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Your golden years are supposed to start in
your 60s. Yet many people seem to be working harder than ever in this decade of life.
The 60s is still a time to end your
traditional career, but with folks living longer, healthier lives, these years have a new
look. More often than not, folks are heading right back into the work force.
Al DeAgazio, 68, is busier in retirement than he ever was
during his working years. In the year since he retired from the government, he's developed
a budding second "career" as a volunteer handyman. This isn't what he expected.
"I imagined retirement would be kicking back and
reading, doing a lot of sailing, and playing around," he said.
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"I imagined retirement would be
kicking back and reading, doing a lot of sailing, and playing around."
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| —Al DeAgazio,
68, retired New Englander. |
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The 60s used to be when just about every worker retired and
settled down to do nothing. But today, DeAgazio's experience is increasingly common.
Indeed, an AARP study shows that 81 percent of baby boomers, a generation just about to
enter its 60s, expects to work full or part time in retirement.
Whether beginning second careers, taking up delayed
hobbies, traveling, or the like, 60-somethings aren't content to simply "settle
down."
To borrow a phrase, "This is not your father's
retirement."
In your 60s, you've arrived at traditional retirement.
Let's take a look at the major questions folks in their 60s face, and some strategies for
dealing with them.
Questions
What will my retirement look like?
If you haven't done so already, take some time to figure out what you want your retirement
life to be like. Create your ultimate wish list. What unrealized goals in life do you
have? Will you travel? Work? Volunteer? Where will you live? Is it important to live near
friends and/or family?
The institutional picture of retirement — turning 65,
quitting a 40-year career, and moving to Florida or Arizona to play golf all day — is
becoming an outdated image.
"Retirement isn't what it used to be," said
Louise Piazza, program consultant in economic security with AARP. "People are
semi-retired. They retire and then they go back to work."
Dreaming up your retirement is only half of the picture.
Funding those dreams is the rub.
What will it take to make my dreams a reality?
This question may be the toughest to answer. You need to figure out if your resources are
enough to let you live the retirement you want.
Certified financial planner F. Dennis De Stefano, of De
Stefano Wealth Management in Maui, Hawaii, says he's had a few "uncomfortable"
discussions with clients over funding their retirement. When De Stefano runs them through
a few planning scenarios, "it blows them away. They can't do it without reducing
their lifestyle."
Many folks assume they can convert their assets to
fixed-income investments and exclusively live off the interest payments. This strategy may
not allow you to keep up with inflation, De Stefano said.
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"People are semi-retired. They
retire and then they go back to work."
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| —Louise Piazza,
program consultant in economic security with AARP. |
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He offers an example, suppose you retire with a $300,000
nest egg. Further suppose you plan to live on $21,700 a year or $1,800 a month, that would
require you to draw on interest and principal.
Now, let's throw in some market conditions. Say your
account earns a 10% return, but inflation is running at 4 percent. (That's fairly close to
the average rate of inflation since the end of World War II.)
Inflation will cause your cost of living to double every 18
years. You will need to increase your monthly allotment to account for inflation. Under
these conditions, your $300,000 will only last 25 years, De Stefano said.
When can I quit work?
This is one of the most common questions posed to certified financial planner Nancy
Bryant, of Baltimore, Md. "The main issue in their 60s is whether they can retire
earlier or later," she said.
There are two factors to consider in answering this
question. The first is when your resources will become available and the other is their
worth.
When will your resources become available? After you
turn 59ý, you can start withdrawing money from your IRA and 401(k) plans without paying
an early withdrawal penalty. If you take early retirement at age 55, you can begin taking
penalty-free withdrawals from your 401(k) plan.
After age 70ý, you will be required to start taking
withdrawals from your IRA and 401(k) plan unless you are still working at the employer
with which you have your plan. At age 62, you can begin to receive partial Social Security
benefits. At age 65, you can take full benefits, when Medicare kicks in.
If you haven't started saving for retirement, and hope that
the government will provide for you, you may be "forced into a situation of
involuntary simplicity," said Richard Babson, chairman and president of Babson-United
Investment Advisors.
Are your various nest eggs large enough to provide an
adequate retirement? If the numbers don't add up, you can increase your savings rate
or delay retirement to give your accounts more time to grow. As you can see in the chart
below, waiting a few years can really pay off.
How long will I need my money?
Plan to live to 95 or 100. These are the ages financial planners commonly use today to
guard against their clients outliving their money, Piazza said.
The average life expectancy in the U.S. is getting longer.
Indeed, the Internal Revenue Service set age 84 as the average life expectancy to
calculate IRA and 401(k) required minimum distributions.
Improvements in medical treatments and therapy are also
contributing to a long life expectancy.
"Someone retiring at 60 has to take into account
developments in medicine that can prolong life and the quality of life," Babson said.
What other issues will I face?
Retirement is not simply a financial issue. Piazza points out that there are four areas of
retirement not financially defined that folks still need to consider carefully. They're
housing, health, leisure time, and family and friends.
