Safe 4 Retirement: The Four Keys to a Safe Retirement
ISBN: 978-0-615-52007-0
Copyright © 2011 by Jack Tatar
Pennington, NJ 08534
Library of Congress Control Number: 2011915415
Published by PeopleTested® Publications
www.PeopleTested.com
Printed in the United States of America. All rights reserved under International Copyright Law. Contents and/or cover may not be reproduced in whole or in part in any form without the express written consent of the Publisher.
In 2009, my dad died after a battle with prostate cancer.
Six months later, my mom and our family enjoyed a beautiful Sunday afternoon on the back deck of my house. The next day, I had to take my mom to the hospital where she died two days later due to a toxic condition and colon cancer (which she had left untreated and had told none of her family or friends about).
My parents had been married for over 50 years and retired for nearly a decade.
In my sorrow, a few weeks later, I ventured cross-country to spend a weekend with my friend, Sam Kirk, in Los Angeles. His recommended treatment of drinking tequila, smoking cigars, and watching planes fly over his Santa Monica home all night allowed me to open up and discuss my grief with one of my closest friends.
We discussed how people would often say that it was not uncommon for a spouse to die so soon after the loss of the other spouse. If this were true, I wondered why it was so.
Sam, who has been involved with family and social issues for decades in Los Angeles, felt that much of it has to do with the fact that many people are “thrust” into retirement and often aren’t prepared for all of the aspects of it that are new and different for them. For some retirees, they’re unable to change their lives to a new schedule and often fall into a comfort zone with their spouses while missing the social aspects they enjoyed when working.
Sam said that he had seen many retirees neglect their health and become grumpy and irritable simply because they were unable to deal with all of the free time they now had. He said that he had recently been working with seniors on creating a channel for volunteering opportunities for them because many of them didn’t know what to do with their free time. He felt that this becomes an even more critical issue when a retiree loses their spouse or a close friend.
“There’s plenty of books about being financially prepared for retirement, but there aren’t books that consider all of the aspects that are needed to consider when someone retires. How to take care of their health? What to do with their free time? How to stay connected to friends and create more friends? How to stay positive when your family and friends are moving away and/or dying? Ultimately, they need to understand how to create a safe retirement.”
Sam, who works with many young mothers as well, continued, “They have a What to Expect When You’re Expecting book for new mothers, but there needs to be a similar book that explains all of the things needed to prepare for and enjoy a safe retirement.”
This book grew out of that conversation.
Writing this book was not in my plans three years ago. In fact, many people have told me that writing a book is painful and will take too much time away from my business.
I run a market research business called GEM Research Solutions that requires me to travel frequently and speak with thousands of individuals each year, either in focus groups or face to face or over the phone through one on one interviews. Because of the work I do, I’ve seen commercials that no one will ever get to see and I’ve asked people to eat food products that no one will ever eat again (and that’s a good thing!). I get paid to listen to people and gather their opinions and insights about new products and marketing efforts for some of the largest companies in the world today.
Because of my many experiences in the financial industry (I tend to specialize in that industry as I was a financial advisor with Merrill Lynch prior to starting my market research business), I have the opportunity to speak to financial advisors, retirees, and pre-retirees about the challenges and concerns of retirement in the current environment.
This book incorporates what I gleamed from speaking to these many individuals as well as from the current research in the field of retirement and from personal insights I’ve gained from my own experience in considering retirement as the next step in my life.
It’s not an exhaustive study, and I’ve come to learn that things change so frequently in this area that I’ve had to constantly edit and update information prior to publication.Because of this, I’ve created a Web site that is a companion to this book, www.Safe4Retirement.com, where the latest information on these topics will be updated and available for free. I’ve also included many footnotes in each section that provide links to valuable Web content and helpful information on the topics covered in a section.
It’s been a big undertaking to do this book and Web site. This is not something I’ve done because of profit motives or recognition, but rather it’s something that I’ve been compelled to do since my mom’s death.
Writing it has helped me to make some sense of my parents’ deaths, and I know that they would want me to do this. I can hear my mom saying. “If it can help at least one person to view their retirement differently and allow them to spend more years on this wonderful planet with their loving family than they would’ve if they hadn’t done something that this book recommends, then you did the right thing.”
The book is dedicated to
my parents,
Bob and Ellen Tatar.
I miss them every day.
Above all, this is a book that I wish
they’d been able to read before they died.
Wait! One more thing…
I need to thank the following people for making this book possible:
First, my dear friend, Sam Kirk, without whom this book would not exist. Love you, buddy! Thanks!
