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| The first Baby Boomer turned 65 this year |
The last time I visited my parents in Florida, we were missing one ingredient needed for that night’s dinner. I offered to take a “quick” run to the store to pick it up. Well, if you’ve ever gone grocery shopping there, you’ll know that there is no such thing as a quick run to the store. You see, the people there don’t work anymore and have all the time in the world -- I got back just in time for dessert. Okay, I may be exaggerating but you get the point; there are a lot of retirees in Southern Florida. Believe it or not, it won’t be long before the whole country has the same proportion of “seniors” as Florida does today. Can you believe that the first of the baby boomer generation turned 65 years old on January 1 of this year? It’s true. And for the next 19 years, ten thousand boomers a day will reach that milestone. I was born in 1963 and that means that I’m among the last of the Baby Boomers. By the time I reach retirement age it is estimated that nearly 20 percent of the US population will be age 65 or older.
Turning Retirement Savings into Retirement Income
Retirement presents a unique financial challenge for many of us because at one point we will all stop working either by choice, or by circumstance (health, layoffs, etc). When retirement finally arrives, it will become necessary to turn our savings into a reliable source of income to replace the paychecks we once earned. It sounds simple enough, but there is one major risk that threatens to ruin retirement and cause retirees to lose their independence and become dependent on their children.
Risk: Living longer than your money lasts. When the first of the baby boomers were born in 1946, the average life expectancy in the United States was 67 years old. Today, life expectancy is at record highs and a couple retiring at age 65 has a 50 percent chance of seeing one spouse live to age 92. Think about it; that’s almost 30 years without a paycheck!
When my grandfather retired from the phone company, Ma Bell paid him a life-time income that increased each year with the cost of living. When Gramps died in 1995, his retirement check was more than the paycheck he earned working 40 hours per week. Sadly, companies can’t afford that anymore. Take a look at General Motors, for example. Today, GM’s 70,000 workers have to earn enough profits to pay pension and health benefits to approximately 688,000 GM retirees. It’s no wonder that only about 15 percent of private sector employees now retire with pensions. By comparison, 89 of the largest 100 US companies offered a traditional pension plan in 1985.
Creating a 5-step Retirement Income Plan
Making your money last as long as you do can be a daunting challenge, but with planning, you may find reassurance that you’re headed in the right direction. Here are 5 steps that offer the potential to help you turn your hard earned savings into an income that will last for decades to come.
Step 1: Create a realistic budget. Identify your income needs and determine which expenses are essential must-haves, and which could be considered discretionary spending.
Step 2: Identify your sources of future retirement income. Review all the income and assets you have to fund your retirement. Work with your advisor or conduct your own research to determine the best time to begin taking your Social Security and company pension benefits (if any).
Step 3: Compare your income and expenses. This is a critical step. Here you want to match your most predictable income sources against your essential expenses and determine whether there is a gap between the two. If you realize that your essential expenses are not sufficiently covered by reliable income, then you’ll likely need a source of sustainable lifetime income to fill the gap. Income annuities, bond ladders and a variety of other financial products have been designed for such purposes. Fund your discretionary expenses with other financial assets like your IRAs and taxable accounts. Remember, however, there is no one-size-fits-all strategy so it’s a good idea to work with a professional to evaluate your options carefully.
Step 4: Allocate your investment portfolio to meet growth needs. During a thirty-year retirement, prices will likely be rising. So, even if your essential expenses are covered by a lifetime income, it will still be necessary to invest for growth. Remember that 1968 Ford Mustang the cool kids drove around campus? It cost $2,500. In 1981, that same Mustang cost $6,500, and today a base model Mustang goes for $26,500. At several points during retirement, you’ll likely need to replace your car and who knows how much it will cost then. Choose investments while taking into account such factors as your age, risk appetite and time-horizon.
Step 5: Monitor your plan. Work with your advisor regularly so you can adjust your plan as you age, as your life changes and as your retirement evolves over the years.
See you at the checkout line
Finally, let’s look for each other at the grocery store where we can chat about the grandchildren. We’ll be there before you know it!
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/articles/what-the-boomers-are-retiring