- Housing: By the time they've reached their 60s, many
folks have paid off the mortgage on their home. Even if they haven't, home equity is a
powerful tool in planning for retirement; providing a great deal of flexibility.
- Health: Typically, health costs rise as one gets
older. If you aren't covered under a government or private plan, you should figure health
costs into your budget. Long-term nursing care often isn't covered by regular health
insurance. You might want to buy long-term care insurance to cover this expense.
- Leisure Time: Stopping work cold turkey can bring
about loneliness and depression. Right now is a good time to think about how you will keep
yourself mentally and physically invigorated.
- Family and Friends: Being close to and connecting
with family and friends may become more important to you once you retire.
Indeed these are major issues Margaret Phillips, a
61-year-old nurse practitioner, and her husband, Bob, discuss as they plan their
retirement. They plan to stay put in their mid-Atlantic city because "this area has a
lot of what we want. Our friends are here. It has culture. It's a fairly moderate climate.
There's a lot to do," she said.
60s Strategies
There's still time to save
If you're 60 and don't think you can build a decent nest egg, think again. Regularly
putting away even a modest amount can reap sizable gains if you can leave the money
untouched for a decade or so.
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| Retirement is not simply a financial issue.
There are four areas of retirement not financially defined that folks still need to
consider carefully. They're housing, health, leisure time, and family and friends. |
|
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For example, here's what you could build up if you put
aside $2,000 a year for 10 years starting at age 60, and what could happen if you let it
build for another 10 years.
Two savings vehicles you may want to consider using at this
point are taxable accounts and Roth IRAs. Unless you really need a tax deduction, a
tax-deferred IRA may not be a good investment choice. The reason is that at age 70ý you
will be required by the IRS to take minimum distributions, so you won't have time to build
your balance.
With a taxable account or a Roth, you won't have any
required distributions.
Social Security now or later
At age 62, you can start to take partial Social Security benefits, which will be
permanently reduced to 80 percent of your full rate. If you wait until age 65, you can get
full benefits. But, what's the best strategy?
Here are a few guidelines that could help you with your
decision:
Bryant suggests that her single clients take Social
Security benefits early. Her rationale is if you wait until age 65 to take full benefits,
you have to live past 77 for this strategy to pay off. In other words, it will take 12
years of full payments to equal 15 years of reduced benefits.
If you're married, the rule isn't as clear, De Stefano
said. You have to account for the relative size of your spouse's benefit, their age, and
the associated joint life expectancy. Further widow(er) benefit rules also complicate the
equation. He suggests, if both spouses are about the same age, have their own benefits,
and cease working by age 62, the best strategy is for the spouse with the smaller benefit
to claim it immediately and for the other spouse to defer.
You aren't required to use Social Security benefits to
cover the cost of living. If you have other sources of income, you could bank your Social
Security benefits for use later. You might be able to invest the money in a way to
generate a better return than the government provides.
Or, you might want to use your Social Security benefits
along with another full- or part-time job to give you more time before you take
withdrawals from your 401(k) plan or IRA.
Strategies to make your money last
The first strategy is to find a way to delay withdrawing money from your IRA and 401(k)
accounts. You could quit work a few years later, or take a new full- or part-time job in
retirement.
Your goal is to give your accounts more time to grow
through compounding.
"If you can chintz for the first two years (of
retirement), it will mean a whole lot more in the end," Bryant said. "The time
value of money is working in your favor. The less you spend, the more compounding works in
your favor."
Indeed, DeAgazio, a retired government worker, hasn't had
to touch his 401(k) or IRA accounts yet because his government pension and Social Security
have been adequate.
The second strategy is to continue investing your money in
the stock market. Traditionally, Americans converted their investments to bonds when they
reached retirement. The strategy was to live off the income the bonds generated. But, such
a conservative approach likely won't work today; folks are living longer and inflation is
eating away at a dollar's buying power.
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"If you can chintz for the first
two years (of retirement), it will mean a whole lot more in the end."
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| —Nancy Bryant,
certified financial planner of Baltimore, Md. |
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You may need to adjust your risk tolerance by purchasing
stocks or leaving your assets in stocks, so that your investment returns will beat
inflation. "One reason stocks outperform (bonds) is there is the added dimension of
risk," Babson said.
The stock market historically has been the best place to
put your money to beat inflation.
Finally, unless you have unlimited resources, you will need
to figure out how to turn your retirement nest egg into an income stream. For more on this
topic, read April's feature article How to Turn
Your Retirement Money into an Income Stream.
Do some estate planning
At this point, you need to figure out if you want to pass on an estate to your children or
other heirs. You may want to start shifting assets to tax-sheltered accounts or insurance
products. Depending on how much you want to pass on, this could impact the assets you have
available to you in retirement as well.
You may want to consult a financial planner or estate
attorney for more assistance.
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