RETIREMENT COMMENTARY
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In order to properly plan for the 20 to 30 years after one retires, it is
necessary to consider numerous issues 10 to 15 years BEFORE retirement so
that your entire situation is adequately addressed.
Unfortunately, there are three major areas where retirees universally fail.
The first and most important is the fact they do not complete a realistic
budget. Time and time again, most people have no idea of what they have spent
in the past (or are currently spending prior to retirement) and therefore
little conception of what to anticipate in the future. It is not unusual
to find retirees actually spending MORE after retirement than while working
since they have more time to travel, see relatives, give gifts or simply
enjoy themselves.
The second problem is the fact that many retirees immediately put all of
their investment savings in CD's or similar money market instruments under
the assumption that once one retires, no further risk of any type should
be undertaken. While less risk is generally recommended, a no risk scenario
usually means that the after tax returns are being continually offset by
inflation- in some cases producing negative returns. With many retirees using
fixed non-adjustable income streams such as annuities, their lifestyle may
go down by well over 50% during their retirement years. A 6% inflation rate
reduces a value of an income stream by 50% in just 12 years.
And the third area which impacts the first two, is the fact that retirees
think they are only going to live to 70 or 75 years of age. A healthy retiree
should figure on living to around 85 and MUST budget for that period of time.
(Admittedly, some minorities have lifetimes shorter than whites and should
adjust their budget and time frame accordingly.) A 1996 actuary noted that
a male age 65 should expect a lifetime to 80.3 years of age. A female age
65 should plan for 83.5. But I almost invariably add a "fudge factor" for
generalized planning and suggest 85. Note that I said "generalized"- when
speaking to groups. If, however, I am doing work directly for some
clients and, for example, the man smokes, hasn't exercised in years and has
high blood pressure, I will NOT project him living a very long time- even
to age 80- and will plan my numbers and the estate planning accordingly (though
other ages may be added as contingencies).
Looking again at an annual 6% inflation therefore, if there are 24 years
to live after age 60, an income stream at age 84 will only be 25% of its
original purchasing power. Unfortunately the thoughts of a wonderful, stressless
and comfortable retirement can turn into an economic and emotional nightmare.
I've seen it happen. Maybe you will be the lucky one where everything goes
right, but if not.............
Obviously in the retirement process, there are a myriad of issues that MUST
be covered. The following is a list of some of the concerns that the retiree
must analyze in order to make the proper projections.
TIME FRAME
1. How long till you retire?
a. The longer the period for investing prior to retirement, the greater the
retirement kitty you can build up. Further, the more growth investments may
be used at that time- which historically have had a much greater return than
pure income investments.
2. What is life expectancy?
a. Remember men should plan till early 80's and women till mid 80's.
b. Recognize that when article mention longevity, they are discussing people
born TODAY, not necessarily those already at age 65. That definitely causes
confusion with many retirees. For example some census statistics show ages
to 75 for whites and 6 years less for blacks. But unless there are some
mitigating circumstances (some addressed below), it is always better to err
on the conservative side and plan for the longer period of time. Further,
as the ages progress, there is less difference between sexes and races and
by the time you hit the mid/last 70's the differences are supposedly almost
nil.
3. What is health condition of you and your spouse?
a. Obviously poor health of either party can alter your life expectations.
Your lineage is also important- how long have/did your parents and siblings
live? What are their past and current health problems?
EXPENSES
1. How much do you spend currently and what lifestyle do you anticipate after
you retire?
a. A formal budget is absolutely invaluable. But also consider your proposed
lifestyle. If you are going to travel, see relatives, etc., etc., it can
be fairly costly and these significant expenses must be reflected.
2. What are current expenses and how will they change in retirement?
a. While statistics (generally erroneous or at least misleading) from major mutual fund "free retirement brochures" and other simplistic services tend to state that you simply need to take 60% to 80% of current expenses (some say 50% to 90%), many retirees spend close to 100% (or MORE!) of pre- retirement expenses. If you do not know your current expenses, then the percentages of a poorly estimated number are a waste of time. Even if the current expenses are correct, do you take 60% or 80% as a guide to future costs? Remember, if you pick 60% expenses where they should have been 80%, you may run out of money 5 to 10 years before you die. Then what????? Probable welfare and Medicaid, that's what. I cannot stress the absolute necessity of securing current expenses as accurately as possible and then analyzing a future budget as closely as possible.
Don't underbudget.
