New Retirement Realities
I was reading Consumer Reports™ and found an interesting article titled, “The New Retirement-Rules, tools, & attitudes you need now, whether you’re in your 20s, 40, or 60s” on page 22 by Tobie Stanger. A quick synopsis of the article says that the old ways of thinking has changed, but the magazine’s research has new tools and advice to help the reader make his or her money last-whether retirement is near or decades away.
New Retirement Realities
The new retirement realities are quite daunting. When individuals were young working in the 60s, 70s, early 80s probably thought that retirement would be the traditional life- of- reader kind. In 1983, 56 percent of American workers- 80 percent of those making $20,000 or more-would expect an employer-provided pension, according to the Social Security Administration.
That was then. Just a quarter of Americans working today- most are union members- who have the security of a pension, according to the U.S. Bureau of Labor Statistics. Over the past three decades, pensions have been replaced by workplace based savings plans like 401(k)s, which took much of the financial hardship off the employer and placed it on the employee. Many have spent years trying to figure out how to manage 401(k)s plans, making costly errors along the way, for example, making costly investments or prematurely withdrawing money. Professor of economics, Teresa Ghilarducci, at New School for Social Research in New York City, says that, “Managing your own 401(k) is like doing your own electricity wiring, you know you are doing wrong,” (http://teresaghilarducci.org/).
The new era of having multiple vacations, homes, and automobiles is long gone. A host of new forces are altering the traditional approach to retirement planning. Rising healthcare costs and historically low interest rates for fixed income investments, for example, means that many of us will have to rethink our lifestyle expectations. There, however, are positives: market innovations, such as target-date retirement funds and computer-based advisors that are helping consumers make smarter, low-cost investment choices.
This altered landscape will have the greatest impact on younger workers, in particular, the millennials. The millennial generation was born between 1982 and 2000. If you are just a few years away from retirement there is still time to grasp the new realities, implement recommended strategies, and create a secure retirement for oneself.
Your 401(k) is Getting Better
For those who invested in 401(k)s there is still hope. Over a person’s working lives, the typical two income couple will pay more than writing $150,000 in fees on their 401(k) plans, according to Demos, a public policy organization based in New York City. Some possible pitfalls of 401(k)s are confusing or duplicative investment options, high-cost actively managed funds, and poorly performing funds, can and will drain savings.
More and more, 401(k) investors are not taking lousy plans lying down (e.g., some are even taking their employers to court). In the largest recent settlement against a single company, Lockheed Martin in 2015 agreed to pay $62 million to as many as 181,000 current and former employees in class action that claimed, among other things, that the defense contractor slashed returns by charging excessive fees and its retirement plan. A 2015 Supreme Court decision in a case against the utility Edison International set a precedent for requiring plan sponsors to act as “fiduciaries.” A fiduciary are bound to act ethically and prudently with the money of the employers.
To avoid lawsuits and encourage employees to save employers are improving retirement plans by offering target date retirement funds. According toa 2015 report by the investment Company Institute and Bright-Shape.com, a website that analyzes 401(k) plans, states that these typically are low fee mixes of index mutual funds which reallocate over time based on expected time and date, which are a low-cost default options and 75 percent of 401(k)s. That is signs of improvement by 32 percent in 2006. Investment fees are also dropping; the report notes that the average fan participant paid ¢58 in every hundred dollars invested in 2013, down from ¢65 in 2009.
As much is this is interesting to read but I am sure that the person thinks about what he or she can do. She or he can make sure that at least enough goes into a 401(k) to get the full company match and that it is invested in the plan’s low-cost offerings among comparable choices. Log on to your account and check the expense ratios, or fund manager costs. The lower the number, the less expensive option is. If most of the funds have expense ratio of 0.5 or more you have an expensive plan, especially if you work for a company with more than 100 employees, says Robert Hiltonsmith, a Demos policy analyst who has studied 401(K) fees.
Another hopeful tool is to check BrightScope to compare your plans fund offerings and fees with other plans in your industry. Personal Capital (personalcapital.com) combines computer-based advice with human advice for a fee and also provides a free portfolio analysis for customers and noncustomers.
Retirement Advice Is More Reliable
If you have always thought that your financial advisor chose investments with your best interest in mind, you may have deep pockets. Until recently, stockbrokers, insurance agents, and other types of financial advisors really required to recommend retirement investments that were suitable and less expensive and ultimately leave more money in your pocket and less in their own. The funds were anything but your best interest
Last year, the Department of Labor, mandated that professionals gave retirement advice must uphold the fiduciary standard and make decisions in the best interests on the client. The DOL estimates that eliminating “conflicted” advice would reduce costs to retirement savers by $17 billion, or 1 percent of their assets, each year. It is important to note; the rule only applies to advice on retirement accounts.
That is great advice but what can you do. Some professionals-certified financial planners and registered investment advisers have been acting as fiduciaries for years. By April 10, 2017, all retirement advisors must do so. Before then, however, it would be very advantageous to ask a prospective or current advisor for a written confirmation that he or she will act as your fiduciary.
If you work with a broker, you could now be asked to pay a management fee to make up for the loss of sales commission. If the requested fee is more than 1 percent of your assets, find another advisor or consider low-cost price alternatives, such as a computer-based advisor. A computer-based advisor operates within the guidelines of the DOL rule and typically low-cost investment options for set fees.
If You Want a Pension, You Will Have to Pay for It
A traditional pension may have gone the way of the VCR, but you can craft your own pension-style guaranteed cash flow by an ANNUITY. These products, which are a type of insurance you usually buy from an agent, require you to invest a large sum upfront in return for guaranteed payments for a set period or until you die.
