Expectations versus Reality in Retirement
As we baby boomers approach retirement many of us have started to take a much closer look at what we will need in the form of assets if we are to live to the age of 80 and beyond. Most of us have been very focused on accumulation of assets up to this point and may not have stopped to consider what the future outcomes might look like.
We all have had expectations of what our accounts might look like and some of us have had those expectations dashed by market corrections or other financial setbacks. I think it is time that we took a close look at what other expectations we have for the future versus what reality might spring upon us. If we are to be successful in our own retirements we should move toward it with our eyes wide open and our plans firmly in place.
What follows is a short examination of five areas that each of us should prepare for and a few ideas that might help you improve your chances of success. Some of this might appear to be doomsday like but I think we will all be better off if we prepare for the worst while expecting the best, so let’s dig in.
Expectation #1: The stock market will continue to provide above average returns well into the next decade.
We know that investing in the stock market has produced the best chance of growing our assets at rates that beat inflation and other fixed money instruments over time. If you stay invested you will always get the average market return for the period you are in the market.
One thing we can say for sure about the markets, though, is that they will never go straight up or straight down. We tend to see periods of growth and periods of stagnation. In the short-term no one can predict whether you will make or lose money but we know that over the long term (10 plus years) you will get whatever the markets return.
The danger for us going forward is that when we start taking income from our investments, every negative year will shorten the lifespan of our potential income stream by as much as 5 years or more. If we want to live comfortably to ages of 85 or 90 we will need more predictable returns than those odds will give us.
Are you willing to bet that the markets will perform the way you want them to when you get ready to retire? I don’t think any of us is willing to take that bet and that is why more and more of us are looking for instruments that will guarantee us a minimum return and lifetime income streams with the money we already have accumulated. A little research on your part should yield some good choices for those assets you can’t afford to lose.
Expectation #2: I will be in lower tax bracket when I retire.
I am sure you have been told this by every planner or investment professional you have ever talked to. They all encouraged you to fully fund your IRAs and 401ks because of the current tax deductions and the tax deferred growth with the promise that when you retired you will be in a lower tax bracket. I have conducted seminars for over 5 years now where I ask the question of my audience, “do you think future tax rates will be lower, the same or higher”? I can count on one hand the number of people who said lower or the same. When you look at our country’s current level of debt along with the future liabilities for our major entitlement programs (which we will look at next) I think you too will be hard pressed to think your taxes will even stay the same going forward, let alone reduce.
Whatever your current tax bracket is, can you imagine living on less than you are today? If your income stays the same and your deductions disappear because your kids are gone and your home is paid off, what chance do you have to reduce your tax burden? The reality is that during a 20 year retirement, if you have accumulated all of your retirement assets in tax-deferred accounts, you will pay 10 times more in taxes than you saved in taxes over your lifetime, assuming no tax increase. Every increase in taxes going forward will mean you will need to take more money out of your savings to maintain the same lifestyle.
One way to solve this dilemma is to start funding a private tax-free retirement plan using an insurance product that is linked to a market index and designed to provide maximum cash accumulation with a minimum death benefit. This product is known as equity indexed universal life. Here again, a little research on your part will reveal multiple, high quality companies that currently offer these products.
Expectation # 3: I can count on Medicare and Social Security to be there for me like it was for my parents.
The reality is that both of these programs are in trouble and will only get worse as the 80 million baby boomers enter retirement. Ask anyone under the age of 40 if they think Social Security will be there for them and you will soon see that this reality is already well entrenched in our culture. The facts are that 60% of current retirees say that 50% of their income currently comes from Social Security, 34% say that it is 90% of their income and 22% say that it is 100% of their income.
By one account, it is predicted that by 2019 Medicare will consume 24% of all tax receipts and by 2042 it will consume 51% of all taxes collected.1 You might think universal health care will solve this problem. Unfortunately, Medicare is a form of universal health care and anything that will replace it will be burdened by the same reality of baby boomers living much longer in retirement than their parents ever did.
As for Social Security, it is predicted that the Social Security trust fund will begin be tapped into in 2018 and be completely depleted by 2044.2 If we had made changes to this program years ago we might have been able to extend it but I don’t see any congress willing to touch this problem until it is too late.
The bottom line is that benefits will need to go down, we will need to wait longer to be eligible and taxes will need to go up to pay for the massive increases in cost that will result from the higher usage figures projected. We are going to have to become responsible for our own retirement planning and should these promised benefits materialize for us we should feel lucky if we can plan an extra night on the town every month.
