At least one financial planner reports this frequent sequence of responses when clients engage him to provide guidance for retirement.

1. When asked how much retirement income the clients expect to need, the answer is “I don’t know.” (I can understand this.)

2. As a follow-up, the planner asks the clients what their current spending budget is or category spending levels are. The answer: “I don’t know.” (This reflects an irresponsible but curable attitude.)

3. So, the planner asks the clients to go home, study their actual recurring spending and savings amounts in different categories, and report back.

4. Many clients leave with their homework assignment but never return. Apparently, facing and analyzing their own spending is just too much to handle. (This shows a definite lack of discipline.)

When clients are challenged about their spending on new cars and vacations instead of for retirement, this planner hears responses such as:

“A new SUV is a “need” not a “want” because it’s just not safe to be out on the road without one. “

“A vacation in the Caribbean is not merely a dream, but a family health necessity.”

And guess what category of spending no client stated was a “need”?   Saving for retirement.

Wow. I guess these folks were looking for a magic bullet, no sacrifice, retirement plan and when it didn’t materialize in that first visit, they bailed on the entire process.

As the writer points out, it takes discipline to stop rationalizing unnecessary spending.

Sadly, many of our fellow boomers just don’t have that discipline. What may follow, years down the road, is the pain of regret.

Here is the link to the full article:  Saving for Retirement is Possible.

This is an article from Go To Retirement
Copyright 2012 Go To Retirement. All Rights Reserved.

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The logic is relatively simple and in three connected parts:

First,  as baby boomers retire in mass quantities (it’s already started), the ratio of U.S. retirees to active U.S. workers will explode upward.

Second, when baby boomers become retirees, we will begin to sell our mutual funds, stocks, and bonds to generate income to support ourselves. Unfortunately, there will be fewer non-boomer investors to buy what we are selling.  According to the law of supply and demand, the prices we can get for our investments will be suppressed.

Third, boomers will still create a strong demand for goods and services but with a limited supply of workers to provide them, the prices of goods and services we need will increase.

I don’t like the sound of any of this but it is hard to argue with it. Therefore, the safe strategy is to be prepared for it. Make it part of your retirement plan. If the prediction is wrong, you will be that much better off.

Here is a link to the full article including an interview with the researcher.

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So what are these age milestones for retirement planning? Many of them you know but here is a refresher:

Age 59½: Beginning at this age, we can begin penalty-free withdrawals from our various tax-deferred retirement accounts, e.g., 401(k) and IRA accounts. Hopefully, this decision is not one that is forced by economic necessity.

Age 62:  At this age we can start collecting Social Security retirement benefits but at an amount reduced by 25% compared to what we can receive at full retirement age. I turn 62 in 7 months.  I concede that it will be strange knowing that I could receive Social Security then if I wanted it.

Age 65:  This is the age of eligibility for Medicare. This age is actually a bit tricky.  We will have a seven-month window of opportunity to sign up, beginning three months before our 65th birthday.  We do not have to enroll in Medicare if we are still covered by employer health insurance.  Otherwise, missing this window could cause you to have larger Medicare premiums for the rest of your life.

Age 66:  This is full retirement age for those of us born between 1943 and 1954.  At this age  we are entitled to 100 percent of our Social Security retirement benefit.  Also, at this age we are no longer penalized by working for other income and, if your benefits were reduced by working earlier, your benefit amount will now be adjusted upward to compensate.

Age 70:  If we wait until this age, our Social Security benefit is maximized to 132% of our benefit at full retirement age. This is my goal and we will spend other retirement assets as needed to achieve it.

Age 70½:  Retirees at this age must begin “required minimum distributions” from tax-deferred retirement accounts (except for Roth IRAs).

Age 85:  Many so-called longevity insurance policies a/k/a deferred annuities begin payments at this age. I am going to take a serious look at buying one of these policies as a retirement planning strategy. Knowing that this benefit will be available, we can spend our other retirement assets without being afraid of running out of money when we are much older. It’s all about the peace of mind that flows from risk management.

Now I have to take care of my health so I will be around to experience these milestones!

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The expert that disfavors LTC insurance is a staff attorney at California Advocates for Nursing Home Reform. His argument is that instead of buying the insurance with a $3500 annual premium, invest the premium amount., giving you $70,000 plus interest in 20 years. There is a huge psychological flaw in that argument.  The average consumer will not have the discipline to actually invest the premiums that are not paid. They are much more likely to spend it. Also, for older boomers, there is no reasonable assurance of  20 years without a long term care need.

Here is the link to full debate article which is definitely worth reading.

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2. Concerns and Misconceptions About Long Term Care

The Met Life decision concerned me because I was afraid that its next step would be to implement large premium increases for existing policy holders, perhaps to force us to cancel our policies. John Hancock has been one of the worst offenders in yanking up premiums for existing policy holders, sometimes as much as 64% in a single increase.  I asked for a meeting with the broker who sold us the policies and inquired as to whether we (including others at my firm who also bought policies) should find a different insurer. She showed us competitive data that persuaded us not to make a change.  Nevertheless, I will be watching this closely.

