Tag Archives: retire early

The 5 Chapters of Retirement

27 Feb

Julie Newcomb 1

Even if you still have 30 years left until retirement, you’ve probably already started imagining what your retirement might look like. Whether those thoughts are filled with dreams or dread, it’s natural to wonder about the next chapter in your journey.

  • What will life without the demands of a job look and feel like?
  • What type of lifestyle will I be able to afford?
  • Will I be healthy & wealthy enough to travel?

The journey to and through retirement occurs gradually, like successive chapters in a book. Each chapter has its own things to consider. While the journey is different for everyone, here’s a preview.

Chapter 1: The Fifties

At this stage of life, retirement becomes less like a far-off dream and more like a forthcoming reality. You begin to think about when you can retire, and about taking the right steps to retire comfortably.

By one measure, men have their peak earning years in their mid-fifties. Data from the Federal Reserve Bank of New York shows the median male worker earning 127% of his initial salary at that time. The peak earning years for women are harder to statistically gauge, as some women leave the paid workforce for years-long intervals. In inflation-adjusted terms, earnings actually peak earlier in life. PayScale estimates that on average, pay growth for women flattens at age 39 (at a median salary of $60,000), and at age 48 for men (at a median salary of $95,000). So by the fifties, many people are receiving raises to keep up with the cost of living, but essentially earning the equivalent of what they made a decade or more ago.1,2

During your fifties, you may contend with “lifestyle creep” – the phenomenon of your household expenses growing along with your pay raises. These increased expenses may include housing costs, education costs, healthcare costs, even eldercare costs. Despite these financial strains, the inflow of new money into retirement accounts must not cease; your retirement plan assets should not be drawn down through loans or withdrawn too early.

Chapter 2: The Early Sixties

The anticipation builds at this point; you start to think about the process of retiring and the precise financial and lifestyle steps involved. You also begin to think about the near future – not only what you will do next, but how you will do it.

According to the Center for Retirement Research at Boston College, the average American man now retires at age 64, the average American woman at age 62. So the reality is that the early sixties coincide with retirement for many people. This reality is worth noting in light of the difference between Americans’ envisioned and actual retirement ages. Last April, a Gallup poll asked pre-retirees when they expected to leave the workforce: 37% saw themselves working past 65, 32% before 65, and 24% at 65. The same poll asked older, retired Americans when they had stopped working full-time, and 67% of those respondents said they had done so before 65.3,4

You may have to act on your plans to volunteer or start an encore career earlier than you think. If you do not have a set plan for the next chapter, a phased retirement may give you more of an opportunity to determine one.

This is also a time to dial down risk in your portfolio, especially if a bear market occurs right before you retire. You have little time to recover from a downturn.

Chapter 3: The Start of Retired Life

The first year or so of retirement is akin to a “honeymoon phase” – you have the time and perhaps the money to pursue all kinds of dreams. The key is not to spend wildly. Lifestyle creep also affects new retirees; free time often means more chances to spend money.

The good news is that you may spend less than you think. Transportation, insurance, housing, clothing and food costs may all decline. The common view is that you will need to live on 80% of your end salary for a comfortable retirement, but in a 2014 T. Rowe Price survey of retirees, the average respondent was living on 66% of his or her pre-retirement income. Eighty-five percent of those retirees said they were maintaining their standard of living with less money.5

Chapter 4: The Mid-Sixties thru Late Seventies

This is when some people get a little restless. It is also when some people find their retirement savings growing disturbingly smaller. You may get bored with all-leisure, all-the-time and want to volunteer or work on your own terms, health permitting. You may want to adjust your retirement income strategy or see if new streams of income can be arranged.

Chapter 5: Eight & Afterward

The last chapter of retirement is one frequently characterized by the sharing of legacies and life lessons, a new perspective on the process of living and aging, and deeper engagement (or reengagement) with children and grandchildren. This is also the time when you should think about your financial legacy, and review or update your estate plan so that when you leave this world, things are in good order and your wishes are followed.

Before and during your retirement, it is wise to keep in touch with a financial professional who can guide and consult you when questions about income, investments, wealth protection, and wealth transfer arise.

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com. 

Sources:

1 – marketwatch.com/story/peak-earnings-for-men-come-in-their-early-50s-2015-06-18 [6/18/15]

2 – fastcompany.com/3025564/how-to-be-a-success-at-everything/when-are-your-high-earning-years-how-much-you-should-make- [1/30/14]

3 – crr.bc.edu/briefs/the-average-retirement-age-an-update/ [3/15]

4 – gallup.com/poll/182939/americans-settling-older-retirement-age.aspx [4/29/15]

5 – news.investors.com/investing/073014-711065-people-adjust-to-lower-income-in-retirement.htm [7/30/14]

Are You a Victim of the Retirement Savings Gender Gap?