3. Where will you live?
a. One of the major determinants here is health. From my own family's history,
it was apparent that while they did not wish to move from the Northeast where
they had lived their entire lives, the cold winters were taking a toll on
personal health. It was therefore necessary to consider a warmer climate-
at least for the winter months. But economics entered a the picture too.
They could not afford to have a home in both areas, so they used the equity
in their old residence to purchase mobile homes in the Northeast and Florida.
They traveled back and forth each year. The situation is not perfect, but
it is one they have to live with.
4. Will you pay off the mortgage and other obligations.
a. Owning a home free and clear and having a mortgage burning ceremony still
remains the wishes of many retirees. If one has owned a home for many years
and there exists a small mortgage remaining, the payoff is not a major issue,
if at all. However, in the situations where the old residence may be sold
and a new home purchase made, or paying off a very large mortgage is considered,
several issues must be explored.
1. Paying all cash for the new home or paying off a large mortgage simply
to have no mortgage payment is, in most cases, fraught with problems. The
one most prominent is whether there are sufficient funds left for investment
liquidity. Being real estate rich and cash poor may mean that, sooner or
later, the cash will run out. The owner may be forced to sell the property
or possibly seek reverse mortgages which will cost more overall than an original
mortgage. HEAR THIS: Reverse mortgages generally relate to bad planning and
are considered as last ditch survival.
2. If the property is purchased all cash, what happens should the value of
the property decrease? While many people in the 80's felt there was no way
this could happen, the subsequent recession brought with it significant reduction
in real estate values. Admittedly, commercial properties were the hardest
hit, but many residential properties suffered as well- particularly Denver,
many portions of Texas, the Northeast and parts of Arizona and southern
California as well. Or what about the problem where a home is purchased in
a new tract that, for a myriad of reasons, is unable to go forward? Should
the lender have to take the rest of the development back under foreclosure,
it could be many MANY years before the tract is completed. Previous purchasers
will watch their equity drop dramatically. With a small down payment- say
10%- any major loss will be borne by the lender, not the purchaser.
Undoubtedly almost all these properties will increase- but WHEN? Will you
get back your initial investment in the next five, ten or twenty years???
A retiree canNOT afford the risk that real estate always increases while
he/she owns it.
As to the issue of paying a mortgage at 8%, remember that most retirees will
have incomes in the 28% range (add state tax if applicable) and therefore
the after tax rate is about 5.5%. Municipal bond funds, though require
monitoring, would pay, say 5+-%, and therefore yield a break even point.
So keeping the money elsewhere might be good planning because of the liquidity
aspect of the investments. And as you will see, retirees may also need growth
investments as part of their investment strategy. These have provided returns
up to historically of 10%. The point to this strategy is that the alternatives
that are available may be more desirable than tying up all principal in a,
for the most part, non-liquid asset.
The same scenario exists with paying off other types of notes or obligations.
There is certainly no issue in NOT paying off such items as credit cards
since they charge horrendously high interest rate (18%) that no reasonable
investment is going to match with certainty. However, other obligations with
more realistic rates must be analyzed to see if there is a break even point
anywhere available. Remember, regardless of any payoffs, there must be emergency
cash available of at least six months expenses. Don't pay off anything and
leave this kitty barren.
5. Will you own or rent?
a. Owning a home free and clear has already been addressed. The issue really
relates to selling the home and taking the equity to rent a house presumably
in another area with low rents. This is not a simple decision because it
is based on the amount of inflation one anticipates on the rent over the
next 10, 20 or 30 years. Only by completing a formal budget and by increasing
the rent "X%" each year can an objective decision be reached.
6. What will be the cost of health care?
a. This is on the minds of almost all retirees. With the cost of medical
procedures continually increasing, employers are cutting back on their commitment
to health care to even current employees. By the time retirement rolls around,
retirees are going to find, if they have not already, a significantly reduced
health policy for both themselves and their spouse. Additionally, Medicare's
costs have already outstripped their projected budgets. Unquestionably there
has to be a reduction in the benefits Medicare offers. Employees may bargain
for continual health care coverage by reducing the amount of payments to
be received on a pension plan. There may be no alternative because they may
be able to find NO economical policy available to them upon retirement.
Another option that employers have considered is the use of an HMO (Health
Maintenance Organization) to keep policy costs manageable. Retirees, though
they may want to keep their own personal physician, may have little option,
assuming an HMO is even available, in using this form of medical care. Good
HMO policies cost less than almost all other individual policies and usually
cover 100% of the medical work. Admittedly the choice of physicians is limited
and a non affiliated physician will rarely be utilized. But remember, it
is cost, not personal psychological comfort, that is the reason for use.
