Retirement Workshop at AFCPE 2011

1. Retirement Minus 5 to 10 Years:
10 Key Questions
Barbara O’Neill
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

2. Workshop Objectives
• Describe the “Retirement New Normal”
• Describe the “Retirement Grief Cycle”
• Describe common retirement planning errors
• Answer 10 critical retirement planning questions

3. Welcome to First Half of “Retirement Red
Zone” (5 Years Before to 5 Years After)
What is YOUR greatest retirement HOPE and your
greatest retirement FEAR?
Who are your retirement ROLE MODELS…good and bad?

4. We’re in a “New Normal” and Need to
Adjust BOTH Mentally and Financially

5. New Normal Retirement Challenges
• Slow U.S. economic growth
• Flat or decreasing incomes; high unemployment
• Reduced employer retirement income benefits
• Reduced employer retirement health benefits
• More talk about adjusting social safety-net programs
• May need to work longer before retirement and/or
downsize lifestyle
• Lower housing values
• Low returns on savings and investments

6. Sobering Statistics
• 45% chance that one spouse in a 65-year old couple will
live to 95
• EBRI: A retiring couple can expect to spend $295,000
on health insurance and out-of-pocket medical expenses
• 30% of unmarried women age 65+ live solely on Social
Security; 13% of age 75+ in poverty (vs. 6% for men)
• Disconnect: Only 12% of retirees actually have jobs;
72% to 80% of pre-retirees say they plan to work
• 25% of women and 20% of men age 55-64 have a
health problem that limits ability to work
• NEFE: “About 50 million at-risk middle American
households” (Journal of Financial Planning, July 2009)

7. Common Retirement Planning Errors
• RPS (Retirement Postponement Syndrome)
• Banking on unsure things
– Profit on sale of a home or business
– A certain investment account balance
– An inheritance
• Counting on an “econo-retirement”
– Spending by retirees often increases
– Go-go, Slow-go, and no-go phases
• Not saving as much as possible and taking maximum
advantage of employer matching
• Not getting help, when needed

8. For Some, the Dream of Upward
Mobility Appears to be Slipping Away

9. Five Stages: How People Receive “Bad News”
(Elizabeth Kubler-Ross DABDA Model)

10. The “Retirement Grief Cycle”
• Denial: “Not to Worry. This is just a temporary blip and things
will get back to normal soon”
• Anger: “This isn’t fair. They’re taking away [X]”
• Bargaining: “Maybe the union can get an exemption for older
workers so the [change] won’t affect me”
• Depression: “It’s hopeless. I’ll never be able to retire”
• Testing: “If I adjust my spending or work a little longer, I can
probably still retire comfortably”
• Acceptance: “I’ve decided to follow a new financial plan for
retirement”

11. Ten Key Questions You Need to Answer
• How long could I (we) live? • Where do I (we) want to
live?
• How much money do I
(we) need? • What do I (we) want to do?
• What is my (our) projected • Where will I (we) get health
income and expenses? insurance and how much will
it cost?
• Where and how should I
(we) invest? • What can I do to make up
for lost time and/or money?
• How long will my (our)
money last? • What steps should I (we)
take between now and
retirement?

12. How Long Could I (We) Live?
• BIG financial question
– Live too long and you risk running out of money
– Die young and “you can’t take it with you”
• Medical advances are keeping more people alive longer
• CDC Data, 2000 to 2007:
– Death rate from heart disease decreased 19%
– Death rate from cancer decreased 5%
• BUT…unchecked obesity, diabetes taking away some gains
• 2005 Society of Actuaries study
– 2/3 of retirees underestimate average life expectancy
– 42% by 5+ years
• Why do we underestimate longevity? “Familiarity Bias”
– We know more 30-69 year olds who die than 70-100 year olds

13. Life Expectancy Reality Check
• Enter “Life Expectancy Calculator” into an Internet search
engine (e.g., Bing, Google)
• Try at least 3 different calculators
• Look for calculators with questions about lifestyle factors
• Social Security calculator is very basic; based on averages

