Prepare for an Uncertain Retirement

Most people have a vision of their ideal retirement. Some workers imagine retirement as a time to sip cool drinks on the beach. Others dream of playing golf or traveling the world.

But the reality of retirement is likely to be far less clear and certain than the fantasies you have created, says Richard Kaplan, Peer and Sarah Pedersen professor of law at the University of Illinois College of Law in Champaign, Ill.

In the following interview, Kaplan talks about the need for retirement planning for a future that is likely to be as unpredictable as the past and the present. Along the way, he offers his thoughts on Roth IRAs and 401(k) plans, and whether or not annuities are a wise investment.

Are 401(k) plans the best place for investors to save for retirement?

Tax savings and autopilot investing are the main attractions. But the tax savings may disappear if the investor is in a higher tax bracket after retiring than currently, which could happen if tax rates are increased across the board. And if an investor has the self-discipline to save consistently without the automatic withdrawal feature, that benefit may be less important. To a great extent, the answer depends upon the specific plan. Some plans have very limited investment options and high fees, which is not an appealing combination.

For what type of investor are the Roth IRA and Roth 401(k) best suited?

The investor who expects to be in a higher tax bracket after retirement than currently (is best suited to these options). If you think that tax rates are going up across the board, whether to pay for Social Security and Medicare as baby boomers retire, or to pay down our national debt, then giving up a tax exclusion at current rates is not much of a sacrifice.

Alternatively, if someone is not sure about future tax rates and wants to diversify his/her retirement portfolio in terms of pre-tax and after-tax assets, a Roth account might fit the bill.

Should retirees embrace immediate annuities for their main source of income, or are annuities too expensive right now?

Interest rates are at historic lows, and they may be that way for a while. One solution is laddering one's purchases over time to catch rising rates. But if people want regular income -- absent any inflation adjustment, of course -- and believe that the insurer behind the annuity is sound, then annuities are an effective way of covering retirement needs.

Retirees should, however, keep some of their funds outside of these contracts for unexpected expenses, especially health care costs.

How do you feel about the Employee Benefits Security Administration's recent push for putting projected monthly income amounts on 401(k) statements? Will this spur people into saving more, or will this add to the confusion out there?

Most people save for retirement with the goal of obtaining regular income rather than achieving a fixed sum, as such. Surveys show that people vastly underestimate how much they need to save to support their intended spending level, and EBSA's proposal might better enable people to measure their progress.

Even so, monthly income projections are not guaranteed until an account balance is annuitized. Most financial advisers do this sort of analysis for their clients already, so EBSA's proposal will primarily benefit people who are not working with an adviser.

If you could offer one message to the American people about retirement, what would it be?

Planning is a useful exercise, but don't kid yourself that your future life will be more predictable than your past. The biggest unknown in retirement is likely to involve health care costs.