Acknowledging all the financial risks you face in retirement can be an empowering experience.
When you’re planning for retirement, you think about how much money you’ll spend, places you’d like to visit, what health care will cost. But do you think about risk? And do you think about the right risks?
By that, I mean, have you considered any risk other than running out of money?
There are other risks to face.
No generation before today, for one, has ever looked at such a long retirement with largely themselves alone to rely on.
And we’ve seen two market crashes in a decade — 2000 and 2008 — only to raise our heads up and go through a global economic slowdown. Thanks a lot. What’s next?
Some risks you can actually control, however.
You can’t predict where the markets will be be six or 12 months from now. But you can tell yourself you’re going to get a handle on the other things that have as much of an impact on your retirement as your portfolio’s performance.
These are non-market risks that often arise within your own household.
Here’s my list of the special risks faced by current and future retirees:
- Living a very, very, very long life
- Having too much of your wealth in your house
- Not saving enough
- Having to take care of your parents
- Having to support your adult children
- Paying oversized college costs
- Not having control of your budget
- Forgetting about inflation
- Persistently low returns in the markets and low interest rates
- Ultra-volatile market swings just as you stop working
Oh, and, timing. All of these things could happen around the same time.
A silly little step you can take toward addressing these risks is to drop the word “risks” and substitute “issues.” If these are “issues,” maybe someone can do something about them. Maybe that person is you.
I find that some clients don’t realize that they themselves are the ones who determine that their financial plan won’t work. Hoping that your portfolio grows to the sky so it can support you isn’t really much of a defense against overspending. Overspending is something you control.
Or maybe it’s not you. Having your elderly parents to take care of, to worry about, to help financially, is not exactly a choice.
But when you factor something like caring for an elderly parent into your retirement plan, you can start to walk around this issue, take its measure, and begin to see ways to cope. Or begin to see that you can’t cope with this responsibility. You may have to find other resources — speak to other family members, seek out public programs, look for nonprofit groups that help with such things as respite care.
Coping with the issue can mean raising your hand, saying you can’t really handle it all, and asking for help.
Or it can mean that you did your research and you didn’t find a solution for every conundrum. Coping with the issue can mean you realize it’s a pothole and you’re going to hit it.
Okay, so you might live to be 100 or close to it. Did you set a portion of your portfolio aside for very long-term growth? Or did you consider delaying Social Security benefits until age 70 — and by doing that, pump up your check for the rest of your life, no matter how long?
Or, let’s say you figure you will have to live with low returns for a long while. Have you allocated enough to cash or short-term investments to handle your spending needs? Or did you divide your portfolio into buckets for different purposes? And then did you come up with an income strategy for one bucket so that you don’t have to dip into your other buckets?
When you strategize like this in the face of risk, it’s easier to see the actions you can take, even if you can’t make the risk go away.
As financial planners, we don’t often discuss these non-market risks. The one risk we do talk about with clients all the time is market risk, because we know quite a bit about that. Markets are difficult and ever-changing. While that may seem impenetrable to the client, it doesn’t really intimidate us.
But the real risks to the client’s retirement? Many of them lie out there, beyond investments. They may be outside a financial adviser’s perfectly organized financial plan, but they still exist. And clients have to steer around them.
Harriet J. Brackey, CFP, is the co-chief investment officer of GSK Wealth Advisors, a South Florida registered investment advisory firm that manages more than $330 million. She does financial planning for clients and manages their portfolios. Before going into the financial services industry, she was an award-winning journalist who covered Wall Street. Her background includes stints at Business Week, USA Today, The Miami Herald and Nightly Business Report.
MONEY's George Mannes asks people in New York's Times Square if they would ever retire in another country.+ READ ARTICLE
3 Ways to Minimize Health Care Costs
Sign up for Medicare at 65 even if you’re not in the U.S. While Medicare won’t pay for care outside the country, many retirees living abroad schedule doctor visits when they visit home. Plus, if you later return for good and haven’t enrolled, you’ll pay a 10% premium penalty on Part B (the medical insurance portion) for every year you were eligible, says AARP’s Patricia Barry, author of Medicare for Dummies. For 2015, the B premium is $104.90 a month for a married person with modified AGI under $170,000.
Determine your needs. Many nations have two systems: public and private. You’ll probably prefer the convenience and facilities of the latter. Medical costs are lower in most other countries, even in the private system, but unless you can pay out of pocket, you’ll want insurance. Plan to stay put in your new country? You’ll be fine with a policy covering local doctors and hospitals. If you’ll travel, get an international expatriate policy.