Assuming a retiree must still be covered under Medicare, there is also the
use and the cost of Medicare Supplemental Policies (MediGap). These policies
cover extra costs and procedures not covered under the Medicare requirements.
Until most recently, there was a vast difference in policies types- leading
to confusion on the public's part and to abuse by agents. New governmental
restrictions now limit policies to essentially 10 different types. It is
now significantly easier to compare features and price of the various policies.
The problem here is that due to the extensive cost increases of the last
few years, Medigap policy prices have soared to the point where many retirees
cannot afford them. (This increase will cause significant movement to the
sole use of Managed Care Plans.)
And lastly, one must consider the use of a long term nursing home care policy.
No one likes to think of confinement in an institution for a long period
of time, but due to the lengthening of lifetime through medical procedures,
it is a reality and a cost that must be addressed. The costs in California
now run about $35,000 a year. Costs may range from the low $20,000 to over
$100,000 in certain metropolitan areas (NY). How will these costs be covered-
out of one's own pocket, becoming destitute and using Medicaid, or possibly
purchasing a separate independent policy that would cover such costs? In
the first instance, $35,000 can quickly deplete a small portfolio leaving
little for a surviving spouse or other beneficiaries as desired. However,
if you have a substantial net worth- some experts say $1,000,000 or more,
then self funding may be acceptable. And if you have assets under $200,000,
they suggest the use of MediCaid since the purchase of a long term health
care policy maybe excessive to the budget. However, with assets above that
amount, a unilateral acceptance (desire?) for Medicaid means many of your
assets will be depleted before the state picks up the rest of the tab (at
home spouses are able to retain assets for their use however- house, car,
about $70,000 in assets, etc.). But there is unquestionably a social stigma
attached to such use and statistics show that some Medicaid patients do not
receive the same level of care. The most reasonable position for the middle
class is the purchase of a long term health care policy designed according
to a particular budget and the desires of the individual.
7. Will your income tax bracket drop? (Probably not in many cases- only a
full budget can accurately determine)
INCOME
1. Will either you or your spouse work part time? How many hours?
What is the impact on your social security payments?
2. What is available from social security and other government plans?
3. What is the income from employer sponsored plans? Are there inflation adjustments?
4. Are there other assets providing income?
ASSETS
1. What assets are available at retirement?
2. Will the home be sold at retirement?
3. What assets will be depleted during retirement and which assets will be
retained?
ASSUMPTIONS
1. What is the anticipated inflation factor to be used for the next 10, 20 and even 30 years?
2. Is social security indicated to be available for the entire retirement period? With an annual 0, 1%, 2%, 3%, 4% inflation adjustment?
3. What is the actuarial lifetime expected?
4. What are the anticipated before and after tax returns on investments?
5. What is the your risk acceptance? Are both you and your spouse in agreement? Are both of you well versed in financial matters?
6. Will savings continue in retirement?
7. Are there any inheritances expected?
8. If there are assets requiring constant monitoring, who will do it?
Do you or they have the expertise? What if you travel?
As indicated, you must do a budget. Use your checkbook, save receipts, review
your annual taxes, do whatever it takes to get this right since your economic
life depends on it. After you put down your current expenses, try to figure
out what you would spend at retirement. Notice that some expenses remain
level throughout retirement- such as many life insurance policies where the
premiums stay constant. Most of your payments however are going to be for
goods that will continue to rise with inflation- food, clothing, utilities-
almost everything.
RETIREES: Researchers say retirees live on five income streams- Government assistance (42%), personal wealth (20%), pension income (20%), wage earnings (15%) and other sources (3%).
NUMBERS, NUMBERS AND NUMBERS: (1997)
Average social security benefit for retired workers:
1976- $2,698
1996- $8,688
Percentage of retirees who rely on social security for half or more of their income- 66%
Percentage of the elderly who would fall below the poverty line without social security benefits- 54%
Number of baby boomers who will turn 65 between 2011 and 2029- 76 million
Number of workers per retiree in 1960- 5.1
Projected in 2020- 2.4
Year that social security trust fund will begin to lose money - 2012
Year it will be completely depleted - 2029
Percentage of Americans who are almost deliberate in their refusal to deal with retirement- 19%
Percentage of young adults who believe that social security will exist when they retire- 28%
PENSION PLANS: (1998) The National Commission on Retirement Policy reported recently that only half of American workers are covered by a pension plan. And defined benefit plans (which guarantee payments upon retirement and now cover perhaps just 38% of workers) have given way to defined contribution plans (the amount of the payments are not guaranteed but depend on the ability to the employee to invest money over their lifetime).
