If 50 is the new 30, then 80 must be the new
60. Good thing, because otherwise a lot of
people won't be retiring before they draw their
last breath.
Last year Bankrate's Financial Literacy
survey found that one in five people expect to
work until they die. This year one in five
people say they're afraid they'll never be able
to retire. It's true; we asked the same question
two different ways, and the results are
unsettlingly identical.
At this rate, the competition for greeting
jobs at Wal-Mart will be as fierce as the
struggle to get into Harvard.
For the dedicated workers who aspire to
devote their entire lives to propelling the
economy forward with their unceasing toil, the
dream of not retiring can be achieved in any
number of ways. We came up with eight.
Ruin retirement
Spend a lot
Save nothing
Ignore savings vehicles
Disregard taxes
Overestimate portfolio earnings
Miscalculate lifetime earnings
Adopt the ostrich approach
Be ignorant about investments
Spend too much
The most obvious way to ensure that only
death's sweet embrace will release you from the
bonds of employment is simply by saving nothing
and spending a lot.
Spending more than you should on things you feel
you need, but could easily live without, is an
effective way to mess up your retirement plan,
says Ralph Lunt, a Certified Financial Planner
and Chartered Financial Consultant at Strategic
Capital Advisors in Cleveland.
Vacations, new cars, expensive home
remodeling can all feel like necessities. "You
have to ask, can I afford it?" says Lunt. "Then
you have to crunch the numbers -- and maybe if
you cut back in other areas you can afford it --
maybe skipping a vacation or not eating out so
much."
If you don't want to retire, skip the
self-assessment and get out that credit card!
Save little or nothing
In America, spending is in our collective
DNA, but saving is not.
For the slackers who think they might want, or
even need, to quit working at some point, most
experts recommend saving for retirement in a
tax-advantaged plan, for instance, a 401(k).
Further, workers should contribute, at minimum,
enough to get the match offered by their
employers, if they offer matching contributions.
Some experts contend that just contributing
the match is not enough at all and the
contribution should be upward of 10 percent.
"It's always, 'Yes, I'll put in enough to get
the match, but that's it,'" says Dallas-based
Certified Financial Planner Chanc Woods, a
member of the Financial Planning Association.
"Why not put in another 2 (percent) or 3
percent? It won't affect your take-home pay that
much," he says.
The Employee Benefit Research Institute's
annual survey released in April found that 22
percent of workers surveyed have not saved at
all for retirement -- or for anything else for
that matter.
Ignore other savings vehicles
If your job doesn't come with benefits, as is
the case at many small businesses, then
obviously, you're totally off the hook --
working well beyond your twilight years is
virtually assured. After all, it's not like
there are any alternatives for deprived
employees or the self-employed, for that matter.
Delude yourself no further. You do have options.
Take, for instance, the SEP-IRA or the
individual 401(k) plan for the self-employed.
IRAs allow workers to save up to $5,000 annually
($6,000 in 2008 if you're over 50), as long as
they earn at least that amount.
And those who don't want to deal with
tax-deferred savings vehicles have no options
either, right? Clearly, if an account is not
specifically designated for retirement, it
really shouldn't be used.
No.
"The younger generation is only putting money
into a 401(k), if that. They don't know that
there are taxable brokerage accounts or Roth
IRAs that you can put money into," says
Dallas-based Certified Financial Planner Chanc
Woods.
With many investment and savings vehicles
available, no one should feel limited to only
one kind of account unless they see themselves
bagging groceries at 85.
If they are actually contributing the maximum
allowed annually to their 401(k) plan, up to
$15,500 ($5,000 more for those age 50 or over),
they might even be able to afford a
round-the-world voyage on the Queen Elizabeth II
once they kiss their jobs goodbye. But those
who'd rather float on a rubber mattress when
they're not punching the time clock can always
set their sights lower.
Disregard taxes
Some people may wait to screw up their
retirement. Though the process of not saving can
last a lifetime, actual savings may not when it
comes time to get a distribution from a
tax-deferred account.
Lunt says that people typically think that now
that they're retired, they won't have to pay
income taxes anymore.
"Often people make incorrect assumptions
about what their lives will be like in
retirement," says Certified Financial Planner
Paula de Vos, president of Synergist Wealth
Advisors. "They think they will be in a lower
tax bracket, but they may be in a higher one."
Unless your retirement savings have been
invested in a Roth IRA or a Roth 401(k),
distributions will be taxed as ordinary income.
"That could be 25 (percent) to 30 percent less
in retirement dollars that someone isn't
expecting," says Woods.
Plus, he says, a lot of people feel that
income tax rates now are the lowest they'll ever
be. A look back in history proves that. It's
been higher most of the time. In the 1940s, the
top marginal tax rate was 94 percent for
individuals with taxable income of more than
$200,000 (a lot of money in those days, true).
But this just goes to show you that prospective
retirees could be looking at paying higher rates
than today's top rate of 35 percent.
Though they're completely unavoidable, taxes
have to be considered when planning for
retirement income. If you go to all the trouble
of saving and then end up with less income than
you expect, it can definitely ruin your
retirement -- or at least put a damper on it.
Overestimate portfolio earnings
Compounding interest is indeed magical. A little
money plus a lot of time can equal a lot of
money. But there's only so much it can do with
the variables involved.
Retirement hopefuls who dillydally in their
savings efforts may find the time portion of the
equation so drastically reduced as to be
somewhat ineffectual without lots of money
thrown in.
