Paul Ferraresi

I came across an article in the November/December 2008 issue of NEFE Digest (a publication for professional financial educators) and I could not resist sharing it. It holds many of the concepts that I have taught you in this blog. The article was written by Brent A. Neiser, CFP. He is director of Strategic Programs and Alliances and chief organizer of NEFE’s Retirement Income Decumulation Think Tank. Now, although it is being written to us as financial educators, I know you will find it useful as you look over my shoulder. Enjoy and hopefully you will get a few subtle “aha’s.”

Myths of Retirement

Ever have someone tell you that after working hard for the last 40+ years they are “finally ready to retire?” Retire on WHAT, you think. They have virtually no investments, little savings, maybe a house with limited equity, and not much else.

We in the financial education community have to explode the many myths associated with living in retirement and on social security. Astoundingly, many Americans still believe that they can somehow live their life in retirement by relying almost exclusively on that monthly government check. Social Security was designed to be a supplemental income source, not the whole retirement package.

At least 50 million families are currently “undersaved” and racing headfirst towards retirement. Many soon-to-be retirees often don’t think about (or are too overwhelmed to think about) how they are going to pay for retirement. And once they actually get there, they realize they have not adequately calculated the cost of living through retirement. Alarmingly, they often overestimate how long their personal savings will last once they retire and begin spending their limited nest egg.

Too many people think of 65 (or even earlier) as the so-called “magic number” when they will stop working. Quite possible they spent their life working at a job they didn’t like, but it paid the bills. Even worse? A life spent at a job they didn’t like that didn’t pay the bills.

But absent significant health issues, there is no particular reason to retire at 65. All of us have significantly more years beyond that arbitrary date in which we can have vibrant, intellectually stimulating, and challenging lives. Regardless, many stop working, more than likely too early. Doing that and claiming Social Security before full retirement age will reduce lifetime inflation-adjusted earnings by up to a third.

So, how do we motivate people to work longer and save more? It is not an easy sell. Since the 1950s, when the retirement age was roughly 68, we’ve been marching steadily towards a younger retirement age. Right now, it is about 63 according to the Bureau of Labor Statistics.

But working longer and planning too far into the future is counterintuitive to most of us. We’ve been the target of a lifetime of advertising telling us that if you want it, buy it now on credit and worry about tomorrow- tomorrow.

Regardless, of whether someone is in their forties, fifties, or beyond, we as financial educators need to affirm that building up large retirement savings is not a luxury but a necessity. Soon-to-be retirees need to understand not only to save for the “fun” part of retirement, but also for the unavoidable. Medicare co-pays will sap their accumulated savings as they grow older. Inflation will not stop just because they have gone into retirement. As they age, just about everything will cost more, even as they draw down their accumulated savings and investments.

There are some solutions. By retiring later, people can avoid drawing down what little savings they have accumulated and actually can continue to add to their savings. In many cases, they’ll also be able to keep their employer sponsored health insurance.

An added bonus of working past 65: more time to pay off any high-interest outstanding debts, like credit cards, car loans, or personal lines of credit. The goal is to go into retirement debt-free or close to it.

As professionals, it is imperative we provide more education and retirement product options for those in or nearing the retirement phase of their life. Obviously, we also must provide comparable direction and assistance for those in the savings and accumulation phase.

In particular, we must get soon-to-be retirees to talk about annuitizing at least a part of a lump sum distribution from an IRA or 401(k) to provide a stable, secure, and predictable income. But, would-be buyers need to know to shop around and ask lots of questions, because fees and surrender provisions vary significantly.

We need to motivate people to seek out professional investment advice regardless of their current income and how little investment income they may have accumulated. A few hours and a few hundred dollars’ worth of professional advice can make a significant difference in the long run to someone with even limited savings.

As much as anything else, we need to help people understand that retirement is a goal that you can ease into, not an event that has to take place at a specific, pre-determined age. Individuals can go on “retiring” for decades. Retirement, as we see it now, undoubtedly will look different in 10 or 20 years time.

An associate of ours, Kim Barmann, in New Mexico sent this report. I wanted to share it with you to emphasize the importance of staying vigilant in saving money.

$ People Are Saving Less

• The Commerce Department reports that Americans are saving at the lowest rate since the Great Depression.
• Personal savings stood at a national level of negative $6.2 million in January.
• About 40% of Americans say they are saving nothing for retirement. One reason: Over the past year, inflation rose 4.3% while salaries rose only 3.4%.
• One in four Americans told the Employee Benefit Research Institute that they have no saving at all.

$ Retirement Is Coming Later and Later

• The percentage of Americans 55 or older working full-time increased from 54.2% in 1993 to 64.4% in 2005.
• Nearly one in four people between 65 and 74 was still in the labor force in 2006, compared with just one in five in 2000.
• A recent study indicates that 17% of workers have suffered a reduction of retirement benefits offered by their employers in the last two years. Of these, only one-third say they are saving more for their retirement as a result.

$ Student Debt Is Piling Up

• Tuition cost have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics-twice as much as graduates owed a decade ago.
• Nearly a quarter of recent grads owe in excess of $25,000.
• While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

These are the statistics. Break away from the crowd and do NOT be one of the statistics. Call us if you want to stand out from the crowd.

What if you could retire early and still get full retirement benefits?? It is not a new concept but many people do not know about it.

The current Social Security system allows individuals to claim reduced, early retirement benefits beginning at age 62. Individuals who wait until their full retirement age to collect receive about 30% more in monthly benefits. If they wait until age 70 to collect, their benefits will be about 60% larger than at age 62. So what should you suggest your clients do?

