Paul Ferraresi

I find that people who have not saved properly for retirement always rebuff my comment to build a retirement fund assuming you will live to be 100. They laugh it off and I say…but, what happens if you do live to be 100? What is your plan? The fastest growing segment of Americans is those living past the age of 100.

A host of experts are predicting what the future will bring. Ken Dychtwald, a leading “age wave” expert, characterized the 10 physical, social, spiritual, economic, and political crises we will face as we age in the 21st century in the following list. (You can learn more at www.agewave.com.)

1. A Pandemic of Chronic Disease
2. Mass Dementia
3. The Caregiving Crunch
4. Coping With Death and Dying
5. “Gerassic Park”
6. An Inhospitable Marketplace
7. Changing Markers of Old Age
8. Financial Insecurity
9. Age Wars
10. Elder Wasteland

Let’s hear what Dr. Dychtwald has to say about one of these issues, #5. What about “Gerassic Park”? As Dychtwald writes,

All future-oriented public policy in America, including policy regarding Social Security and Medicare, is based on the assumption that there will be no meaningful breakthroughs that will affect longevity or biological aging. So what happens if we wake up tomorrow morning and there is a breakthrough?

Might it be a “Gerassic Park” in which, instead of cloning entire humans, we find a way to clone organs? What if we learn to manipulate the body’s immune system to increase longevity? Can we imagine a future without cancer, a world without Alzheimer’s or heart disease? It is possible…. The biotechnology century is coming; we should expect the unexpected.

–Dr. Ken Dychtwald, “THE 10 PHYSICAL, SOCIAL, SPIRITUAL, ECONOMIC, AND POLITICAL CRISES THE BOOMERS WILL FACE AS THEY AGE IN THE 21ST CENTURY,” American Society on Aging (www.asaging.org)

I see medical breakthroughs each day. That is why, as a Certified Financial Planner, I am bound to do planning for my clients assuming a life expectancy of 120 years.

You may think that living 120 years is far-fetched. When I was in my early teen years, as my grandfather retired at age 65, it was expected he would be dead by age 70. Over the past 50 years, with medical advances, the Insurance Institute states that a married couple reaching age 65 can expect one of the spouses will easily live to the age of 95.

Better plan for at least 30-40 years of retirement funding.

Discipline or regret!

I find that as each new year comes, people often state, “Gee, where did the year go? It went by so quickly.” And yet, other times people bemoan that things are moving too slowly. Since we, in general, are here on this planet for 100 years and then pass away for eternity…here is a glimpse of how long eternity is….

“In the cold northern wastes there is a mountain a thousand miles long, a thousand miles high. Once each thousand years a small bird flies north. This small bird flies north to sharpen his beak on the cold hard stone of the mountain. When the mountain is thusly worn down, one second of eternity shall have passed.” –Tibetan Poem

With the markets in turmoil for the past 10-12 years, most people now feel that they are doomed financially to have a reasonable retirement. Not true.

In my 40-year career I have watched the herd mentality hit investors. Here is my point. Going back to 1871, the average rate of return for the stock market has been around 12-13%. Like a pendulum on a clock there are periods when the returns are greater than 13%, and, other periods with returns much less. (From a technical standpoint, the S&P 500 has a standard deviation of +/- 21%. So around 70% of the time you could expect returns of +34% to -8%. We could take these calculations out to three standard deviations but that is not necessary for this discussion.)

During the 1970s the S&P averaged a 5.9% return each year for those 10 years. In the 80s and 90s, it averaged around 21% each year (the low tax rates and high tech days). So you knew in advance that the years 2000-2010+ were going to be bad years…just to average things out. Well, it happened. Like all forces of nature, the market moves in cycles. Even though the public sees doom and gloom today, the markets will start the next trend line upward soon.

So how do you save and invest? Wade Pfau wrote a great paper, “Safe Savings Rates: A New Approach to Retirement Planning Over the Life Cycle.”

We all know about the safe withdrawal rate, namely, you should never take out more than 4% of your retirement account value annually in order to assure you will never outlive your income. Pfau assumed a 30-year accumulation period followed by a 30-year withdrawal period. Going back to 1871 he found using a 60/40 mix (60% stocks and 40% bonds) that one needed to save 16.67% of gross salary each year, adjusted for inflation. (So, if inflation went up 3% this year…next year would require 19.67% savings to make headway.) Now if your income went up every year by the exact amount of inflation, then, your rate would stay at 16.67%.

This formula plan would assure that you would have enough funding to live on 50% of your final year’s income level. Unfortunately, most Americans live on 91-95% of their final year’s salary in retirement…so, you will have to increase the rate of savings above 16.67% per year. I always suggest a person save at least 25% of gross income. That way, if you place your monies in a tin can in the back yard at a zero rate of return, you will have 10 years worth of money when you retire.

