Planning for Retirement- Getting Close

George F. McClureIEEE Region 3 Director

IEEE Annual Meeting 2007

Are You Ready?• First Baby Boomers turn 62 in 2008

• But few are financially prepared to retire with 65% to 85% of pre-retirement income– 35% of Early Boomers (1946-1954) ‘at risk’– 44% of Late Boomers (1955-1964)– 49% of Generation Xers (1965-1972)

• Ratio varied, marital status, hsehold income

• Ref.: 2004 Survey of Consumer Finances

Median Nest Egg• Household heads approaching retirement:

– $60,000 in 401(k) + IRA balances– Defined Benefit (DB) pensions add to that, but

fading fast– Most of working age have no other savings

Boomer Retirement Attitudes

• Trivent Retirement Survey, 2,500 polled

• Money #1 concern for 71%• Health issues #1 for 13%• No formal retirement planning for 59%

– Used an advisor: 16%– Rest did own serious calculations

Harris Interactive poll, 2006, ages 45-64, not retired, Harris Interactive poll, 2006, ages 45-64, not retired, population-weighted, 95% confidence population-weighted, 95% confidence

Why More Boomers Will Work• Fewer covered by DB pension plans• Rapid decline in retiree health benefits (no

ERISA mandate to provide them)

• Better educated (37% grads vs. 22% pre-war)

• Better health; work less physical

• Need to augment the retirement nest egg– Delaying retirement by 3 years can add 30%

to retirement income

Boomer Obstacles to Saving• Starting late in life to save/invest – 35%

• Health care/health insurance cost – 32%

• Salary too low – 29%

• Credit card debt – 28%

• Cost of housing – 27%

• Medical problems – 22%

• Paying for college – 16%

Planned Retirement Activities

• U.S. travel, to new places – 45%

• Spend more time with children, grandchildren – 39%

• Take up hobby, craft, activity – 23%

• Travel outside the U.S. – 21%

• Volunteer more – 20%

• Move to lower cost area – 15%

Working in Retirement

• 43% plan to keep working– 39% will need the money– 30% want to keep busy– 16% expect work will make life easier– 13% will need the health care benefits

• One wife’s quote: “I married him for better or for worse, but not for lunch.”

What Kind of Work?

• 43% - Enjoyable, to keep busy

• 20% - Whatever earns a good income

• 11% - Whatever provides health insurance

• 7% - Meaningful, e.g., non-profit work

• 5% - Challenging or risky; new business?

• 14% - Not sure

Personal Assessment

• How is your health? Good genes?– 20% chance of 30 years in retirement– Joint life even longer, esp. if spouse younger

• IRS life expectancy at age 70:– Single life: 17 years– Joint life: 21.8 years (more if spouse younger)– Minimum distribution over 27.4 years

SSA Table: http://www.ssa.gov/OACT/STATS/table4c6.html

Personal calculator: http://www.livingto100.com/

When to Draw Social Security?

• Early, at age 62 (25% reduction – going to 30%)• Normal, age 66, 67 if born 1960 or later• Late, to age 70 (add 8%/year past normal

retirement) – no increase past age 70• Break-even at age 81 (with 5% return)• Benefit at age 70: 65% higher than for age 62• Spousal benefit grows, too, if delayedYour mileage may vary- see calculator at

http://ssa.gov/OACT/quickcalc/index.html

Earnings Penalty• Policy shift: encourage seniors working

• Earnings penalty eliminated above normal retirement age

• Early retirement earnings penalty: $1 for every $2 above $12,960 (2007) http://www.ssa.gov/retire2/whileworking.htm

How Are You Doing?• First milestone: save twice annual salary

• Max out on tax-deferred savings

• Employer matching is found money

• It gets easier later

• Use a financial retirement calculator to point the way

• Spend less at Starbucks

Savings Vehicles• Employer deferral plans: $15.5K, indexed

• IRA: $4K + $1K catch-up (if >50)

• Tax-efficient mutual funds• Variable annuities – aim to grow then convert

• Self-employment: SEP $10.5K

Planning and Calculators• Work out a retirement budget• Figure income replacement ratio (80-90%?)

• Compare assets with needs– http://choosetosave.org/calculators/#retirement – http://personal.fidelity.com/retirement/index.html?refh

p=pr&ut=B21

– http://www.aarp.org/money/financial_planning/sessionseven/retirement_planning_calculator.html

– http://nationwide.com/nw/nrri/index.htm?wtgo=retirability

Getting to Medicare• Eligible at age 65; elect Part B for doctor visit

coverage http://www.medicareadvocacy.org/FAQ_PartB.htm

• If still employed, Medicare becomes secondary insurance

• Part B premiums are means-tested now• Medicare assigns reimbursements to procedures

– Diagnostic Related Groups• Not all physicians accept assignment• Financial Advantage offers Medigap plans

Long-Term Care• Not covered by Medicare

• Means tests for Medicaid coverage, not feasible for engineers (5 year look-back)

• Growing emphasis on home health care

• Look at family history, own health

• Financial Advantage offers LTC plans and information

Rolling Over• Trustee-to-trustee transfer avoids tax risk

• Cash out after-tax 401(k) contributions

• Sell long-held matching stock for cap gain

• Isolate the transfer (separate IRA) if you may go back to another job

• Track nest egg investments monthly

• New issue: asset allocation– Life cycle funds?

Nest Egg Management Strategy

• Draw on taxable assets first, wait on IRAs

• Both can add to IRAs if one has the income to cover it: 2 X $5K this year

• For lifetime income, consider annuities– Single life– Years certain– Joint lifetimes (cover both spouses)

• Reverse mortgage another possibility

At 70-1/2• Begin minimum required distribution

(MRD) – Ref. IRS Pub. 590

• If self-employed or younger spouse income can continue to add to Roth IRA

• Can safely draw ~4%/yr. from nest egg

• If larger MRD than needed, convert part to after-tax saving; reinvest tax-efficiently

• CRT charitable deduction can reduce tax

Pitfalls• Withdrawing too much too soon

• Taking cash distribution before age 59-1/2– 10% penalty– Exception: take as stream of payments

• Contributing less than the maximums

• Making IRA contributions late

Pluses• Self-employment in retirement

– Possible tax-deferred account addition– Expenses can include health benefits, LTC

premiums

• Lower retirement AGI may permit more Roth conversions (no MRDs required)

• If beneficiary for IRA is grandchild, may stretch out withdrawals for over 40 years

• The second million- easier than the first

To Dig Deeper• Stanley & Danko, The Millionaire Next Door, 1996 [over 1 M sold]

• Thomas J. Stanley, The Millionaire Mind, 2000

• The American Association of Individual Investors www.aaii.com

• Center for Retirement Research, http://crr.bc.edu/

• Tax Hotline, monthly newsletter www.BottomLineSecrets.com/pubs

• Bottom Line Retirement, monthly newsletter, ibid.

• Bottom Line Personal, monthly newsletter, ibid.

• Jonathan Clements, “Getting Going,” regular feature columns, www.wsj.com [may be accessible online without subscription. Also writes books on money management.]

• Money management tools, http://online.wsj.com/personal_journal/tools?mod=2_0036

Questions, comments? g.mcclure@ieee.org [Put Scottsdale in subject line]