Yet much of this is lost since, should they change jobs, about 66% do NOT roll the money over to another plan- they simply spend it.
The study indicated that only 45% considered an annuity for providing retirement income for life and said that workers need to be educated about them. While that is viable, such education has almost universally voided the problems with annuities- an almost complete lack of control and an unbelievably dismal return. As stated herein, returns might approximate an acceptable yield of a Treasury Bond only if the annuitant were to live 10 to 15 years after his/her actuarial lifetime.
RETIREE MEDICAL CARE: 1998 (Kaiser Family Foundation) Employer-sponsored retiree health benefits from large companies has declined since 1991.
Their study also showed "that the number of big businesses charging premiums, tightening eligibility requirements, encouraging use of managed care, and placing dollar caps on coverage increased". In addition, the report concluded that potential changes in the Medicare program, such as a higher eligibility age, could accelerate the decline in retiree benefits by shifting additional health care costs to employers and retirees and thus encouraging companies to scale back or eliminate retiree plans.
"For retirees age 65 and older, the percentage of all large firms offering health benefits declined from 80% in 1991 to 71% in 1996.
For retirees age 65 and older, the percentage of employers requiring retirees to pay premiums for health coverage increased from 72% to 88%.
The percentage of employers placing dollar caps on future obligations for retiree health coverage rose from virtually zero to 39%.
More large employers are imposing stricter eligibility requirements for retiree health coverage such as a greater number of years worked.
And proposed Medicare reform could exacerbate the problem. If Medicare was not available till age 67, "a typical large company with a predominately older workforce would pay about 18% more in lifetime retiree health benefits for its employees, while a company with a younger workforce would pay about 16% more." Call 800 656-4533 for more info.
PENSIONS: The PBGC helps employees protect their rights. They suggest that you retain a copy of the summary plan description which outlines your company benefits Obtain, review and file your statements that show your work history Notify the pension office of any change of marital status, change of address, divorce, death of a spouse
You can get info by calling the Pension Benefit Guarantee Corporation at 202 219-8776. Advisers also take calls at 15 regional offices
Atlanta- 404 562-2156
Boston- 617 565-9600
Chicago- 312 353-0900
Cincinnati- 606 578-4680
Dallas- 214 767-6831
Detroit- 313 226-7450
Kansas City- 816 426-5131
Los Angeles- 818 583-7862
Miami- 305 651-6464
New York- 212 399-5191
Philadelphia- 215 596-1134
St. Louis- 314 539-2691
San Francisco- 415 744-6700
Seattle- 206 553-4244
RETIREMENT PLANNING: 1998 (ReliaStar) A survey of 400 Americans age 65 indicates that many of them are heading into retirement with a false sense of security. Many respondents apparently base their expectations of future financial security on gains made in the recent bull market-and do not for see a correction or downturn eroding those gains in the future (remember 1973 and 1974???). Only 10% percent of those polled viewed retirement as a time of financial worry and 8 in 10 sixty five year olds expect to be at least as financially well of during retirement as during their working years. The administration on aging reports that Social Security accounts for 42% of retiree income, while pensions assets and wages now account for 55% of retiree income.
Of Americans age 65, 71% had no written financial plan. 44% who said that they were worried about retirement security admitted that they waited too long to establish the retirement savings program.
Seventy percent of those 65 year olds considered themselves optimistic about retirement and their retirement security, even though the Census Bureau reported that 40 percent of those 65 and older live alone are poor. About 25% of 65 year olds trusted their employers more than anyone else to give them financial advice (Shoot me!)
MEN AND RETIREMENT: (1999) Many men have problems once the retire since work was everything they did and were. Gail Sheehy suggest that man review the following issues
1. Are you preparing to make the crossroads of midlife
2. Are you ready to search for a new direction leading to more meaning.
3. How do you plan to prolong your physical health
4. Do you know how to maintain your sexual potency
5. What things can you do to nourish your spirit
6. Are you willing to risk deeper intimacy that will offer you a buffer against the inevitable losses of middle and later life.
