We’ve all read the headlines that show that most Americans are not financially prepared to fund their own retirement. The numbers look scary, but the difference between being able to afford retirement and not can be surprisingly thin if you know the right levers to push.
Read More→

Are you about to retire? Congratulations! Your many years of hard work have paid off, and now it’s time to finally take it easy. You probably have many ideas about how you’re going to spend your free time. To ensure you can enjoy your new life, you need to think about how you’re going to spend your money in retirement. The following guidelines might be helpful to you in your planning.
Read More→

Throw out those rocking chairs because retirement is changing! The goal of enjoying a comfortable retirement lifestyle is still the same but the types of activities people plan to enjoy in retirement and the opportunities they plan to pursue are changing and expanding.

The New 65

Advances in medicine play a major role in the changes, especially in terms of increased life expectancies. The average life expectancy for a baby born in the U.S. at the turn of the previous century was 47.3 years. 1 Fifty years later, the life expectancy for newborns was 68.2 years. According to projections, babies born in 2010 can look forward to an average life expectancy of 78.3 years. 2 That’s an increase of over 65% in a little more than 100 years.

The Old Three-legged Stool

More time to enjoy being retired is a big plus. However, a longer retirement means you’ll need more money. Where will your income come from when you retire? Traditionally, financial professionals used the “three-legged stool” analogy to explain the most likely sources of retirement income. The legs were Social Security, pension benefits and personal savings—three income sources working together to support your retirement. Let’s look at how well the three legs are holding up these days.

Social Security: The Social Security system was designed to provide supplemental income only, not the bulk of a retiree’s living expenses. In 2010, the average monthly Social Security benefit amount was $1,076 ($12,909 per year),3 which is not enough to allow most people to live comfortably. As the pie chart shows, today’s retirees receive only 36% of their income from Social Security. Additionally, the future of Social Security is uncertain as the government wrestles with whether to change benefit formulas and age requirements to help reduce the federal debt.

Pensions: This is the leg that has changed the most. Traditionally, a pension is a steady monthly benefit paid to covered retirees who accrued vested benefits while employed. Pensions are much less common today. More and more employers are offering retirement savings plans instead. Retirement benefits under these plans are determined by the amount you have saved in your account.

Savings and Investments: Most people will probably need to rely on their personal savings and investments to supply a significant portion of their retirement income, especially if they won’t receive traditional pension benefits.

A Working Retirement

Not everyone is ready to stop working at “normal retirement age.” Some people plan to continue working so they can stay active, pursue new interests, continue to earn a full-time income or simply make some extra money. However, if you have to work just to make ends meet once you reach retirement age, it could be a problem. There are many factors, such as your health and appropriate job opportunities, that you won’t be able to control.

Do It Now

Since you won’t know everything about retirement until you get there, you should make the most of what you do know—your employer’s plan is a great opportunity to save and invest for retirement. If you decide you can do more now for the future, make the changes soon.

1 Centers for Disease Control and Prevention, National Vital Statistics Reports, www.cdc.gov
2 The 2010 Statistical Abstract, U.S. Census Bureau, www.census.gov
3 Monthly Statistical Snapshot January 2011, Social Security Administration

If you’re approaching retirement, perhaps you’re wondering what you should do about your mortgage. If mortgage debt is keeping you awake at night, you have lots of company. The Employee Benefit Research Institute has found that 43% of everyone in the 65-74 age group had mortgage debt in 2007. The median amount of mortgage debt, adjusted for inflation, was $69,000.

When weighing the pros and cons of carrying a mortgage into retirement, I like to explain to clients that there are two factors to consider—the emotional and financial. You can’t quantify emotions, of course, but you can definitely analyze financial factors. Let’s do that with a hypothetical example.

Meet Joe Homeowner

Joe is 65 and preparing to retire. He has a $230,000 mortgage on his house, with a monthly payment of $1,850. Joe has sufficient funds in his portfolio to eliminate this debt at once. If instead he continues to make his monthly payments, he’ll pay off his mortgage in 20 years.

I’ve greatly simplified Joe’s situation. For example, I’m not taking into account whether he has high-interest-rate credit card or other consumer debt. Paying that down might be a better decision than paying down his mortgage.