Similarly, young people whose savings start
strong and then taper off might find that they
could have accumulated much more money had they
just saved more consistently over time.
Plus, failing to account for market
volatility could have would-be Warren Buffetts
wishing they had put most of their money in CDs
some days.
People sometimes assume constant growth
rates, says CFP Paula de Vos, president of
Synergist Wealth Advisors.
"They overestimate the amount of certainty in
an uncertain world, and it's something you have
to maintain vigilance over," she says.
Miscalculate lifetime earnings
Some optimistic people assume that one day their
paltry income will catch up with their spending
and they'll finally have more than enough money
to pay their mortgage off, save for retirement
and pay down debts.
"The economy has been pretty nice to us over the
past 10 or 20 years, and kids don't know what it
was like in tough bear markets," says
Dallas-based CFP Chanc Woods, member of the
Financial Planning Association.
"The great Depression was so long ago that
kids don't know how difficult the job market can
be, or how bad the economy could get. Everyone
knows that they should have three to six months
of expenses saved up, but instead everyone is
trying to be cool and buying nice cars and
clothes," he says.
That throw-caution-to-the-wind-type thinking
lends itself to the work-until-you-die
lifestyle. By assuming that things will get
better and the worst will never happen, there's
a pretty good chance you'll find yourself broke
and trying to catch up. Probably well before
retirement.
Adopt the ostrich-style planning approach
If you've been able to tune out advertising
messages and instead accidentally scrimped and
saved for your golden years and find yourself
doing pretty well, don't worry -- there are
still plenty of ways to go wrong.
For instance, without a plan for every aspect of
retirement, things can go seriously awry. From
long-term care needs to the death of a spouse,
any number of factors can derail a plan. The
what-ifs could keep a less sanguine person up at
night.
"Part of a retirement plan is knowing that
we're saving this much every month and we're 35
and at a 5 percent return in 30 years we're
going to have all this money," says CFP Ralph
Lunt, vice president and chief financial officer
at Strategic Capital Advisors. "Well, what if
one of us isn't here next month?"
Term life insurance may provide some peace of
mind here by providing funds to a surviving
spouse or children.
Any catastrophe can potentially change
long-term financial plans irreversibly. "Just in
the state of Texas, an assisted-living facility,
nursing home or home health care runs about $150
to $170 a day just for the care. The average
need is just over three years," says
Dallas-based CFP Chanc Woods.
Long-term care insurance, though somewhat
pricey, can guard against depleting your estate
or your family's funds in the event of an
ongoing medical issue. According to AARP, about
60 percent of people over age 65 will need some
kind of long-term care.
Health care can eat into retirement plans as
well. The Employee Benefit Research Institute
estimates that the upper range of out-of-pocket
medical expenses in retirement for a 65-year-old
couple ranges from $235,000 to $376,000. Those
figures can potentially almost double for a
couple with large prescription needs and only
Medicare and Medicare supplements.
The figures are lower if you're willing to
roll the dice for a 50 percent chance of having
enough money rather than 90 percent, as above.
To have a 50-50 chance of having enough money to
cover health care costs in retirement, a
65-year-old couple could need between $154,000
and $246,000.
While some people may enjoy the security of
buying life and long-term care insurance, others
prefer to use another type of time-tested,
though historically risky, long-term care
insurance -- having lots of kids. It is hoped
you raised them all to be doctors or nurses.
Remain ignorant about investments
Though actually socking away dollars goes
against the never-retire plan, using that money
ineffectively can hamstring any retirement
efforts.
Ignorance when it comes to your investments can
slow down growth. A typical blunder is to own
several funds of the same category, for
instance, holding two large-cap value funds.
Anyone can easily trip up good intentions by
disregarding the value of asset allocation and
diversification.
"People may underestimate the power and the
benefit of a globally diversified portfolio.
Because a portfolio has a bunch of different
things does not mean that it is a globally
diversified portfolio," clarifies CFP Paula de
Vos, president of Synergist Wealth Advisors.
It may take professional help. For anyone who
doesn't have the time to plan, fee-only
financial advisers can map out a route to
retirement without the detours that many people
inadvertently take. Use Bankrate's database to
find a Certified Financial Planner professional
near you.
From rolling over 401(k) plans to choosing a
place to keep your IRA, the choices can be
overwhelming and lead busy people to make hasty,
uninformed choices.
"Sometimes when people are looking to roll
over qualified plans, they don't necessarily
explore all of the benefits or detriments in
assessing whether it's the right thing for them
to do in a given instance," says de Vos. From
tax, legal and financial standpoints, she adds,
"They are fairly complicated."
Whether you do it yourself or have someone to
help you, planning is essential unless, of
course, you want to work until you die.
"Certainly the day you retire isn't the first
day you should be thinking about it," says CFP
Ralph Lunt, vice president and chief financial
officer at Strategic Capital Advisors.
HABITS OF SUCCESSFUL INVESTORS
1. Proper asset allocation.
2. Diversification
3.
Not trying to time the market
4.
Don't let the tax tail wag the investment dog.
5. Do your own homework, understand what
you own.
6. Remove ego and
emotion from your investments.
7.
Have a plan, stick to it and make adjustments as
time and circumstances warrant.
8. Be honest with yourself.
9. Measure using the appropriate
yardstick.
10. Don't try to
catch the first and last eighth of trades, the
direction counts.
