When Jennifer Rhoads sits with a new client looking for retirement planning assistance, among her first questions: When do you want to retire?
Rhoads, a senior vice president for wealth management at First Independent Bank in Vancouver, believes people need a road map if they expect to ever leave behind the full-time world of work.
“The greatest challenge facing many baby boomers is the lack of a guaranteed income stream,” Rhoads said. “Without that pension, they will have to save, invest and then manage that portfolio for their lifetime.”
With the collapse of home values and the Dow Jones Industrial Average down 8 percent during the past 10 years, many of those nearing retirement might find the process daunting, if not discouraging. But Rhoads and other investment advisers say it is better to dig into retirement planning than live in a world of worry. More information helps people get real about what’s possible and what isn’t, they say.
And there may be a pleasant surprise or two because it’s not just about how much money you have saved, but how you want to live in retirement.
Vancouver financial adviser Dan Foster starts the conversation with that in mind.
“I ask them what kind of lifestyle they expect to be living in retirement, and I ask them to realistically estimate their lifespan,” said Foster, a financial adviser with Ameriprise Financial and president of the Oregon-Southwest Washington chapter of the Financial Planning Association. “It’s my job to tell them what’s possible. If we can’t achieve it, then I help them make adjustments.”
Boomers, Foster and Rhoads say, might be smart enough to understand investment options from bonds to variable annuities, and they might understand market trends, but they might not be objective about what’s possible in retirement.
“You’ve got to have a plan, but you’ve also got to look at what can go wrong with your plan,” Foster said. “You must get objective advice and feel comfortable with the person you’re working with. Too often investors focus on the return and don’t look at the risk.”
Those retirement risks are:
n The risk of outliving retirement savings.
n The risk that inflation will eat into your retirement purchasing power.
n The risk that market downturns and variable returns will undermine your lifestyle plans in retirement.
Extra risks for women
Women face the additional risk of outliving their spouse. If you’re a 65-year-old woman, for example, you have a 40 percent chance of living to age 90. You have a 26 percent chance of doing the same if you’re male. Eighty percent of women will outlive their husbands, on average, by 14 years.
Nearly 800,000 women become widows each year, according to MSN.com. The U.S. has more than four times — 11.3 million versus 2.6 million — as many widows as widowers. But according to U.S. Census Bureau research, nearly 30 percent of unmarried women 65 and older are living at or below the poverty line.
“Women need to be fully engaged in the retirement planning process,” said Rhoads. “I speak to a lot of married couples and encourage them to have frank conversations about what happens when one of them dies.
“If it’s a second marriage, planning is even more important. If the couple has a good, honest relationship, they’ve got to talk about estate planning where children are the beneficiaries at the death of the second spouse.”
That detailed planning is essential to a good retirement. According to MIT AgeLab, a research program devoted to the aging population, when a woman outlives her husband, her income decreases by 50 percent yet expenses only decrease by 20 percent.
Meanwhile, the rocky economy is forcing many to re-evaluate their plans and consider working longer or continuing to work part time in retirement.
A report from MorganStanley SmithBarney said monthly payments from Social Security now meet only 40 percent of a retiree’s income needs. And purchasing power of retirement savings will likely diminish over time with inflation. For instance, the purchasing power of $1,000 today will be cut nearly in half during the next 20 years if inflation increases the cost of living by 2 percent a year over that time period.
Then there’s the risk of negative returns early in retirement that could seriously reduce the size of your nest egg. And a “safe” saving account in a money market fund paying 1 percent a year, or less, is not going to keep up with inflation.
Frozen with anxiety
With all of these factors to weigh, it’s no wonder that many pre-retirees are frozen with anxiety.
“Those planning for retirement must ask themselves how they want to spend their time,” Foster said. “It’s a quality-of-life question, not a money question. There are ways to make it happen by reducing living expenses. It’s not about giving up control … but about starting with the end in mind.”
Boomers may have to negotiate with themselves to close the gap between what’s possible with their retirement income and the lifestyle adjustments they may need to make.
Women, because they generally live longer, must make sure they’re covered, Rhoads said. A $500,000 nest egg might be enough for someone who also has a guaranteed pension benefit, but it might not be nearly enough for someone else, she said.
With all of this weighing on boomers, the formula that said “All you need to do is withdraw 4 percent a year from your nest egg, and you’ll be fine,” is out the window, say the experts.
AARP recently released two tip sheets offering general guidance for how to make good retirement decisions. The first, “Making Your Nest Egg Last a Lifetime” by researcher Anthony Webb, suggests delaying claiming Social Security for as long as possible. The other encourages certain retirees, especially women, to consider purchasing an annuity as a way to establish a fixed and dependable stream of income that covers basic living expenses.
Here again things get complicated because annuities can mean big commissions for those who sell them and because of their complexity, annuities are difficult to understand. Which returns us to the question of whether those planning for retirement can do it themselves?
There are plenty of Web sites available to help boomers get planning started. But experts say that because markets have become more volatile, investment choices more diverse and complicated, expert help may be needed. But who can you trust?
“You have to feel that your adviser is working for your best interests,” Rhoads said. “If you don’t trust your adviser, don’t work with them. They’ve got to deliver on what they said they’d do on an ongoing basis.”
For Foster, getting objective financial advice is essential for those preparing to retire.
“Ask a lot of questions,” Foster said.