Price private policies. Major insurers that offer international private policies include Aetna International, Cigna Global, Bupa Global, and GeoBlue. Members of the Association of Americans Resident Abroad (aaro.org) are eligible for a group plan—in 2015, a couple in their sixties will pay $500 or so a month for hospitalization coverage. Keep in mind that even group private policies require underwriting, so if you have a preexisting condition, you might have a waiting period and a higher premium. Also, some plans stop at age 75 or 85, though that may work if you’ll move back to the U.S.
When torn between paying for a child's education or saving for retirement, parents should save for themselves. Here's why.
Saving money isn’t as easy — or as straightforward — as it used to be. Often, people find they have to delay retirement and work longer to reach their financial goals. In fact, one of the most common issues parents face these days is how to save for both retirement and a child’s college fund.
Last month, for example, I met with a couple who wanted to open college savings funds for each of their three children. They were already contributing the maximums to their 401(k)s with employer matches. I applauded their financial foresight; it’s great to see people thinking ahead.
Then I gave them my honest, professional opinion: Putting a lot of money into college funds isn’t going to help if their retirement savings suffer as a result. Sure, they’ll have an easier time paying tuition in the short term, but down the road their kids may end up having to support them — right when they should be saving for their own retirement.
The tug-of-war between clients’ retirement and their children’s education can lead to difficult conversations with clients, and difficult conversations between clients and their children. Who wants to deprive their children of their dreams and of their top-choice school?
I try to be matter-of-fact with my clients about this sensitive subject. I start with data: If you have x amount of money and you need to put y amount away for your own retirement, you only have z amount left over for your children’s college.
I also talk a little about my own experience — how my parents were able to write a check for my college tuition. But college was less expensive then, and costs were a much smaller percentage of their salary than they would be today. Times have changed.
As much as we all want to be friends with our children, we have to put that aside. I tell people that if they don’t know whether they should put their money in a 529 account or their retirement account, they should put it in their retirement account. Financial planners commonly point out that you can get a loan for college but you can’t get one for retirement.
I don’t think people realize that. I think that they just want to do right by their children.
After I talk about my own experience, I move on to my recommendation. I tell clients that one way to approach this issue with their children is to make them partners in this venture. Tell them that you’re going to pay a portion of the cost of education. Set a budget for what you can afford, then work with them to find a way to fill in the gaps. Make a commitment, then stick to it.
I explain to my clients that choosing their retirement doesn’t mean that they can’t help your children financially and it doesn’t mean they are being a bad parent or are being selfish. It does mean that they should prioritize saving for retirement.
When clients tell me that they feel guilty for putting their retirement first, I ask them this: “Where is the benefit in saving for your children’s college but not for your own retirement?” Without a substantial nest egg, I tell them, you could end up being a burden on your children when you’re older.
And there’s an added bonus, I tell them: If your kids see you putting your retirement first, it might teach them about the importance of saving for their own retirement. That could end up being the best payoff of all.
Sally Brandon is vice president of client services for Rebalance IRA, a retirement-focused investment advisory firm with almost $250 million of assets under management. In this role, she manages a wide range of retirement investing needs for over 350 clients. Sally earned her BA from UCLA and an MBA from USC.
When you short-change retirement savings to pay for the kids' college, they may end up paying way more than the price of tuition to support you in later life.
Making personal sacrifices for the good of your children is Parenting 101. But there are limits, and financial advisers roundly agree that your retirement security should not be on the table.
Still, parents short-change their retirement plans all the time, often to set aside money for Junior to go college. More than half of parents agree that this is a worthwhile trade-off, according to a T. Rowe Price survey last year. Digging into the reasons, the fund company followed up with new results this month. In part, researchers found:
- Depleting savings is a habit. Parents say it is no big deal to steal from retirement savings. Some 58% have dipped into a retirement account at least once—most often to pay down debt, pay day-to-day living expenses, or tide the family over during a period of underemployment.
- Many plan to work forever. About half of parents say they are destined to work as long as they are physically able—so why bother saving? Among those who plan to retire, about half say they would be willing to delay their plans or get a part-time job in order to pay for college for their kids.
- Student debt scares them. More than half of parents say spending retirement money is preferable to their kids graduating with student debt and starting life in a hole. They speak from experience. Just under half of parents say they left college with student debt and it has hurt their finances.
We love our kids, and the past seven years have been especially tough on young adults trying to launch. So we shield them from some of life’s financial horrors, indulging them when they ask for support or boomerang home—to the point that we have created a whole new life phase called emerging adulthood.
Yet you may not be doing the kids any favors when you rob from your future self to keep them from piling up student loans today. Paying for college when you should be paying for your retirement increases the likelihood that they will end up paying for you in old age, and that is no bargain. They may have to sacrifice career opportunities or income in order to be near you. You’ll go into assisted living before you become a burden on the kids? Fine. At $77,380 per person per year for long-term care, it could take a lot more resources than the cost of borrowing for tuition.