The lovely and talented Karen Lacey for all of her writing and editing assistance. No KLacey, no book! Thanks!
Diane Young, who I have the good fortune of having as a wonderful friend and who is one of the leading experts on retirement planning in the country. Your insights were critical! Thanks!
My literary mentor, Ira Dittersdorf, for his guidance and advice and for helping me get through college English. See you on Bloomsday!
My sister, Regina, and her children, Sean and Jillian. This book is for you as well!
My kids, Eric and Grace. Success in life lies in one’s ability to know your priorities. You guys are my priorities and without you, I’m nothing. You are two of the bravest people I have ever met. You are the world to me!
Most importantly, my wife, Maude, who has suffered through three decades of me and my many crazy ideas. Thanks for sticking with me. I know that God exists because He gave me you. I love you always.
Most books on retirement written today focus on the aspect that many consider to be the end point of retirement planning: having enough money to retire. It’s often the measuring stick that people use to decide when they can retire and what lifestyle they can afford to have in retirement.
I call it “Financial Preparedness,” and although it’s important, it’s only one of what I consider to be the Four Keys that are critical for achieving a safe retirement.
This first section is not intended to be an exhaustive and complete guide to all of the financial aspects of retirement planning. There are enough books out there that are dedicated solely to that purpose. Rather, this section will provide you with enough information and direction to make the important decisions about your ability to be financially prepared for retirement.
Throughout the book, we’ll direct you to our companion Web site, www.Safe4Retirement.com, which will provide you with current and updated Web links, worksheets, and further information that you should evaluate on your own to fully gain the financial insights and details that are specific to your own situation.
I find that most financial books on the market today that discuss retirement planning come with an agenda and a set way of doing things. You will find that I also have strong opinions on things as well. However, this section is not intended to be the be all and end all of financial information, and it’s important to understand that everyone’s situation is different and no book could completely satisfy everyone.
The value of this section will be in its ability to help guide and motivate you to gather information, prepare a plan, and understand your financial preparedness for retirement. However, with the advice in this book and with any advice you gain from anyone regarding your finances, you must remember that it’s your money and, therefore, decisions related to that money should always be your decisions. These decisions may be made with your family, but it’s critical to remember that you’re the one in control.
To start, let’s think of where we are today. Many of us may still have financial obligations—mortgages, perhaps car and/or student loans, credit card debt, kids we’re putting through college, and maybe parents whose health has failed and need extra help of one kind or another.
Or we could be single, divorced, or widowed and on a sole income with or without any of the combination of events above. But the end goal is the same when thinking about retirement—when do we have enough money to say, “adios amigos, see you at the beach”?
Although it may be the amount of money we have that determines if and when we can retire, the reasons for wanting to retire vary—spend more time with the family, take on new projects, follow those dreams or hobbies that have lain smoldering for all those years.
In this chapter we’ll seek to answer the vital questions that will help you secure the First Key to a Safe Retirement: Being Financially Prepared for Retirement.
So, what do we mean by the term, “Financial Preparedness”?
At its simplest, financial preparedness consists of doing three things:
Step 1: We determine exactly where we currently are financially and what we need to retire.
Step 2: We create a plan for maintaining that financial level.
Step 3: We allow for things to go wrong.
A traditional definition of a financially safe retirement means having enough money for you and your immediate family to live comfortably off without being forced to go back to work, and with enough of a cushion to allow for a realistic deluge of the unexpected.
However, today’s baby boomer doesn’t necessarily fit what would be considered the traditional category.
Checkered golf slacks and once a week bridge games may or may not be what you have in mind for yourself or your spouse when you think of retirement. Many soon-to-be-retirees have plans to travel, to start new businesses, to write the book they’ve always wanted to, or any of a million other activities that previous generations less willingly ventured into. Others of you will want to do nothing but swing in your hammocks, whether it’s in Florida, Minnesota, or on a tiny island in the Caribbean, and sip the libation of choice.
The point here is the dream itself can be anything. That’s the good news.
What’s mandatory is to have a written goal and a plan related to your finances. And that’s where this section can help.
Sure, people retire all the time without a plan. “Plans are for sissies,” they rumble into their pinot noirs. “I know how much I’ve got and that’s all I need to know.” Fine, I say to them. If you’ve got it all down, bully for you.
But moving ahead with a plan, and a plan based on sound financial advice and follow through, may not fully allow you to eliminate risk, but it will at least cushion it and give you a fighting chance when tough times come. Even if you haven’t used a plan or written budget in the past, now is a good time to do so.