My  last comment brings me to the first topic in my list of misconceptions about Long Term Care.

1.  Long Term Care insurers can raise premiums  any time they want and in any amount.  This is mostly untrue.  In most states, insurance companies have to obtain approval of state insurance regulators to increase premiums for existing policies that allow for rate increases. The proposed premium increases have to be “justified.” Justification generally means that the insurer must show that it is losing money (and will likely continue  to lose money) on the policies as a group. Sadly, this seems to be the case for most LTC insurers, who underestimated how long its policy holders would live and how much long term care they would need. I believe that Met Life has requested an increase that has not yet been approved. I am holding my breath on this one.

2.  You are unlikely to need long term care.  This is sort of true but the risks are greater than you think. Recent data shows that 20% of older Americans will need long term care for 5 years or longer. That puts you in the one-in-five category.  The average cost of long term care is in the range of $75,000 per year.  Compare that risk to the likelihood that your house will burn down. If you own your home with no mortgage, have you considered cancelling your homeowner’s insurance because your house is unlikely to burn down?

3.  The government will pay for my long term care.  This will not happen, even under Obama Care.  Medicare only covers short-term rehab from an injury or illness. Medicaid will pay for some long term care but only after you have essentially spent yourself below the poverty line. Having LTC insurance that meets the long term care partnership guidelines actually provides a double benefit in this regard. For example, if you have a LTC policy that provides $250,000 in benefits and those benefits are exhausted because you need more care, you can get Medicaid coverage for that additional care and still keep $250,000 in personal assets. (Make sure you ask your sales person about this.)

4.  My family will take care of me.  If you need skilled care, your family can’t provide it and probably can’t afford to pay for it.  If you need care at home, do you really expect (or want) your family to be on site to bathe you, fix your meals, and (without being too graphic here), attend to your personal hygiene? I don’t think so.

5. I will get the insurance if my health declines.  While long term care insurance may not be as tough to get as regular health insurance, if you develop a chronic disease and then apply for LTC coverage, you are likely to be denied.  If you are older when you apply for coverage, you will likely be tested for cognitive decline as well.

6.  The insurance is too complicated to even think about.  I get this, because the policies can offer a myriad of confusing options. Because of this, people are concerned that they will buy the wrong coverage so they avoid the issue altogether. If you don’t understand it, don’t buy it but don’t avoid the issue either. Find a trusted and knowledgeable adviser to guide you (not a sales person). You can start exploring the topic by reading about the key provisions in long term care policies. 

Long term care is a difficult problem to think about, but the pain of not having insurance to cover it can be much greater than the pain of being prepared for it.

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Once you get past discarding the obvious trash (stuff that is broken, clothes that are torn or that will never fit, etc.), it become more difficult. No one likes to get rid of something that is in perfectly good shape, even if it is doing nothing in your life but taking up space. We rationalize keeping it because “I might need that someday” or “that was a fun thing for me to use – ten years ago.” Giving it to someone who could use it now may be painful because it establishes that maybe we shouldn’t have purchased that object to begin with.

On the other hand, after you give away that first item that has some historical significance to your life, there is a twinge of anxiety followed by a much larger feeling of liberation. The dam of reluctance breaks and each succeeding separation becomes much easier.

Last summer when I went into Craigslist downsizing-mode, I also decided to sell two large objects that I have carried around with me for 45 years. I have been an Amateur Radio operator since the 8th grade. For $50 dollars (an advance from my parents), I acquired my “dream” radio receiver in 1965 (used, of course). In 1967, I acquired a radio transmitter that I had lusted after. I used these throughout high school. When I went to college, this equipment went into boxes. Since that time, I have fired them up only once.

I loved the memories of using that equipment. But they were outdated (remember vacuum tubes?), needed to be refurbished, and weighed almost 100 pounds between them. (What we Hams call “boat anchors.”) They simply needed to go. So I sold them to another Ham who wanted to restore them.

When I physically transferred possession of my old radio gear, there was some uneasiness. I asked the buyer to email me photos of the restored equipment so I could cherish those images instead of the actual “stuff.” This “fond photo-memory” strategy works better than keeping the stuff around. Five minutes after the stuff was gone, I was over it. The positive feelings of being liberated from stuff were now dominating my stuff-attachments.

Since that time, I have had no problem getting rid of anything that I have no use for. The irrational attachments to “things” are gone. Each trip to the dump or to Good Will brings more freedom – mental and physical. If it is something I want help remembering, I photograph it.

So my regular stuff-separation trips will continue. I am invading the attic now. There are many more downsizing adventures ahead of me. When it is time to sell this house, I will be ready.

Now if only Mrs. P. will join the de-cluttering club! That will be another chapter in our downsizing story.

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To access your statement online, you first need to establish a “My Social Security” account. This requires answering numerous questions to confirm your identity, etc. I recommend that everyone do this, not only to reduce paper but to improve access to information you will need to complete your retirement plan. We can no longer use the excuse that we don’t know what our likely retirement benefit will be.