It sounds cold to put yourself first. But the reality is that your kids can borrow to go to school; you cannot borrow to retire. So get rid of the guilt. Some 63% of parents feel guilty that they cannot fully pay for college and 58% feel like a failure, T. Rowe Price found. Nonsense. Paying for college for the kids is great if it does not derail your savings plan. But if it does that burden must become theirs. That’s Parenting 101, rightly understood.
These questions stump most Americans with college degrees.
Following are three questions. If you’ve been around the financial block a few times, you’ll probably find all of them easy to answer. Most Americans didn’t get them right, though, reflecting poor financial literacy. That’s a shame — because, unsurprisingly, the more you know about financial matters and money management, the better you can do at saving and investing, and the more comfortable your retirement will probably be.
Here are the questions — see if you know the answers.
- Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? (A) More than $102. (B) Exactly $102. (C) Less than $102.
- Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? (A) More than today. (B) Exactly the same. (C) Less than today.
- Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
Did you get them all right? In case you’re not sure, the answers are, respectively, A, C, and False.
The questions originated about a decade ago, with Wharton business school professor and executive director of the Pension Research Council Olivia Mitchell, and George Washington School of Business professor and academic director of the Global Financial Literacy Excellence Center Annamaria Lusardi. In a quest to learn more about wealth inequality, they’ve been asking Americans and others these questions for years, while studying how the results correlate with factors such as retirement savings. The questions are designed to shed light on whether various populations “have the fundamental knowledge of finance needed to function as effective economic decision makers.”
They first surveyed Americans aged 50 and older and found that only half of them answered the first two questions correctly. Only a third got all three right. As they asked the same questions of the broader American population and people outside the U.S., too, the results were generally similar: “[W]e found widespread financial illiteracy even in relatively rich countries with well-developed financial markets such as Germany, the Netherlands, Switzerland, Sweden, Japan, Italy, France, Australia and New Zealand. Performance was markedly worse in Russia and Romania.”
If you think that better-educated folks would do well on the quiz, you’d be wrong. They do better, but even among Americans with college degrees, the majority (55.7%) didn’t get all three questions right (versus 81% for those with high school degrees). What Mitchell and Lusardi found was that those most likely to do well on the quiz were those who are affluent. They attribute a full third of America’s wealth inequality to “the financial-knowledge gap separating the well-to-do and the less so.”
This is consistent with other research, such as that of University of Massachusetts graduate student Joosuk Sebastian Chae, whose research has found that those with higher-than-average wealth accumulation exhibit advanced financial literacy levels.
The importance of financial literacy
This is all important stuff, because those who don’t understand basic financial concepts, such as how money grows, how inflation affects us, and how diversification can reduce risk, are likely to make suboptimal financial decisions throughout their lives, ending up with poorer results as they approach and enter retirement. Consider the inflation issue, for example: If you don’t appreciate how inflation shrinks the value of money over time, you might be thinking that your expected income stream in retirement, from Social Security and/or a pension, will be enough to live on. Factoring in inflation, though, you might understand that your expected $30,000 per year could have the purchasing power of only $14,000 in 25 years.
Mitchell and Lusardi note that financial knowledge is correlated with better results: “Our analysis of financial knowledge and investor performance showed that more knowledgeable individuals invest in more sophisticated assets, suggesting that they can expect to earn higher returns on their retirement savings accounts.” Thus, better financial literacy can help people avoid credit card debt, take advantage of refinancing opportunities, optimize Social Security benefits, avoid predatory lenders, avoid financial scams and those pushing poor investments, and plan and save for retirement.
Even if you got all three questions correct, you can probably improve your financial condition and ultimate performance by continuing to learn. Many of the most successful investors are known to be voracious readers, eager to keep learning even more.
It sounds like a tall order, but these 4 fixes put one maxed-out family on the way to a more secure financial future—and they can help you, too.
As a navigation officer on boats carrying supplies to oil rigs in the Gulf of Mexico, Lonnie Roberts Jr. is experiencing the downside of falling fuel prices. As oil companies look to preserve profit margins, Lonnie’s employer cut back his pay 9% and eliminated the 4% match on his 401(k) in January.
Even before that, Lonnie, 47, and wife Shawn, 45, felt behind on retirement. Now the Cedar Park, Texas, couple are especially anxious, knowing they need to find a way to live on less while building up their $245,000 nest egg.
With Lonnie on a boat for weeks at a time, Shawn gave up her job as an aesthetician to be home with Adison, 13, and Aiden, 11. So the family lives on Lonnie’s now $127,000 salary, 7% of which goes into his 401(k) and 7% to buying company stock. After expenses, they don’t have much left over, and their credit card balances have grown to $9,700. Something has to give. “To retire in 20 years,” says Lonnie, “we know we need to make the right moves now.”
