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Avoiding the great retirement dilemma

Scott Keffer

“What’s your biggest hope – and your biggest concern – for your retirement?” I asked Dan, my 57-year old friend and physician through my barking bronchitis-induced cough.

“My biggest hope?” he replied, looking out the window as if he were reminiscing. “Well, retiring, per se, doesn’t interest me. I mean, I love the people. It’s the business side that makes me crazy. I hate the regulations and restrictions, but I still love the patients and the work.”

“I hear you!” I sympathized.

“In terms of concerns, I don’t know.” He paused. “Having enough, I guess.” He thought for a moment and then looked me straight in the eye. “Yes. That’s it. Will I have enough?”

“Will you?” I asked, wondering why I had never asked my friend before.

“Truthfully? I don’t know. I really don’t know.” he emphasized.

Retirement. What do you think of? Peace of mind? Freedom to come and go? Less stress? Less restrictions? The time and money to do all the things you’ve been waiting to do? I call it “Lifestyle without Limits.”

What is your ideal retirement? Take a moment right now, if you would. Pull out a piece of paper and write at the top of the page, My Ideal Retirement. Now, answer these questions: What will it feel like? What new things will I do? What old things will I do again? What people and places will I visit? What am I looking forward to never doing again?

Pull out another piece of paper and write at the top, Obstacles. Take a few moments and list all those things that you think could get in the way of your Ideal Retirement.

Retirement – remember when it was something that your parents were getting ready for. Then so far in the future that it was just a speck on the horizon. Now it is too close for comfort – like a speeding train barreling down on me – too close to ignore.

“Will I have enough?” That’s the Big Question! It’s everyone’s number one concern. The Retirement Dilemma is showing up at retirement and not having enough – It’s like being at the checkout register and you’re short. You are out of money.

Avoiding the Retirement Dilemma is about avoiding three realities and three obstacles. The three Retirement Realities are:

· Your Lifestyle Won’t Decrease After Retirement (The Famous Retirement Myth).

· Cost of Living Increases Faster After Retirement.

· Life Expectancy After Retirement is Increasing Dramatically.

Here is The Famous Retirement Myth promulgated in the Social Security Bulletin, 2003/2004: “85the financial planning literature often recommends having enough post-retirement income to be able to replace 70 percent to 80 percent of pre-retirement income.”

The Myth says that your lifestyle will reduce by 30 percent in retirement. Really? Let me ask you a very serious question. Think about this for a minute. What three out of every ten things are you going to give up when you retire? Here is the truth: lifestyles do not go down when you retire. In fact, lifestyles often increase due to more traveling and other postponed leisure activities.

In terms of cost of living, the two biggest villains for retirees are inflation and health care costs, which are rising at rates in excess of inflation. In There’s Just No Rest for the Retired Investor, The Wall Street Journal reported, “Retirees have a much higher inflation rate than the general population, largely because of medical costs. CPI-E, a consumer price index that tracks the cost of living for those ages 62 and older, has risen notably faster than the oft-cited CPI-W.”

“Life expectancy for Americans has hit an all-time high” according to a report from the U.S. Dept. of Health and Human Services.

In the 20-year period between 1970 and 1990, the average life expectancy of a 65 year old increased modestly, about 15 percent. In the 12-year period that followed, average life expectancy increased 50 percent. Today, the average 65-year-old will live 21 years, to age 86! That’s six more years – with a $100,000 per year lifestyle, you would require an additional $600,000. What will happen to our life expectancy over the next 12 years?

Let’s look at the obstacles:

Faulty Wealth Projections.

· Less Time To Make Up Any Shortfall (Early Retirement Is a Double Whammy).

· Wealth Friction.

Remember when $1 million was a lot of money? In 1953, Marilyn Monroe, Betty Grable and Lauren Bacall set out to find eligible millionaires in the movie, How to Marry a Millionaire. Today, the title would have to be changed to How to Marry a Hepta-Millionaire. That’s how much money you would need today to equal a millionaire in 1953 – $7 million.

How much is enough today? How much capital do I need to overcome the three Retirement Realities? Alan Greenspan, the retired Chairman of the Board of Governors of the Federal Reserve System, summed it up like this, “One of the most complex economic calculations that most workers will ever undertake is, without a doubt, deciding how much to save for retirement.”

The answer is complex – however, it can be answered. You will need a professional analysis to help you make well-informed decisions. Here’s a caution however: beware of faulty projections that use average rates of return. You’ve seen them before. They show your capital earning market averages and in the future you have enough wealth to buy half of Europe.

If you count on earning average rates of return to support you in retirement, you could wind up penniless. Here’s why: the market doesn’t earn the average return year in and year out. When you are in retirement and withdrawing funds, small downturns can have a dramatic effect on your wealth.

For example, let’s assume you wanted to begin withdrawing $100,000 per year, indexed at three percent, from your $1 million popular growth mutual fund in January, 2000. “How long will my monies last?” you ask. Your fund had averaged a 16.83 percent return per year for the past 10 years. A projection is run and you are told that, although “the numbers are not guaranteed” and “past performance is no guarantee of future performance,” the projections show that you are in good shape after five years. At a 16.83 percent average annual rate of return you would have over $1.4 million. To be conservative, the numbers are also run at an average 12.5 percent and 8.5 percent – at 12.5 percent, your portfolio would be worth $1.1 million; at 8.5 percent, you would still have over $875,000. A range between $875,000 and $1.4 million. How would you have felt? Pretty good?

But the market doesn’t produce average rates of return, does it? The actual return for that fund was drastically different – you would have had $486,000 left after six years of withdrawals. Not quite what you expected!

In 2000, there was a 0.6 percent probability that you would have $1 million left after six years. See the major flaw with using averages to create a Lifestyle Assurance Plan for your retirement? So, the next time you see one of those rosy, “You will own half of Europe” proposals, here’s what you need to ask: “What’s the probability that the projection will be valid?” I like a 90 percent or better probability of success.

Once you have determined “How much capital,” then you will need to create a Capital Creation Roadmap to make up any shortfall. As you already know, time is of the essence. Let’s assume you needed an additional $1 million at age 65. If you are age 50, you will need to save around $45,000 per year. Just five years later at age 55, the amount increases to $75,000 per year, about one and a half times more. At age 60, you would need to save over four times more, or $180,000 per year.

Lastly, there is what I call Wealth Friction – forces that steal from your wealth – sometimes unknowingly. Wealth Friction will TRICK (TRC) you out of your money – T: unnecessary Taxes; R: hidden Risks; C: undisclosed Costs. Wealth Friction steals your wealth without your knowledge. Day after day, month after month, year after year it can steal more and more of your wealth from you. Ignore it and your future security may be in jeopardy. Avoid it and there’s more wealth for you – a lot more. A proactive plan is your best weapon to neutralize Wealth Friction.

“So, what do I do next?” Dan asked.

“If you keep doing what you have been doing, will it ensure that you are able to live out your Ideal Retirement?” I queried.

“I don’t really know!” Dan replied.

“Then you need help!” I responded.

Help! You need a professional assessment – not pie-in-the-sky projections – and a reliable game plan that will help you avoid The Great Retirement Dilemma and help you answer the Big Question, “Will I have enough?” I urge you to get your game plan today. The sooner you do, the sooner you’ll be on your way to a “Lifestyle without Limits.”

Scott Keffer is president and founder of Wealth Transfer Solutions, Inc., a legacy planning company in Pittsburgh.

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