Expectation #4: I will live to my normal life expectancy.
This might well be true but then you must ask yourself, what is my life expectancy? When Social Security was instituted the average time spent in retirement was 3 years. Many of us today will spend 20 to 30 years in retirement. Statistically speaking, if you are a single male age 65 you have a 50% chance you will live to age 85 and a 25% chance to live to 92. If you are a single female age 65 you have a 50% chance you will live to 88 and 25% you will live to 94. If you are a married couple age 65 one of you has a 50% chance to live to 92 and a 25% to live to 97.
If these numbers don’t get you thinking about how long you will need for your money to last consider this. One of the fastest growing age groups in the United States are those people over the age of 100. There are currently over 27,000 people over 100 and that number is sure to grow as the baby boomers begin to age.
Expectation # 5: I will stay healthy well into my final years.
There is no doubt about it; we are much more conscious of our health and taking care of our bodies and minds than any generation in the history of the world. We are finding new ways to combat disease and to stave off illness as well as to treat conditions that would have killed us only a generation ago. However, all of this has come at a price and that price needs to be calculated into our future income needs.
According to a study by Fidelity Investments, a retired couple without employer-sponsored health insurance can expect to pay $215,000 for out-of-pocket health care costs like premiums and co-pays. Moreover, this number does not include significant costs like long-term care, which isn’t fully covered by Medicare. These numbers also assume you live to your life expectancy and not beyond. Last year these costs rose by 7.5% and we do not know what kind of increases we may see in the years ahead. As we have outlined above, Medicare costs could easily rise by double digits in the next 20 years.
If we add in home health care and long-term care into this equation we can easily double the numbers above and put a further strain on our already over taxed retirement funds. One thing you can do about potential long-term care needs is to purchase a long-term care policy from one of the many experts in this field.
What you can do to prepare
The numbers aren’t pretty but there is no need to despair. Whether you have years to prepare for retirement or you are already there you can create a plan to succeed and prosper in your own retirement. To summarize let’s go over the realities again:
Investment directly into stock market investments can leave you at the mercy of the markets and geopolitical events. You will need to be in investments that can give you predictable returns without the threat of market downturns.
Taxes will probably be going up over the next few years and into your retirement. It would be best to use your tax-deferred retirement plans early in your retirement and it may be prudent to move them to tax-free instruments at your earliest opportunity.
Government entitlement programs will take a larger and larger share of the tax revenue in the future and future benefits may well be reduced or eliminated. Start taking responsibility of your future income needs by using instruments that can give you market based growth in a tax-free environment.
Plan to outlive your own life expectancy. Create plans that will provide income streams you cannot outlive. There are many instruments on the market today that provide living income benefits you cannot outlive and that can be funded with both taxable and tax-deferred assets you now own.
Expect to stay healthy but plan for the probability that you will need to spend more on heath care in the future. Purchase a long-term care policy that will pay for future needs at home and in care facilities.
One thing you can do right now is to get educated and speak with a professional advisor, preferably one who carries the CERTIFIED FINANCIAL PLANNER designation. The sooner you take action the greater your success will be. Remember, by planning for the worst while expecting the best, you will be the ultimate winner and your retirement years will be all you have dreamed they would be.
Marc Cram is a CFP in Durham, NC. He works to protect and increase people’s assets using safe, liquid investments. Marc can be contacted through his website at http://www.cramgroup.com. Get a free 12 page article on how to safely and conservatively build wealth at http://www.wealthyyou.us
Planning by Others for Yourself
Investments are necessary if we want our money to grow. It is never enough to just keep on saving. We must also try to ensure that we are getting the best returns on our money. For anyone to keep a track of their finances and know where they should invest, it helps to go and get hold of some expert advice.
There are individuals and companies who provide these services at a charge to various individuals and organizations. If a person provides a financial advisor with his bank details, the kinds of investments that he has already made, and the amount of money that he has available for future investments, the advisor shall help him make the best decisions.
People seeking to make investments will also be educated on the various schemes available through which they can leverage, earn profits, and pay lower amounts of interest. It could be investing in stocks, Forex or in any of the other options that are available in the markets. Most of us know very little about the kinds of investments that we can make. Hence, it is prudent to contact an advisor who can suggest to us what the best investments would be. In the long run, the ones to benefit would be ourselves.
