Tag Archives: living in retirement

How Retirement Expectations Differ From Reality

Good Day,

We all have this vision of the prefect retirement, where life will be one big fiesta, OH! you can’t wait for that day. Then, we go ahead and make plans on how to achieve the ‘perfect vision’ we have in our mind, Ok, the planning bit is very commendable on your part, but the problem comes in when we fail to separate fact from ‘fiction.’ The reason most retirees, after making the big change, often get disappointed when things don’t go as they had planned, is often due to unrealistic expectations about their future, and when in retirement, the world around them seems to be falling apart when reality checks-in. To avoid being in this situation, ensure that when coming up with your retirement plan, keep is as realistic as possible, and as Emily Brandon points out in the following article, current workers are placing too much expectations concerning their retirement.

Current workers who are planning for retirement often envision retirement as something very different from what current retirees are actually experiencing. A recent BlackRock and Boston Research Group poll of 1,002 workers with retirement accounts at work and 1,035 retirees who previously participated in a 401(k) or similar type of retirement plan found that workers are expecting to pay for and experience retirement in a way that contrasts with the lifestyle of current retirees. Here’s a look at how current workers are planning to remake retirement:

Aiming for a later retirement age.

Many current workers plan to stay on the job until their mid or late 60s. Some 48 percent of workers think they will retire at age 64 or later. Another 17 percent of workers surveyed think they will never retire due to their finances or personal preferences. “They are much less confident of their ability to actually amass the dollars they need to retire,” says Warren Cormier, president of Boston Research Group. “I don’t know if its pessimism or realism. They are not as far along in the path toward retirement as they had hoped.” Only 19 percent of current retirees were able and willing to work until age 64 or later. Job loss, health problems, or family circumstances often push people into retirement ahead of schedule. While only 11 percent of current workers plan to retire before age 60, 42 percent of current retirees left their jobs before reaching their 60s.

Planning on working in retirement.

Only 15 percent of current workers envision a retirement that involves not working at all. Most workers would like their retirement to include volunteer work (36 percent), paid employment even though they won’t need the money (34 percent), or working out of necessity (15 percent). “Working a few more years really lessens the amount you will need in retirement,” says Chip Castille, head of BlackRock’s U.S. and Canada Defined Contribution Group. “As we move into a retirement system that relies more on defined-contribution than defined-benefit plans, people are realizing they may need to work a little bit longer.” Most of the retirees surveyed (86 percent) don’t receive any income from employment. And planning to work in retirement doesn’t mean you will be able to find a job or will still want to work or be able to work in your late 60s.

Depending on a 401(k) to fund retirement.

Almost half of workers (48 percent) expect their 401(k) or 403(b) plan to be their largest source of monthly income in retirement. Most workers (75 percent) expect to begin drawing down their 401(k) at age 65 or later. But only 15 percent of retirees get 25 percent or more of their retirement income from their 401(k) and similar types of savings and investment accounts, even though all the retirees in the survey participated in a retirement account while they were working. “The current retirees take a vast portion of their income from secure income sources such as Social Security and legacy defined-benefit plans and they are secure in their concept of receiving Social Security,” says Cormier. “People who are actively working today don’t have a defined-benefit plan available to them. The only thing they have left to expect is a defined-contribution plan. It’s a completely different mix of what is available to them to pay expenses in retirement.” The more retirement income sources you have, the better protected you will be if something goes wrong with any one of them.

Saving for a shorter period of retirement.

Most workers (61 percent) think their savings or investments will need to last for between 20 and 29 years. Only a quarter of the employees surveyed think their retirement savings and investments will need to last for 30 or more years. But what if you end up living until 100? Most retirees (52 percent) think their savings needs to last for 30 or more years after retirement. “Current workers tend to underestimate how long they are going to live and retirees have a better idea,” says Castille. “Retirees have actually gone through the exercise of creating a budget.”

You’ve retired! Now put your plan to the test

Good Day,

You’ve done all that is required for one to have a successful retirement, and the time has now come for you to enjoy the fruits of your labor. Time and time again, retirees have been known to go overboard with their spending plans, and most end up messing up what was once a good plan. As you put your retirement plan to the test, it is always advisable to remember that even during retirement, you’ll still need to plan to ensure the worst case scenario doesn’t happen to you, that is, running out of money during retirement. So, as you put your retirement plan to the test, ensure that you that you observe the following points as advised by Donna Rosato and Susie Poppick in the following article.

Throughout retirement, check your financial plan and your spending periodically.

Welcome to your first year of retirement. You made it! Hard work and diligent saving have paid off. Your financial plan should practically run itself at this point. Still, aim to check in periodically.

What to do

Don’t go chasing yield.

As you age, the fixed-income portion of your portfolio becomes more important. The goal isn’t maximum income, but maximum preservation — by way of diversification. So put the majority of these holdings into a total bond market index fund. For inflation protection, add TIPS, keeping them to less than 30% of your bond share.

Anyone who has substantial money outside tax-deferred accounts and is in a high tax bracket should consider munis too. Initially, you’ll also keep 12 months of expenses, plus your emergency fund, in cash.

Every couple of years, trim a few percentage points from your stockholdings and stick the money in bonds and cash. By 75, you should have two to three years’ expenses in a money-market or short-term bond fund.

“At that point, you don’t need as much growth to keep up with inflation,” says Greg Carroll, managing partner at Sterling Wealth Management in Carlsbad, Calif.

Do a yearly spending checkup.

Before you quit working, you gave yourself a budget. Expect to blow it.

“Retiring is like going on a long vacation, and you always spend more on vacation,” says wealth adviser Jeff Townsend. Besides, your costs of living will naturally vary, as will your portfolio’s value.

Townsend suggests tracking your spending once annually to keep yourself honest. Go back to the budget worksheet on Fidelity’s Retirement Income Planner. Then plug-in your assets to see if your spending is sustainable.

Chronically going over a 4% inflation-adjusted draw could cause your money to run out, but even if you’ve gone off the rails in a few years, dialing back can make a difference.

Take from all baskets.

As you spend down your cash account, you’ll need to replenish it. Minimizing the taxes you incur on portfolio withdrawals will maximize the life span of your savings.

Generally, retirees have been advised to tap taxable assets first, because the long-term capital gains rate on them is lower than the income tax rate owed on traditional 401(k) and IRA withdrawals, and because this method allows tax-deferred accounts to continue to grow without a tax bite. Whether or not the strategy works, however, depends on many variables.

Another failing: Once you do transition to drawing solely on tax-deferred accounts, you may be bumped into a higher tax bracket, says Colorado Springs financial planner and CPA Allan Roth. Not to mention that “all this becomes even more complicated with possible tax-rate changes for 2013,” says Roth.

While there’s no one perfect system, Roth suggests being more egalitarian with your drawdown. Start by balancing any tax deductions you have with withdrawals from tax-deferred accounts, then take the rest of the money you need from taxable accounts.

Never retire your resume.

Keep in mind that a worst-case scenario may necessitate your returning to work. Submitting a CV that hasn’t been dusted off since Y2K won’t do you any favors.

So update your résumé now while recent accomplishments are fresh in your mind, says New York City executive recruiter Steve Viscusi. Then revisit it once a year to add something, even if it’s volunteer work or leadership in a social club.

5 years from retirement? Do this now

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