Will You Outlive Your Retirement Savings?

Your nest egg needs to sustain you throughout retirement.  Here's how to make sure it does! 

Of the various things today's older workers might fear — losing their jobs, needing to quit due to health issues, and so forth — there's perhaps no prospect more terrifying than the notion of outliving their savings. In fact, 60% of Baby Boomers claim they're more worried about running out of money in retirement than actually dying.

Sadly, it's a valid concern, especially since countless older Americans are also considerably behind on savings. The Economic Policy Institute reports that the median savings balance among workers ages 56 to 61 is a mere $17,000 — hardly enough to live off even with Social Security factored into the mix.

If you're concerned about outliving your savings, then you'll need to be proactive in avoiding that fate. And there are steps you can take to improve your long-term financial picture. First, however, you'll need to assess your personal risk, which you can do by asking yourself the following questions:  

1. Have I been saving 15% or more of my income?

It used to be the case that to retire comfortably, you'd need to set aside 10% of your earnings over time. Not anymore. Given the way health care and other costs have inflated in recent years, you'll need to do better if you want enough money to cover the bills for the long haul. That's why workers today really need to set aside 15% or more of their income for the future.

If you've been saving at that level, or somewhere in the vicinity, then you're probably in pretty good shape. Similarly, if you haven't been saving that much, but are still relatively young with many working years ahead of you, there's a good chance you'll come out just fine if you ramp up immediately. But if you're already in your mid- to late 50s and haven't been hitting that threshold, there's a strong chance you'll run out of money at some point if you don't take steps to compensate.

How do you do that? It's simple: Work longer, and max out your savings for as many years as you can. If your original goal was to retire at 65 and you push yourself to work until 70, all the while maxing out your 401(k) during that five-year period, you'll have an extra $122,500 to play with in retirement — and that assumes zero investment growth. Not only will extending your career offer you an opportunity to save more, but it'll also help you avoid dipping into your existing savings for however many years you remain on the job.

Another option: Continue working in retirement, albeit on a part-time basis. You can approach your long-term employer about a partial retirement, or pursue something new if you can't bear to keep plugging away at your current job any longer. The key is to generate enough income to avoid depleting your nest egg prematurely.

2. How much of my savings do I plan to withdraw each year?

The key to stretching your nest egg is knowing how much of it you can afford to withdraw annually during retirement. For years, experts have lauded the 4% rule as a solid withdrawal strategy, since the rule is designed to make your savings last for up to 30 years — but unless you fit very specific criteria, withdrawing that much of your savings each year could cause you to deplete your reserves sooner than expected.

The problem with the 4% rule is that it makes certain assumptions about your portfolio and its growth potential. One is that you still have more than half of your assets in stocks, and that your bonds generate a respectable level of income. But what if you unloaded most of your stocks in an effort to lower your risk? Suddenly, that formula is thrown way off. Similarly, bonds today pay considerably less than they did back when the rule was established. So today's retirees need to adjust their withdrawal strategies accordingly.

What should you do? Use the 4% rule as a starting point, but develop a withdrawal plan that better aligns with your circumstances. For example, if you're heavily invested in bonds, and they aren't paying much interest, start out by withdrawing 2% of your nest egg rather than 4%. Being conservative with your withdrawals will help sustain your nest egg, so it's there for you throughout retirement.

3. Am I underestimating my life expectancy?

Many seniors plan for something in the ballpark of a 20-year retirement, but for some folks, that's a dangerously low estimate. That's because one out of every four 65-year-olds today will live past the age of 90, while one in 10 will live past 95. If you're one of them, yet you retire in your mid-60s, you could easily end up in a situation where you run out of money with several years of retirement left ahead of you.

A better bet? Assess your health, and if it's relatively strong, assume the best when it comes to your lifespan. If you operate under the assumption that you'll live until 90 and pass away at 88, you'll have a little something left over to leave to your heirs. And that's a much more ideal scenario than spending down your savings and burdening your family with your bills in your late 80s — assuming you even have that option, which many seniors don't.

If there's one risk you can't afford to take as a senior, it's outliving your savings and scrambling in your old age. So don't put yourself in that situation. Assess your personal risk early on, and take steps to compensate. Otherwise, you could end up falling victim to the fate that's so many retirees' worst nightmare.

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Nearly 1 in 4 Americans Has Done No Retirement Planning

It used to be that many American career paths included pensions. Employees would put in their time in the office or factory, and employers would take care of them when they got too old to work.

Today, jobs with defined-benefit pension plans are few and far between. Left to our own devices, are Americans taking care of their retirement needs? Our new survey says no.