5 Jan

shutterstock_108591956You may or may not be surprised to hear that there is a gender gap when it comes to retirement savings between men and women.

 In fact

  • The median IRA/workplace retirement savings balance for a 45-year-old woman is $43,446.
  • The median IRA/workplace retirement savings balance for a 45-year-old man is $63,875.

Obviously, you cannot retire on that. The 2015 edition of Financial Finesse’s annual survey, The Gender Gap in Financial Literacy, gauged the additional amount of savings that the median 45-year-old male employee and the median 45-year-old female employee would need to replace 70% of pre-retirement income and pay for estimated medical expenses (long term care not included.) It found a 26% disparity:

  • The median male employee saver needed $212,256 to reach that goal
  • The median female employee needed $268,404.1

A gap in some aspects of financial literacy was also notable.

  • Just 67% of pre-retiree women responded that they had a general knowledge of investment classes compared to 84% of their male peers.
  • While 78% of men surveyed said that they had an emergency fund, merely 67% of women did.
  • Just 34% of women were confident about the way their portfolios were allocated, versus 48% of men.2

Is the solution to simply work longer?

Some women hope to keep working into their seventies, but that may not happen. Earlier in this decade, MetLife studied “leading edge” baby boomers born in 1946 as they turned 66 in 2012. It found that 52% were already retired, and 43% had claimed Social Security earlier than they anticipated.3

How can women plan to address this?

  1. Find out where you stand in terms of savings now. A simple retirement planning calculator (there are many available online) can help you see how much more you need to save, per year and over the course of your career.
  2. Save enough to get the match. If your employer will match a percentage of your retirement plan contributions per paycheck, strive to contribute enough to your plan each paycheck so that the match occurs.
  3. Ask about automatic escalation. Some workplace retirement plans have this option, through which you can boost your retirement contributions by 1% a year. This is a nice “autopilot” way to promote larger retirement nest eggs.
  4. Make tax efficiency one of your goals. Consult a financial professional about this, for there are potential advantages to having your money in taxable, tax-deferred, and tax-exempt accounts. For example, when you contribute to a traditional IRA or a typical employer-sponsored retirement plan, you make tax-deferred contributions. This lowers your taxable income today, although the distributions from those accounts will be taxable in retirement. You defer after-tax dollars into Roth IRAs; those dollars are taxable today, but you will eventually get tax-free growth and tax-free withdrawals if you follow IRS rules. Taxable investment accounts may seem less preferable, but they too can potentially help you pursue financial goals.4
  5. Determine an appropriate “glide path.” Many financial professionals caution retirement savers to gradually reduce the risk in their portfolio as they age – to “glide” from a portfolio mainly invested in equities to one less invested in them. (Some retirement plan accounts will actually adjust your investment mix for you as you age.) Glide paths are different for everyone, however. If you really need to accelerate your retirement savings effort, then you may need to accept more risk in your portfolio in exchange for the possibility of greater returns. (Again, this is a good topic for a conversation with a financial professional.)   

In some ways, women are narrowing the retirement saving gender gap. Financial Finesse found that 4.2% more women had adopted an investment strategy in the 2015 survey compared to the 2012 edition, and 2% more had done a basic retirement savings projection.  In passing, it also noted that the percentage of women who said they were on track to meet their retirement savings goal rose 4.2% from 2012 to 2014.2

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com. 

Sources:.

1 – 2015_Gender_Gap_report_final_brief_v2.pdf [12/3/15]

2 – forbes.com/sites/nextavenue/2015/09/17/the-unexpected-news-about-women-men-and-retirement/ [9/17/15]

3 – metlife.com/mmi/research/oldest-boomers.html#graphic [12/3/15]

4 – nerdwallet.com/blog/advisorvoices/prioritize-key-retirement-savings-steps/ [12/1/15]

 

What’s Your Saving Psychology?

14 Aug

shutterstock_103929902How much you (and your household) save may depend more on psychological tendencies than on cash flow. It’s why the customer service representative making $40,000/year can save more than the engineer making $85,000/year even when they have a similar cost of living. It comes down to their outlook. With a positive outlook, saving becomes a commitment. With a less positive outlook, it becomes a task – and tasks and chores are often postponed.

