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AgingOptions Life Plan: Finance

“Will I have enough assets in order to not run out of money before I run out of life?” is top of mind for all of us in the final third of our lives. In answering this, preservation, positioning and passing of accumulated wealth goes beyond traditional estate planning. It calls for all affected family members to be participants in a model that integrates health, housing and elder law considerations.


9 Retirement myths you need to ignore

Preparing for retirement is hard enough but if you believe these retirement myths, you’re likely to run out of money early.  Unfortunately, most of these myths are still being bandied about.

  1. You can rely upon Social Security. The average Social Security benefit is $1,328 a month, an amount close to poverty level. Social Security was never meant to be the sole support in retirement.
  2. You don’t have to worry about inflation. If you’re old enough to contemplate retirement, you’re old enough to remember that in 1980 inflation rose to 13 percent. Even a small jump in inflation will mean your current dollars are worth less but should we ever return to a more typical 5 percent or more, inflation will take a bite out of your retirement.
  3. The stock market will produce your wealth. We’ve been in a bull market for the past six years so we’ve seen stock prices rise without significant drops for quite a while. And while stocks are great for the long term, they do tumble. Just look to 2008 and 2001 to see how those markets treated people’s investments and retirement accounts.
  4. You can work if you need to. Poll after poll shows that retirees often think that they’ll work for longer periods of time than just up to a retirement age but to accomplish that goal you need several things. One is that your own health must be good enough to keep working and too many Americans have chronic disease by the time they reach 65 for that to be the case for the majority. The next is that your parent, partner or child must also be in good health or you’ll come out of the labor market to care for them. The third is that you need to be able to have the stamina to work a job and employers must be willing to hire you. Nobody wants to claim ageism in the work place but it exists. It’s often very difficult to find work once you are over the age of 65.
  5. You can rely on inheritance. Recent news stories are trying to break the news to Baby Boomers gently but longer lives and poorer health outcomes at the end are cutting into a lot of inheritances
  6. Live off the interest. Seen an interest rate higher than 2 percent recently? It’s been a while since anyone was able to survive on interest alone. For the same reason, living off bonds and CDs in retirement is likely to cut into your principal quickly. It’s okay to cut into your principal, that’s why you saved it anyway but you don’t want the principal to be cut into too much too quickly
  7. A million bucks is the magical number. Most people will need to support themselves for 25 to 30 years and a million dollars doesn’t buy as much as it used to. In addition, an uncovered medical condition can cost you upwards of $100,000 a year for nursing care only
  8. You’ll spend less money in retirement. Often it’s quite the opposite especially initially as retirees pay for the travel and other things they’ve waited all their careers to do. Later on health issues will cost more than your current health costs and as mentioned above that portion of your budget can exceed most people’s planning.
  9. Medicare will cover your health costs. Medicare doesn’t pay for everything and co-pays and deductibles can bite into your own savings. Supplemental policies can help pay for some of those costs but that insurance too will costs money and the price of it increases nearly every year.

Protecting your 401(k) from excessive costs

Many Americans focus their retirement savings plans almost exclusively upon their 401(k) plans through their employer.  But, high fees cost Americans tens of thousands of dollars over the course of their working lives.  Those plans have costs that are deducted from your investment each year.  According to online financial advisor, FutureAdvisor, a working couple could lose over $150,000 in retirement savings just from fees.  Those fees don’t look like much, usually in the neighborhood of half a percent to somewhere around 2 percent but the long term effect of lost returns added to the cost of fees on higher balances can hurt your savings.  For instance, a person with a low balance of less than $50,000 might pay less than $100 a year.  But, by the time an individual has contributed over a lifetime of working, the fees can add up to several thousand dollars a year in cash and lost wealth building opportunity.  In addition, some employees must also take on additional costs such as trading and operating fees to pay for the plan.  You’d think the higher fees might be to compensate for higher earnings but FutureAdvisor found just the opposite.  They found that lower fee funds tended to outperform higher fee equivalents.

Fees are generally higher at smaller companies of 1,000 employees or less, as those companies have less negotiating power with the financial firms but that’s not always the case.  If you’re unsure how much you’re paying in fees or how much a balanced portfolio should cost you within your 401(k), you can browse the listings on FutureAdvisor.com to get some sense of the costs.  Last year, federal rules went into place that required plan providers to be more transparent about the fees they charged.  But a recent survey found that the same percentage of people who didn’t know their fees in the year previous to the change continued not knowing their fees afterwards.

This Tuesday, the Supreme Court will hear arguments about excessive 401(k) fees charged by a company.  Employees of Edison International argue that the company has a fiduciary responsibility to act in the best interests of its employees.  According to the suit, employees argue that the company breached this responsibility in six of its fund options.  The court will consider whether plan sponsors have a duty to monitor a plan’s fund offerings beyond a current statute that limits suits to within six years.  A ruling supporting the 401(k) participants would require that employers must use their buying power to get the best deal for their employees. Depending upon the outcome, there may be quite the backlog of suits in the pipeline from others.