"Companies have realized they can shift much of the risk and responsibility of managing a retirement plan to their employees by ditching the traditional defined-benefit plan for a defined-contribution plan," says Chartered Financial Analyst Phillip Christenson at Phillip James Financial in Plymouth, Minnesota. "While this isn't inherently a bad change, when combined with a general lack of financial education and low interest rates, it has contributed to a challenging retirement picture."

In an exclusive MoneyTips online survey, 452 Americans were asked about preparing for retirement. Some of those were already enjoying retirement, while others were decades away from their golden years.

We asked the 194 subjects yet to retire:

More than half (59.3%) revealed they had invested in a 401(k) or other retirement vehicle, which was the most popular response, followed by "Saved money" (39.7%), "Set up an IRA" (39.2%), "Invested in mutual funds" (32.0%), and "Participated in a Pension Plan" (26.8%). Nevertheless, nearly 1 in 4 (23.3%) admitted doing absolutely nothing to plan for retirement.

We also asked 258 current retirees:

Current retirees seem to have done a better job preparing, with less than 1 in 11 (8.9%) doing nothing to plan for retirement. More than half had invested in a 401(k) (57.4%), saved money (55.8%), participated in a pension plan (55.4%), and/or set up an IRA(50.8%). While those yet to retire were a little better at investing in a 401(k) or other retirement vehicle (59.3% vs. 57.4%), the future retirees had made fewer investments in IRAs, pensions, stocks, mutual funds, and bonds than current retirees had.

Says financial advisor Christenson, "One of my big concerns is not how a client is saving but whether they are saving enough. A retirement can be a 30-plus-year proposition. It's very hard to go back to work in your 80's if you realize you are running out of money."

We also asked those yet to retire:

The sad results are that more than 1 in 5 (21.1%) are not saving anything for retirement, and more than 1 in 3 (36.1%) are saving less than $100/month. Saving at least $100 but less than $1000 monthly was the most-popular answer (45.4%).

Commented Christenson, "We are heading towards a crisis with over a third of those surveyed saving less than $100 each month. This means their only chance at retirement is Social Security, which most likely will change by the time many people start drawing from it."

We broke down those numbers by gender, and found men are saving more than women are.

Nearly 1 in 4 women (23.9%) are not saving anything for retirement, compared to just 1 in 6 men (17.6%). Moreover, more than 4 in 10 women (41.3%) are saving less than $100 per month, compared to less than 3 in 10 men (29.4%). This could be because on average, women earn less than men do. When we looked at income, we saw that nearly half (47.2%) of people in families earning less than $100,000 annually were saving less than $100/month for retirement.

Added Christenson, "We are seeing more women as the primary and even sole bread-winners in a family. It really doesn't matter who is earning the money as long as the family is properly saving for retirement, education, and their other goals. A couple should plan together on what to spend their money on and how much to save. Getting on the same page with your significant other is crucial to implementing a savings plan."

See if your 401(k) needs fixing with a free analysis. For more of our exclusive retirement data and insights, visit MoneyTips Retirement Survey Findings.

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Consumer Concerns Have Increased Over Financial Retirement Risks

The Society of Actuaries (SOA) recently released its ninth biennial Risks and Process of Retirement SurveyOpens a New Window., which identified an overall increase in consumers’ level of concern for their finances both prior to and during retirement in 2017.

The survey shows a significant number of retirees and pre-retirees reporting that they feel unprepared to navigate financial shocks and unexpected expenses. 61 percent of pre-retirees and 47 percent of retirees feel unprepared for expenses in retirement that could deplete their assets.

Anna Rappaport, fellow of the Society of Actuaries (SOA) and chair of the SOA's Committee on Post-Retirement Needs and Risks discussed with FOX Business how Americans can understand, prepare for and manage retirement risks in retirement.

Here is what you need to know.

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Boomer:  What steps can pre retirees and retirees take to deal with the financial risks they may face in retirement?

Rappaport:  Pre-retirees and retirees alike face significant financial risks in retirement, most notably that they’re preparing for an uncertain time period with finite financial resources. And while the new survey from the Society of Actuaries shows that consumers are taking steps to mitigate these risks by saving money, eliminating debt and cutting back on spending, there’s still work to be done.

Many retirees have too short a planning horizon and do not consider longer-term issues including preparing for healthcare, long-term care, and inflation costs. These three categories consistently rank as Americans’ top retirement financial concerns, and it’s crucial to account for the costs during the retirement planning process. Long-term care is particularly challenging to plan for since most long-term care is not covered by Medicare, and the vast majority of retirees have not planned for this expense.