Back in 2008, I wrote about how I read my annual Social Security Statement. At that time, my estimated monthly retirement benefit at full retirement age was $2,314. When I checked this morning online, the estimated benefit had increased 7.4% to $2,485. If I delay until age 70 (probable), my monthly benefit will be $3,326.

There is an upper limit on a monthly Social Security retirement benefit. For 2012, a person retiring at full retirement age can receive a maximum benefit of $2,513.

I was pleased to see how user-friendly the My Social Security account interface is.  If you are worried about other folks accessing your account, you have the option of having a text message sent to you each time someone (including you) logs in to your account.

The SSA will email you annually, reminding you to review your updated statement. Generally, the updates occur after your birthday.

If you still like paper, paper statements will still be mailed to people age 60 and older who haven’t yet signed up for benefits, to 25-year-olds (to jolt them back to reality), and to other people who are unable to use the online tool.

To start the process of creating a My Social Security account and accessing your statement, follow this link.

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The interview was by telephone. It didn’t last long. Most of it was me discussing our personal downsizing experiment to a condo that is 1/3 the size of the house we raised our family in. Because there were not many questions asked, I doubted that I would be quoted in the article.

I was wrong.

The article – “When Downsizing Makes Dollars and Sense” – was published yesterday at CNBC.com. I was surprised to see that I was quoted extensively in the article. Even better, most of it was accurate. (The article states that we built our family home in 1980. Actually, we moved to Tennessee in 1980 but our present house wasn’t built until 1992.)

Unfortunately, the article did not link to this blog. That would have been nice because it would probably have added new readers.

The article is definitely worth your time, and not because I am quoted in it. It contains advice from others that should be considered. One piece of advice is a warning against keeping a vacation home in retirement. We are on a different path because right now we are juggling three homes, with plans to sell the “big house” in the next few years.

We still have lots of stuff to get rid of – that is a slow process but we are taking our time to reduce the shock value of downsizing.

Here is the link to the CNBC article:  Downsizing Makes Dollars and Sense.

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A writer at Smart Money magazine recently asked some experts in Social Security at the Stanford Institute for Economic Policy Research to analyze the economic benefit of delaying claiming Social Security in terms of an equivalent retirement investment. The results were very informative.

As one example, if a 62 year old unmarried man in average health waits until age 67 to collect Social Security (instead of age 62), that is the equivalent of buying a long-term bond that pays 3.2% a year. (If that man were a woman, the annual return is 4%.)

The numbers get even better for married couples, if they follow a “restricted application” strategy.  Using this strategy, the  higher-earning married spouse delays claiming his or her own benefit from age 62 to age 70. Instead, that spouse begins collecting spousal benefits at age 66 from the lower-earner’s earnings record. The investment return arising from this strategy is equivalent to owning a bond that yields 7.0% annually!

Actually, the equivalent investment return is even better than from a conventional bond, because the Social Security payments are government-guaranteed, adjusted for inflation, and for most folks, tax-free.  A typical retiree would have to earn more than 10% on a fixed rate, taxable CD to do this well.

As the article points out, the wild card in this analysis is health. But unless my expectations of a normal life span are already in doubt, I am not going to “take the money and run” early just because I am afraid of dying young.

Will you?

Read the full article here.

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There is lots of pessimism and general gloom and doom to be found in the retirement confidence survey data. Sadly, the gloom and doom attitude is probably justified by the facts. Here are some of the survey “highlights”:

• Only 14 percent of Americans are “very confident”  they will have enough money to live comfortably in retirement. This is an historic low number.  A lot of this is related to uncertainty in the job market, a concern expressed by 42% of the respondents.  Similar financial concerns are linked to an inability to meet future health care and long term care obligations.  Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today.

• For so many people, retirement savings and investments are non-existent. Specifically, 60 percent of workers state that the total value of their household savings and investments (not including pensions and home equity) is less than $25,000.  For a worker over 40, that is a scary bad statistic.

• One-half of current retirees surveyed say their retirement was unplanned. Instead, they stopped working because of health problems, a disability, or a job action by their employer (e.g., the infamous ”downsizing”).  Folks who rely on the “I’ll just work longer” retirement plan should take careful note of this.

• This next stat is crazy:  56 percent of workers say neither they nor their spouse have tried to calculate how much money they will need save so that they can live comfortably in retirement. This is the “head in the sand” retirement plan. (The adult children of these folks should probably intervene for their own future protection!)

For baby boomers with no meaningful savings, there is not much opportunity to fix the problem, particularly if they become one of the 50% who retire involuntarily.  Social Security will be it for them. If they also retire with debt, financial survival is questionable.

There are non-financial reasons to be uncertain about retirement. I think I will write more about those another time.

Where does your retirement confidence fall on a scale of 1-10 where 1=”I’m doomed”, 5=”I might make it if I stay healthy, the markets improve, and inflation is low” and 10=”No worries – I am financially set for a satisfactory retirement lifestyle under all foreseeable cirumstances.”

I would say that we are an 8 for now but shooting for 10.

Here is a link to the EBRI survey.

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