Archives for October 17, 2019

When you’re trying to balance multiple financial responsibilities at the same time, saving for retirement may seem like a lesser priority than your other tasks. In fact, 42% of workers say they don’t want to think about retirement planning until they get closer to retirement age, a survey from the Transamerica Center for Retirement Studies found.

Although retirement planning is not the most exciting topic to think about, you should be thinking about it long before you actually leave your job. If you put off saving or don’t know whether you’re on track, by the time you realize you’re behind, it might be too late to do anything about it.

However, if you want to ensure you’re as prepared as possible for retirement, there’s one simple thing you can do every year: Give your savings a checkup.

Why annual (financial) checkups are crucial

If you’re saving anything at all for retirement, it’s easy to feel like you’re on the right track simply because you’re doing something. But if you’re blindly throwing money in your 401(k) or IRA without knowing whether that’s going to be enough to retire comfortably, you may be putting your financial future in jeopardy.

Saving for the future isn’t a set-it-and-forget-it situation. To make sure you’re doing enough to prepare, you’ll need to check in on your savings at least once a year, then make any necessary adjustments to ensure you’ll reach your goal by retirement age.

What exactly does a yearly checkup look like, though? To start, double-check that your retirement goal hasn’t changed. Even if you’ve already calculated the amount you should have saved by the time you retire, that number isn’t set in stone. Your annual living expenses could increase, meaning you’ll need to save more for retirement to keep up your current lifestyle. Or you might decide you’re going to move to a more expensive city once you retire, which can completely change how much you’ll be spending each year in retirement.

Run your numbers through a retirement calculator to get an estimate of how much you should be saving, as well as what you’ll have to save each month to reach that goal. If your overall retirement goal has changed, you might find you need to be saving more or less each month. It’s better to find that out early while you still have time to adjust your plan rather than wait until you reach retirement age and realize you don’t have enough saved to live comfortably.

What to do if you’re already behind on your savings

Say you’re performing your yearly checkup and realize you’ll need to start saving more than you can afford if you want to reach your goal. It may be tempting to give up, thinking that there’s nothing you can do now to catch up. But it’s still important to save what you can, even if it’s not much.

The hard truth is that depending on just how far behind you are, it might not be possible to save as much as you need. If you’re in your 50s with nothing saved, for example, you likely won’t be able to save $1 million in the next 10 or 15 years. However, that doesn’t mean you can’t save anything, and having even a little saved for retirement is far better than nothing.

If you’re behind on your savings, you’ll need to set a new, more realistic retirement goal. Think about your future expenses in retirement and consider whether there are ways to reduce them. If you’d planned on taking several expensive vacations, for instance, consider nixing those and finding more affordable ways to entertain yourself in retirement. Or if you’re currently living in an expensive city, it might be worthwhile to think about moving to dramatically lower your everyday living expenses. Of course, you can’t predict all your future costs, especially when retirement is still decades away. But by planning on living a more frugal lifestyle, you can get by on less during your golden years.

Next, see if there are ways you can start saving more now. If you don’t already, begin tracking your spending to determine if there are areas of your budget where you can cut back. Even if you feel like you don’t have a penny to spare for retirement, you might be surprised by how much room you have in your budget if you look for it. Saving even a few dollars per week in each spending category can potentially amount to hundreds of dollars per month, so it may not be as painful as it sounds to cut costs.

Finally, make sure you’re investing your money wisely. When you don’t have much extra cash to put toward retirement, every dollar counts. If you’re throwing your money in a savings account earning 1% annual interest, your savings won’t go nearly as far as if you’re investing it in a 401(k) or IRA earning a, say, 8% annual rate of return.

Managing your money can be tough, but it’s even more challenging when you don’t know whether you’re on the right track to reach your goals. To ensure your financial situation is as healthy as possible, make sure you’re regularly giving yourself a checkup. It can’ only help you save more for retirement, but it can also give you peace of mind that your finances are in order and that you’re doing everything possible to be successful.

As cost-of-living adjustments (COLA) go, it’s paltry. Some 68 million Social Security beneficiaries will receive a 1.6% increase in their monthly check starting in 2020. That means the average Social Security beneficiary will see their benefit increase by just $23.40 a month to $1,460.

What’s more, some of the increase will be used to offset the rising cost of Medicare Part B, says Heather Schreiber, the founder of HLS Retirement Consulting.

