Many Workers Will Outlive Retirement Savings
The 5th Annual Retirement Fitness Survey from Wells Fargo1 came out with some interesting findings:
- When it comes to their retirement, 50-somethings seem to be in a state of denial about how long their retirement savings will last, according to the study. Although the recent economic downturn has forced pre-retirees ages 50 to 59, to consider working years longer than they had hoped, their current rate of savings is unlikely to fund the retirement lifestyles they expect.
- Only 23% of pre-retirees are saving more for retirement than they were a year ago. 57% are saving the same amount, and 20% are now saving less.
- 67% say their expectations for retirement have changed in the past year, and 56% now expect to work longer by an average of three additional years.
- Overall, the financial positions and savings habits of this group are insufficient to last for their expected 20-plus years of retirement (closer to 30 years in my opinion).
- While pre-retirees surveyed expect to need $800,000 for retirement, they have saved only $300,000 (median amounts). At a 4% withdrawal rate, $800,000 will only generate $32,000/year in pre-tax income!
- Pre-retirees clearly haven’t assessed how long their savings will last in retirement. They expect to live nearly 21 years in retirement, but plan on spending nearly 10% of their savings every year in retirement. The industry recommendation is to withdraw no more than 4 percent annually.
- People have been overly optimistic about their investment returns. When they started saving (typically in their 30s), both pre-retirees and retirees expected the value of their investments to grow by 8.7%/year, on average. In fact, the compound annual growth rate of the S&P 500 from 1958 through 2008 was 6.6% (without dividends).
- Despite inadequate savings, nearly two-thirds lack any formal plans for retirement savings or spending strategies. Only 35% of the pre-retirees have a written plan for retirement, and of this group, only 52% say they updated it in the past year during the market downturn.
- 40% wish they had been more proactive about educating themselves about retirement preparation.
- Only 34% “wish they had cut back more on their previous lifestyle and saved more” for retirement.
“In the wake of the severe economic crisis, we had expected to find people had become more conservative in their savings and spending behavior,” said Lynne Ford, of Wells Fargo. “We were surprised to see how few people have increased their rate of savings and how many people in their 50s have no retirement plan at all. For people in the last 10 to 15 years of their working career,the failure to have a thorough retirement plan in place is like driving while blindfolded.”
Dangers of Reverse Mortgages – the Next Bubble?
What is a reverse mortgage? It is a way of taking equity out of your home if you have substantial equity when you are 62 years of age or older. The obvious advantage of a reverse mortgage is that seniors, who want to stay in their homes, can supplement their incomes or eliminate existing mortgage payments.With a reverse mortgage, equity in the home can be exchanged for a lump sum payment or monthly payments. However, reverse mortgages are very complex contracts, which make understanding regular mortgage notes seem like a 1st grade quiz compared to the complexity of reverse mortgages.
Before you (or a loved one) seriously consider a reverse mortgage, make sure you understand the very complicated rules governing them and how quickly fees and interest charges can balloon. Homeowners can end up without any equity (or even negative equity) and could even be evicted from their homes,for example, if a spouse dies. Beware of unscrupulous salespeople pushing these reverse mortgages, preying on emotions and then trying to persuade you to use the mortgage proceeds to buy financial products such as deferred annuities that can be inappropriate for your situation. The required counseling for the mortgages can be far too skimpy and of little educational value. In New Mexico, property values are not nearly as high as they are in the northeast or California, where reverse mortgages can make more sense. Whatever your situation, remember a reverse mortgage is to be used only as a last resort. Never use one to fund discretionary wants like vacations, a fancy new car or “stuff”! Before you seriously consider one of these loans, consult with an informed impartial party.
Retirement Plan Contribution Limits to Remain Unchanged in 2010
Due to the low inflation statistics for 2009 (Q3 ’08 to Q3 ’09), all the retirement plan contribution limits will remain unchanged for 2010. The most common limits to remember are $16,500/year for 401K, 403b, 457b or the Federal Thrift Savings Plan (TSP) plus a $5,500/year catch up for individuals over 50. IRA limits stay at$5,000/year or $6,000 for those 50 and over.
As mentioned in the October Newsletter, there will be no 2010 Social Security Cost-of-Living adjustments. However, if your Medicare Part B premiums increase, a “hold harmless” provision protects 93% of beneficiaries from paying a higher premium. The “hold harmless” provision does not apply if your MAGI2 is over $85,000 single or $170,000 filing jointly or if you become entitled to Medicare Part B in 2010 and you will be paying Medicare Part C or D premiums.
Roth IRA Conversions
Remember, 2010 is the year when income limitations have been removed for converting traditional IRA’s into a Roth IRA(s). This year is the only year that taxes on the conversion can be spread out over two tax years (2011 and 2012). There are many complexities to these conversions, and they are not appropriate for everybody. Let me know if you would like to look into the suitability for your situation?
Just got back from a wonderful week spent in Akumal, Mexico (1.5 hours south of Cancun). Enjoyed the spectacular Mayan ruins at Tulum and Cobá, snorkeling (saw 3 types of rays), hiking the lovely beaches, enjoying the hospitality of the very friendly Mayan locals and of course, the delicious food (the Mayan habanero peppers give our NM chile a bit of competition!). In May I will be attending the annual NAPFA Conference in Chicago, to see if Ican get a little smarter (need 60 hours of CE’s every 2 years) and attend a meeting of my practice management group about how to improve our financial planning business practices. Since I continue to welcome new clients, please feel free to pass this newsletter on to anyone who may be interested. My website at www.MadeyskiFP.com has information for prospective clients to review if they are interested in my financial planning services.
1Fifth Annual Retirement Fitness Survey, https://www.wellsfargo.com/press/2009/20091105_Retirement. On behalf of Wells Fargo, Richard Day Research conducted 2,108 online surveys with pre-retirees (ages 50 to 59) and young retirees (ages 55 to 70). Those interviewed were relatively affluent, each having at least $100,000 in household investable assets, excluding real estate. Assuming no sample bias, the margin of error would be +/- 3% for each sample (at the 95% confidence level).
2Modified Adjusted Gross Income. In U.S. tax law, Modified Adjusted Gross Income (MAGI) is the Adjusted Gross Income (AGI), modified by various adjustments. There are various MAGI’s,computed in different ways; the most used is Modified AGI for Roth IRA purposes, detailed in the instructions to Form 8606. Other MAGI’s appear in Form 8839 (Qualified Adoption Expenses) and Form 8815 (Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued after 1989).