Published November 17, 2011
This year marked the first wave of aging baby boomers reaching full retirement age, and for many of us, things aren't going the way we had planned.
Rising health care costs, selloffs on Wall Street and the drop in home prices have left many boomers in or near retirement worrying about their finances instead of spending time with their grandchildren, travelling and doing whatever other retirement activities they’ve been dreaming of.
A recent Pew Research Center survey found that 80% of the nation's 79 million boomers are dissatisfied with the current economic landscape— more than members of any other age group. Adding to that, a recent Gallup poll showed 66% of Americans ranked not having enough money for retirement as their top financial concern, an increase from 53% just a decade ago.
With all of this doom and gloom surrounding us, what should boomers be doing with their finances to avoid any pitfalls in our upcoming retirement? I spoke with Joni Clark, chief investment strategist for Loring Ward, an asset management firm based in Silicon Valley, and she answered the following questions regarding this retirement crisis:
Boomer: For those boomers who do not have adequate savings or retirement funds, is there a way for them to play catch up before they retire?
Clark: Unfortunately, this is a common problem facing many boomers. There is no ideal “quick-start” program that can generate the returns needed to fund the dream retirement. In fact, anyone who does claim to have a quick fix should be viewed with a wary eye.
In retirement planning, investors only have control of savings and spending. The sequence of market returns are out of an investor’s control. Boomers should pay as much as they can reasonably afford into their retirement savings before they retire, and control spending once retirement begins.
The IRS allows for additional “catch-up” contributions into retirement plans for those 50 years or older. The catch-up provisions allow for an additional $1,000 contribution to an IRA account, or an additional $5,500 to a 401(k) account.
Rather than look for a quick fix, boomers need to consider one or all of the following options:
• Delaying retirement. If you are healthy and able to continue your career, staying in the workforce is an excellent way to continue building your portfolio while avoiding the need to draw down funds more than required.
•Take a part-time job after retiring. If you are unable to continue in your present career, part-time work provides income, keeps your mind active and can help your savings go further. ( Get tips for finding part-time work here and here)
• Downsize your retirement spending plan. Boomers who have had to live on a careful budget before retirement will need to be careful stewards of their retirement savings after retirement.
Boomer: Medicare covers the big portion of retirees’ health-care expenses. What other insurance protection should we be looking for to help defray the costs not covered by Medicare?
Clark: There are a number of good supplemental care insurance policies that help seniors manage those costs not covered by Medicare. Your financial advisor should be able to recommend a good insurance broker who can direct you to a good policy. If you do not have a good financial adviser, your certified public accountant, estate and/or tax attorney can often direct you to a good insurance broker as well.
Boomer: A lot of baby boomers today find themselves owing more on their mortgage than their house is worth. What recommendation would you have, should they cut their losses and walk away and just rent?
Clark: There is no quick or easy answer to that question. While on the surface, it might seem like a simple decision to walk away from payments on an underwater mortgage, there are long-term legal and credit consequences that need to be considered.
That kind of decision needs to be made in consultation with your financial advisor and your attorney, and be careful about any quick-fix services that offer simple solutions.
Boomer: Social Security is available to baby boomers at age 62, but most boomers plan on working into their 70s. Should I collect Social Security while I am still actively working?
Clark: There are limits to the amount of income that can be earned annually when collecting social security. If you take social security benefits before age 65 and you earn income in excess of the annual earnings limit, your social security benefit will be reduced. In 2011, the annual earnings limit is $14,160. That means you can earn up to $14,160 and your benefits will not be reduced. If you earn over $14,160 the amount of reduction you incur will depend on your age.
Also, there are clear benefits to delaying Social Security payments. If you are still working productively, and you can afford to delay collecting Social Security checks, it makes sense to delay, up to when you reach the age of 70.
Delaying Social Security payments will lead to a corresponding increase in monthly payments when you do begin receiving Social Security checks, until you are 70 years old. At that point, the benefits in terms of higher monthly payments will not increase, so it doesn’t make sense to delay past that age.
Boomer: Boomers’ 401(k)s took a big hit in 2008. Should they remain in stocks or go to cash to avoid the next bear market?
Clark: Certainly boomers – and a lot of other investors – took a hit on their 401(k) plans in 2008, and those potential losses generate powerful emotions that may make you want to convert all of your assets to cash or money market funds, which is today’s equivalent of sticking your money under a mattress.
The best option in turbulent markets is usually to do absolutely nothing and wait it out. The markets will eventually reverse course, and if you move to cash you will essentially lock in losses and impede the future growth potential for your retirement savings.
Since you mentioned 2008 as an example, let’s take a closer look at that year. You might be surprised at what you’ll find:
Everyone who converted to cash in 2008 – especially after the market dropped – locked in those losses, which meant they also missed the market surges that took place in 2009.
Investors who sold out of the equity market for the safety of cash in early March may have locked in losses of close to 25% for the year-to-date 2009, and may have missed out on a 58% stock market rebound (as measured by the S&P 500 Index). The results are even more dramatic for small cap stocks, as measured by the Russell 2000 Index, with losses of 31% early in the year, and a rebound of 78% in the latter part of the year.
Of course, a brief period like this may not signal the start of a new bull market. But recent history does serve as a reminder of how suddenly a major turnaround can begin. It's important for investors to consider remaining in the market—even when their emotions tell them otherwise—to potentially benefit from an eventual market recovery, and to be positioned to capture positive performance when it occurs.
Some investors think they will be able to recognize when the recovery has taken hold and they can safely get back in to the market. But historically, market recoveries have occurred unexpectedly. We saw this in 2002 and again in 2009, with what were, in retrospect, strong bull markets that began without warning.
To minimize risk, you should be diversifying your 401(k) plan and any other investments across a range of asset classes, which can often be accomplished through a variety of index funds.
Define your plan for diversifying, and then rebalance regularly, whether once a quarter, once every six months, or once a year. Sell the assets with the most growth to bring your portfolio back into alignment with your plan, and use that to meet your withdrawal requirements.
This approach forces you to sell high, something everyone tries to do, but few actually accomplish.