Combating the Biggest Retirement Threats Facing Baby Boomers
NEW YORK -- Baby boomers -- those aged 51 to 69 -- believe there are significant threats to their retirement, but less than half (47 percent) of them have a financial retirement plan in place to combat these dangers, according to survey findings released by Natixis Global Asset Management.
What's more, with the cost of retirement shifting away from the government (Social Security) and employers (pensions), the burden of remaining solvent post-career falls increasingly on the individual American's shoulders in the form saving, investing, selling a home or working longer after retiring. That's why it's more important than ever to create and follow a financial plan, even in the late-stage run-up to retirement.
Those nearing retirement have the same fears -- that they won't have enough money to last through retirement, according to the Natixis survey. To allay these anxieties, TheStreet spoke with advisers to concoct a strategic retirement game-plan based on some fundamental questions.
How long will I live?
Almost 75 percent of boomer investors who responded to the Natixis survey said the costs of basic needs in old age such as long-term care could endanger their financial well-being. Confronting extended life expectancies is, as a result, of the essence.
"Longevity is definitely a risk," says Ed Farrington, executive vice president of retirement for Natixis Global Management. "If the average age of retirement is 65 and the likelihood that you will live to age 80 is high, then you will need to support yourself for 15 years on your retirement savings and investments and whatever you might get from Social Security."
Farrington says that's several years longer than the past generation, and because of that longevity, baby boomers need to seek advice from a financial professional to help stay realistic about your retirement plan based on income streams, savings, tolerance for risk, health and many other personal lifestyle factors which have huge implications in how a person might save, spend and earn.
"But how long you will live is definitely a wild card between 75 and 95," says Michael Garry, a fee-only certified financial planner and owner of Yardley Wealth Management in Newtown, Pennsylvania. " We use plenty of different calculators to estimate this number but we like to err on the side of expecting a longer life because you don't want to run out of money before you die."
How much money will I need for medical costs, especially those that might be uninsured, and what about long-term care?
Medical costs represent a significant financial risk to retirement for 71 percent of boomers investors who responded to the Natixis survey.
"Healthcare becomes one of the primary things you spend money on after age 70, so you have to be wary of how health care costs will impact your future life," says Farrington. "Right now, you have no clue what that will be, but a financial adviser or certified financial planner who specializes in retirement plans can give you a realistic expectation of basic medical costs not covered by Medicare, extra insurance plans you may need and costs for planning for long-term care that is realistic for you."
How much will the cost of living rise before I retire and during my retirement?
Inflation was an aspect that worried half of boomer investors who responded to the Natixis survey.
"If you don't plan for both inflation and longevity, you could suddenly be living a leaner life you did not expect," says Farrington.
He explains that the historic 3 or 4 percent inflation turns a dollar into 48 cents after 20 years, so a retiree of that period would have less than half the purchasing power he has today -- all other factors equal. Even with the lower inflation rates seen in recent years, a 62-year-old is still considered a long-term investor and will need to take some risk to outpace inflation and fight that longevity risk.
"Many folks think that once they turn 65, they need a safer portfolio, but a good mix of stocks is still important," explains Garry. "Even if you are already retired, I still like to see 50 to 60 percent invested stocks or index funds, the other 35 to 45 percent in bond indexes and around 5 percent in cash."
He adds that if a retiree's income or return streams are not as robust as needed, then the person will need to save more cash while still maintaining a career or delay an exit from the workforce.
What else can boomers do to boost the income stream?
Consult a professional and make a financial plan for your retirement. Working with a planner can give you more realistic projections and discuss your personal risk tolerance with you to see where you are comfortable. "Participants in our 401(k) plans survey earlier this year who said they had financial advisers had far better financial behaviors in personal savings and their workplace savings plan," Farrington notes. "They were saving at 9 percent of their income and had both long-term and short term goals."
Consider alternative investment strategies. Farrington definitely advises considering all alternative investment strategies beyond traditional stocks and bonds such as real estate and commodities. "These other sources of return all act differently and can help you withstand market ups and downs and longevity," he explains.
Maybe you're not comfortable with traditional investments. Not everybody is. Take Linda & Hector Gutierrez, San Marino, California-based baby boomers who purposely shy away from the stock market in lieu of real estate investing to provide a comfortable income stream now and for their future. "In the beginning, I had a 401(k) because my employer matched contributions, but I never understood the stock market and am afraid to make a mistake," says Linda, who was already a real estate broker, but hadn't yet bought any houses for herself. "Once I met Hector who already had some houses rented, I felt investing in rental properties was the way to solidify our income and my eyes were opened. I like to see my investment, know it's there and collect the money every month." Now the Gutierrezes don't worry about retirement because of the cash flow from all the rental properties they plan to maintain.
Make better use of traditional asserts. Farrington goes so far as to advise trying to find an actively managed fund that fits your comfort zone. Investment in an index fund is simply replicating the S&P 500 or other index, so he suggests looking for active managers who might outperform the market with the least amount of risk. "But, if the return stream is too volatile it tends to create bad behaviors," says Farrington. "Scared investors don't stay invested and that jeopardizes their long-term goals, so work with a professional adviser who can help you match your risk tolerance and goals."
It's important for a retiree always to look for a fee-only planner to know the adviser isn't trying to sell the retiree specific investments. With that hurdle cleared, the retiree can look for funds with low expense ratios and those that invest in different asset classes, advises Garry.
Keep your work income as long as possible. Working is the biggest income stream there is, so the longer a retiree can continue to work, the more he can sock away. Even second careers that generate a profit such as owning a business or becoming self-employed can help keep bolster a retiree's earning after his initial career ends.
"You will have a return on investment that will be based on how much time you want to keep putting into it," advises Garry.
Contribute as much as possible to savings plans. If a retiree is still working and participating in a workplace savings plan such as a 401(k), he should definitely increase his savings contributions to 10 percent or more depending on individual needs and the particular plan.
"I see the people spend a lot on buying a house and on college for their kids but once that's all done you can use that money and time before retirement to really ratchet up savings," explains Garry, who advises that the yearly pre-tax 401(k) contribution limit for 50 and over is $24,000 and the self-employed can save even more can in a SEP plan or an individual 401(K).
Delay taking Social Security payments. Way too many baby boomers take Social Security and pensions too early at 62 when it is first allowed, says Garry.
"If you can wait until age 70, you'll receive an 8 percent higher monthly payment amount, but people feel like they are leaving that money on the table by not taking it early which just does not bear out," he explains.
Stay consistent. "Consistency is key for the best outcome," advises Farrington, "and that confidence to avoid acting emotionally so your portfolio can withstand different market movements comes from having a solid plan."