Read the article and insert the 25% under a 60/40 mix, and you will see the plan will amply fund your lifestyle.

One of the greatest frustrations I experience is trying to get clients to accept that they will live a long time after retirement.

In the past 25 years, medical breakthroughs, such as stents, have extended people’s lives without debilitating surgery. Weekly, you see in the media celebrities or the “average person” living well into their 100’s. In fact, the fastest growing segment of Americans are those living past age 100.

So how do you plan financially for this event? You work from age 25 to age 65…a mere 40 years to accumulate enough money to live 35 or 40 years after retirement. Funny, if you save 10% of your gross income in your working years, and, assuming no rate of return (common today in bank accounts) for the 40 years of work…you will have, at 65, four years’ worth of monies after retirement. If you save 25% of your gross, with the same factors, you will have 10 years of living expenses available at retirement. Both scenarios assume no inflation.

The authors of a new study, The Problem With Living Too Long, from the Institutional Retirement Income Council, report half of all females who are aged 65 today will live to almost 88. Thus, if you, as a 65-year-old female, guess you will live to be 88, then, that gives you only a 50/50 chance of not outliving your income. Statistically, a quarter of those women will live five years past age 88 and 10% will live to age 98. So, if you want a 90% certainty of how long you will live…better use age 98.

You are playing with loaded dice if you say, well, I’ll be dead at 85 and so I only need to plan financially until then. How will you pay your bills when you live longer? Are you going to call on your kids to fund your lifestyle? (They probably will be retired themselves.)

The better choice is for people to work longer, save more, or live on less now. This funding requirement should not be a surprise to anyone. You have had your entire lifetime to plan for your retirement.

Sit down with a professional advisor…this week, and have them map out at least a “rough and dirty” template as to the path you are on. I have done scenarios over the years where people have only a projected 5-30% of what they will need in retirement. They are in shock since they never thought about it. (Must be because they are too concerned over who will win on Dancing With the Stars.)

Start now…a small change can produce tremendous results.

The chart below will give you an idea of what you can expect:

THE LIFE EXPECTANCY GAMBLE
10% of all 65-year-olds will live into their 90s

65-year-old males:

50% will live to 85.99 — 25% will live to 90.78 — 10% will live to 94.74

65-year-old females:

50% will live to 87.97 — 25% will live to 93.17 — 10% will live to 97.64

65-year-old joint life expectancy*:

50% will live to 91.07 — 25% will live to 95.07 — 10% will live to 98.80

Source: Actuarial Consultants Inc. Data is based on 2013 mortality rates for people who do not hold annuities using IRS projections based on July 2000 tables from the Society of Actuaries.
*At least one spouse will live to the age indicated.

You can deal with this issue like the “ant or the grasshopper.”

Ah yes…discipline or regret.

Oftentimes, when a person does not prepare adequately for retirement funding, they consider using a reverse mortgage just to exist.

Assume a retiree’s home is paid off. They can go to a bank and obtain a reverse mortgage loan against the property. Depending on the person’s age, their health, and the property value, the lender will provide funding to the retiree. The amount may be, say, 50% of the appraised value of the property. There are no payments due to the bank. The principal and interest accrue. Once the person dies, the bank will take the property and sell it. The outstanding mortgage may be 80-90% of the home’s value at the person’s death, so, the bank can still make some money once it sells the home. On the other hand, the surviving spouse or heirs could pay off the loan and take ownership.

A recent article in the September 2011 issue of Investment Advisor magazine showed AARP suing Fannie Mae and Wells Fargo over reverse mortgages.

HUD had established original rules that “…a borrower or heir would never pay more than the home was worth at the time of repayment.” In 2008 HUD changed the rules…. The heir must pay the full mortgage amount even if it exceeded the value of the home. AARP sued and HUD returned to the original rules.

A new suit has come up, by AARP, toward Fannie Mae and Wells Fargo. These institutions are failing to give notice to surviving spouses and heirs of their rights to buy the property for the lower value. These institutions are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home.

Thus, a stranger could purchase a reverse mortgage home for the fair market value where an heir could not.

A simple solution to not getting caught in this trap is to start early funding for your retirement. Sit down with a Certified Financial Planner no later than your early thirties to get a plan in place to actively fund your plan. Day after day I have a large number of people, around the age of 58, who earn $100,000 per year or more, and have less than $50,000 saved for retirement, call into the office, looking for a quick solution. With only $50,000 that will fund the first six months of their retirement. Sad….

As always, discipline or regret.