Financially speaking, saving is winning. Sometimes that lesson is lost, however. To some people, saving feels like losing – “losing” money that could be spent. So assert Ellen Rogin and Lisa Kueng, authors of a recently published book entitled Picture Your Prosperity: Smart Money Moves to Turn Your Vision into Reality. They cite a perceptual difference. If people are asked if they can save 20% of their income, the answer may be a resounding “no” – but if they are asked if they can live on 80% of their income, that may seem reasonable.1

There may be a gap between perception & behavior. Since 2001, Gallup has asked Americans a poll question: “Thinking about money for a moment, are you the type of person who more enjoys spending money or more enjoys saving money?”2

While more respondents have chosen “saving money” over “spending money” in every year the poll has been conducted, the difference in the responses never exceeded 5% from 2001-06. It hit 9% in 2009, and has been 18% or greater ever since. In 2014, 62% of respondents indicated they preferred to save instead of spend, with only 34% of respondents preferring spending.2

So are we a nation of good savers? Not to the degree that these poll results might suggest. The most recently available Commerce Department data (January 2015) shows the average personal savings rate at 5.5% – a percentage point higher than two years ago, but subpar historically. During the 1970s, the personal savings rate averaged 11.8%; in the 1990s, it averaged 6.7%.2,3

Tricks to help you save more

  • Automated retirement plan contributions can assist the growth of savings, and are a means of paying oneself first.
  • There is the envelope system, wherein a household divides its paycheck into figurative (or literal) envelopes, assigning X dollars per month to different packets representing different budget categories. When the envelopes are empty, you can spend no more. The psychology is never to empty the envelopes, of course – leaving a little aside each month that can be saved.
  • Households take an incremental approach: they start by saving one or two cents of every dollar they make, then gradually increase that percentage, household expenses permitting.
  • Frugality may help as well. A decision to live on 70% or 80% of household income frees up some dollars for saving.
  • Invest (or at least save) the accumulated consumer savings you realize at the mall, the supermarket, the recycling center – even pocket change amassed over time. Take it line item by line item: spending $20 less each week at the supermarket translates to $1,040 saved annually.

Working with financial professionals may encourage greater savings. A 2014 study on workplace retirement plan participation from Natixis Global Asset Management had a couple of details affirming this. While employees who chose to go without input from a financial professional contributed an average of 7.8% of their incomes to their retirement plan accounts, employees who sought such input contributed an average of 9.5%. The study also learned that 74% of the employees who had turned to financial professionals understood how much money their accounts needed to amass for retirement, compared to 54% of employees not seeking such help.4

Saving money should make anyone feel great. It means effectively “paying yourself” or at least building up cash on hand. A household with a save-first financial approach may find itself making progress toward near-term and long-term money goals.

Sources:

1 – businessinsider.com/mental-trick-save-money-2015-1 [1/27/15]

2 – gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx [4/21/14]

3 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [3/2/15]

4 – bostonglobe.com/business/2014/09/06/advice-seekers-save-more-study-finds/dJmUUXz78twO9OxLcRTqdN/story.html [9/6/14]

 Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

When is the Ideal Time to Retire?

26 Jun

Older Couple on BenchWhen it comes to planning your retirement, no one has the luxury of “knowing what tomorrow holds,” so we’re left to dream and work toward our ideal retirement scenario. But, do we (YOU) really want to retire at 65? Is there a new “normal”?

According to the latest annual retirement survey from the Transamerica Center for Retirement Studies, which gauges the outlook of American workers, 51% of us plan to work part-time once retired. Moreover, 64% of workers 60 and older wanted to work at least a little after 65 and 18% had no intention of retiring.1

Are financial needs shaping these responses? Not entirely. While 61% of all those polled in the Transamerica survey cited income and employer-sponsored health benefits as major reasons to stay employed in the “third act” of life, 34% of respondents said they wanted to keep working because they enjoy their occupation or like the social and mental engagement of the workplace.1

It seems “retirement” and “work” are no longer mutually exclusive. Not all of us have sufficiently large retirement nest eggs, so we strive to stay employed – to let our savings compound a little more, and to leave us with fewer years of retirement to fund.

We want to keep working into our mid-sixties because of two other realities as well. If you are a baby boomer and you retire before age 66 (or 67, in the case of those born 1960 and later), your monthly Social Security benefits will be smaller than if you had worked until full retirement age. Additionally, we can qualify for Medicare at age 65.2,3

We are sometimes cautioned that working too much in retirement may result in our Social Security benefits being taxed – but is there really such a thing as “too much” retirement income?

Income aside, there is another question we all face as retirement approaches.

How much control will we have over our retirement transition? In the Transamerica survey, 41% of respondents saw themselves making a gradual entry into retirement, shifting from full-time employment to part-time employment or another kind of work in their sixties.1

Is that thinking realistic? It may or may not be. A recent Gallup survey of retirees found that 67% had left the workforce before age 65; just 18% had managed to work longer. Recent research from the Employee Benefit Retirement Institute fielded roughly the same results: 14% of retirees kept working after 65 and about half had been forced to stop working earlier than they planned due to layoffs, health issues or eldercare responsibilities.3

If you do want to make a gradual retirement transition, what might help you do it?