I’ve seen enough people succeed and fail in retirement, and because of that, I believe that it’s absolutely necessary to have a plan for your finances. Heading into retirement without a plan increases the likelihood of having to say, “I shoulda,” the phrase that strikes terror into the hearts of every retiree when faced with the unwanted reality of going back to an undesired life at the office.
This chapter is designed to help you eliminate “I shoulda” and instead fill you with, “Thank goodness I planned ahead because now I’m going to live the life I dreamed of in retirement.” Just as life and those dreams are different for every person, the financial plans that will be created are also different for every person.
Your plan also needs to work in fluctuating markets. In today’s world a 1,000 point drop in the Dow Jones Industrial Average still makes the headlines. Will it in another ten years, or will it be just another day at the stock market in the new world we live in?
Which industry specific, scandalous, or systemic market cycle will hit us next, and right at that tender moment when we need to start drawing funds from our mutual fund invested 401(k)?
How do we manage our own retirements in the “sandwich generation”? Maybe we’re one of those individuals and couples who have responsibilities at both ends of the familial spectrum: the financial burden of children in college and, simultaneously, the cost in time, effort, and dollars of aging parents needing more help than they ever thought they would.
Moving forward in this section, we’ll take you through the steps you need in order to understand where you are financially right now, where you need to be in order to retire, how to maintain this level for what may end up being decades in retirement, and what to do when something goes awry.
Successful retirement planning is possible and easy. Just like a rocket taking off into space, it takes the most amount of effort right at the beginning. You’ll need to spend time going through your statements and goals, and plan for eventualities, but once the plan is in place, it takes only a bit of discipline and yearly or biannual or quarterly reviews to make sure all is still in order.
So let’s get started.
Examining where you are financially and putting together a financial preparedness plan requires time and effort. Inevitably, the question pops up as to whether to do this on your own or to call in some assistance, such as a financial advisor.
I’ve had the luxury of being an advisor and an individual investor. What I’ve learned over the years is that there are pros and cons to working with an advisor as well as doing it on your own. Every person needs to do what provides him or her with the most comfort. Whichever way you proceed, make sure you do so armed with reliable information.
The intent of this section is to provide you some insights to help you make the decision on how to proceed on pursuing your plan. The reality is that most of the work will need to be done on your own anyway. Gathering information, retrieving statements, and thinking about your situation are all things that you will need to do. You’ll also need to review your situation on a yearly basis. These things shouldn’t be delegated to someone else.
So, let’s look at what you need to consider when deciding to choose or not to choose an outside resource to help you formulate a plan for your finances.
Some of the pros of working with a financial advisor are the following:
Following are some of the cons of working with a financial advisor:
The fact is you can do it either way. Some people feel better having someone help make their retirement plan for them, and others want to stay firmly in control. The rest of us lie somewhere in between and need to weigh the pros and cons of whether or not to hire someone to help us out.
There are also “hybrid” options available to you as well. Many of the reputable online and discount brokers now provide quality tools for developing and executing investment plans without the need for, and cost of an advisor. Many full-service brokers are also offering combination online trading and advice options to clients as well. The key is to do what’s comfortable for you and never feel forced into an arrangement that makes you uncomfortable or causes you to lose sleep over who’s managing your finances.
If you choose to work with someone rather than going it alone, it leads to the question of how to pick a financial advisor, Certified Financial Planner™, or other financial professional. Like finding the right doctor or dentist, making the wrong choice could be damaging to your financial health. It’s best to proceed cautiously and ask a lot of questions before signing on with anyone.
Referrals. This is often the best way to find any professional, whether it be your mechanic, your brain surgeon, or even your hair stylist. Ask your friends and family but don’t stop there. They may like the person just fine, but always do more due diligence on your own. This is your financial health, after all. It’s your advisor, not your friend’s.
Interview several. Give yourself choices. Get second, third, and fourth opinions. Let them know that you’re interviewing several other advisors to find the most appropriate one for you.
Google them. One of the advantages of the Internet is you can find out about people. Do it. You might be amazed at what you dig up. Check out their standing with the National Association of Securities Dealers (NASD). This is the regulatory body for stockbrokers and financial advisors.
Ask them how they get paid. The reputable advisors will be happy to answer this question and, as I said, they’ll respect you as a client for doing so. If they don’t answer you or you don’t like or understand their answer, move on to the next advisor interview.
How are they licensed? Can they sell mutual funds, stocks, bonds, insurance? Are they limited in any way? It’s wise to work with an advisor who can provide you the most options, as investments selected should be based on the needs of the client, not limited by what the advisor can or can’t offer.
