An article appeared on Bloomberg last week that sounded the alarm on the very real prospect that millions of people will outlive their retirement savings. Lawmakers Seek to Prevent Americans Outliving Savings (Bloomberg, June 11, 2010) had this to say:
“In 1983, 62 percent of workers had only company-funded pensions, while 12 percent had 401(k)s, the center said. In 2007, those numbers were 17 percent and 63 percent, respectively”¦ Most American households at or near retirement “are consumed by fear,” said Anthony Webb, associate director of research at the research nonprofit. “Instead of walking on the beach hand-in-hand in retirement, the reality is that they’re sitting around the kitchen table cutting coupons”¦Nearly half, or 47 percent, of those on the verge of retirement are predicted to run out of money”¦”
The article went on to say that the average 401(k) account has $66,900, and the average monthly Social Security benefit is $1,067—both numbers as of the spring of this year, and neither consistent with the TV version of retirement.
Those numbers are averages and we can and should plan to be above average. But even if we are, even if we’re successful in achieving the hallowed million dollar 401k, will it be enough to cover us for decades of retirement living and the inflation, recessions and stock market reversals that will be inevitable over such a time span?
What should we be doing now
We need to begin thinking of building a retirement plan in the same way we would an investment portfolio—we must diversify. And that doesn’t mean merely diversifying between investments, but diversifying our life’s plan for retirement.
The foundation for retirement needs to be built on much more than just a pile of money sitting in a tax sheltered retirement plan. In fact, some of that planning won’t even have anything to do with money.
How do we diversify our life’s plan for retirement?
Maximize 401k contributions. This is the most obvious course of action and the one that gets the most attention—for that reason, I won’t spend too much time on it. Fund your account to the greatest extent you’re able—at least high enough to maximize the company match.
Also, seek true diversification in the account; a 401k is long term money and it needs to be managed with that time horizon in mind. A 100% allocation in stocks might look pretty smart in a big market run up, but it could easily leave you in a financial ditch if the market crashes, which it’s done twice in the past ten years.
Build non-tax sheltered savings. It’s important to understand that tax deferred is not the same thing as tax exempt. Tax sheltered retirement plans are deferred, not exempt, so you will pay taxes on the money at some point. Current tax rates are low by the standards of the post World War II era, and given the size of government deficits, betting on continued low rates could prove to be a strategic error.
The possibility that you could be in a higher tax bracket after retirement can’t and shouldn’t be dismissed. For this reason, a decent percentage of your financial assets should be invested in non-tax sheltered accounts. At a minimum, this will provide you with money that won’t be restricted by tax considerations. Think of it as tax diversification.
Plan on a retirement career. Despite all of our planning, saving and (hopefully) intelligent investing, we may not be able to accumulate all that we need to keep us living in comfort for the 20 or 30 years we should expect to live past age 65. Plan on supplementing investment income and what ever you might receive from pensions and social security with at least some employment income.
Begin now to plan for a second career—hopefully a less taxing one—that you can do in your golden years. A part time business or job in the early years of retirement can lessen reliance on investment income and enable you to stretch your savings far longer than if you begin tapping them immediately.
Be debt free. Most of us take on debt early in life to buy houses and cars that we can’t possibly afford to pay for in cash. Pay those debts steadily and faithfully until they’re all gone, then don’t incur any new debt. You will need to lower your cost of living in the retirement years and perhaps the single best way to do this is to make sure you aren’t paying for yesterday’s debts.
Prepare your body for retirement. Improving and maintaining your health is another aspect of cost of living reduction. Healthcare is a major cost in households today, but nowhere more than for the elderly for whom it’s often the largest single expense.
One of the best “investments” you can make in your retirement future will be taking care of your health while you’re still young. Picking up chronic health conditions is a part of the aging process, but the fewer we have the better, and the less of our financial resources will be needed to deal with them. Medicare is already strained and future predictions aren’t comforting so we may be on the hook for what ever it won’t cover. The investments of time and effort we make in better health can be worth hundreds of thousands of dollars later.
Keep your friends close, and your family closer. This has obvious emotional benefits, but there are a few financial ones as well. When we’re socially disconnected, we need to pay to find entertainment and to have others help us when we need assistance. But the more connected we are with family, friends and community, the less we’ll have to pay to find enjoyment and aid. Also, we often rely on work to provide community and companionship—once we’re retired, we’ll need to look elsewhere.
Get comfortable with reality! We all tend to have a vision of retirement as a care free world in which we’ll have plenty of time and money to do what we couldn’t do in our working years, and all our troubles will magically fade into the past. After all, we’re virtually bombarded with images of that kind of retirement from the institutions who are selling us the programs that will allegedly get us there.
But an expectation like this can only lead to disappointment. Other than the fact that you won’t be working at your current occupation, life in retirement will pretty much be what it’s been all of your life. Accept and prepare your mind for that reality, rather than the fantasy. Once you do, you’ll realize that retirement planning really isn’t all about money.
What are some other ways you can think of to broaden retirement planning beyond a 401k to encompass a complete life plan for retirement?
This post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.
( Photo courtesy of epSos.de )