In a separate but related story, President Obama wants to strengthen the current requirement that financial advisors recommend only “suitable” products for clients to one of fiduciary responsibility.  Suitable simply means that a broker must believe that a product by suitable for the client.  Fiduciary is a legal standard that would make advisors liable for bad advice or products.  Fiduciary requires that advisors place a client’s interest above their own.  Currently, an advisor can steer clients towards products with high fees and lower returns in order to increase their own compensation.  The White House estimates that conflicted advice costs retirees $17 billion.  According to some research, the current system can cut an individual’s savings by more than 25 percent.  Here’s another story about how you can lose assets you have in your 401(k).

So, if you have a company 401(k) and you suspect you are paying too much in fees, how do you go about making changes at work to provide better choices?  That’s an article from this weekend’s The Wall Street JournalAmong the recommendations is to make the case tactfully.  After all, even in some large companies, the people in charge of making the decision about 401(k) benefits may not know much more than the average American about 401(k) plans.  If your company’s 401(k) plan is listed at FutureAdvisor or BrightScope, you’ll find rating systems that can shore up your arguments and help you do the homework necessary to make your case.

 

What do you need to do to successfully age?

When people think about retirement they usually think about their savings plans or where they’re going to go now that they have so much free time.  You hear people say all the time that they are going to spend time with their family or get some fishing in.  You might hear them say that they are going to downsize or start a new business.  (Here’s a list of retirement goals, no one achieves.)  We don’t really know a good definition of successful aging yet but we do have some idea of what it means to fail at aging.  Here are some things every retiree should think about and most do not.

  • It’s hard to spend your savings when you’ve concentrated most of your adult life on accumulating it but that’s exactly what was meant to happen.  You’ll need a strategy to keep from spending too much too fast.  On the other end of the spectrum are the retirees who are so frightened they’ll overspend that they go too far and suffer financially when they don’t need to.  You need to create a strategy.  A financial advisor can help you create a budget and help you stick with it.  One suggestion is to practice retirement, that is, try to actually live off your retirement income, to see if you can adequately adjust to your different financial position.  You’ll need that money to last for the rest of your life and that probably means that you’ll continue to invest and save in order to stay ahead of inflation.  Successful financial planning doesn’t prevent you from dying broke.  It prevents you from living broke.
  • This year we’ll celebrate the 50th Anniversary of Medicare and Medicaid and while those programs have some justifiable boasting points there are things that you may not have considered.  If you have spent most of your working life with a health care policy that allowed you to routinely see an eye doctor, dentist or hearing doctor, the fact is that Medicare won’t help you out with those.  Nor will it cover much if any of any long-term care treatment you may need.  To continue getting the health care help you’re likely to need as you age you’ll likely need to invest in additional medical and long-term care insurance.  Without a company providing the research and investigation of those services for you, you’ll either need to hire someone to help you with that or you’ll need to learn to do the research yourself.
  • A 40+ hour work week sucks up a lot of time.  Not working provides people with an abundance of time but often no one to share it with if friends, spouses and previous co-workers are still members of the rat race.  In addition, nearly half of all retirees live alone.  Before you leave the workplace, put a plan into place to keep you from becoming bored or lonely.  Perhaps no other group experiences loneliness to the degree of older adults.  It’s a hard fact that friends are more likely to die when you are older than at any other time.  If you’re not a joiner, find some way to get involved outside your home.  Retirees watch more television than just about any other group and if you’ve seen day time television lately, it’s nothing to brag about.  On the plus side, all that extra time does provide an opportunity to linger over a meal with friends or to take in a play, read a book or work on a home improvement project.  Older people have the opportunity to play a significant role in fixing the real problems of this world if they quit thinking of themselves as “used up” and begin to see themselves as the people with the wisdom, skill and knowledge to play not just an active role in fixing our world but a leading role.  Imagine the world we could see if people aren’t donating their spare time to a cause but rather the rest of their lives to it.
  • If you’ve thought about moving south for the winter or to the South of France for the rest of your life, you should know that despite a lot of people’s intentions to the contrary, less than 6 percent of Americans moved to a new residence, 1 percent moved to another state and just .3 percent moved overseas according to the Census Bureau.  It’s hard to move away from the people and places you are already familiar with.  That’s not to say that you won’t move if that is your plan, just be prepared to fight the currents of inertia.  If you do actually make the decision to go and then actually carry it out, you should understand how such a move will affect your retirement benefits.

Most Americans spend more time planning a vacation than they do their retirement but we are talking some serious time off when we talk about retirement.  Have a plan in place and a sense of purpose or you’ll literally die of boredom.

Here’s some other words of wisdom about retirement.

 

Incorporating financial planning into the divorce decree

Gray divorces, that is divorce between retirement age spouses with long-lasting marriages requires careful consideration and planning by both spouses.  Generally, older couples aren’t worried about custody of the kid or kids but instead they need to worry about things like pensions.  Roughly 1 in 4 divorces in 2010 occurred to people 50 and older according to a 2013 working paper from the National Center for Family & Marriage Research.  If you consider that most Americans don’t have nearly the retirement funds they are likely going to need by the end of life and then you split those funds between the couple, you’re likely to find that both halves of the equation will have to consider whether working longer is in their future.