The government typically deducts Medicare Part B premiums from a beneficiary’s Social Security check. Those premiums are expected to rise around $8.80 a month to $144.30 in 2020 for about 70% of Medicare beneficiaries.

So, what should you do?

Tighten your belt 

Social Security beneficiaries will have to look for ways to trim unnecessary expenses if they want to maintain their desired standard of living. 

“Retirees living on a fixed budget may need to consider tightening the reins in areas of nonessential spending and, if necessary, work with a reputable financial professional to help guide them in making the monies they have saved for retirement work smarter,” says Schreiber.  

Spend down your assets

Some retirees only want to spend their interest income and dividends to fund their retirement lifestyle. But many retirees might need to consider spending down their principal as well to fund living expenses. 

The often-recited rule of thumb is that you can withdraw 4% per year from your nest egg and not worry about running out of money for 30 years.

Consider investing in assets that are supposed to keep pace with inflation. Some low-risk investments include Treasury Inflation-Protected Securities, or TIPS, and Series I savings bonds. TIPS and Series I savings bonds can be purchased at TreasuryDirect.gov.

Don’t, however, increase the amount of money you invest in risky – as in stocks – assets. Of the three levers that can be adjusted to create additional income in retirement – increasing income, reducing expenses and increasing risk – increasing risk, especially in retirement, can lead to disastrous results, says David Cechanowicz, a senior financial planner with REDW Wealth.

Go back to work or stay working

It might not be the most appealing option, but you should consider going back to work either part or full time. Earned income is one way to offset the adverse effects of inflation. 

Working longer can provide a significant multiplier effect for income in retirement, says Cechanowicz.  How so? One, working just one more year will generally increase an individual’s basic Social Security retirement benefit by boosting their lifetime earnings. Two, even in the years between age 62 and 66, each year of delay will increase the base Social Security benefit by about 6.7% per year. Three, that additional year of work means one less year of income needed in retirement. And finally, that additional year may enable an individual or family to pay down debt, which could reduce expenses in retirement.

Don’t file for Social Security just yet

If you haven’t claimed Social Security yet consider waiting – though not beyond age 70 – to file for your benefits. That way, Schreiber says, your monthly check will increase. You can learn more about what are called delayed retirement credits or DRCs at the Social Security website: www.ssa.gov/planners/retire/delayret.html.

“It may mean having to work longer, or dipping into retirement savings to delay claiming,” says Cechanowicz, adding that the long-term boost in benefits could make a significant difference in retirement income.

If you’re not yet retired, Cechanowicz also recommends saving as much as possible to reduce your reliance on Social Security later. 

Remember that inflation is low

Social Security’s COLA is so low because inflation is low. The COLA, by way of background, is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W. In other words, the cost of goods and services such as housing and clothing and transportation is not rising so fast.The bad news, according to the Senior Citizens League, is that the cost of living for seniors is rising faster than it is for the general population.

Medicare Part B premium rise is curbed

The low COLA will limit, at least for some, the increase of Medicare Part B premium under what’s called “hold harmless” clause in the law, says Jim Blankenship, author of “A Social Security Owner’s Manual.”

Current law contains a provision that limits the dollar increase in the premium to the dollar increase in an individual’s Social Security benefit.

This would apply to anyone receiving a Social Security benefit of less than an estimated $550 per month.

“It’s cold comfort for folks in that position,” says Blankenship. “Although their net Social Security benefit would not decrease, the cost of living continues to increase.”

This would seem to be a reasonably straightforward question to answer. On the surface, it would appear a federal employee could add up his assets (TSP, IRA’s, savings, etc.) then subtract his debts (mortgage, credit cards, car loans, etc.), and voilà…he would have the result.

Not exactly! This will tell you your current net worth, but the question as to how well off you are would still remain unanswered. To answer this, you must shift your focus towards how much is actually needed for retirement.

The Million Dollar Misconception

“A MILLION DOLLARS!” Just mouthing the word “million” grants a satisfying sensation as it rolls off the tongue, and one million dollars is a large amount of money; I don’t care who you are!

Nonetheless, one million dollars does not provide the financial security that it used to. While it may be one of the goals some feds will shoot for, it might not be enough savings to sustain them throughout their retirement years.

Some of us more mature (sounds so much better than older, doesn’t it?) individuals remember when a million dollars was huge money.

