In part one of 21st Century Retirement Strategies, I talked about the need to start your retirement plans at the very beginning of your working career. I wasn’t kidding. I have a hard time believing that people don’t think about it 100% of the time. It should be done as soon as you are employed and eligible to participate in your employer’s retirement plan, or if self-employed able to contribute to a plan you create yourself. Not only that, it should also be a consideration when you are interviewing for a job, even when changing jobs. Finding out what the benefits are when it comes to retirement plan options may not seem that important, but it is.
Retirement planning is as much of a skill as just about anything you that you do in life. The main problem is that for most of us there isn’t much education or preparation for it and we have to learn as much as we can on our own. Fortunately, you might say, we have a fairly long period between day one of work and retirement day to figure it all out. Today, I’ll cover some of those retirement strategies that can help you secure your golden years.
Social Security & Inflation
For the past several years, the inflation rate has been low and that has affected the Social Security cost of living (COLA) payouts. In fact in several of the past 10 years, there has been no inflation adjustment at all into the payout. Reality is this: prices do go up every year, and in particular on things that affect retirees even more so even if the government inflation basket doesn’t say they do. Medical costs for one are skyrocketing. That alone makes the future worrisome for retirees.
One thing you should seriously consider is to delay your Social Security benefits as long as you can. If you don’t take them at 62 when first eligible, it will still give you the cost of living adjustments you would get if you were actively collecting when you finally do. It also avoids any taxes you might owe if you continue working and collecting (which you are allowed to do). If you can wait until age 70 (the maximum age for increasing your benefit), your increased Social Security payments are double what they would have been at age 62!
The Effects of Inflation
That’s significant, especially because of inflation. Here’s what inflation can do if you have $100,000 right now in your retirement account and you are 40 years old. This is what it would be worth with inflation that averages 3% a year…
- In 10 years $72,742
- In 20 years $53,479
- In 30 years $40,104
The result is when you reach age 70 you may have less than half the buying power you have today with that money. That is why you need to keep on building up your retirement funds early and delay drawing Social Security for as long as you can.
Years ago, and I am talking here about my parents’ working era before I was even born, lots of employers offered great benefits to their prospective employees. If you aren’t familiar with that, think of something like “pensions” from your employer. A pension is, or I might say it was, a fund contributed to by employers to be paid out periodically to a retired employee (usually monthly). It was invested or compounded in some way so that it will grow and be a substantial part of an employee’s retirement funds. At least that is how it used to be. So why did it change?
The History of Pensions
Let’s examine briefly the history of pensions. Pensions began as far back as the 17th century in Europe. Here in the United States, the popularity of pensions began to build in the late 19th century but it really blossomed in the 1940’s, primarily because of WWII with wage freezes and wage stagnation in private industry. Government and military pensions are still around and are the most common forms of pensions in the world.
As the years have moved on, pensions as a key part of retirement planning have definitely changed. In 1970, 43% of all US workers were covered by some form of defined pension plan but according to the Bureau of Labor Statistics that number has fallen to less than 10% today.
Why They’re Disappearing
Pensions are disappearing for several reasons. Since pensions are contributed to by employers based on wages, it is an expense employers want to shed. The number of employees in the workforce that help support that cost (the younger workers) has declined partly due to the huge number of baby boomers who are and have been retiring. Since the 1970’s, the number of 401(k) plans has been growing and growing, replacing pensions.
The drop off in pensions started with the recession in the early 1970’s that forced business to cut back on the number of workers they employ. When recovery finally came along, employers realized that they had made their employees become more productive by using less people to accomplish more work. I remember those days well. When working for R.H. Macy Corporation back then, I remember large cutbacks in our sales and management staffing. Some of those lost jobs just never returned. Add in automation and robotics that now are a growing part of the labor force and you can see why there are even fewer jobs being created. New companies and the new jobs being created by technology are simply not offering pensions.
Life expectancy is increasing and that means payouts are lasting much longer than ever. In the case of government pensions, it is not uncommon to find that they do not have ample funds to cover their obligation for pension payouts and are in serious trouble. State, local, and federal government are the biggest providers of pensions today. Unfortunately, many of those plans are now in the red.
There are about 3.5 million military personnel that receive a pension today. Some several hundred thousand have transferred their military pensions into civil service positions after leaving the military. Compounding the government pension problem is the fact that they also “insure” private company pension plans through the Pension Benefit Guarantee Corporation as an obligation. It’s one reason that the national debt is at nearly 20 trillion dollars.