14. How Much Money Do I (We) Need?
• “It depends” (many variables)
• Compare some retirement savings calculations:
– http://www.choosetosave.org/ballpark/ (ASEC Ballpark
Estimate)
– http://njaes.rutgers.edu/pubs/publication.asp?pid=FS431
(Rutgers)
• General Guideline: For every $1,000 in monthly income,
you need $300,000 in savings ($300,000 x .04 (4%) =
12,000 ÷ 12 = $1,000) based on 4% withdrawal rate
– $2,000/month ≈ $600,000
– $3,000/month ≈ $900,000
– $4,000/month ≈ $1.2 million

15. What is My (Our) Projected Income?
Five possible sources for most people:
• Social Security (get an online benefit estimate)
• Pensions
• Retirement savings plans and investments
– 401(k), 403(b), 457 plans
– IRAs
– Annuities
– Taxable and tax-free investment accounts
• Income generated by home equity
– Reverse mortgage
– Rent
• Employment

16. What are My (Our) Projected Expenses?
• 75% of average U.S. retiree’s budget in order starting
with the highest amount
– Housing
– Transportation
– Food
– Medical
– Entertainment
• Try to pay off mortgage and credit cards before retiring
• Percentages (e.g., 75% of income) may not be accurate
• Much better to do a current and projected spending plan
– http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf
• Do a “test-drive”: Consider trying to live on pre-
retirement income BEFORE you retire

17. Where and How Should I (We) Invest?
• Invest a much as you can in a Roth or traditional IRA and
tax-deferred employer plan (e.g. 401(k) plan)
• Earmark a portion of raises for retirement savings
• Make catch-up contributions starting at age 50
• Maintain some equities in your portfolio to hedge inflation
• Assess your TRUE investment risk tolerance
– http://njaes.rutgers.edu/money/riskquiz/
• Reduce your risk level if you’ve accumulated the principal
you need to produce an adequate income stream

18. More Thoughts on Investing
• You could have a 30-40 year time horizon
• Diversify your portfolio: different asset classes
• Common guideline: 110- Your Age = % in stocks
– 110 – 65 = 55% (moderate risk tolerance)
• Consider consolidating accounts (RMDs start at 70½)
• Consider dividend-paying stocks and mutual funds
• Consider low-cost annuities for a guaranteed stream of income
(especially without a pension)
• Track your net worth and asset allocation annually
• RCE Excel spreadsheets:
– http://njaes.rutgers.edu/money/default.asp#resources

19. How Long Will My (Our) Money Last?
• “It depends” on two key factors:
– Rate of return earned on retirement savings
– Percentage of portfolio assets withdrawn
• Nest egg will be depleted faster if…
– The rate of withdrawal exceeds the rate of return
• Worst case scenario: Retiring during a severe market
downturn and selling stocks/funds for income
– Nest egg is severely eroded by market losses
– Withdrawals deplete it further
– Should have a 3-5 year cash withdrawal cushion to avoid this

20. Get a Monte-Carlo Analysis
• Uses historical investment performance data to estimate
probability of not running out of money
• A CFP® can do it for you or you can use an online
calculator (Search “Monte Carlo Calculator”)
• Check assumptions and beware of GIGO

21. Where Do I (We) Want to Live?
WSJ Article (3/21/11): BIG issue among couples; communication is key

22. What to Do?
• Compare individual visions of retirement
• “Must have” and “negotiable” items
– Clashing ideas and silent standoffs are common
– New Trend: Retirement LAT Couples (Living Apart Together)
• Start the conversation early
• The closer to retirement, the more “real” it becomes
• Research Studies: boomers much more likely than their parents
to move: 20% (AARP) to 42% (Del Webb) versus 10% historically
• Investigate taxes and living costs in other states
– http://retirementliving.com/RLtaxes.html
• Take extended vacation/”scouting” trips

23. What Do I (We) Want to Do?
• What gives you deep satisfaction?
– Meaningful relationships
– Helping others
– Learning new things
– Devoting yourself to a cause you believe in
– Applying your skills and experiences
– Achievement
• Is work a source of great pride and self-worth?
• The key word is “passion”
• What will a “typical day” in retirement look like?

