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WHAT CAN BE SAFELY PREDICTED
ABOUT YOUR RETIREMENT? - "Failing to plan is planning
to fail"
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Despite the challenges and risks, retirement has been
the earlier choice for an increasing percentage of
Americans since World War II. Social Security Administration
research shows the median age of retirement falling
from age 68 or 69 to 62 between 1950 and 1985. Though
the trend has flattened in the last 17 years the baby
boomer's arrival at middle age figures to reinvest
the issue with importance. A survey of the group's
retirement attitudes by the AARP found that, compared
with their parents, boomers believe:
- They will need more money
to live comfortably in retirement.
- They are more
self-indulgent.
- They are healthier.
- They will
live longer.
The motive for retiring is all important. Simply ceasing
to work, while undeniably appealing on Mondays and other
bad days, does not in itself constitute a fulfilling
retirement lifestyle. Finding the right avocation is
no less important than selecting the right vocation,
for more retiree's recreation isn't enough. Workaholics
may have a particularly difficult time finding their
way. Individuals who draw a blank when they try to envision
themselves as retirees may benefit from a systematic
approach to retirement planning of the sort advocated
by McLean, Va., planner Frederick McNair. He tells his
clients to break their retirement years into three segments:
This
phase is typified by "very active behavior," McNair
says. "Travel, the development of hobbies -- things
you were constrained from doing before. These are the
opportunities that were deferred."
In the following period, retirees tend to be less self-indulgent
and more concerned with legacy building. It is a time
of "giving service to others," whether the community
at large or members of one's family, the grandchildren,
say. It's also in this second phase that plans are made,
logistics arranged and assets allocated for the third
and final stage.
This is when, frankly, life's endgame is played out.
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A person who retires at 50 today
probably should assume a retirement lasting anywhere
from 33 to 45 years, McNair says.
This gets to the issue of longevity and, even more important,
morbidity, the natural tendency of health to decline
as people age. A well-planned retirement recognizes
not just how long a person might live, but that his
or her final years very well could be characterized
by ill health requiring nursing care or hospitalization.
It is difficult, but necessary, McNair says, for a 50-year-old
contemplating retirement to "conceptually grasp the
potential for health to decline and for finances to
be depleted."
After identifying the desired retirement
lifestyle -- and gauging, as accurately as possible,
retirement's likely duration -- it's critical that sufficient
assets be amassed to pay for it. A realistic cost assessment
is a necessary first step, but there's evidence that
most Americans defer such calculations, and then aren't
very realistic when finally they get around to them.
When the Employee Benefit Research Institute surveyed
U.S. workers on retirement issues in early 2002, it
found that only 32% had attempted to calculate how much
they would need to save for retirement. Still, 70% expressed
confidence that they would have enough.
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Once the cost of a retirement has
been estimated, any number of analyses can be run to
learn whether the prospective retiree has the resources.
A common denominator seems to be an appreciation of
worst-case scenarios and a recognition, as McNair says,
that financial forecasting is "not an exact science."
(You can do a rough estimate of your needs with MSN
Money's Retirement
Expense Calculator and our Retirement
Income Calculator .)
Be cautions against being lulled
into a false sense of security by projections of average
returns.
Will inflation cut down your purchasing power? Watch
out for the ravages of inflation. A portfolio can earn
handsome returns, but if the cost of living increases
at a faster clip, retirement can be jeopardized. So
you will need assets that will grow over time and provide
a hedge against inflation.
How reliable is your income? Weigh this carefully. The
future viability of Social Security is an open question,
although recent projections show it could run with no
changes at all until 2041. And, as the Enron debacle
has proved, company pensions and retirement savings
plans are not always the bedrock upon which a retirement
can be built. So not only do you need assets that will
grow, you also need assets that won't shrink -- bonds,
bond funds, Real Property, and similar income generating
investments.
Many online planning engines offer the simulations,
including the MSN
Money Retirement Planner, which is powered by mPower
or if you are with Xerox you have the Xerox
benefits planning tool (Financial engines).
What if you retire and then, for
whatever reason, can't make ends meet? How do you UN-retire?
One strategy is to maintain contact with the work world
by lining up part-time employment during retirement.
A majority of boomers -- nearly eight in 10, according
to the AARP survey -- already plan to do that, whether
out of perceived economic necessity or simply for fun.
A variety of resources exist -- private and not-for-profit
-- to help retirees find work. A good place to start
is AARP's Work Options home page
www.aarp.org/careers
Even if all of this rumination and calculation yields
an unfavorable result or finding that early retirement
simply is out of reach, it will not necessarily have
been in vain. All future solutions must begin with the
facts!
Please feel free to contact me to discuss directly my
"real time" approach to the problems, and opportunities
- email
Gary Smith
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Many Baby boomers and
future retiree's will have to decide on a Lump sum distribution
of Individual pension plans, IRA's and 401K's versus
accepting a the seemingly "safer" company's promised
annuity payments for life. Most of us would believe
it prudent to understand the impact of these decisions
on our own retirement. Sadly, many won't take the time
to do so. After living through Market down turns, Corporate
scandals (Enron, WorldCom, etc.), and hearing all the
political debate regarding what's in store for our social
security, I am now more convinced the Lump Sum IRA roll
over should be the option of choice for most of us leaving
their companies with vested pension plans. More than
ever, it is the prudent option prudent to consider.
"There is no absolutely secure financial retirement
plan." (Check out our present Social security system
and their promises if you don't believe me.) Therefore,
if you cannot count on the government, why do you think
the company annuity plan will behave better for you?
My premise is then don't let fear or the lack of a feeling
of security, keep you from making the best retirement
decisions possible for you and your loved ones.
Note:
It has been my experience, you can almost always do
better than the company plan, even if all you did was
to go out and buy a lifetime annuity for yourself with
the same cash amount.
"You cannot put all your eggs into one basket". Watching
the stock Market has always made me crazy. But the returns
over the long run are undeniable. Additionally there
are professionals who consistently make money in up
or down markets. Diversification of retirement investments
into real property is an essential to reduce risk, and
maximized growth or income requirements.
Note: It has been my experience, you can almost always
do better than the
company plan, even if all you did was to go out and
buy a lifetime annuity
for yourself with the same cash amount. (See Berkshire
Hathaway link in my
Contacts page.)
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