financial advisers recommend that investors whose retirement is more than 20 years away hold at least 3/4 of their portfolios in stocks and stock funds.

Of course, a stock-heavy portfolio can give you some hair-raising moments (or years). For example, during the 1973-74 bear market, U.S. stocks lost 43% of their value – and it took the market three-and-a-half years to recoup those losses. The stock market also suffered a 47.6% decline during the bear market at the start of this decade.

If you don’t have the stomach for steep downturns, you might increase your allocation to include more bonds or bond funds. Holding, say, 70% of your portfolio in stocks and 30% in bonds will let you capture most of the long-term growth of stocks while sheltering your investments to a certain extent during market downturns.

How should my strategy change as I get older?

As you approach retirement age, most experts agree you should gradually shift more into bonds to protect the money you’ve accumulated. But retirement can last a few decades, so it generally pays to maintain a healthy dose of stocks well into retirement: possibly between 40% and 50% while you’re in your 70s, and up to 30% when you’re in your 80s.

If you want to put your asset allocation on autopilot, consider “target-date retirement funds,” which are available in many retirement plans. You simply choose a fund that’s labeled with the year you intend to retire, and it will automatically adjust what it invests in (usually a mix of stocks, bonds and cash) to maximize your return and minimize your risk as you get older.

For an idea of what the right mix of stocks and bonds is for you, go to our asset allocation calculator.

How much money will I need in retirement?

Ah, the key question. One rule of thumb is that you’ll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you’ve paid off your mortgage and are in excellent health when you kiss the office good-bye. But if you plan to build your dream house, trot around the globe, or get that Ph.D. in philosophy you’ve always wanted, you may need 100% of your annual income – or more.

It’s important to make realistic estimates about what kind of expenses you will have in retirement. Be honest about how you want to live in retirement and how much it will cost. These estimates are important when it comes time to figure out how much you need to save in order to comfortably afford your retirement.

One way to begin estimating your retirement costs is to take a close look at your current expenses in various categories, and then estimate how they will change. For example, your mortgage might be paid off by then – and you won’t have commuting costs. Then again, your health care costs are likely to rise. For more help making a precise estimate, use this calculator.

Will pensions and Social Security be enough?

Unfortunately, probably not. When you run the numbers, you should definitely factor in other sources of income in retirement, including Social Security and a traditional pension, if you’re lucky enough to have one. But your personal savings will have to generate enough income to cover the shortfall.

You can check your estimated Social Security benefits by using the government’s Social Security Online calculators. Current or former employers can provide estimates of any pension benefits you might receive when you retire.

How much should I save?

“As much as you can” is the standard advice. Many financial planners recommend that you save 10% to 15% of your income for retirement, starting in your 20s.

But that’s just a general guideline. This is your retirement we’re talking about, so it pays to get a little more specific by doing your homework up front. It’s a good idea to establish a savings target – one that tells you roughly how much you should set aside over time to meet your retirement goals.

The best way to determine your savings target is to use an online calculator like this one. It will help you figure out how much you should accumulate and how much you must set aside in the meantime to reach that target. Be sure to update the calculation each year, so that you can see if you’re on track.

As a general rule, you’ll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses. So for example if your projected retirement expenses exceed Social Security and pensions by $20,000 a year, you might need a nest egg of $300,000 to $400,000 to bridge the gap.

What if I can’t save enough?

Try to divert as much of your earnings into savings as you can. If you don’t have a budget, create one. If you do have a budget, revise it to reflect your newly urgent commitment to saving, as well as any changes in your spending since your last outbreak of budget fever. Chip away at wasteful habits – that might mean ditching expensive dinners or unused gym memberships.

If you’re still young and you can’t save enough right now, don’t be discouraged. Your income will probably grow as you progress in your career, allowing you to save more. You might also have other opportunities to boost your savings rate; for example, a bonus or inheritance can make a big difference in your long-term prospects if you invest some of the money in retirement accounts.

How can I reduce the amount I’ll need?

The most obvious way is to rethink your standard of living in retirement. Swapping the around-the-world sailing trip for a Caribbean cruise may help you lower your retirement target to a more attainable goal.

You can also delay your planned retirement date from, say, 62 to 68 or so. Working past the traditional retirement age will let you postpone withdrawals from your retirement accounts. Your savings will have more time to grow, and you’ll reduce the number of years you’ll need to draw on them. Working longer may also let you delay taking Social Security until you reach at least full retirement age (66 if you’re 50 today), potentially increasing the size of your monthly benefit by 30% or more.

The great thing about online retirement savings calculators is that you can play with the numbers to see exactly how much more or less you’ll need to save based on when you plan to stop working, or how much you’ll spend in retirement, or any number of other factors.

Working part-time can help too. But the problem is that you don’t know if you’ll have the interest or energy to work at an advanced age – or if you’ll have health problems that prevent it. You also may have a tough time finding an employer who wants to hire you in your later years for the amount of money you want to earn. So pinning your entire retirement strategy to working in your 70s or beyond isn’t such a great idea.

What if I’m running out of time?