Consider the firm they work for. Big names like Merrill Lynch and Morgan Stanley can be high quality but along with that, they can also be expensive. If the financial advisor you’re considering is working as an independent, they still have a trading and product platform they work within. Ask them who the company is and then research it. Google the firm and ensure that they are not only legitimate, but also don’t have any pending judgments against them.
Ask them what their service level commitments and communication policies are. How often will they contact you? Do they conduct annual reviews? Quarterly reviews? What happens when problems occur? Who can you call and how quickly will they respond to your concerns?
Do they have specific designations? Many financial advisors have letters after their names. Unfortunately, these “qualifications” often mean only that the firm they work for had set up an easy class so they could get these letters and impress clients. Major firms are especially notorious for this. So although you should be weary of designations, be assured that there are some very legitimate ones out there that you should look for. Many reputable advisors have gained the Certified Financial Planner™ (CFP©) designation. The training to get this designation is intense and thorough. It indicates that the advisor has been through training that is focused on all aspects of financial planning including estate and retirement planning. A growing designation in the industry is that of the CFA (Chartered Financial Advisor). This indicates that the advisor is extremely knowledgeable about investment selection and understanding the micro and macro factors impacting the markets. Either of these designations should be view as a plus when considering advisors.
Okay, this is the part where you roll up your sleeves and plug in the laptop or grab your trusty pen. Whatever you feel most comfortable using to record your financial world is what you need to use now.
In my past career as a financial advisor, I saw the full spectrum of detail displayed by investors, from those who monitor even the smallest expenditure, such as gum bought at the gas station, to those who accidently remember the account from the job years ago with an extra $200,000 in it. “Woops, just forgot about that one,” they might tell me with a shy grin.
For this crucial part, you need to take a clear picture of where you are financially, even if this entails sorting through statements, old file boxes, or whatever. This section will require work on your part as we look at four areas of your current financial situation:
Most of us have a general idea of what we have. We know, more or less, what’s in our savings accounts, 401(k)s, etc., and can come up with a ballpark figure of what we’re worth. But how often do we get right down into the nitty gritty, look at the details, check for anything we might have missed, and then add it all up?
You need to do it now in order to get started with your Safe Retirement. Don’t worry, it’s actually fun. By doing this exercise, you get one step closer to reaching the dream, and you may just learn that you’re actually closer to it than you think.
You need to open those files and envelopes that you’ve been sticking statements and receipts in for the past ten years thinking that some day you’ll actually need to look at them. That day has arrived.
So, let’s begin by gathering information on the following:
NOTE: Your primary home can be considered a retirement asset, but for now, I’d like you to avoid including that. Can you sell it, downsize, and use the excess for income? Sure, and I cover those options later. But let’s see what the numbers look like while keeping your home intact. It’s where you live, after all, and you’ll gain a more realistic view of your income assets when you make it your last consideration for retirement assets.
Okay, now for the icky bit. Liabilities. You need to know exactly what you owe and what kind of interest they’re taking you for. Again, some of you will have this information at your fingertips and others will need to do a bit of digging.
For this, consider the following:
NOTE: Make a note of the interest that’s paid alongside the amount owed. This can be the real shocker. If you don’t know what interest rate you’re charged, find out. It’s your money being flushed down the financial commode.
As you begin to gather your information, it’s important to consider what will provide you income in retirement and what won’t. Does Aunt Clarissa’s china set get included? How about the penny collection Uncle Jed has willed you that he swears has the copper one that’s worth a bundle? Unfortunately, they’re not.
What counts toward retirement income are those assets you can turn into an ongoing stream of income.
Unless you intend to spend your retirement selling the collections you have around the house and using those funds for income, the list of items that will provide retirement income will primarily be made up of current investments and any retirement-based plans you’ve set up. You’ll need to pay particular attention to ensuring you’ve gathered all of the appropriate statements from your investment and banking accounts for this step.
Although stock options are a valuable asset, they can prove to be a moving target as their value changes daily based on the underlying price of the stock. They could be exercised one day and, therefore, need to be included with an estimated value.
Many people think of their home as the first asset. As I said, I’m going to ask you to avoid including that for now. If you have a second home that generates income, that should certainly be considered as an asset that can generate income for you while you continue to live in your primary residence.
For those people who are fortunate to be able to pay off their primary mortgage when they retire, you’ll get an automatic increase in income simply from not having to pay that mortgage each month. However, if that’s not you, then we’ll need to allow for mortgage payments in the expenditure area.
