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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

Planning for Retirement- Getting Close

George F. McClure

IEEE Region 3 Director

IEEE Annual Meeting 2007

are you ready
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
median nest egg
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
boomer retirement attitudes
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

why more boomers will work
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
boomer obstacles to saving
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%
planned retirement activities
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%
working in retirement
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.”
what kind of work
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
personal assessment
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/

when to draw social security
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

earnings penalty
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
how are you doing
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
savings vehicles
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
planning and calculators
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
getting to medicare
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
long term care
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
rolling over
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?
nest egg management strategy
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
at 70 1 2
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
pitfalls
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
pluses
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
to dig deeper
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? g.mcclure@ieee.org [Put Scottsdale in subject line]