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Planning for Retirement - Getting Close. George F. McClure IEEE Region 3 Director IEEE Annual Meeting 2007. Are You Ready?. First Baby Boomers turn 62 in 2008 But few are financially prepared to retire with 65% to 85% of pre-retirement income 35% of Early Boomers (1946-1954) ‘at risk’

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Planning for retirement getting close l.jpg

Planning for Retirement- Getting Close

George F. McClure

IEEE Region 3 Director

IEEE Annual Meeting 2007


Are you ready l.jpg
Are You Ready?

  • First Baby Boomers turn 62 in 2008

  • But few are financially prepared to retire with 65% to 85% of pre-retirement income

    • 35% of Early Boomers (1946-1954) ‘at risk’

    • 44% of Late Boomers (1955-1964)

    • 49% of Generation Xers (1965-1972)

  • Ratio varied, marital status, hsehold income

  • Ref.: 2004 Survey of Consumer Finances


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Median Nest Egg

  • Household heads approaching retirement:

    • $60,000 in 401(k) + IRA balances

    • Defined Benefit (DB) pensions add to that, but fading fast

    • Most of working age have no other savings


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Boomer Retirement Attitudes

  • Trivent Retirement Survey, 2,500 polled

  • Money #1 concern for 71%

  • Health issues #1 for 13%

  • No formal retirement planning for 59%

    • Used an advisor: 16%

    • Rest did own serious calculations

      Harris Interactive poll, 2006, ages 45-64, not retired, population-weighted, 95% confidence


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Why More Boomers Will Work

  • Fewer covered by DB pension plans

  • Rapid decline in retiree health benefits (no ERISA mandate to provide them)

  • Better educated (37% grads vs. 22% pre-war)

  • Better health; work less physical

  • Need to augment the retirement nest egg

    • Delaying retirement by 3 years can add 30% to retirement income


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Boomer Obstacles to Saving

  • Starting late in life to save/invest – 35%

  • Health care/health insurance cost – 32%

  • Salary too low – 29%

  • Credit card debt – 28%

  • Cost of housing – 27%

  • Medical problems – 22%

  • Paying for college – 16%


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Planned Retirement Activities

  • U.S. travel, to new places – 45%

  • Spend more time with children, grandchildren – 39%

  • Take up hobby, craft, activity – 23%

  • Travel outside the U.S. – 21%

  • Volunteer more – 20%

  • Move to lower cost area – 15%


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Working in Retirement

  • 43% plan to keep working

    • 39% will need the money

    • 30% want to keep busy

    • 16% expect work will make life easier

    • 13% will need the health care benefits

  • One wife’s quote: “I married him for better or for worse, but not for lunch.”


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What Kind of Work?

  • 43% - Enjoyable, to keep busy

  • 20% - Whatever earns a good income

  • 11% - Whatever provides health insurance

  • 7% - Meaningful, e.g., non-profit work

  • 5% - Challenging or risky; new business?

  • 14% - Not sure


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Personal Assessment

  • How is your health? Good genes?

    • 20% chance of 30 years in retirement

    • Joint life even longer, esp. if spouse younger

  • IRS life expectancy at age 70:

    • Single life: 17 years

    • Joint life: 21.8 years (more if spouse younger)

    • Minimum distribution over 27.4 years

      SSA Table: http://www.ssa.gov/OACT/STATS/table4c6.html

      Personal calculator: http://www.livingto100.com/


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When to Draw Social Security?

  • Early, at age 62 (25% reduction – going to 30%)

  • Normal, age 66, 67 if born 1960 or later

  • Late, to age 70 (add 8%/year past normal retirement) – no increase past age 70

  • Break-even at age 81 (with 5% return)

  • Benefit at age 70: 65% higher than for age 62

  • Spousal benefit grows, too, if delayed

    Your mileage may vary- see calculator at http://ssa.gov/OACT/quickcalc/index.html


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Earnings Penalty

  • Policy shift: encourage seniors working

  • Earnings penalty eliminated above normal retirement age

  • Early retirement earnings penalty: $1 for every $2 above $12,960 (2007) http://www.ssa.gov/retire2/whileworking.htm


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How Are You Doing?