Assuming a normal life expectancy and using the interest rate on government bonds, the actuarial present value of lifetime benefits are the same for those taking early retirement as for those waiting to take benefits at a later age. Of course, if one’s life expectancy is not normal (due to illness or bad luck or particularly good genes or good luck) one retirement age will look more attractive than another.

Look at going for the best of both worlds: retire at age 62, then pay back and reapply for Social Security benefits at age 70 if you come to regret your early decision.

A couple claimed their Social Security benefits at age 62 and now they each receive reduced benefit of $13,250 annually (in 2008 dollars). If they had waited until their normal retirement age (65) to collect benefits, the couple would each receive $18,928 a year. If they waited until 70 (this year) to apply, their benefit in 2008 would have been $20,693, thanks to the delayed benefit credit.

If they choose to pay back the Social Security benefits they have received over the past eight years, they will each receive the much higher benefit for the rest of their lives. If they take this option, each would repay $94,556 to Social Security. They would then each begin receiving $20,693 a year (the same as if they had waited until age 70 to begin receiving benefits); and as a result, they would have approximately 56% more in real Social Security benefits every year for the rest of their lives. “Essentially, the government has given them an interest-free loan.”

Many people think their retirement will consist of a leisurely life of traveling or playing golf after picking up their gold watch.

Soon to be retirees have many questions to address before showing up for their last day. First off will be when you retire. It will make a major difference in the amount of money you’ll actually have in retirement. Most people fall into the trap of taking Social Security too soon.

Data from the Bureau of Labor Statistics show Americans are increasingly taking early retirement. In the 1950’s the average retirement age was 67.6 years old. By the 1960’s the age dropped to 64.6 and by the 1990’s it dropped to 62.6.

It appears, according to a study by NEFE, those with combined pre-retirement income of $30,000 to $100,000 have NOT planned adequately for their retirement. With to much debt, not enough money saved and few plans for how they will decumulate their funds it is a time bomb ready to explode.

The key is more education and a desire to be self sufficient. Looking at the above statistics on retirement age I reflected that in the 1960’s the average person did retire around age 65. (This was mandated by the government as the “official” retirement age). Most workers died about 7-8 years after retirement with their spouse surviving about another 10 years. Their pension and Social Security made it a somewhat “comfortable” retirement. Today, the life expectancy for a healthy 65 year old male is near age 85. The surviving spouse is expected to live into their early 90’s. Wouldn’t it make sense for people to work to say age 78 or so? Then, following the above formula for the worker would live 7-8 years after retirement and still have a “comfortable” retirement. Isn’t that what is happening as you go to many stores and see countless senior citizens happily working?

This would solve all the financial problems for Social Security, keep people active and productive, and, provide society with dedicated hard working employees. The activity would keep people fit, possibly stop them from deteriorating mentally and physically and take a strain off our country’s medical facilities. Ah yes, as George Burns said “If I knew I was going to live this long I would have taken better care of myself.”

The response I get from most people on the above idea…. Paul, I hate my job and just want to get out. My response…. Who chose that job and why not get out now. “Well, I need the great pay and benefits” My response…. You have complained for 10 years saying the same thing. Why didn’t you set up a side business 10 years ago so you could walk away today.” Ten years from now you will probably say the same thing again, so, why not start to make changes now?

Ah yes, discipline or regret.

Life is like a marathon race. Many ups and downs. Pain from each step we take, yet, euphoria as we pass each marker. As you run and try to reach your goals for this year… why not sprint???

I find reading books helps one reach insights. Doug Andrew, author of many best selling books can help you “sprint” to financial independence. I am a trained advisor on Doug’s team and suggest a basic book from his collection…..

________THE______________________________________________

LAST CHANCE MILLIONAIRE

IT’S NOT TOO LATE TO BECOME WEALTHY by Douglas R. Andrew

 PRE – PAY YOUR MORTGAGE
 SOCK AWAY AS MUCH MONEY AS YOU CAN IN YOUR 401K!
 DIVERSIFY YOUR PORTFOLIO!

THAT’S THE GUARANTEED WAY TO A SAFE AND SECURE RETIREMENT!

BUT IS IT?

For the millions of Baby Boomers facing retirement, here is a brilliant – and refreshing contrarian – guide to accumulating wealth and security regardless of age, income, or current assets.

According to Doug Andrew, the bestselling author of MISSED FORTUNE 101, too many Americans are being led down the wrong financial path. Even worse, many Baby Boomers find themselves panicking – fearful that they’ve already fallen too far behind to ever catch up.

In this indispensable and eye-opening guide, Andrew provides fresh new pathways to reaching financial security – pathways that all Americans need to consider now. Centering on his Three Miracles of Wealth Accumulation: the Miracle of Compound Interest, the Miracle of Tax-Favored Accumulation, and the Miracle of Positive, Safe Leverage, Andrew explodes many of the commonly-held myths about 401ks, pensions, paying down one’s mortgage, and other forms of retirement planning. Along the way, Andrew offers unique strategies that will not only increase your wealth, but also help readers enjoy their best years while securing their future.

 Douglas R. Andrew’s first hardcover, Missed Fortune 101 (0-446-57657-3), was published by Warner Business Books in 2005 and has sold in excess of 500,000 copies.

 With an estimated 83 million Baby Boomers approaching retirement, books that focus on financial security are perennial bestsellers, as demonstrated by the blockbuster success of the #1 New York Times bestselling Rich Dad series by Robert T. Kiyosaki.

 Americans are perpetually striving to join the millionaire’s club, as evidenced by the continuing success of The Millionaire Next Door (Longstreet Press, 1996), which has sold more than two million combines copies.

Doug Andrew’s initial books Missed Fortune, Missed Fortune 101 and Millionaire by Thirty are other ones you need to read.

If you want more information email me at founders@foundersgroup.net or call 713-871-5919.