It’s my advice here: don’t plan on a pension in your future or that it will be a real option when you seek or change jobs. Unless you plan on some kind of civil service career, a pension is not in the cards.
The 9 Best Options to Support You in Retirement
The workplace is generally the very first place that you really find out about retirement planning even if you are new and young at your place of business. The human resources staff or the business owner has information about what benefits are being offered to employees and that’s where you can start. So think of your retirement strategy as a puzzle and let’s look at all of the pieces that can actually form your retirement plan.
1. 401(k) Plan
A 401(k) plan is an employer retirement plan than became popular back in the 1980’s to replace company pension programs which were becoming far too costly to maintain. While pensions are still around in mostly government jobs, 401(k) is the most common vehicle for employees in the private sector. You can invest as much as $18,000 a year (subject to change) into a plan and deductions are shielded from your gross wages and tax deferred until you withdraw them in the future.
Employers usually offer you investments in mutual funds that are good performers and you usually have many choices.*
*Just keep in mind that like all investments in market products, it isn’t guaranteed to make money for you. But when your contributions are being matched with free money and you are in it for the long haul, your chances of success are really enhanced.
The best part of the 401(k) plan is “the matching portion” that many companies are doing which is actually “free money” to you that adds to your investment. It may be 1, 2, 3% match or even more. Whatever it is, you should always try and get a matching investment for the largest amount you can possibly afford. Time invested and free money means you will see huge growth in your retirement funds.
In smaller companies, those with 100 or fewer employees, a Simple IRA plan is offered with similar features to a 401(k) plan.
Check this out at work and find out all the details so you can start ASAP. It’s the number one way an employee can prepare for retirement in the 21st century!
2. IRA Plan
An IRA plan is a plan that you set up yourself at a bank or brokerage firm*, in person or online. There are two kinds of IRA accounts. The Traditional IRA allows you to deduct your annual contributions from your income and avoid the taxes until you withdraw the funds when you are retired. The Roth IRA allows you contribute now and pay the taxes on those funds when earned, but not when you withdraw them in retirement. Each has its own advantages.
* Market investments have risks, fixed return investments are protected by our government insurance such as FDIC.
There are annual limits to how much you may invest tax deferred in the Traditional IRA plans, depending on your age (up to $5,500 under age 50 and up to $6,500 over 50 currently). But you can contribute more than that if you want to do so.
You can also set up accounts for your spouse, even if they aren’t working each year, as long as you are married and file a joint tax return. The invested money can be split any way you like between you as long as it doesn’t exceed the allowable tax deferment you qualify to have. Investing in a spousal account is a good investment and protects the spouse for their future too.
Roth IRA’s have income limitations that are capped currently at no more than $133,000 per year for an individual and $196,000 for a married couple in 2017 and are subject to change each tax year.
3. SEP and 401 Solo Plans
SEP and 401 Solo self-employment retirement plans are plans that you can create when you are self-employed.
The SEP plan is designed for any sized business to offer to its employees and has definite advantages for the employer in that it has little cost to administrate and allows a separate retirement account that an employee can set up himself while the employer only contributes to it annually. The employee is 100% vested in it from day one and owns it 100%.
401 Solo plans are just like 401(k) plans only for the self-employed (and spouse if applicable). They have the same rules as company plans only just for the individual business owner.
4. Stock Market Investing
Investing in the stock market today is very inviting for many people. Not only for funding retirement plans but as a means to increase wealth and income while they are in the prime of their life.
Investing in the market over the years has proven to be a very profitable way in the long term to gain wealth. However, it has no guarantees with it and from time to time has seen serious losses incurred by investors. It’s risk versus reward. You hear the terms bull and bear when the market is described, and that’s the way that experts see and describe market conditions and also indicates and defines the risk you are taking.
Sometimes at your workplace, investing in your own company stock may be an option, and it even can be at reduced or no cost to you if you are fortunate. Even if that isn’t an option, I do think, depending on where you are financially in your life and what your “risk tolerance” is that you consider some kind of market investment and staying invested over the long haul may be your best investment strategy. When you first invest, research a bit and seek some kind of advice from a professional. At the very least, let someone ask you the questions that can determine your risk tolerance and the appropriate amounts you can afford to invest.
Annuities are insurance policies that you buy and then are paid back to you over time in retirement like a pension. They have a somewhat bad reputation and there may be reasons for some to avoid them. One decision you must make is whether you buy a fixed rate or a variable interest rate annuity.