Here are four fixes that can help get them on the right track:
Free up cash. Chase Mouchet and Bryan Lee of Strategic Financial Planning of Plano, Texas, say the Robertses can trim $1,300 a month by eliminating impulse buys, putting off college savings, and being more economical. Also, Lonnie should sell his $3,700 in company stock, but keep buying at a 15% discount and selling right away (triggering almost no taxes) to generate $1,300 a year. Directing all this to the credit card, they should pay it off in five months.
Build in a cushion. Next priority: an emergency fund of five to seven months’ expenses. Shawn is considering returning to work part-time. If she does, the added income ($1,600 a month after tax) would help them hit the goal in another eight months.
Return to retirement. Lonnie and Shawn can then max out his 401(k) and two Roth IRAs. Mouchet and Lee also advise putting $500 a month in taxable investments. (College savings will have to wait until their pay rises.)
Boost returns. The Robertses have 80% of their nest egg in a variable annuity that’s grown just 2% total in 10 years, partly due to fees of 3% a year. Instead, the planners suggest transferring the money to a new IRA invested in low-cost index funds, with 70% in stocks, 20% in bonds, 10% in real estate. In sum, these steps should allow Shawn and Lonnie to retire at 65 and 67. Says Shawn, “It’s a relief to know we can do this.”
If you have socked away money in a 401(k) and your 60th birthday is behind you, chances are you are thinking about when to retire.
Chances are, too, that you are planning to retire sooner rather than later. The average retirement age seems to have stabilized at 62 for women and 64 for men, according to new research from Boston College’s Center for Retirement Research. But retiring too young can be very harmful to your financial health, the study found, and older workers would do well to hang in a bit longer.
Continuing to work reduces the amount of time when people need to live on their savings …
A financial adviser shares tips for easing anxiety in a rollercoaster market.
“It’s been too good for too long,” my client said.
She had every right to feel suspicious. With the markets appearing to be at an all-time high, she was justified in having that waiting-for-the-other-shoe-to-drop instinct. I understood her desire to tread cautiously.
The majority of baby boomers are at a crossroad in their lives: They want to retire, they should retire, and it’s time to retire. But they are extremely nervous nowadays about the markets’ record-breaking levels.
Over my many years of experience working with clients in this situation — they’re ready to retire, but they can’t quite pull the trigger — I’ve seen how scary it can be to make that potentially irrevocable decision. What if markets go down? Should they have waited? What if this, what if that?
It is human nature to question ourselves at times like these, but then again, times are always a bit uncertain.
I have found that the most important step in keeping clients calm in a volatile market is to have an investment education meeting regarding their risk level and market volatility at the start of our working relationship and routinely thereafter. Our clients are actively involved in assessing their own risk tolerance and choosing a portfolio objective that suits their long-term goals.
We also want to set the right expectation of our management so our clients know that we never sell out of the market just because things are starting to go bad. Market timing has not proven to be a successful growth strategy, which is why we work with our clients upfront to establish a portfolio and game plan they can live with.
Unfortunately, the inevitable will happen: The markets will go south, and clients will panic. How can financial planners ease clients’ anxiety? Here are a few suggestions:
- Discuss defensive tactics. Show clients the dollar amounts they have in bonds and other fixed income. Translate that into the number of years’ worth of personal spending that is not in the stock market. Have an honest conversation about if that number will be enough over the long-term.
- Leave emotion out of it. Talk to them about the danger of selling at the wrong time and illustrate how emotional decisions tend to do more harm than good. Remind them of how quickly markets can turn around after a big drop. It’s been known to happen on more than one occasion, so share your knowledge of these experiences. Let them know that you don’t want them to miss the upside.
- Look at the positives. Reinvesting dividends and capital gains? Are clients making monthly contributions to a 401(k) or other investment accounts? Remind your clients that when markets are down they are buying at lower prices, which can work well for their strategy over the longer term. A down market also often makes investing easier and less frightening to buy, so that might be the time to purchase any equities they once worried were too expensive.
The markets will always have some level of volatility. As an adviser providing regular guidance and support, you want to do everything you can to help clients not overreact to the daily news, hard as it might be. Urge them to continue to think long-term. It may not always be easy to see, but today’s bad news may just be a client’s big buy opportunity, and they won’t want to miss that!
Marilyn Plum, CFP, is director of portfolio management and co-owner of Ballou Plum Wealth Advisors, a registered investment adviser in Lafayette, Calif. She is also a registered representative with LPL Financial. With over 30 years of experience in the financial advisory business, Plum is well-known for financial planning expertise and client education on wealth preservation, retirement, and portfolio management.