24. Where Will I (We) Get Health Insurance
and How Much Will it Cost?
• Find out if you have access to retiree health insurance
– If so, compare the cost to a supplemental Medicare plan
– Will spousal coverage end if covered employee dies?
• Many retiree benefits being scaled back in public and
private sector
• If no employer benefit, “patch together a plan”
– Medicare at age 65 (can COBRA a group plan 18 months before)
– A Medicare supplement plan
– Medicare Part D (prescription drugs)
• Contact local SHIP office (www.shiptalk.org)

25. More About Retiree Health Insurance
• People with better health habits will eventually spend
MORE on health care than those with poor health:
– More years of medical expenses (e.g., age 93 versus 73)
– Likelihood of a chronic condition in advanced old age
– Likelihood of a need for long-term care (LTC)
• >50% chance that even the healthiest retiree may
eventually need LTC
• Consider LTC insurance or have a good alternative:
– Adequate defined benefit pension (with a COLA)
– Adequate annuity
– Self-insurance (assets and income)?

26. What Can I (We) Do to Make Up for
Lost Time or Money?
Before Retirement
After Retirement
• Increase retirement savings
• Trade down to a smaller
• Spend less and pay off debt home
• “Moonlight” for additional • Move to a less expensive
income location
• Invest more aggressively to • Work after retirement
try to earn a higher return
• Reverse mortgage or sale-
• Preserve lump-sum leaseback of home
distributions
• Make tax-efficient asset
• Work longer before retiring withdrawals

27. What Steps Should I (We) Take
Between Now and Retirement?
• Plan to get out of debt before you retire
– Pay off mortgage (prepay principal, biweekly payments)
– Eliminate consumer debt
• Assess available retirement benefits
– Employer savings plan and health insurance (self and spouse)
– Social Security (age 62, FRA, age 70)
• Review your insurance needs
– May not need life insurance if kids grown, mortgage repaid
– Consider LTC insurance with freed-up premium dollars
• Live more simply
– Save cash freed up by reducing expenses
– Lower the bar for retirement lifestyle

28. More Steps to Take Before Retirement
• Save aggressively (until it hurts!)
– Up to 6,000 in an IRA and up to $2,000 in employer plan (if 50+)
– Up to 20% of business net earnings in a SEP
• Invest broadly
– Multiple asset classes including international investments
– U.S. assets are <1/3 of world economy
– Low-cost index funds and ETFs
• Consider working longer than originally planned
– Boosts Social Security and DB pension benefits
– Provides more time to save in IRAs, 401(k)s, etc.
– Fewer years to withdraw money from savings
– Continued access to employer benefits
– “Retire” while still working

29. More Steps to Take Before Retirement
• Develop realistic plans to pay for retirement
– Plan to work until 66-67 but save as if retiring at 60-62
– Use retirement savings and Monte Carlo calculators
– Anticipate ways to create a “retirement paycheck” (e.g., annuity)
– Take steps to mitigate “broken promises”
• Try to control your exit
– Stockpile cash for stock market downturns
– Voluntary retirees 30% more likely to be happier
• Educate yourself about pre-retirement issues
– NEFE: http://www.myretirementpaycheck.org/
– eXtension: http://www.extension.org/pages/8633/financial-security:-
retirement-planning
– Financial advisors (CFP Board: http://letsmakeaplan.org/)

30. Comments? Questions? Experiences?
Money Magazine (October 2008):
“The 10 years before retirement and five years after
make up the riskiest period of your financial life.”
• Decisions made can impact you for 30-40 years
• Many perils outside of your control (aging parents,
boomerang children, health issues, workplace ageism)