In 1970, I was a young pup in a small farming community in East Central Missouri. I remember hearing about a neighbor who sold his farm and retired to Florida. The scuttlebutt was that he would walk away with a cool million and would never have to worry about money again. I don’t know what happened to that neighbor over the years, but there is a good chance he never did worry about money again.

I share this story to make a point: I wonder if we are sometimes guilty of seeing things through that old lens of yesterday, because without a doubt, a million dollars just isn’t what it used to be. 

With the longer life spans we enjoy today, the maximum annual withdrawal amount from retirement assets (TSPs, IRAs, etc) generally accepted by the financial industry (as a kind of rule of thumb)is 4%The concept is, if no more than 4% is withdrawn each year, it will hopefully  carry one from retirement to the end of his life.

If we use this standard, 4% of $1,000,000 is $40,000 per year. ($1,000,000 x 4% = $40,000). 

But what is $40,000 worth today? According to dollartimes.com‘s inflation calculator, $40,000 in 1970 would be equivalent to withdrawing $266,560 in today’s dollars from retirement assets.    

Note: according to the same calculator, $1,000,000 in 1970 is equivalent to $6,664,005 in today’s dollars.

After taking inflation and investment risk into account, predicting the amount of income and savings needed to maintain one’s lifestyle during retirement is a daunting task.

3 Reasons Federal Employees are Looking to Mitigate the Number of Missed Targets in Their Retirement Plan

1. Working later in life out of necessity

It is one thing to work late in life in order to keep active and maintain social interactions with others; it is quite another to work because there is more month than money. 

2. Unable to maintain a desired lifestyle

In my experience, retired feds spend 10-20% less when they retire than they did while they were working. This expense reduction doesn’t appear to alter the retirees’ lifestyles. This type of savings is likely only a reduction in adding to retirement savings and work-related expenses and is an entirely normal and a satisfactory post-retirement outcome.

On the flip side, what federal retirees are looking to avoid is making cuts due to financial necessity and not organically or by choice. According to CNN Money, “One rule of thumb is that you’ll need 70% of your annual pre-retirement income to live comfortably.”

3. Moving in with family due to income issues

I love my kids and I cherish my grandchildren very much. Nevertheless, the thought of living in their homes late in life makes my stomach churn just a bit…Yuck! I understand many families find this arrangement pleasant and preferred, and I don’t mean to disparage them or their choice. It is just NOT for me. 

5 Targets Often Missed

1. Inflation is, in my opinion, the number one missed target in preparing for retirement. The rising cost of goods and services is the reason why it would take over six million dollars in 2019 to have the same buying power as only one million dollars had in 1970. According to dollartimes.com, inflation averaged 3.95% from 1970 to 2019.
2. Overestimating long-term growth of investments – No one knows what the markets may yield in the future for retirement savings. But, overestimating investment increases could lead to an income shortage later in life.
3. Assuming fixed income (federal pension, social security, etc.) will keep pace with inflation. I would be greatly surprised if this happens. Ask a retired person on a fixed income if her Cost of Living Adjustments (COLA) have kept up with her actual rising living expenses.
4. Underestimating new expenses.
5. Potentially the most devastating miss is feds simply not knowing what they don’t know. It should be noted that federal employees planning their own retirement are not alone here. Intelligent, experienced and caring financial advisors can have their arrows fall short of this target as well. There are more moving parts to a federal retirement than most Americans experience which may throw off an otherwise great advisor (who doesn’t focus on federal retirements) or adept feds planning on the DIY approach.

Additional Steps to Take

So now what? We have identified several obstacles to learning how much you are worth which could be a critical component to any retirement plan, but please understand, these impediments probably won’t be the entirety of the hurdles most feds will have to deal with. Since we know that no two feds are precisely the same, your list of issues will almost certainly be different than others in your office. 

There are tools and resources out there to help account for many of the more common barriers federal employees could share. Just a few of them are:

1. OPM.gov – OPM has put together a trove of information on its website including several useful tools such as retirement information for CSRS, FERS, several insightful publications, calculators, etc.
2. For more basic assistance, Calculator.net has a helpful retirement calculator that could provide some ballpark retirement savings and income estimates. 
3. Silverlight Financial (My office) donates a free, no-obligation 1-hour  Federal Retirement Readiness Review to federal employees.
4. AARP has a modest 10 question ready for retirement quiz. 