How then, exactly, do we organize all this to keep you and yours in the form of a retirement you so readily deserve? Let’s examine those assets that will provide us an income, how we know when we can start taking withdrawals, and what other areas we might consider tapping into for extra reserves.
Other than social security, retirement plans at work are the obvious first place to look for your future retirement income. However, there are several things we need to remember when doing this.
First, consider both your current employer’s plans as well as those from previous employers. More than once, I’ve seen individuals build a financial plan and, in the process of going through reams of old statements and money market prospectuses, they come across a statement from an old employer describing the defined benefit plan they were eligible for upon retirement. Sometimes they’ve been enrolled in a plan and didn’t realize it or forgot about it.
Let’s take a look at the two most common work based plans:
Defined Benefit Plan. This employer retirement plan delivers a fixed income to the recipient upon retirement based on a formula. You can think of it as the traditional or old-fashioned “pension plan.” A defined benefit plan does not provide individual accounts for employees, like a 401(k), but rather states a fixed monetary benefit for the employee. The amount can be based upon criteria such as employee years of service, age, previs pay, rank, etc. The payments are usually monthly, although some can be taken in a lump sum.
Defined Contribution Plan. Over the last few decades, this has become the far more common plan for employees. Given the rising cost of doing business, defined contribution plans have rapidly overtaken defined benefit plans as the normal form of employer sponsored retirement programs. Contributions are paid into individual employee accounts by either the employer or the employee or both. Most common is the 401(k) plan (named after the IRS code legalizing it). The employee pays into the plan with before tax dollars and the employer “matches” that amount of money up to a certain percentage. This money is then invested, usually in mutual funds, and often the employee is able to choose him or herself how aggressive or conservative the portfolio is.
Although there are other employer sponsored retirement plans, these two types are the most common. If you have a 403(b) plan or something similar, this should be appropriately included. The same goes for a SEP or SIMPLE plan for small business owners.
Note: Remember that there are many rules related to all retirement plans including the fact that the IRS will penalize you if you fail to withdraw the required amount each year from your IRA after the age of 70 ½. Given this, if you use a CPA or an accountant, ask him to check that you’re taking out the right amount from the fund. Stay up to date with the latest rules and regulations (as well as tips and resources on retirement plans and strategies) at our companion Web site, www.Safe4Retirement.com.
If you have a defined benefit plan, you need to determine what the payout will be. If you don’t have the documentation you need to explain your benefits, give the human resources department of your (ex) employer a call and find out. If you have a choice between taking a monthly income or a lump sum payout, you need to sit down and do some quick math.
Here’s a conservative approach that can help you to make that decision. First, look at life expectancy tables. If you don’t have them at the ready (and why would you?), Google them or ask your financial advisor or CPA for a copy. Then, assume you’ll live longer. Now, calculate the total amount of monthly payouts based on the time between when you retire and when you’re considered ready to do the final check out. If that number is greater than the lump sum payout growing at an annualized 5%, logic would tell you to take the monthly payments. If the lump sum amount is greater, consider taking that one.
Another factor to consider is how likely you think it is that your previous employer will stay in business. If they go under and can’t afford to pay out their defined benefit “guaranteed” pension plan, the government can step in and take over, but at a greatly reduce payout rate. This shouldn’t cause you to worry unnecessarily, but you need to get a full picture of what can happen. The company may be just fine, but understanding your options means having the opportunity to make wiser decisions.
If you have a defined contribution plan, like a 401(k), you can leave it at the company you worked for and continue to have it invested or invest the funds yourself. Or, you can roll it over into a traditional IRA in a bank, an online account, or through a brokerage firm (often with the help of a financial advisor).
There are advantages and disadvantages to rolling your 401(k) assets away from the employer sponsored system. Some advantages to moving the money into an IRA are:
Some disadvantages to rolling the 401(k) assets away from the company are:
Most of the time, you must retire or terminate employment with the company for some other reason before you have access to this money. With certain exceptions, you cannot withdraw funds from your 401(k) or IRA accounts before the age of 59 ½ without a 10% penalty from Uncle Sam. The idea being this money was meant for retirement and who would retire before 59 ½? Well, times have changed but the rules haven’t.
After 59 ½ you can withdraw to your heart’s desire but remember, normally the contributions you made were with pre-tax dollars, and the IRS wants their share of whatever you make. If the contributions were with pre-tax dollars, what you withdraw is considered ordinary income. You must declare it. Fortunately, most of us should be in a lower tax bracket during retirement than we were when fully employed so the government gets a bit less. You can also time your retirement so you begin taking withdrawals in a new tax year.