Another important step retirees can take is to prepare for unexpected events, such as major long-term care events, unplanned medical expenses, family members needing help and a variety of other expenses to ensure all financial bases are covered in retirement. The Society of Actuaries offers a discussion of shocks and unexpected expenses in an earlier report.

Additionally, pre-retirees and retirees can review another Society of Actuaries report that offers a comprehensive view of many retirement risks.

Boomer:  Most Americans can expect to spend at least 20 years in retirement, how can they plan in advance to not outlive their assets.

Rappaport:  Preparing for long-term issues is very important, however Society of Actuaries research shows that many retirees only focus on shorter-term expected expenses.  Claiming Social Security later is one way to help as it increases monthly income during retirement, and that income is inflation protected.  Buying an annuity is another way to use assets so that they are guaranteed for life.  They can also be guaranteed for the life of a spouse.  The Society of Actuaries offers decision briefs that provide information about Social Security claiming and about making resources last through life.

Boomer:  What can couples do to ensure their financial resources last for the partner that lives the longest of the two?

Rappaport:  There are a variety of ways that couples can work together to protect the longer-living partner.  For example, if the higher earning partner claims Social Security later, that will help ensure financial resources for the longer-living souse. Annuities, if used, should include a survivor benefit.  Life insurance is another way to protect survivors.  The couple may also wish to pay attention to the ownership of all assets, and include survivor protection in most or all of them. Finally, long-term care insurance can also help, because if one partner becomes seriously ill and needs a lot of care, that can mean that assets are used for that care, and there is little left for the survivor.

Boomer:  What is the “Spend Safely in Retirement Strategy”?

Rappaport:  The “Spend Safely in Retirement Strategy” is an approach to address the various financial challenge of retirement. It was identified as an optimal retirement income strategy by the Society of Actuaries and Stanford Center for Longevity. So what exactly, does the strategy entail? It recommends delaying Social Security benefits as long as possible – but no later than age 70 – which may be the only guaranteed lifetime income needed for many middle income workers. Another core component of the strategy is to invest any additional retirement savings in low-cost target date, balanced, or stock index funds, and use the IRS required minimum distribution to determine the annual withdrawal. This strategy produces a higher than expected average income, keeps pace with inflations and produces low measures of volatility, compared to other retirement income strategies.

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What Will Senior Housing Look Like in 2028?

Part of the TRANSFORMING LIFE AS WE AGE SPECIAL REPORT

(This article appeared previously on the website of A Place for Mom, Inc.)

Experts in aging, technology and senior living communities weigh in.

The first of the boomers — the population born between 1946 and 1964 — turned 65 in 2011, and the last will turn 65 in 2029. By 2030, boomers over 65 will make up 20 percent of the U.S. population, numbering around 60 million people, according to a report from the U.S Census Bureau.

“Significant changes are coming as we move out of the World War II generation to the baby boomer generation,” says Steve Maag, director, residential communities, at LeadingAge, a national association dedicated to advocacy, education and research on aging. That’s because boomers have higher expectations as consumers and a history of having those expectations met, Maag says.

Senior Housing in 2028

With that in mind, what will senior housing look like in 10 years? A Place for Mom checked with experts on aging, senior living communities and technology to find out. Here are some significant changes you’re likely to see by 2028 and beyond.

Boomer Consumers Transform Senior Housing

The baby boomer generation has never been one to accept the status quo, and that won’t change when it comes to senior living communities, says Maag.

“Historically, we’ve had a pretty trusted delivery system because customers of the past accepted it and weren’t as demanding,” says Maag. “Customers of the future are going to push to do things more the way they want to do it.”

According to Maag, retirement and senior living communities will have to respond to consumer demand by providing greater diversification of services that include:

• Dining options and restaurant-menu meal variety with more choices, including gluten-free, vegetarian and even Japanese, Thai and other culturally diverse foods
• Greater emphasis on lifestyle and wellness programs
• More choices in apartment fixtures, designs and furnishings
• More variety in payment structures

“Baby boomers want to have a voice in decisions in things like financial structure and payment systems and will push back and be assertive if they have questions and concerns,” says Maag.

Technology Will Improve Senior Living

Whether older people of the future plan to age in place at home or move to a senior living community, technological advances will enable them to live healthier, richer lives. One big factor is advances in telehealth, a technology that enables health care providers to diagnose and interact with patients via computer screen.

“Telehealth will obviously grow” over the next decade, says Robyn Stone, senior vice president for research at LeadingAge. Telehealth, already in place in many rural communities, breaks down transportation barriers for older adults, mitigates health care costs such as emergency room visits and helps older adults remain in their homes longer.

“You also have the potential for actually seeing a person’s environment and seeing their meds instead of having the person bring them in or having to reconcile through health records,” says Stone.

We’ll also see more senior-focused computer systems aimed at keeping long-term care residents happy and engaged, says Tom Bang, CEO of It’s Never 2 Late, a Colorado company that’s developed a picture-based, touchscreen computer interface system and installed the intuitive technology at approximately 2,300 senior living communities in the United States.

The communities use the technology to allow residents to connect by webcam to family and friends, but also to access engaging, personalized content and mind-stimulating activities. The system is also used by staff for memory care and rehabilitation programs.

Sensing technology that goes beyond today’s fitness monitors will also play a part in tracking heart rates and other vital signs. “Those are very natural technologies to be adapted in the right way in caring for seniors,” Bang says.

A Shift in Family Caregiving

In the future, family members will likely have less availability to provide caregiving for aging loved ones, says Stone.

A few reasons for the coming shift include:

• Disruptive effects of divorce on family support networks among middle-aged and older people
• More women remaining in the labor force longer, restricting their family caregiving roles
• Tremendous growth in the childless population of older adults

“When you combine all of these factors, it’s unlikely that family caregivers will be able to continue the level of caregiving performed by past generations,” says Stone. “It’s clear that a decline in family caregivers will put more pressure on formal care providers.”

Changing Price Points and More Cost Transparency

Not all boomers will have the same level of financial resources, such as pensions and paid-off mortgages, as previous generations, says Maribeth Bersani, COO of Argentum, a national trade association for senior living providers.

“We’re going to have to see some different price points for different people’s incomes and price levels,” says Bersani. Because senior living prices vary greatly by state, more people who can’t afford assisted living in their own state may even consider a cross-country move in their retirement planning.

For example, someone living in Massachusetts, where the current monthly median cost for assisted living is $5,600, might get their friends together and say, “Hey, let’s retire in Nebraska,” where the current median cost is about $2,000 less per month, says Bersani.

With unknown changes in health care and Medicaid ahead, aging boomers shouldn’t necessarily rely on Medicaid and other state assistance, either. “The established payment systems to meet their needs could present tremendous challenges,” says Maag. “People will have to move away from traditional government payment sources because those are not going to be adequate.”

Wherever they may choose to live, boomers who have grown accustomed to the ubiquity of online comparison shopping will expect senior living providers to list more information about pricing on their websites as they evaluate their options.

“More and more, senior living consumers expect to obtain pricing information online as a critical part of their search and decision process,” says Dan Willis, senior vice president of partner services at A Place for Mom. “Senior living providers who present this information in a way that is easy to access and understand will see increasing benefits.”

Appealing to the ‘Young Old’

Older adult communities of the future will trend toward becoming more attractive to the “young old,” boomers who’ve reached their late 60s or early 70s by 2028 and want to move into senior communities while they’re still healthy enough to enjoy the amenities, says Bersani.

“We hear a lot of people say they wish they would have moved in sooner so they could have participated more in activities,” she says.

It looks like the generation at the helm of a more health-conscious society, rock ‘n’ roll music and war protests is now well on its way to bringing about societal change in senior living.

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Home Equity Gives Seniors Financial Leverage

Housing wealth for older homeowners is on the rise nationally, giving them a source of money for late-in-life expenses, according to a mortgage industry group.

The National Reverse Mortgage Lenders Association reported Sept. 29 that homeowners age 62 and older saw their home equity increase by a combined 2.4 percent to $6.42 trillion in the second quarter of 2017.

According to the association NRMLA, the growth in housing wealth for retirement-age homeowners was driven by an $162 billion boost in senior home values and offset by a 0.8 percent increase of senior-held mortgage debt that equaled $12 billion. The quarterly measurement of home equity rose to its higheset level since 2000.

“It is unclear whether Congress and the president will come to an agreement on healthcare reform this year, but there is little doubt that healthcare spending per person will continue to increase. This is a particularly sobering fact for older Americans who can expect to spend between $200,000 to $400,000 out- of-pocket for medical expenses during retirement,” said NRMLA chief executive officer Peter Bell. “The question for them right now is not whether the Senate can pass a bill, but how are they going to pay for the financial shocks of aging? Housing wealth provides older homeowners with an available source of funds to manage the costs of caregiving and other expenses incurred in the last third of life.”

