By Sondra L. Shapiro
To avoid committing the cliché of the cobbler and his shoeless children, I take to heart the plethora of financial and health information that crosses my desk.
One of the things I learned early in my career is it’s never too soon to begin socking away money for retirement. Through the years I have interviewed far too many financially strapped retirees, yet I am still moved by individuals who are wiped out by one catastrophic illness or who have not sufficiently calculated the amount needed to live in relative comfort. With the average person spending 20 years in retirement, fewer than half of Americans have calculated how much they need to save for retirement, according to the United States Department of Labor.
The Employee Benefit Research Institute’s (EBRI) 2011 retirement survey found that the percentage of workers not confident about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent, the highest level measured in the 21 years of the survey. At the same time, the number of respondents who are very confident matched the low of 13 percent that was first measured in 2009.
The EBRI reported 68 percent of workers and their spouses have saved for retirement (down from 75 percent in 2009) and 59 percent say they and/or their spouse are currently saving (down from 65 percent in 2009). “A sizable percentage” of workers report they have virtually no savings or investments: 29 percent say they have less than $1,000. “In total, more than half of workers (56 percent) report that the total value of their household savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000,” according to the EBRI.
Once we retire, we still need to vigilantly nurture our nest eggs. Yet, many retirees take a neglectful approach, according to a new Associated Press report (AP). “Eventually you’re going to run into trouble if you don’t break the pattern of financial neglect. The money simply may not hold up in the long run,” said the AP.
The AP report sited seven mistakes and ways to avoid them while working and in retirement:
•Being too conservative with money. Treasury bonds, certificates of deposit and other savings instruments with scant yields can give retirees a false sense of security. They guarantee some income, however small, and can provide protection from stock market volatility. But they don’t provide a fighting chance to keep up with inflation in the long term.
Most financial planners say the safer move for the long haul is to devote a healthy portion of your portfolio to stocks. A rough guideline for asset allocation is to own a percentage in stocks equal to 110 or 120 minus your age.
•Putting off planning. Failing to create a financial or estate plan can get you in trouble later in retirement when you may no longer be at the top of your game mentally. About half the population over 80 suffers from significant cognitive impairment. Without guidance or a plan, elderly investors can harm their finances through unwise decisions.
Prepare thorough financial and estate plans and discuss future aging-related scenarios with an adviser.
•Bailing out the kids. It’s possible to be too selfless and charitable in retirement if it means putting your own financial security at risk.
Some seniors contribute to down payments for their children’s first homes even though they’re struggling to fund their own retirements. Others stretch to pay for the college expenses of a child or grandchild. One of the oldest maxims of financial planning bears repeating: You can take out loans for college but you can’t take out a loan to pay for your retirement.
•Paying too much in taxes. Retirees usually are in lower tax brackets than they were in their working years. But they often fail to make adjustments that could further lower their taxes.
Putting off taking withdrawals from an individual retirement account until they are required to at age 70 1/2 also can be costly. That’s because such amounts are taxable and often bump retirees into a higher tax bracket. A plan of gradual withdrawals starting in your 60s can be a better strategy.
Retirees who do regular volunteer work tend to leave tax deductions for mileage and out-of-pocket costs on the table. And snowbirds who spend months in the Sunbelt often don’t know they could save thousands of dollars by changing their legal residency to a state with a smaller or even no income tax, as is true of Florida.
Have a plan to minimize the tax impact of withdrawals, keep your receipts for volunteering costs, and don’t miss out on any deductions.
•Following financial advice from friends and family. Seniors routinely act on guidance from their friends and family when it comes to stocks, bonds, budgeting, IRAs or insurance. Not only is that risky, the willingness to follow off-the-cuff advice increases a retiree’s vulnerability to financial scams targeting the elderly.
Validate any advice from friends and family with objective materials. Use a credible online resource or organization, or enlist the services of a financial professional.
•Underestimating the costs of health care. The ability to pay for health care is an increasingly critical part of retirement income security. What was once referred to as the three-legged stool of retirement security — pension, savings and Social Security — now requires a fourth pillar: health care savings.
A typical 65-year-old couple retiring now needs roughly $230,000 to cover medical expenses in retirement, not counting long-term care, according to Fidelity Investments. Remember, long-term care and many other costs associated with health care fall outside Medicare coverage.
Buy Medigap supplemental insurance that fills in benefit gaps in traditional Medicare. And strongly consider buying long-term care insurance, which pays for in-home care and nursing home care, unless your health or age make it unaffordable. It can help ensure that significant medical expenses later in retirement don’t wipe out your assets.
•Underestimating how long they’ll live. With all the advances in medical technology, life expectancy is growing faster than ever before.
The downside is most seniors don’t have nearly enough savings or income to stretch over a retirement that could last 30 years or more. Ideally, financial preparation for a long life starts during your work career with the creation of a financial plan that will provide income deep into retirement. Failing that, working past anticipated retirement age, even part-time, will allow existing savings additional time to grow.
Because my husband, David, and I are in our 50s we sat down last year with a trusted insurance agent to select a long-term-care insurance policy with inflation protection. We also just compiled a financial goal analysis with our finance team — a goals and objectives exercise that offers a roadmap to a more secure retirement. The exercise took into consideration our savings, investments, desired retirement age and lifestyle goals.
It is impossible to determine what the future holds. To quote another well-known phrase, “The best laid plans …” At least we are venturing into unchartered waters with the proper navigational aids.
Sondra Shapiro is the executive editor of the Fifty Plus Advocate. Email her at firstname.lastname@example.org or read more at www.fiftyplusadvocate.com or on facebook at www.facebook.com/fiftyplusadvocate. Associated Press material was used in this report.