A Positive Note

Ok, so maybe a million dollars can’t buy what it used to, and perhaps it has even lost some of its luster over the past 50 or so years. But it is still an admirable and worthwhile goal.

Here is a fun exercise. As a federal employee, you have more than just what you save for your retirement to look forward too. You also have a pension, and FERS employees may qualify for Social Security. 

Do a little research to find out what your income will be from these sources when you retire. When you know those annual figures, divide them by 4%, and you will learn their values in whole dollars. For many readers, I suspect this number will be in the million-dollar-plus range.

Example: $40,000 per year in income from fixed sources (SSA or federal pension) divided by 4% = $1,000,000)  

The answer to how well off you are is identifiable and out there! However, be cautious not to fall into the trap of only learning your net worth.

It’s possible to live on Social Security if you scale your expenses accordingly. That means you have to find a way to keep your housing costs as low as possible since, for most people, that’s the biggest expense they pay each month.

Possible, it should be noted, does not mean it’s a good idea. Social Security will generally replace about 40% of your former earnings for average earners. Living on that and that alone is likely a very challenging if not bleak existence. Attempting to live solely on Social Security is dangerous and puts you at great risk for major financial problems.

If you have no other choice, however, it may be possible to squeak by on the $1,471 a month that the average person receives in Social Security. Of course, some people receive a lower monthly benefit while others will have a partner or spouse to share expenses.

There’s no exact formula because every person has a different set of financial factors. For example, you might retire but have a car loan or lease payment while someone else might be paying off credit card debt or dealing with other financial issues.

How to live on Social Security alone

It’s important to note that nobody should plan on living solely on Social Security. Ideally, you should have started saving early in your working life or at least put some money away at some point. Many people who did not save much may own a home and be able to move someplace cheaper to make it easier to survive without working.

If you have only Social Security and have no appreciable assets, it’s very important to understand your budget and get your expenses in line — $1,471 is not very much money and stretching to cover the basics can be a challenge.

For someone who has no debts or significant assets and gets a Social Security check in that range, you will have to make a strong plan. One thing you should consider is living in a state that doesn’t tax Social Security. You’ll want to find one that also has affordable housing, low property taxes, and a generally low cost of living. After that, it’s important to find appropriate housing and that’s possible in some states that court retired workers.

In Florida, for example, there are countless 55+ communities that cater to lower-income retirees. Some of these offer manufactured homes for rent or purchase where rents on a one-bedroom can be below $600 a month, buying a similar unit may cost between $15,000-$45,000. If you buy, it’s important to remember that you will generally have to pay to lease the land where your manufactured/mobile home sits and that in the vast majority of cases manufactured homes are assets that lose value over time (like a car) — they don’t gain like a traditional home does.

Florida and other retiree-friendly states also have some condo complexes that are strictly for people 55-and-over where rents fall into the below-$600 range. In addition, there are also senior-friendly RV parks where you can rent or buy.

None of these options are luxurious, but if you shop around, it’s possible to find warm, well-kept communities with pools, clubhouses, and active social calendars. Your actual home will be small but that may be offset by living in a community with shared amenities and spaces.

Manage the rest of your expenses

If you bring in $1,471 a month and spend $600 on rent or housing, then you have very little left over. It’s hot in Florida and running air conditioning costs money. You may also want an internet connection and a phone plan, which are both as close to necessities as possible.

There are ways to save money here. Shop around when you look at 55+ communities because some include internet or at least have public WiFi in the community spaces. Others may offer cable and have water included. Do your homework and remember that nothing is free so be careful about rent or fees that are priced to include things you don’t want.

If you are pretty careful, you may be able to cover rent, lot, or HOA fees plus utilities, phone, and internet for under $800. That leaves you about $620 a month to cover food, clothing, and, well, everything else.

The reality is that few people would want to get by solely on Social Security because the scenario mentioned above includes little to no room for healthcare and that’s likely to be an expense for most seniors (even with Medicaid). The picture gets a little better for couples (or even roommates) as that’s a way to half housing costs.

Just because you can do something does not mean you want to do it or that it would be pleasant. Even if retirement is coming up soon for you, it’s best to keep working longer or even part-time to avoid having to make the tough choices and sacrifices required to possibly get by on Social Security alone.