If you find yourself running short on time – say, you’re in your 40s or even your 50s, and you haven’t gotten started yet – there are still a few things you can do. The key is to do them now.

You should first max out your contributions to tax-favored retirement accounts like IRAs and 401(k)s. For 2010, the IRS allows $16,500 for a 401(k) (though your employer may impose lower limits), and $5,000 for traditional and Roth IRAs. If you’re over 50, you can contribute an additional catch-up contributions. Even the government understands that this is crunch time, and it has devised a few ways to help you out.

For example, workers age 50 and older can put more money into IRAs and workplace retirement plans than younger savers can. That means you can and should contribute an additional $5,000 to a 401(k) and $1,000 to traditional and Roth IRAs.

If you’re arriving late to retirement planning, a traditional IRA may be a better choice than a Roth.

I’m saving a lot but will still fall short – what now?

Consider other alternatives that can reduce how much you need to save. The most obvious one: Think about delaying retirement by a few years. That strategy will allow you make more contributions to your retirement accounts while postponing withdrawals – which could significantly increase the size of your nest egg even as it reduces the amount you need to accumulate to make it through retirement.

For example, if you retire today at age 65 with $500,000 in retirement savings and withdraw $43,000 a year, your savings likely would last until you reached age 90. But if you delay retirement for another five years and max out your IRA contributions during that period, you would retire at 70 with $772,680 saved. That nest egg would let you withdraw $72,000 a year until age 90. (Calculations assume an 8% annual return on your investments.) So by delaying your retirement just five years, you can increase your retirement income by nearly $30,000 a year.

Getting a part-time job after you retire also can make a big financial difference – and can provide mental, physical and emotional benefits as well. Other options include trading down to a less-expensive home (you can invest the profits toward retirement), reining in your spending or transforming the equity in your home into income by taking out a reverse mortgage – though high costs mean this last option is a good idea for only a small number of retirees.

When can I retire?

Trying to figure out whether you can afford to retire is like putting together pieces of a financial jigsaw puzzle. First, you need to estimate how much you’ll spend in retirement. Then you must consider the income you’ll collect in retirement from pensions and Social Security – as well as the amount you can afford to draw from your personal savings or other sources.

The idea is to assemble the various pieces, and then see whether the picture of retirement life that emerges is acceptable to you.

To help bring the retirement picture into better focus, try plugging all your pertinent financial information – including pensions, Social Security, retirement investment accounts and anticipated retirement expenses – into an online calculator. The calculator can crunch all the numbers and assess your odds of being able to retire on the schedule you envision.

Revisit the calculator and all the different pieces of the puzzle each year, in order to make sure you remain on track.

5 New Realities of Retirement


The current economic condition has brought new challenges that has forced people to think outside the box, to find new ways of surviving in these tough economic times. A new survey has revealed that more and more Americans are losing faith in the government’s effort to solve the economic problems the country is facing. For example, the economy is not creating enough jobs to absorb all the people who are unemployed, the healthcare program is being forced down our throats, the stock market has no clear sense of direction, I mean, the problems keep piling up each passing day. With all theses problems, retirees are facing new challenges not witnessed before, and this calls for new strategies to try to minimize the impact on their retirement portfolios. Liz Davidson tries illustrates in the following article some of the realities facing retirees, and how to go about solving them.

You just can’t count on normal anymore. I was thinking about this last week when the earthquake hit and I had to duck for cover under a desk while in a meeting in Washington, DC. Being from California, I am used to and fully prepared for earthquakes, but not necessarily when I am in DC. Most DC 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 possible terrorist attack. You just can’t be prepared for everything.

Pre-retirees, however, need to have 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 commonly used in the past may not work anymore. Retirees used to count on getting a decent interest rate on certificates of deposit or the simple act of selling a home for retirement income. Unfortunately, you 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:

Interest rates remaining low for extended periods of time.

Retirees used to get income by staggering the maturities of long-term CD’s or bonds so 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 ever 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 3-4% or more. In addition, these dividends tend to grow faster than inflation. There used to be a tradeoff between getting a higher income now from a bond or a growing income from stock dividends. While they still aren’t covered by FDIC insurance like a CD, they can provide more income both now and over the long run.

Home prices remain low.

Many retirees plan to use their home equity by taking a HELOC 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 a family member renders. This way you don’t need to rely on recovering home prices that are unlikely to rise as fast as long-term care costs.

Your home won’t sell.

Along with home prices being down, there may be the similar issue of not being able to sell the home at all. Hindsight is twenty-twenty, 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 your home out, you can still benefit from the $250,000 (or $500,000 if you are married filing jointly) capital gain tax exclusion if you lived in the home two of the previous five years.

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.

Your company sponsored retiree health care plan goes away.

Companies are being forced to eliminate or reduce 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 having 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 pre-tax contributions to the account, and funds used exclusively to pay for qualified medical expenses are tax-free. Funds not used for qualified expenses are subject to income taxes, and if used prior to age 65 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 plan 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 you suspected. On the other hand, there could be some other random event we haven’t considered; you know, like an earthquake in Washington, DC.

%d bloggers like this: