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Thursday, November 5, 2009

The new retirement paradigm -- will my money last?

By Kevin Reardon
Retirement planning 20 years ago was far different and easier than it is today. Back in the good old days, Mom and Dad added up their expected social security benefits, pension benefits, reliably strong dividend and interest income. Many found this number to be adequate to maintain their lifestyle, so they retired. On occasion, they would tap into their principal to buy a new car or take a special vacation but those instances were relatively infrequent. In addition, most retirees had little to no debt, having paid off their house and rarely having financed a car or made a non-cash purchase. Lastly, the 60 year-old client of 20 years ago typically had the choice to continue working a few extra years if they wanted to create a little extra surety in their financial plan or if they simply wanted to stay active.

Fast forward to today. Clients who are approaching their traditional retirement age have a far different scenario. Most pre-retirees today do not have the traditional pension plans of yesteryear which offered a lifetime of guaranteed income. Most of those defined benefit plans were replaced with 401k plans and the burden of saving for retirement was shifted from the employer to the employee. Many workers didn't properly anticipate the need to save on their own behalf or they underestimated the amount needed to provide adequately in the new paradigm. Adding to the problem is the fact that these plans have fallen under duress in the last decade as the equity markets have produced negative returns for the last 10 years. The sad result is that 401k account balances have not reached projected values.

As we examine pre-retirees' dividend and interest income, we see much lower amounts trickling in each year. Interest rates have plummeted to 50-year lows and many corporations have reduced or eliminated their dividend payments. Gone are the days of 8-10% CDs rates and 6-8% money market rates that we saw 20 years ago.

Social security, although still viable for older workers, replaces a smaller percentage of a retirees' income today than in years past. In addition, a portion of a client's social security benefits are taxable if their incomes exceed a relatively low amount, further taxing the client's retirement budget.

The wage growth we experienced in the 1980s and 1990s did not continue into the last decade, further hurting a client's ability to save. Add in the cost of living increases we saw in the last decade and it explains why many workers today are struggling to pay off auto loans, credit card debts, and other consumer loans.

The last component facing today's pre-retirees is the longer life expectancy they will experience compared to their parents and the added costs that go with it. Not only will today's retirees need more assets to sustain this longer life expectancy but they are more likely to face long term care issues the longer they live. The cost of a prolonged illness can be staggering and financially devastating to a surviving spouse, especially when he or she does not have pension income that continues to roll in month after month.

So what is a worker to do in this new paradigm? While certainly not easy, the answers are relatively straightforward. First, recognize that we are in a new paradigm and the greater responsibility that has been placed on your shoulders, relative to your parents, to prepare for retirement.

Align your expenses before retirement to match your expected income in retirement. This allows you to "test drive" your retirement budget and make adjustments where needed. It will also allow you to save a greater percentage of your income in the last few years of your career, helping to catch-up your retirement savings. No one likes to cut their budget but the alternative of outliving your money should be a sufficient motivator.

Understand that working past a traditional retirement age of 65 is needed but that you will need to be proactive with your employer in explaining the value you provide relative to a younger, lower-cost worker that could replace you. Replacing an older worker with a younger worker may not be right and it might not even be legal given the laws against age discrimination - but it is reality. Start now in freshening up your skill set or in acquiring a new skill set that will make you irreplaceable.

Although pay cuts are never desired, if you are willing to reduce your salary as you get older, it could 'buy' you additional years of employment that could greatly aid your financial plan. In addition, consider retirement jobs you would enjoy doing that will help supplement your income whether that is consulting in your chosen field, working at a hardware store or craft shop, tutoring children, giving music lessons, serving as a tour guide, etc.

As you address the rising costs of healthcare and the increased chance of suffering a long term illness, make a plan today for how you would address this issue. Will your children be able to take care of you? Can your financial plan withstand hundreds of thousands of dollars of end of life expenses? Do you have permanent life insurance in place that can replace existing assets upon your death? What ever you decide, make a plan and discuss it with your children so they understand your situation.

We have entered a new paradigm in retirement planning, one that pre-retirees need to quickly address. A good financial planner will have already brought these issues to your attention and helped you structure a plan of action to help you succeed. If not, don't waste time planning for tomorrow because it will be here after today!

-- Reardon is owner & president of Brookfield-based Shakespeare Wealth Management Inc.


Comments: 9

At December 30, 2009 at 1:25 PM, Blogger drdarmond said...

I agree that the retirement world in changing and quickly. Working past normal retirement age has been more problematic, especially in light of the economic recession. For those in the energy industry, we have seen drastic cuts in the workforce for those near retirement and those not even close.

That leaves the retiree or those near retirement with the need to find other job opportunities. As a recent retiree, I feel that each person should determine what their passion really is and focus on finding a way to gain income from that passion. The internet opens ways to do that either directly or indirectly. Here is a wish that all that want to find employment do find their way to a satisfying and fulfilling job.

Don D'Armond

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