There are a number of professionally qualified people who have been in the financial industry for years together and who have great knowledge of the way in which the markets operate. Following their advice, one will be able to rest easy knowing that one’s money is in safe hands and shall not be wasted. Financial advisors keep track of the finances of their clients, meet them regularly to provide updates, and suggest intelligent changes.
However, even people who are availing of financial advice from professionals encounter financial troubles at times. Then, they need help in smoothening out the rough financial patch that they are going through. Tough financial situations arise due to a variety of reasons. It could be because of the rise of some sudden expenditure. It could happen if a family member suddenly falls ill and incurs large medical expenses which one might not have been prepared for.
Such situations may lead one into a difficult debt situation. At such times, one would be required to look more carefully into one’s own savings so as to chalk out a better plan for the future.
Thus, people who are planning their finances will have to create personal goals and make an extensive analysis of their financial standing and make adjustments accordingly. This will help them to manage the sudden expenses that have arisen and ensure that they become debt-free soon enough. For instance, it might make sense to cut down on credit card usage so as to eliminate making bulk payments at the end of the month and gain more self control in dealing with money matters.
Even if the debt amount is not high, one will still need to start saving. This will mean a change in lifestyle and the person concerned will have to keep attack of his finances.
Debt management at http://www.thriftyscot.co.uk/money/manage-debt.html is essential. Come to us for IVA Advice at http://www.thriftyscot.co.uk/money/what-is-an-iva.html and for securing a poor credit loan at http://www.thriftyscot.co.uk/Loans/bad-credit-loans.html
Cost Of Payday Loan : Not Much If You Make Payments On Time
The cost of payday loans is an issue that has been much hyped and discussed over and over again. The fact of the matter is that nothing comes for free, and when you can avail a fast cash loan when other credit options are unavailable to you, the fee and charges for cash loan will not be something that you will complain about. In fact the low cost payday loan can cost lesser than a hefty late payment fee, or prove cheaper than a default payment that would not do much good to your credit profile too.
Low Cost Instant Approval Loans
Payday loans are available in sums ranging from $100 to $1,500 and they usually cost about $15-$30 for $100 borrowed for 7 days to14 days. They are usually borrowed by cash strapped, hard-working people who live from one paycheck to another. Such people find it hard to manage emergencies while living on a tight budget and rely on faxless low cost payday loan to get them through their temporary financial crisis.
When You Need To Worry
The cost of taking a payday loan is a matter of concern only when the borrower is unable to manage his finances well. The cash advance loans are useful and offer timely relief in cases of temporary financial crises; they are not long term solutions and cannot offer much help to those who have deep-rooted debt problems. If the borrower unwittingly borrows more than he can afford he may have a tough time as these loans are indeed very expensive if they are continually “rolled over” or extended. If payments are made on the due date, the loans are very affordable, it is only when the borrower is unable to make payments on time that it may get costlier than expected.
If you do not abuse the services of a cash advance lender, you may find the fee paid for payday loan much lesser than the hassle of a bounced check. It is better than asking friends and relatives for short cash loans and making them aware of your financial situation. Your credit history is not considered and you require no collateral, so it is indeed not very expensive as long as payments are made on time. Consider other factors in its favor such as no lengthy loan application procedures, paper work or having to actually face someone to secure a loan. It can be done in an impersonal manner, completely online. If you repay the loan on time, it can be a source of relief which is better than not making payments on time and worrying about mounting cost of payday loan.
To keep the cost of payday loan as low as possible consider your finances carefully and borrow from low cost payday loan lenders only as much as you need and that which can be repaid easily on your next payday. Visit http://www.lowcost-paydayloan.com/ for more information about payday loans.
Designing a New Paradigm for Financial Planning
We have planned our retirements pretty much the same way for the last 30 years but maybe it is time to design a new paradigm for the future.
What do we mean by the word paradigm? The dictionary defines a paradigm as a set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them, especially in an intellectual discipline. In other words, a paradigm becomes our TRUTH. We accept it as fact until we believe it otherwise. It is our way of viewing reality and everything that agrees with it we take as true and everything that contradicts it, in our mind, is rejected as false. Sometimes we learn that our paradigms themselves are false (think of the discovery that the world was round) and we then have to create new paradigms and fit the new facts within them. It is lucky for us that we can do this, because if we were unable to make these adjustments we would have a hard time with change. Because we are reasonable beings, we can take new information and adapt it to new circumstances allowing us to create, evolve and progress.
