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Retirement Planning: Risky Business – Provided You Know August 13, 2008

Posted by retirementwithaplan in Uncategorized.
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It has become risky business to retire, provided you know what the risks are, have made plans for them, and understand that those plans may have grossly underestimated what you need depending on your age. A recent paper released by the Center for Retirement Research (CRR) has found that three things are showing signs of a troubled horizon for future retirees.

Social Security: Future retirees can expect less of a total income impact from Social Security, perhaps lessening their overall quality of life. Often referred to as the third leg of a retirement plan, giving folks the erroneous impression that these benefits will make up a third of what they will need in retirement, Social Security will have far less of an overall contribution to your plan. With the average age of retirement hovering around the sixty-years-old mark and with life expectancies rising steadily, much less of what might have been planned for, even anticipated can be expected.

Retirement plans: Currently, only 21 percent of the future retirees can expect a traditional pension often referred to as a defined benefit plan. As we found in the previous post, those plans should have an estimated payout of roughly one-half of what you might have expected. This is due to unknowns such as under-funding and even corporate bankruptcies and worse, the plan being frozen and/or dissolved. Once the PBGC gets hold of the plan, your previous plan’s estimates will seem generous.

The rest of us are covered by plans such as a 401(k) or defined contribution plans. Because these are self-directed, many of the plans are under-funded. This means that the expected life-style of these workers in retirement has been overestimated in some cases as much as 60%. A recent Survey of Consumer Finances found 44% of the respondents in an “at risk” situation of not having enough money saved to make it through their retired years.

Surprisingly, the lower the income, the less you need to worry. Social Security will have a higher replacement income cost due in large part to the progressive nature of the system. They will still need to save, but the impact of not saving enough will not be as crippling as it would be for the middle-income wage earner. The more money you make, the more worried you become. And this fact has made the high-income wage earner less susceptible to facing a lower standard of living in the future.

The middle-income wage earner on the other hand, is faced with some real issues that they may be underestimating. Which brings us to the third element in the CCR’s list of worrisome problems facing future retirees.

Health care: Estimates are all over the board on how much it will cost to cover you and your spouse in retirement. The ability to pinpoint this number with any accuracy has lead to an under-funding of plans designed to offset these costs. With health care costs rising anywhere from 8-10% year-over-year, the estimated need for late Boomers, those born after 1954 to 1964 is $200,000 for lifetime health coverage.

The question this study asks: are you worried enough? Most of us have some sort of gut feeling about where we are, where we are headed, and what retirement will be like when we get there. This is better than not knowing. But the study does point to the fact that over a quarter of those surveyed, are not worried enough about what their future holds.

While it should go without saying, there are some things you can do know that would help with these costs.

Save more – even a few percentage points more each week will add tens of thousands of dollars to your retirement coffers and even more the younger you start.

Get healthy – The easiest way to offset future health costs is to get control of those health issues will you are still working. Although these are hard to accomplish, stopping smoking, eating better and some exercise will pay huge dividends in the future.

Worry more – Even as worrying can have a negative effect on your health, when it comes to retirement savings, it might just be the extra catalyst you need to accomplish the “save more” and “get healthy” parts of your retirement plan.



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