A 2015 research paper from Ohio State University (“Aging in Place: Analyzing the Use of Reverse Mortgages to Preserve Independent Living”) shows that 14 percent of reverse mortgage borrowers took out the loan with the intention of using the proceeds to pay ongoing health or disability expenses. An example, according to NRMLA, ia couple in Maine who used reverse mortgage loan proceeds to pay off aging medical bills, help their adult son, and supplement retirement savings.

The National Reverse Mortgage Lenders Association (nrmlaonline.org) represents the lenders, loan servicers and housing counseling agencies responsible for more than 90 percent of reverse mortgage transactions in the U.S.

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National Reverse Mortgage Lenders Association on Reverse Mortgage Done Right

Reverse Mortgage Done Right!  Click on Link

https://www.facebook.com/RMLendersAssociation/videos/1736534589692452/ 

Boost Retirement Income with Home Equity

Using home equity to enhance retirement income planning is an emerging topic in financial planning.

When I address consumer groups and conferences for financial professionals all around the country, I note that the traditional three-legged stool of retirement security–which traditionally has relied on pensions, personal savings and Social Security–is broken. Many Americans have not accumulated enough savings to support a retirement that could last 30 years or more.

I offer an alternative analogy of a retirement income pyramid that relies on Social Security and retirement savings as a solid base, augmented by additional layers that tap home equity, assume part-time employment and incorporate other sources of income, if necessary, such as inheritances, brokerage accounts and income-producing assets.

New research by Peter Neuwirth, Barry Sacks and Stephen Sacks published in the October issue of the Journal of Financial Planning documents how including home equity in the form of a reverse mortgage, with retirement savings, can maximize retirement income while minimizing the probability of exhausting all assets before the end of retirement.

ALTERNATIVE STRATEGY

In the article, "Integrating Home Equity and Retirement Savings through the Rule of 30", the authors suggest that this new approach could serve as an alternative to the 4% rule of thumb that financial advisers have used for decades. The 4% rule, first developed by financial planner William Bengen in 1994, is based on the theory that if a retiree restricts his or her initial withdrawals to 4% of their portfolio in the first year of retirement, and increases annual withdrawals to account for inflation, their savings should last for 30 years or more.

But steep market declines during the financial crisis of 2007- 2009, which coincided with the first few years of retirement for millions of Baby Boomers, threw that theory into question as steep losses early in retirement decimated their portfolios, leaving many retirees with insufficient assets to benefit from subsequent market recoveries.

The new research demonstrates that the appropriate dollar amount of the initial withdrawal for any given total amount of retirement savings plus home value at the outset of retirement turned out to be 1/30 of that combined amount for a broad range of retirees. The research assumes the portfolio is invested 60% in equities and 40% in bonds.

The analysis is based on retirees using a coordinated strategy of establishing a reverse mortgage credit line at the outset of retirement and drawing income from the portfolio in the first year of retirement equal to 1/30 of total retirement income resources (portfolio and home equity). If the portfolio performance is positive, the next year's income would be withdrawn from the portfolio. If the performance is negative, the ensuing year's income would be withdrawn from the reverse mortgage credit line.

"The dollar amount of the initial withdrawal that resulted in an approximately 90% probability of cash flow survival was the same across a broad range of ratios of home value to initial value of retirement saving portfolio," the article found.

The research tested the hypothesis against four profiles of retirees, including mass-affluent retirees with a home value of about $400,000 and a portfolio of retirement savings of $800,000; house rich, mass-affluent retirees with a home value of $800,000 and a retirement savings of $400,000; the almost-affluent retiree with a home value of $150,000 and total retirement savings of $300,000; and the house-rich, almost affluent retirees with a home value of $300,000 and a retirement portfolio of $150,000.

"FORGOTTEN ASSET"

"Home equity has been the forgotten asset of retirement planning for years," said Jamie Hopkins, co-director of the Center for Retirement Income at The American College of Financial Services.

"Most financial advisers don't take a comprehensive look at home equity solutions in a retirement income plan," Mr. Hopkins said. "This can leave the client's largest asset sitting idle until being used as a last resort or as a legacy asset to heirs upon death," he added. "But for many people, using home equity more strategically and throughout retirement can be a more effective solution."

Mr. Hopkins noted that the new research highlights another important concept: "Reverse mortgages are not just for the cash-poor and house-rich client, but that reverse mortgages can help millions of middle wealth Americans in retirement."

The authors noted that despite recent changes to initial and annual mortgage insurance premium rates and lending limits that affect reverse mortgages issued after Oct. 2, none of the changes "would have a material impact on the key findings presented here."

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