If you are looking for a guaranteed lifetime of continuous funds that can never run out, fixed rate annuities are guaranteed income in your retirement years. All other annuities have some risk with variable rate annuities being the highest. They can be purchased in any amount and will pay you in many different options like for your lifetime, or for a certain period of specific time that you pick (the shorter the period the bigger the periodic payout). You can start the payments immediately or defer them for years and years; any leftover funds if you die before the final scheduled payments can be left to a beneficiary too. You can never lose your initial investment with a fixed rate annuity as long as the insurer remains in business.
I purchased a 5 year deferred fixed rate annuity from NY Life (through AARP), a very highly rated insurance company with over 100 years of history. I will begin receiving payments from it when I turn age 70. Those payments are guaranteed for at least 20 years and they can continue after that until I pass on (like an insurance product). If I die before the 20 years, my spouse will be able to continue to collect the payments for the remaining years until it reaches the total 20.
Annuities are recommended for some, but only as a part of your retirement planning. Money placed in an annuity is almost impossible to access after it is set up until the agreed upon time and dates of its payout. Make sure you fully understand the annuity and have other more liquid funds available so you can access it if needed.
6. Life Insurance
I am including life insurance as part of your retirement planning safety net because when you or your spouse passes away, even if you aren’t yet retired, it can leave a big hole in your loved ones’ finances. While the survivors can recover financially, with kids left behind, college to pay for, and other big obligations like a mortgage on your home, it can be difficult without another source of income. An insurance policy will bridge that gap until the family can fully get back on its feet which may take years.
Term insurance is fairly inexpensive and the cheapest to obtain when you are young and healthy. Everyone who has a family or is planning one should have some term life even if you are only in your 20’s. Life insurance is most important when you are in the prime of your life and isn’t money you only count on when you are a senior citizen.
7. Long Term Care Insurance
A newer 21st century retirement strategy is Long Term Care Insurance (LTC). This type of insurance will help protect you when you are older and possibly unable to care for yourself. LTC policies also help you pay if you are admitted into assisted living or nursing home care which can literally cost hundreds of thousands of dollars per year.
It’s easy to see that without this kind of insurance coverage, one can run through their personal assets and retirement savings pretty quickly in that situation. On average, 52% of adults 65 and older will need long term support and services and the average duration of that need is about 2 years.
8. Retirement and Downsizing
The biggest and maybe the very best and cheapest way to deal with retirement is by downsizing your lifestyle and living arrangements. I know that at first glance this seems like some sort of punishment for a person who has worked hard all their life and now has the chance to enjoy life on their own terms. Even assuming that you are physically able to do that, the real question is “how you will pay for it?”
Downsizing is something that you can do at any age and frankly it is being done by a lot of people even in their 20’s and 30’s. The minimalist and those who are environmentally concerned do it for reasons that might be different from just financial, but they do it and so can you if you try.
A simple list would include things like
- Make a budget based on your “new lifestyle” plan and stick to it
- Sell your house and buy a condo or rent
- Relocate to a tax-friendly state or one with lower costs of living
- Become a one-car or no-car family
- Consider reducing life insurance coverages and the expense if your kids are grown and no longer dependent on you to support them
- Sell unused possessions for extra income or donate to charity to help others and get a tax deduction
- Share items and expenses with other family members or friends to save
- Prepare meals at home and limit dining out
- Take advantage of free services, entertainment, and discounts to save money; join AARP
- Use coupons when grocery shopping and shop with a list only
There are even more things you can and should do when you are pinching pennies and trying to protect your lifestyle without having your weekly paycheck as you did before.
9. Reverse Mortgages
I have written about reverse mortgages before and for some it can be a life saver although there are downsides to it for sure. If you are at least 62 and a homeowner, it is possible to have money paid to you from your home equity every month and thus you can stay in your home and not have to ever make a mortgage payment again.
There are lots of fine points and you need to do cautious homework on these plans, but for some people it may be the only way they can afford to stay in their treasured home.
A big life-changing event like retirement is a milestone you can make or break by what you do now and after you retire. The good news is that you have more than just a tiny bit of control over what will happen but only if you start early and really plan ahead with retirement strategies like these. It’s not easy, but it’s so important and so many of us don’t think about it as much as we should.
Where are you in the process of retirement planning? Are you preparing for it on your own? Do you have help? Do you re-evaluate your plan periodically? What are the ways you can improve your plan so you can enjoy retirement when it arrives?