  • First milestone: save twice annual salary

  • Max out on tax-deferred savings

  • Employer matching is found money

  • It gets easier later

  • Use a financial retirement calculator to point the way

  • Spend less at Starbucks


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Savings Vehicles

  • Employer deferral plans: $15.5K, indexed

  • IRA: $4K + $1K catch-up (if >50)

  • Tax-efficient mutual funds

  • Variable annuities – aim to grow then convert

  • Self-employment: SEP $10.5K


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Planning and Calculators

  • Work out a retirement budget

  • Figure income replacement ratio (80-90%?)

  • Compare assets with needs

    • http://choosetosave.org/calculators/#retirement

    • http://personal.fidelity.com/retirement/index.html?refhp=pr&ut=B21

    • http://www.aarp.org/money/financial_planning/sessionseven/retirement_planning_calculator.html

    • http://nationwide.com/nw/nrri/index.htm?wtgo=retirability


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Getting to Medicare

  • Eligible at age 65; elect Part B for doctor visit coverage http://www.medicareadvocacy.org/FAQ_PartB.htm

  • If still employed, Medicare becomes secondary insurance

  • Part B premiums are means-tested now

  • Medicare assigns reimbursements to procedures – Diagnostic Related Groups

  • Not all physicians accept assignment

  • Financial Advantage offers Medigap plans


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Long-Term Care

  • Not covered by Medicare

  • Means tests for Medicaid coverage, not feasible for engineers (5 year look-back)

  • Growing emphasis on home health care

  • Look at family history, own health

  • Financial Advantage offers LTC plans and information


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Rolling Over

  • Trustee-to-trustee transfer avoids tax risk

  • Cash out after-tax 401(k) contributions

  • Sell long-held matching stock for cap gain

  • Isolate the transfer (separate IRA) if you may go back to another job

  • Track nest egg investments monthly

  • New issue: asset allocation

    • Life cycle funds?


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Nest Egg Management Strategy

  • Draw on taxable assets first, wait on IRAs

  • Both can add to IRAs if one has the income to cover it: 2 X $5K this year

  • For lifetime income, consider annuities

    • Single life

    • Years certain

    • Joint lifetimes (cover both spouses)

  • Reverse mortgage another possibility


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At 70-1/2

  • Begin minimum required distribution (MRD) – Ref. IRS Pub. 590

  • If self-employed or younger spouse income can continue to add to Roth IRA

  • Can safely draw ~4%/yr. from nest egg

  • If larger MRD than needed, convert part to after-tax saving; reinvest tax-efficiently

  • CRT charitable deduction can reduce tax


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Pitfalls

  • Withdrawing too much too soon

  • Taking cash distribution before age 59-1/2

    • 10% penalty

    • Exception: take as stream of payments

  • Contributing less than the maximums

  • Making IRA contributions late


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Pluses

  • Self-employment in retirement

    • Possible tax-deferred account addition

    • Expenses can include health benefits, LTC premiums

  • Lower retirement AGI may permit more Roth conversions (no MRDs required)

  • If beneficiary for IRA is grandchild, may stretch out withdrawals for over 40 years

  • The second million- easier than the first


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To Dig Deeper

  • Stanley & Danko, The Millionaire Next Door, 1996[over 1 M sold]

  • Thomas J. Stanley, The Millionaire Mind, 2000

  • The American Association of Individual Investors www.aaii.com

  • Center for Retirement Research, http://crr.bc.edu/

  • Tax Hotline, monthly newsletter www.BottomLineSecrets.com/pubs

  • Bottom Line Retirement, monthly newsletter, ibid.

  • Bottom Line Personal, monthly newsletter, ibid.

  • Jonathan Clements, “Getting Going,” regular feature columns, www.wsj.com [may be accessible online without subscription. Also writes books on money management.]

  • Money management tools, http://online.wsj.com/personal_journal/tools?mod=2_0036

    Questions, comments? [email protected] [Put Scottsdale in subject line]


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