  1. Work on maintaining your health.
  2. Maintain and enhance your skill set, so that your prospects for employment in your sixties are not reduced by separation from the latest technologies.
  3. Keep networking.
  4. Think about Plan B: if you are unable to continue working in your chosen career even part-time, what prospects might you have for creating income through financial decisions, self-employment or in other lines of work? How can you reduce your monthly expenses?

Easing out of work & into retirement may be the new normal. Pessimistic analysts contend that many baby boomers will not be able to keep working past 65, no matter their aspirations. They may be wrong – just as this active, ambitious generation has changed America, it may also change the definition of retirement.

Sources:

1 – forbes.com/sites/laurashin/2015/05/05/why-the-new-retirement-involves-working-past-65/ [5/5/15]

2 – ssa.gov/retire2/agereduction.htm [6/11/15]

3 – money.usnews.com/money/blogs/planning-to-retire/2015/05/22/how-to-pick-the-optimal-retirement-age [5/22/15]

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

 

The Retirement Reality…

30 May

Retirement Couple

It May Be Better Than You Think!

If you’re like most Americans, your dreams about retirement quickly give way to the question: Am I saving enough? There’s no “one-size-fits-all” number to answer this question, but recent studies give some interesting insight into the spending habits of seniors and how it affects their happiness during retirement years. So, here’s your reality check.

Few retirees actually outlive their money. If this was truly a crisis, we would see federal and state governments and social services agencies addressing it relentlessly. The vast majority of retirees are wise about their savings and income: they don’t spend recklessly, and if they need to live on less at a certain point, they live on less. It isn’t an ideal choice, but it is a prudent one. Health crises can and do impoverish retirees and leave them dependent on Medicaid, but that tends to occur toward the very end of retirement rather than the start.

You may not need to retire on 70-80% of your end salary. This is a common guideline for new retirees, but according to some analysts, you may not need to withdraw that much for long.

In the initial phase of retirement, you will probably want to travel, explore new pursuits and hobbies and get around to some things you may have put on the back burner. So in the first few years away from work, you might spend roughly as much as you did before you retired. After that, you could spend less.

Bureau of Labor Statistics data is very revealing about this. JP Morgan Asset Management recently studied U.S. household spending and found that it peaks at age 48. The average U.S. household headed by people aged 65-74 spends only 63% as much as a household headed by people aged 55-64. Additionally, the average household headed by people 75 and older spends only 72% as much as the average household headed by people aged 65-74.1

In the big picture, households run by those 75 and older typically spend about half as much per year as households headed by people in their late forties.1

Further interesting analysis of BLS statistics and retirement spending patterns comes from David Blanchett,thehead of retirement research at Morningstar Investment Management. He sees a correlation between career earnings and retirement spending, one contrary to many presumptions. Comparatively speaking, he notes that higher-earning retirees commonly have to replace less of their income once their careers conclude. As he commented to Money Magazine, “the household that makes $40,000 a year might have an 85% replacement rate, and the household making $100,000 a year might need 60%.”2

Why, exactly? The upper-income household is watching its costs fall away in retirement. The home loan, the private school tuition, dining out due to convenience, the professional wardrobe, the car payment, the workplace retirement plan contribution – this is where the money goes. When these costs are reduced or absent, you spend less to live. Blanchett believes that the whole 70-80% guideline may “overestimate the true cost of retirement for many people by as much as 20%.”2

Your annual withdrawal rate could vary notably. Anything from healthcare expenses to a dream vacation to a new entrepreneurial venture could affect it. So could the performance of the stock or bond market.

You could retire before you anticipate. You may want to work well into your sixties or beyond – and the longer you wait to claim Social Security benefits after age 62, the greater your monthly payout. Reality, on the other hand, shows that most people don’t retire at age 66, 67 or 70: according to Gallup, the average retirement age in this country is 61. The aforementioned JP Morgan Asset Management study determined that less than 2% of Americans wait until age 70 to claim Social Security benefits. So if your assumption is that you will work to full retirement age (or later), you should keep in mind that you may find yourself electing to claim Social Security earlier, if only to avert drawing down your retirement savings too quickly.1

You don’t have to be a millionaire to have a happy retirement. In a 2011 Consumer Reports poll of U.S. retirees, 68% of respondents were “highly satisfied” with their lives irrespective of their financial standing. Backing that up, JP Morgan Asset Management found that retiree satisfaction increased only incrementally the more retirement spending surpassed $40,000 a year.1

The retirement you live may be slightly different than the retirement you have imagined. Fortunately, retirement planning and retirement income strategies may be revised in response.

Julie Newcomb, a Certified Financial Planner in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

Sources:

1 – http://www.reuters.com/article/2014/03/12/us-column-stern-advice-idUSBREA2B1R020140312 [3/12/14]

2 – http://www.money.cnn.com/2014/02/26/retirement/retirement-spending.moneymag/index.html [2/26/14]