Dividing pensions, benefits, HSAs, and retirement funds creates long-term effects for both parties and shouldn’t be taken lightly.  Sometimes people make the emotional decision to keep the house and give up too much of the financial assets but failing to make good decisions about splitting assets can cost hundreds of thousands of dollars in retirement.  If you’re planning to divorce:

  • Consider hiring a financial advisor to maximize claims for Social Security benefits, funds from 401(k) plans and divorce settlements even before hiring a divorce lawyer.  Retirement is considerably more expensive for a single person (man or woman) than it is for married couples. (Read this article on why marriage is a boon to retirement planning.) Another area that a financial advisor can help with is in taxable issues.  Taxes can reduce seemingly hefty retirement benefits.  Knowing how to successfully move those funds to other retirement accounts without experiencing a tax hit can preserve the value of the assets.
  • Consider the impact on your business.  An increased value of a business during the life of a marriage must be divided.  This often means selling that business in order to pay the spouse for his or her half.
  • Consider the confusion.  Federal courts determine the guidelines for dividing funds in a 401(k) plan, yet state law dictates how IRAs are divided.  This can confuse things for many people.  In addition, pension plans require a properly prepared qualified domestic relations order (QDRO) to allow accounts to be separated, withdrawn and deposited in retirement accounts without penalty.
  • Consider how insurance policies might play a role.  Insurance goes beyond your medical care.  It incorporates life insurance, property/casualty and disability insurance.  If one or the other parties requires child support or alimony to avoid being financially devastated, you’ll need a life/disability insurance policy to cover you financially in case something happens to the ex-spouse.
  • Consider who you have listed as beneficiary.  Change the beneficiary designations of all retirement accounts.  It can’t be said enough.  Far too often, people experience a major, life changing event and then they fail to update their documents to reflect that change.

A thoughtful, final divorce decree can help eliminate some of the arguing associated with divorce and can help keep both parties out of the poor house.  Protect your assets by hiring who can look at the financial aspects of divorce through a wider lens.

Why more women will become a burden on their loved ones and what you can do to prevent it

Although poverty rates dropped from 35 percent in 1959 to 8.7 percent in 2011, a disproportionate number of those in poverty are women.  Elderly women 65 years old and older outnumber elderly men in the same age bracket three to two, making poverty and aging a women’s issue.  Normal transitions such as moving from married to single (through divorce or widowhood) or working to retired may thrust a person into poverty when they had successfully avoided it previously.  For women, older age increases the chance of living in poverty, living singly increases that chance even more.  Poverty among older women living alone was at 18.4 percent for 2011.  Here are some of the reasons more women experience poverty than men.

  • Women live longer. Women don’t live a lot longer but do live long enough that 85 percent of people over the age of 85 are women according to the U.S. Census Bureau. With men living to an average age of 84.3 according to the Social Security office, women’s longer lives (86.6 years) mean they need to save more (and be smarter about retirement benefits-check here for Social Security benefits for survivors).  Women also often understand less about financial planning than their male partners. They reap the benefits (and suffer the consequences) of having a partner do the planning and/or not understanding the partner’s retirement benefits and how his death will affect her benefits. Many women fear stepping on their man’s toes but the time to learn from him is when he’s still warm blooded and capable of answering your questions. If you’re not currently part of the financial planning picture, make it a point to get there.
  • Women die alone. I’m not saying that family won’t be there by their side but male significant others are likely to die married and women are likely to die widowed. Leading a solo life can be hard for some people accustomed to having a companion for everything from eating out to traveling to staying in. Join groups, take up hobbies or get a roommate. The other option is to learn to enjoy single life. With widows outnumbering widowers three to one, the older you are at widowhood, the smaller your chance of finding another man to share your life with. So don’t count on another man to help keep you out of financial difficulties.
  • Women work lower income jobs for fewer hours and shorter periods of time. Part-time workers often don’t qualify for retirement benefits and more women than men will work at part-time hours often in order to provide unpaid care for family members (either children or parents and often both). While the days of choosing to stay at home have all but disappeared, making such a decision can hurt future employment options if you haven’t used the time to keep up your skills no matter how actively you’ve been engaged in community programs. Although women save a larger percentage of their wages, they usually have significantly smaller retirement accounts. That’s because women typically earn less money than their male counterparts (in 2009, the median income of women over the age of 65 was $15,282—roughly 59 percent of the median income of men in the same age bracket).

Lack of retirement options, lower salaries, age discrimination and less time in the work force tends to mean that women aren’t financially ready for retirement when a spouse is ready to give up the rat race and take up 18-holes of golf.  Be sure and check with Social Security to find out what your benefits will be.  Some applications out there can help you use spousal benefits to maximize those benefits so be aware of anything that can help you reach a higher level of benefits.  Then consider whether staying in the job at least for a while longer won’t reap far more benefits than an early start to your own retirement.

If you have questions about your financial planning for retirement, contact a financial advisor.  He or she can help you plot a course for a successful retirement that avoids these shoals.