Imagine Writing a Check for Your Entire Mortgage

What homeowner hasn’t dreamed of doing this? By paying off his mortgage, Joe would reduce his monthly expenses and pay far less mortgage interest than he would if the loan ran its full 20-year course. He would also gain peace of mind, a benefit that you can’t put a price on.

But that peace of mind might be deceptive. This is where we move from the emotional to the financial side of the equation. What are the likely impacts if Joe’s mortgage disappears?

• By immediately paying off the remaining balance on his mortgage, Joe would significantly reduce his cash-flow flexibility. Joe in effect takes cash from his portfolio and locks it up in his house. He might need that money if he wants to travel, support a charity, go back to school or embark on another adventure in his retirement years. The ability to extend expenses over time is a significant benefit of not paying off a mortgage early.

• Joe would also lose the tax break he’s been enjoying on all that mortgage interest. This could be a substantial loss, depending on the interest rate and Joe’s income.

• Inflation should be a crucial consideration for Joe. As inflation rises, having fixed debt (such as a mortgage) at the historically low interest rates we are seeing today works in favor of the debt holder over time.

• There is also the question of how Joe will generate the $230,000 from his portfolio. He probably needs to liquidate some of his investments, which could trigger capital gains taxes.

My Recommendation on Mortgage Debt

I’ve found that paying off a mortgage is not just about resources. It’s very much a personal decision, strongly tied to a person’s comfort with risk. I always advise investors with debt to pay off as much as possible before retirement.

That’s an easy call when considering something like a credit card balance, but a mortgage is very different. The financial impact of paying off a mortgage early deserves a careful analysis of the rate of return you can achieve on your long-term investment portfolio versus your long-term tax rate. This is particularly crucial today given current mortgage rates and the uncertainty regarding future tax rates. I am ready to help you analyze this situation as you near retirement.

Monte Carlo Simulation (MCS) is one the most powerful analytical tools in my financial planning toolbox. MCS sounds like gambling, and in a way it is, because this system harnesses the power of probability to predict your financial future.

Here’s how MCS works. As with all financial planning, I help you establish where you are right now. Then you decide where you want to be at, say, retirement. From there we determine how to get from point A to point B.

MCS takes your data and runs the equivalent of 10,000 trials, in effect rolling the dice for each year between now and your retirement. The simulations try to account for all possible ups and downs in the market. The results, expressed as a percentage, make up your retirement sustainability—the probability that you will be able to fully fund all of your retirement goals.

If the odds of achieving your investment return are not as favorable as you’d like, there are three variables you can change:

• You can move your retirement age farther into the future
• You can step up your savings rate
• You can reduce your desired spending rate in retirement

With these variables adjusted, I can run the simulations again and see if the odds of achieving your investment return have improved.

Planning for Retirement at Any Age
If your retirement is at least 15 years away, MCS will give you an education in how small changes at the starting line can have a huge impact at the finish. MCS will keep rolling the dice and show you how you’re doing relative to your ultimate goals.

If your retirement is less than five years away, or if you’re already retired, MCS takes on a somewhat different role. With a shorter time span to work with, the simulations become more accurate. You can also realistically separate your goals into necessary and discretionary rather than combining them all into a single retirement goal.

The simulations will show you which if any of your discretionary goals are at risk. MCS will also show you something even more important—which of your goals are not at risk. Not being able to spend a month in Italy every year is not the same as not being able to meet your basic living expenses! With this information in hand, we can take steps to shore up your plan and get your threatened goals back on track.

Think of MCS as a generator for “What if?” scenarios tailored to your financial situation. With this terrific tool on our side, we can plot the best way forward for the best possible financial outcome.

It never hurts to review the basics of retirement planning. One of the most significant is coordination. By coordination, I mean how the assets in your portfolio work together to further your goals.

We all understand that we should aim for a diversified mix of investments. Of course, diversification will not ensure that you reap a profit if the market takes a turn for the worse. Nor will it guarantee that you won’t lose money. But the alternative, holding just one type of asset, is potentially far riskier.