David Blanchett, (http://www.davidmblanchett.com/research), head of retirement research at the investment research company MorningStar, says a good choice for most people it is simple, immediate annuity, which starts paying income right after you invest. Another decent options is a deferred income annuity (DIA) that enables you to pay up front and begin collecting payments years later. (DIA’s that start paying out at age 80 or later are typically called longevity annuities). ALL annuities require lump sum payments, which might scare some people off. For instance, to get a lifetime monthly payment all of $493 or $5,916 annually from a Jackson National life insurance immediate annuity a 65-year-old man for living in Illinois would have to pay $100,000 upfront. A woman from the same state would get $463, or annually, $5,556.
IMPORTANT information: Burstein in annuity does not guarantee that you will come out ahead: insurers count on a proportion of their policyholders dying before they collect, Blanchett explains. “The value comes from the certainty of having income for life,” he says.
What can you do?
Purchasing annuity locks up your savings, so it’s not wise to invest more than 40 percent of your assets in one, says professor, PhD of retirement income at The American College of Financial Services, Wade Pfau (https://retirementresearcher.com/). Indeed, the smaller your nest egg, lets you may want to devote to an annuity, he adds.
If the same 65-year-old man in the above example had a $250,000 nest egg, for instance, investing $100,000 or 40 percent, in an immediate annuity would leave just $150,000 for other investments or emergency cash. In that instance, a deferred annuity might be a better deal. Pfau’s research has shown that a 65-year-old could cover all spending after age 85 by devoting 10 to 15 percent of current assets towards a DIA.
You can compare immediate annuity payouts free at ImmediateAnnuities.com. Do not just choose the insurer that pays all the most. Pick one that is also highly rated for financial strength to increase the chances it will still be financially viable years from now. The Immediate Annuities reports include ratings by three rating agencies-A.M. Best, Moody’s, and Standard & Poor’s. It is also recommended checking the Weiss Rating. A free 30 day, non binding trial, but after $25 per month.
AVOID variable annuities. These complex products base their benefits in part on stock market returns and carry significant upfront costs and risks.
Do Not Count on Packing Up and Moving on
Although there are some new retirees still heading to Arizona, Florida, and other classic retirement destinations, but most are staying put: 87 percent of individuals 65 and older want to stay in their current location, according to a 2014 survey by AARP. Those same individuals are still influenced by, among other factors, the desire to be near family and communities which he or she has been a longtime member.
In another trend, particularly single women, are sharing their homes, sometimes for company, sometimes to help pay bills, and sometimes for both. Rika Mead, age 70, of Highlands Ranch, Colorado, started housing boarders in 2014, after a friend asked her to rent rooms in her three-story house to summer interns he was employing. Mead, a self-employed management consultant, whom is a retired five years ago for my long-term career in government, soon grew to appreciate not only the income boost but also the company. “I worried about being flexible enough to have other people in my living space,” she recalls, “Those interns were so delightful that I got over it.”
What can you do
If you would like to try home sharing take advantage of the new online roommate matching services geared towards seniors and women or a home sharing clearinghouse such as the free National Shared Housing Resource Center (nationalsharedhousing.org).
If your home is larger than you need or you would like to move from a multi-story to a one story home, downsize and invest the savings or use it to enhance your lifestyle. The Are for Retirement Research at Boston College estimates that property taxes, insurance, maintenance, and utilities cost homeowners an average of 3.25 percent of a home’s value each year. If you downsize from a $250,000 home to one that costs $150,000, your annual maintenance and other expenses would go from $8125-$4875, saving $3250 a year.
Claiming Social Security Requires a Serious Strategy
People that have been born between 1943 and 1954 other notable for their full retirement benefit at age 66. But it might be smart to wait until 70 to start collecting because your monthly benefit grows the longer you wait. Collecting at 70 guarantees the largest monthly payout about 32% higher than what you would have collected at age 66. More than a third of Americans claim Social Security benefits at 62, the early age that you can collect, yet the monthly payout at age 70 is a whopping 76 percent higher than if you were 62.
Seeing this case example, if Mike waited until his full retirement age of 66 to claim Social Security, he would collect about $2,200 per month. At age 62, he’s entitled to about 75% of that, or $1,650 per month. But claiming early also means Mike’s family will collect benefits four years early than expected.
There is a great temptation to claim one’s benefit earlier if you do not expect to live long. However, a person should guard against the possibility that you are wrong, and it is better to preserve those higher payments for your later years, when healthcare costs rise in saving dwindled, says Alicia Munnell, director of Boston College’s Center for Retirement Research (http://crr.bc.edu/author/alicia-munnell/).
Paul Markowich, an executive vice president at Firstrust Financial Resources in Philadelphia, agrees that having a higher, predictable income later in life is the safer route (http://www.firstrustfinancialresources.com/). He says he has found that in general, people who plan to retire at or after the full retirement age of 66, who have a nest egg of $100,000 or more, are better off waiting to collect Social Security until age 70 and living in their savings in the meantime. That’s because the guaranteed 32 percent return they get for waiting those four years is likely to be greater than what their own savings would generate.
The decision can be more nuanced for those who want to retire before age 66. Markovich gives the example two clients: a married, retired couple, both 64, with a net worth including their home of slightly more than $1 million. Using financial software, he can determine that if they collected Social Security at age 66 and earned a reasonable five percent on their investments, they would have a net worth of $1.85 million at age 95. If they waited until age 72 o’clock, their net worth and 95 would be $300,000 less because they would have to spend down their invested assets to cover living expenses.
What you can do
Before you file for benefits, make sure that you are making an informed claiming decision my first consulting a financial advisor and speaking with Social Security officers. MaximizeMySocialSecurity.com and SocialSecurityChoices.com are two websites that analyze the best way to take Social Security payments, which is particularly useful for couples. Each chart is a $40 fee for its services.
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