by Joe Hearn | Jul 13, 2012 | Distribution Planning, Retirement, Social Security
I met with a prospective new client this week and he asked me the question I get asked by most people during introductory meetings:
“When can I afford to retire?”
We spent about an hour working through some numbers and coming up with the answer. I thought seeing a real world example would be helpful to some of you, so I asked him if I could share the details as long as I kept his name confidential. Here are the basic facts:
- He and his wife are 61 years old
- He has worked for his current employer for 41 years
- His 401(k) is worth around $700,000
- They have another $600,000 in savings and investments
- His estimated Social Security benefits are $1,900 per month if he retires early at 62 and $2,500 per month if he waits until full retirement age at 66.
- His wife does not work outside the home and has not qualified for Social Security
- Their house is paid for and they have no other debt
- They need an income of $60,000 per year in retirement
Step 1 in deciding when to retire is answering the question “How much income do I need?” As George Foreman said, “The question isn’t at what age I want to retire, it’s at what income.” In this case, the client (Let’s call him Jim) wants to have about $60,000 per year gross (i.e. Before taking out taxes).
Step 2 is figuring out where that money is going to come from. If Jim retires at 62, he will get $1,900 per month from Social Security. That’s $22,800 per year. He wasn’t expecting his wife to receive any Social Security because she hadn’t worked the 40 quarters required to qualify. Needless to say, he was happy when I told him that she qualifies for a spousal benefit. Spouses are entitled to receive the higher of their benefit (in this case $0) or half their spouses benefit (in this case $950 per month). That adds another $11,400 in income per year.
So they need a total of $60,000 and $34,200 of that is coming from Social Security. That means their personal investments will need to generate the remaining $25,800. Is their nest egg up to the task?
They have a total of $1,300,000. As we have discussed here many times before, research shows that a safe withdrawal rate from a portfolio is around 4 percent. Taking a 4 percent withdrawal from their portfolio would get them about $52,000 per year, which more than covers the $25,800 they need. So looking at the numbers, Jim and his wife could afford to retire at 62. But should they? I advised him to seriously consider waiting a few years. Here’s why:
- They will almost certainly need more income than they are expecting. Jim told me that his $60,000 estimate is the absolute minimum they’d need to maintain their lifestyle. If anything unexpected happens and they need to draw more, they could run out of money sooner than expected.
- They are both in good health and have parents that are alive and in their nineties. Given their health and family history, there’s a good chance that they will live for a long time. If that’s the case, their money needs to last. Working for a few more years not only gives them a chance to save more, but also means that they won’t be drawing income from their savings yet, which will help it last longer.
- The breakeven point on their Social Security (where it makes sense to wait until full retirement age to claim benefits) is about 12 years. That means if they plan on living past age 74, it probably makes sense to wait to begin collecting benefits until full retirement age rather than taking a reduced benefit at 62.
- Another potential reason to wait is health care. Right now, Jim’s employer pays the cost of his health care, but that would stop if he retires. Since he and his wife won’t be eligible for Medicare until age 65, retiring now would mean either going without health care or paying out of pocket for coverage. To continue his current coverage using COBRA would be about $900 per month. Waiting to retire until they are eligible for Medicare would eliminate that expense.
- Finally, we’re living in an uncertain time. Inflation is tame now, but could easily get much worse. The markets are volatile. Interest rates are low. All of these things can damage a portfolio’s ability to generate enough income.
Conclusion: Jim and his wife can afford to retire now, but as long as they’re in good health and Jim is relatively happy at his job, waiting could greatly increase their security during retirement. I hope that example helps shed some light on the process of deciding when you can afford to retire. Touch base if you have any questions or if there’s ever anything I can do for you.
Joe
by Joe Hearn | Jul 9, 2012 | Insurance, Medicare
One of the biggest obstacles to retiring early is health care. If you want to retire at 62, but don’t become eligible for Medicare until 65, you have a three-year window where you need to bridge the gap between your employer’s coverage and Medicare. Traditionally, that has meant either going without insurance (not a good idea) or paying for an individual policy (mucho deniro or not available due to pre-existing conditions).
The new health care law has elements that could make it easier to bridge the gap between employer coverage and Medicare, thus making early retirement a more viable option. The law phases in over time, so I’ll discuss the options available to you between now and 2014 and those after 2014.
Between now and January 1, 2014
In the short term, the law makes $5 billion available to employers to spend on insurance for employees who decide to retire early (visit www.errp.gov for more info). The drawback here is that your employer needs to offer retirement insurance benefits, which most don’t.
If you’re willing to buy an individual policy to bridge the gap, but don’t qualify due to a pre-existing condition, the new law also has a pre-existing conditions insurance plan. Visit HealthCare.gov to get details for your state and information on how to apply.
After January 1, 2014
Both the early retiree and pre-existing conditions programs mentioned above expire at the end of 2013. What replaces them? Starting January 1, 2014 insurers will no longer be allowed to deny coverage based on pre-existing conditions, so you can shop around with private insurers regardless of your health. If you want to retire early and still can’t find affordable coverage with a private insurance company, states will have “exchanges” where anyone can buy health insurance.
So if you plan on retiring early, it looks like you’ll have a few more options for health coverage. Work with a trusted adviser to see if these options are right for you.
by Joe Hearn | Jun 14, 2012 | Housing, Retirement
Raise your hand if you’ve ever made it through a particularly stressful day at the office by doing a Google image search for “Tropical Island.” Me too. In fact, if I type the letter “a” in the search bar, Google automatically thinks I’m looking for “Aruba” (B is Belize, C is Curaçao, etc.). While I’m partial to the tropics, you can also practice this desk-top-escapism by Googling London, Paris, Sydney or any other destination that suits your fancy.
There’s just something about our fast paced lives that makes a simple life in an exotic locale sound pretty appealing. Which raises the question: Should you retire overseas? Before packing the snorkel and sun block and buying a one way ticket to retirement paradise, it’s important to do your homework and determine if the expat life is right for you.
Retirement Budget
No matter if you retire in the States or abroad, much of your planning will revolve around your retirement budget. It will influence how much you need to save, when you can afford to retire and what types of things you can afford to do.
One of the appeals of retiring overseas is finding a location with a lower cost of living than the U.S. This is particularly true recently as the poor economy has battered retirement portfolios. If you’re ready to retire, but your nest egg isn’t, one option is to delay retirement and give your portfolio a chance to recover. Another option would be to move to a location where your dollar will go further. The website Xpatulator.com will help you analyze how far your dollar will take you in hundreds of different locations.
Healthcare
Most retirees in the U.S. rely on Medicare to cover a majority of their health related expenses. Unfortunately, Medicare will not provide coverage for U.S. citizens living abroad. That can seem like a deal breaker to many, but there are alternatives to Medicare.
The most obvious option would be to self-insure. Healthcare costs can be significantly less in some countries and it could make sense for a healthy individual to pay for care out of pocket on an as needed basis.
Another option is to purchase local coverage (which can be very reasonable, if available) or buy an international health policy through a company like Aetna International or ihi Bupa.
If quality of care is a concern, visit Joint Commission International to learn about internationally accredited and certified health care organizations in the country that you are considering. Keep in mind that if you eventually move back to the United States and want to sign up for Medicare, you will pay stiff penalties for waiting past age 65 to enroll.
Social Security
Unlike Medicare, your Social Security check can follow you beyond U.S. borders (assuming you don’t decide to retire to sunny North Korea or some other restricted country). Practically speaking, it may be easier to have your check deposited into a U.S. bank account and then access your funds using your ATM card abroad. This can help you avoid certain delays and fees if you try to have the check deposited directly into your foreign bank account. For more information, read Social Security Administration Publication 05-10137.
Taxes
Calculating your tax liability can be difficult under the best of circumstances. Add foreign residency into the mix and things can get downright complicated. Generally speaking, you will be subject to the same income taxes abroad that you would be within the U.S. You may also be subject to state taxes if you are still considered a resident of a state because you maintain a house or bank account there.
If you get a job overseas to supplement your retirement income, you may be able to exclude up to $95,100 of that income from your U.S. tax bill by claiming the Foreign Earned Income Exclusion (FEIE). This can help you avoid paying taxes to both the U.S. and your new country of residence on the same income. Before moving overseas, meet with a trusted tax advisor who is experienced in foreign tax issues so you can minimize your tax bill and stay within the good graces of the IRS.
Working
Many countries require you to obtain some form of work permit or visa before you will be able to legally work in that country. Keep that in mind as you consider where to retire. If possible, design your retirement budget so that it is not dependent on income from working. If you do decide to work, consider jobs where expats have a competitive advantage such as teaching English as a second language (ESL).
Buying Property
Buying property in a foreign country can be complicated. Some countries prohibit ownership by a foreigner altogether. Because of this, renting may be a better option. Either way, you should work with a local real estate agent and local attorney to make sure that any contracts are in order and that the transaction goes smoothly.
Retiring overseas isn’t for everyone, but it can be a great fit for some. If your dream retirement includes Panama instead of Pennsylvania or Uruguay instead of Utah, just make sure to do your homework and work closely with your advisers to ensure a seamless transition.
And don’t forget to send me a postcard!
Joe
I originally published a version of this article at www.fpanet.org.
by Joe Hearn | May 15, 2012 | Retirement
There is perhaps no more revered institution in America than that of Sport. Baseball is our national pastime. The Super Bowl is our most watched television program. Popular franchises have billion dollar price tags. Phrases like “The Miracle on Ice” and “The Dream Team” still illicit emotion decades after the games that spawned them. Our heroes are people like Jordan, Ali, DiMaggio and Armstrong. Go to the most remote nation on earth and you will likely find many people who can’t name our President, but they can recognize a picture of Tiger Woods or LeBron James.
Why are people so drawn to sport? Is it the passion of the players? The thrill of victory? The hometown pride in the team? Those are all good reasons, but I think somewhere near the top of the list would have to be the life lessons we can draw from organized competition. Whether it’s little league or major league, there are things we can all learn from games and the players who play them.
That is probably why I recently found myself wondering, as I watched fans yell advice to Tiger at the tee box, what advice he would have for us if the tables were turned. Since my beat is retirement, I pondered what wisdom guys like Tiger, Tebow and Tyson would have for those planning their golden years.
Tiger Woods (Have a plan)
In Hank Haney’s new book The Big Miss, Tiger’s former coach reveals that he always played his best golf when he had a plan for improvement, structured practice sessions and a clear goal that it was all pointing to. If Tiger were to look at how most of us are preparing for retirement he would probably ask, “What’s the plan?” How much do you need to save? Where will you live? What are you going to do? Our plan should answer all those questions and should be a step-by-step guide to get us from where we are to where we want to be.
Coach John Wooden (The importance of team)
John Wooden was the first person to be inducted into the basketball hall of fame as both a player and a coach. As great as his talents were, he understood the importance of team. A favorite saying of his was, “The main ingredient to stardom is the rest of the team.” Are you going it alone with your retirement planning or do you have a team? Partnering with trained professionals like a financial planner, estate-planning attorney, and accountant can bring a level of expertise and discipline to your planning that greatly increases your odds of success.
Andy Murray (Focus on fundamentals)
Andy Murray is a great tennis player. Unfortunately, he hasn’t won a major yet because he happens to be playing the game at a time when it is dominated by three of the greatest players to ever pick up a racquet: Federer, Nadal, and Djokovic. To rise to the challenge, he is returning to the fundamentals of the game. He has hired a new coach (tennis great Ivan Lendl) and is working tirelessly on the key building blocks of his game like the forehand, backhand, serve, spin, placement and power. He has a special diet and trains for endurance, strength, explosiveness and agility. His advice for us would likely be “Focus on the fundamentals.” For retirees, that means things like a retirement budget, debt reduction, asset allocation, distribution strategy, health care, Medicare and Social Security.
Cal Ripken, Jr. (Stay healthy)
Cal Ripken, Jr. broke a record in baseball that many thought was unbreakable: Lou Gehrig’s record for consecutive games played. As if to put an exclamation point on it, he exceeded Gehrig’s mark by 501 games. How did he do it? He stayed healthy. “Early in my career I decided I never wanted to get out of shape,” he said. To make the most out of retirement, you should follow Ripken’s lead. Taking care of yourself and staying healthy will not only allow you to be more active during retirement, but it will also lessen the strain on your nest egg.
Mike Tyson (Don’t sabotage yourself)
Iron Mike won over $300 million in prize money during his career. Unfortunately, he also elevated bad decision making to an art form—horrible spending habits, jail time, biting off his opponent’s ear—and he was eventually forced to declare bankruptcy. Don’t be like Mike. One bad decision can ruin a lifetime of good ones. One of the earliest lessons in life is that actions have consequences and boy is that true in the final third of life. Don’t do anything that would derail your retirement dreams.
Lance Armstrong (Deal with adversity)
Things don’t always go according to plan. Markets can fall. The government can change the rules on things like Social Security or Medicare. There can be an unexpected illness. Being retired doesn’t mean that everything magically goes your way. After facing cancer, no one would have blamed Lance Armstrong if he’d decided to quit racing. Instead he fought through the adversity and eventually won the Tour de France seven times. Why didn’t he quit? “Pain is temporary,” he said. “It may last a minute, or an hour, or a day, or a year, but eventually it will subside and something else will take its place. If I quit, however, it lasts forever.”
Michael Jordan (Diversify your income streams)
During retirement it’s helpful to have income from multiple sources like Social Security, a pension, savings, a small business or part-time work. This reduces risk and increases your options. Having several sources of income was one of the reasons Michael Jordan could afford to walk away from basketball and pursue his dream of playing minor league baseball. The pittance a minor leaguer is paid was no worry when he still had millions coming in from Nike, McDonalds, and Gatorade. You and I may have fewer zeroes in our paychecks, but we can follow the same principle.
Muhammad Ali (Visualize the future)
Muhammad Ali once said, “I hated every minute of training, but I said, ‘Don’t quit. Suffer now and live the rest of your life a champion.'” Getting ready for retirement is hard work. It takes discipline and sacrifice. Experts in behavioral finance have shown that you can make it easier and improve your chances if you do what Ali did and visualize yourself in the future.
A recent study* showed participants pictures of themselves and then asked them to allocate money toward a hypothetical retirement savings account. Half were shown current pictures of themselves. The other half were shown “age morphed” pictures of themselves that depicted what they would look like in old age. Those shown the age adjusted photos allocated twice as much money to savings as did the others.
I could go on and on drawing parallels between athletics and retirement, but you get my point. Just like the athletes we adore, we all want to succeed and do our best. And like those athletes, if we work hard and keep our head in the game, good things will come. As Yogi Berra might say “Retirement is 90 percent mental. The other half is physical.”
Is there anything I can do to help? Don’t be a stranger. Touch base anytime.
Joe
Photo courtesy of Chase McAlpine. Used under Creative Commons License. I originally published this article at www.fpanet.org.
*—Ersner-Hershfield, H., Goldstein, D., Sharpe, W., and Bailenson, J. (2010). Future Self-Continuity and Saving Behavior. Working paper.
by Joe Hearn | May 8, 2012 | Estate Planning, Insurance, Investing, Retirement
The odds are extremely good that my wife will outlive me. Whatever the reason—genetics, a healthier diet, the fact that she uses our treadmill as something other than a clothes rack—there will likely come a day when she bids me adieu.
Most people know that women have a longer life expectancy than men, living about 81 years compared to 76 for the average male. But what they may not have considered is what this statistic means in reality: namely that the overwhelming majority of people in retirement are women.
In the U.S., women make up nearly 60 percent of the population over age 65 and nearly 70 percent of the population of those over age 85*. How should that reality affect the retirement planning of the fairer sex?
Investments
At a minimum, a longer retirement means the need for more income. All else being equal, funding a 20-year retirement will be more expensive than funding a 10-year retirement. That means more money will need to be set aside leading up to retirement and withdrawal rates will need to be sustainable (around 4 percent) during retirement in order to keep from running out of money.
Also, asset allocation will be more important than ever. The portfolio will need to be invested aggressively enough to overcome the ravaging effects of inflation that are sure to happen over a longer period, but not so aggressively that investment losses wipe out principal. Maintaining the proper balance is a key ingredient to making the money last.
Pension plans
A pension plan for a married couple can be an important source of retirement income, but what happens to that income when one of the spouses dies? If the husband dies and it was his pension, does that income go away? It depends. If the pension benefit was based on his life only, then payments will likely end when he dies. To avoid the negative financial impact that this would likely cause, couples should arrange with the pension provider to base the benefits on both of their lives. “Joint Life” benefits will likely be smaller than those based on a single life, but they will also minimize the financial impact on the surviving spouse.
Social Security
Women are more likely than men to leave the workforce at some point in their careers in order to raise children or care for aging parents. Some choose not to work outside the home at all. This, along with the fact that women still tend to earn less than their male counterparts, can impact their eligibility for Social Security benefits. Because of that, the Social Security Administration has special rules that apply to people who are widowed, divorced or still married, but with little in the way of earned benefits.
For starters, spousal benefits entitle everyone to either their own benefit or half of their spouse’s benefit, whichever is greater. In addition, those widowed or divorced are able to collect benefits on their former spouse’s Social Security record if:
- The former spouse is collecting benefits or is deceased
- You were married for at least 10 years
- You are 62 or older (60 or older if your spouse is deceased)
Getting remarried could affect your eligibility for benefits under certain conditions, so be sure to check with the Social Security Administration before heading back to the altar. For more information visit www.ssa.gov and download the brochure “What Every Woman Should Know.”
Life Insurance
The primary purpose of life insurance is to replace a person’s income in the event of his or her death (Note: It can also be an effective estate planning tool, but that is a discussion for another article). Because of that, many people keep adequate insurance coverage during their working years to protect their spouse and children, but then get rid of it when they retire. This could be a big mistake if a significant portion of a couple’s retirement income is attributable to just one of the spouses, say in the form of pension or Social Security benefits.
How do you know if you need life insurance during retirement? Ask yourself this question: “Would my death create a significant financial hardship for my spouse?” If not, then you probably don’t need life insurance. However, if the death of either you or your spouse would result in significant loss of income for the other, then life insurance can be a good way to protect against that loss.
Long-term care insurance
Long-term care insurance can help cover a variety of costs including home health care, respite care, adult day care, care in an assisted living facility, or nursing home care. This type of insurance can make sense for women for a variety of reasons, but two stand out. First, if a woman is predeceased by her husband, there is a good chance that there will be some large medical bills related to his final illness and care. These bills can take a big chunk out a couple’s nest egg and impair its ability to provide income to the surviving spouse. Long-term care insurance can help preserve those assets by covering expenses not usually covered by health insurance, Medicare or Medicaid.
Second, if a woman lives 5, 10 or even 20 years longer than her husband, there is a good chance that she will need some type of long-term care services during her life as well. And because her husband died first, she will have fewer options if she becomes sick or disabled and needs someone to help. A long-term care policy can provide peace of mind, minimize burden on friends or family, and help her get into her choice of facilities or be cared for at home as long as possible.
Estate Planning
Married couples typically create their estate plan (e.g. wills, powers of attorney, etc.) together, but it is the wife who tends to see that plan in action. Because women live longer, it is the wife who will likely be the one to use the powers of attorney for finance and health care if her husband becomes disabled or incapacitated due to illness. She will also need to handle his estate when he dies. When that occurs she will need to update her own planning and make sure that it passes her property to the correct people and names the people she wants to handle her affairs in the event that she is no longer able. Because of that, women should pay particular attention to their family’s estate planning and make sure that it is up to date and accurately reflects their wishes.
Living a long, healthy life definitely has its benefits. It means more time with friends and family. More time doing the things you love. More time enjoying life and experiencing all that it has to offer. Unfortunately, it can also mean outliving those you love. By planning ahead, you can create security and peace of mind for yourself and your family and keep your retirement on track.
Photo by Mark Brooks. Used under Creative Commons License. I originally published this article at www.fpanet.org.
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