More Than Just Your 401k Plan
You may have set up a good balance in your employer-sponsored retirement plan. It’s only natural to let that plan go along and hope for the best, but there’s more to retirement than what’s happening with your employer-sponsored plan. What about your investments outside that plan, such as individual retirement accounts (IRAs)? Does your portfolio still seem balanced when you consider different plans and investments as one unified resource?

If you’re married, you must also consider your spouse’s investments. Do you even know what types of investments are in your spouse’s portfolio, and does he or she know what’s in yours? If your portfolios were established before you married, it’s likely you don’t.

Don’t Be a Copycat
Diversification is a worthy goal, but not if all your retirement accounts are diversified in the same way. If you are duplicating investments in your various plans or when compared with your spouse’s plans, you could end up overinvested in one company, industry or asset class. That could increase your exposure to risk and defeat the purpose of diversifying in the first place. Or it could mean that your accounts are so conservative that your investments may not achieve your long-term goals.

Aim For the Big Picture
Your financial advisor can help you analyze your complete financial picture (including your spouse’s investments). A professional can take an objective look at your investments, analyze their risk exposure, expenses and past performance, and determine how each factor fits into your asset allocation. Your overall asset allocation, the way your assets are divided among stocks, bonds and cash equivalents, should reflect the timeframe you have before retirement, your comfort with risk and your specific financial targets.

Your advisor can also help you diversify not just within a portfolio but within each asset class. This could be very important. For example, you might want to include funds that invest in small companies as well as funds that invest in large companies in your stock investments.

It pays to brush up on the basics. When your investments are coordinated, they can work together much more effectively to help you reach your financial goals.

Financial Hurdles for Women
Retirement planning is a different ballgame for women. They outlive men, they spend more time out of the workforce, and they generally earn less than men do. There’s also a less-tangible but still significant factor—confidence.

A recent survey by Transamerica Center for Retirement Studies found that only 6% of female respondents were very confident in their ability to achieve a financially secure retirement. A study by MetLife and the Women’s Institute for a Secure Retirement (WISER) shows that this confidence gap is a constant among women. Even women who are secure in their careers and who have a good grasp on finances worry that they will not have the assets they need to support themselves in retirement.

Challenges Facing Women
It’s easy to see the factors that undermine a woman’s financial confidence. The big three are time away from the workplace, income disparity, and longevity.

Time away from the workplace. According to WISER, women typically work 12 years less than men because they care for children, aging parents, and other family members. When not in the workforce, women are not building pension benefits, paying into Social Security, or contributing to an employer’s 401(k) or 403(b) plan. Those missing 12 years could mean far fewer assets decades later.

Income disparity. It’s no secret that men and women are paid unequally. WISER reports that women in general make 77 cents for every dollar a man makes. This disparity translates into smaller retirement savings for women. A 2010 Harris Interactive survey found that the average defined-contribution plan balances of women are 40% smaller than those of men.

Longevity. The American Association for Long Term Care Insurance reports that women live an average of five years longer than men and are 10 times more likely to reach age 85. Because they live longer, women face paying more living expenses and are more likely to incur long-term care costs.

Time to Take Control
I’ve outlined some real challenges here, but with careful, early planning they can all be met. Do not let a lack of confidence turn into denial or paralysis! Let’s examine some concrete steps women can take to help reach a comfortable retirement.

1. To compensate for time spent outside the workforce, women should contribute extra money to an employer-sponsored retirement plan while they have it. A little belt-tightening early on might make up for missing income years later.

2. Some married women let their spouse manage the family finances. This could present a problem over time. I encourage women to take a proactive approach to understand where their money comes from, where it goes, and how to manage their resources. This positions a woman to more easily pick up the financial pieces if they become widowed.

3. Women can counter longevity risk with products such as annuities, which offer guaranteed income for life. Although they come with some risk, annuities are a good complement to Social Security.

4. Women should also consider long-term care insurance to help manage healthcare costs later in life.

5. A professional financial advisor can help a woman assess her retirement goals and develop strategies to achieve them. Planning for retirement is complicated. Why not seek qualified help?

Confidence for All Women
Whether a woman is a career professional, a widow or a stay-at-home mom, she faces unique challenges that require special consideration. By taking an active role in her finances and imagining a comfortable future, she might discover that retirement is not impossible after all. That’s just the thing she needs to close the confidence gap.