So, what is the set of assumptions we have been planning with up to now? There are two basic assumptions that I see are in need of immediate evaluation:
1. Saving money in a tax-deferred environment is prudent planning.
2. You will be in a lower tax bracket when you retire.
Let’s deal with the second assumption first as I feel it is what has been driving the first assumption for a long time. In every seminar I give I ask the participants if they think taxes will be lower, the same or higher in the future. Without fail 100% of those responding agree that taxes will be higher in the future. Now there are many reasons why we believe this is so but let me enumerate just a few:
1. People over age 65 will nearly double in the next 30 years (from 12% today to 19.4% in 2030)
2. Our governmental debt ($7 Trillion) and trade balance of payments ($617 Billion) do not favor lower taxes
3. Social Security, Medicare and Medicaid are headed for huge deficits (up to $70 trillion by some estimates)
4. We have fewer deductions once we retire (no children and low or no mortgage interest write off)
Laurence J. Kautlikoff, Professor of Economics at Boston University and author of the book “The Coming Generational Storm”, has done the accounting, looking out several generations, and he concludes that “After calculating the immediate and permanent federal personal and corporate income tax hike needed to achieve generational balance; the requisite tax hike is a whopping 69 percent!” There are plenty of other authors out there saying the same thing which leads me to agree with my seminar attendees, that income taxes are going to be higher in the future.
Assuming you are still with me and that you agree with the forgoing assumption (if your paradigm allows it), we need to examine the thinking behind assumption number one, that saving money in a tax-deferred environment is prudent. First, we need to look at what deferred growth provides us. One of the reasons financial planners have been preaching deferred growth for so long is that you can accumulate more real dollars in a tax deferred environment than you can in a taxable environment. If your money isn’t being chipped away at with taxes every year, you can indeed end up with more dollars in your retirement account.
However, all you have done is to defer those taxes to a day when you thought you were going to be in a lower tax bracket, thereby allowing you a larger income in retirement.
Are you starting to see where I am going here? What we have unwittingly done is create a retirement plan for Uncle Sam, not for us. If we are in fact going to be in a higher tax bracket in retirement, we will end up with less real dollars in our pockets and Uncle Sam will end up with more in his. Let me give you an example that makes this real:
Assume you are in a 33% tax bracket and that you have saved $4,000 per year for 30 years in a tax-deductible account (a total of $120,000). If your account grew at 8% per year your account would be worth about $500,000 at the end of the 30th year. Over those 30 years you would have saved $1,320 per year in taxes or a total savings of $39,600. Now assuming you stay in the same tax bracket in retirement (although it could be a higher one) and you take out 6% of you retirement account each year, you will have an income of $30,000 on which you pay 33% in taxes ($9,900) to net $20,100 in spendable income. If you look, you can see that it would take only 4 years in retirement for you to exhaust 30 years of tax savings ($39,600 / $9,900 = 4).
For every year after four in retirement you are creating Uncle Sam’s retirement plan. On top of that, if you need $30,000 to live comfortably in retirement you will need to take out $45,000 each year in order to net the $30,000 you need to live on. You had better be earning at least 9% in your portfolio or you will run out of money before you run out of life.
Have we been duped? We were convinced that deferring the taxes was a smart move. What if we were farmers and the government came to us and said, “You have a choice. You can choose to pay tax on your seed or your harvest, which do you want?” We would most certainly say, “We will pay tax on the seed”. We understand that tax-free beats tax deferred all day long. In the example above, we will have increased our retirement income by 50% if we are able to access and spend the full 6% of our saved dollars without being taxed on it.
Wouldn’t it make more sense to create a tax-free retirement plan, or at least try to cut some of Uncle Sam’s take? We can do that, although the number of instruments is narrow, if we start adopting this new paradigm. Here are some of the things you can do right now:
1. Change your 401k contributions so that you are only capturing the company match. No reason to create a larger taxable harvest than necessary.
2. Fully fund a Roth IRA if you are eligible.
3. Fund an investment grade life insurance policy that can be accessed tax-free in retirement.
4. Optimize idle assets, like home equity, to fund your tax-free vehicles.
If we start educating ourselves in this new way of thinking we can create a successful, long retirement and remove some of the burden on our children and grandchildren.
Marc Cram is a CFP in Durham, NC. He works to protect and increase people’s assets using safe, liquid investments. Marc can be contacted through his website at http://www.cramgroup.com. Get a free 12 page article on how to safely and conservatively build wealth at http://www.wealthyyou.us