Why People Retire- (1999) Californians age 45 to 70
| Wanted to do other things | 31.1% |
| Health Reasons | 28.2 |
| Didn't like job or expected to lose their job | 12.6 |
| Poor Health of Family member | 5.2 |
| Age | 5.2 |
| Other | 17.2 |
OLDER AND BETTER: (SBNC 1999) "Small businesses suffering from acute labor shortages should consider recruitment strategies geared to older workers. Workers aged 50 to 60 stick with their jobs an average of 15 years, with better attendance than most other age groups. Mature workers 55 and older are also less apt to be involved in accidents on the job. Although they make up 14% of the U.S. labor force, they account for just 9.7% of workplace injuries. Moreover, a recent survey shows that workers aged 55 years have the lowest health care costs. Even in companies where health costs rise with age, the lower absenteeism and turnover rates more than offset the additional health costs."
ARE RETIREES REALLY WEALTHY?: (Prof. Edward N. Wolff, a New York University 2000) "Four out of five working-age Americans essentially have no wealth, except for equity in their homes, while in 1997 the top 1 percent owned 48.6 percent of all financial assets like stocks and bonds. That is the greatest concentration in the nation's history. The most important division among today's retirees is between those who own their own homes and those who don't: homeowners retire with an average net worth of $115,000, while nonhomeowners have $800. Baby boomers are expected on average to live a bit more than 17 years after reaching age 65, with those with more money enjoying better health and longer lives because of generally better medical care and diet and more healthful life styles.
PBGC: (2000) The Pension Benefit Guaranty Corp., established to protect the benefits of participants in failed corporate pension plans, reported a $5.01 billion surplus in 1998, as compared to a $3 billion deficit in the early 1990s. While substantial, this $5 billion surplus is dwarfed by the PBGC's potential $15-$17 billion exposure in unfunded liabilities in pension plans maintained by financially weak companies.
Characteristics of person in the labor force without pensions (GAO 2000) pdf format The U.S. General Accounting Office was asked by the House Committee on Education and the Workforce to provide information concerning (1) the proportion of the labor force without pension coverage and how that proportion has changed over the past decade, (2) the characteristics of workers in that labor force, and (3) the proportion and characteristics of retired people who lack pension income or pension assets.
HOUSING EQUITY BY THE ELDERLY: (National Bureau of Economic Research Working Paper) Housing equity is the principle asset of a large fraction of older Americans. Indeed many retired persons have essentially no financial assets, other then Social Security and, for some, employer-provided pension benefits. Yet we find that housing wealth is typically not used to support non-housing consumption during retirement. Based on data from the Survey of Income and Program Participation, and the Asset and Health Dynamics Among the Oldest Old, we consider the change in home equity as families age. The results are based in large part on families aged 70 and older. We find that, barring changes in household structure, most elderly families are unlikely to move. Even among movers, those families that continue to own typically do not reduce home equity. However, precipitating shocks, like the death of a spouse or entry to a nursing home, sometimes lead to liquidation of home equity. Home equity is typically not liquidated to support general non-housing consumption needs. The implication is that when considering whether families have saved enough to maintain their pre-retirement standard of living after retirement, housing equity should not be counted on to support general non-housing consumption. These conclusions seem to correspond closely with the results of a recent American Association of Retired Persons survey, which found that 95 percent of persons 75 and older agreed with the statement: What I'd really like to do is stay in my current residence as long as possible.'
Never retire (USA Today 2000): Most Americans want to retire early from their full-time jobs but continue working in a different capacity, according to a recent survey. Only 10% want to stop working altogether when they retire. And 70% would continue to work in some capacity even if they had enough money to live comfortably for the rest of their lives; 42% would like to work part-time for enjoyment; 11% would do volunteer work; 10% would work part-time primarily for the income; and 19% would like to start their own businesses.
Driving: (2000) Last year, 4,934 drivers age 70 and older died in car crashes, according to new data from the National Highway Traffic Safety Administration. That's a 33% jump from 1989, when 3,719 older motorists were killed. At the same time, overall fatalities dropped from 45,582 in 1989 to 41,345 last year, a 9% decrease.
Retirement Plan Beneficiary (2000)the choice of beneficiary will depend on a number of factors, such as options available under the plan, the participant's and spouse's (and other possible beneficiary's) health and financial needs, the degree of the spouse 's dependence on plan distributions, and the desire to pass assets on to the participant's heirs.
Inherited IRA's and Pension Funds (2000)
Savings: (Consumer Federation 2001) A survey indicated that 53 percent of respondents said they often lived from paycheck to paycheck. The percentage rose to 64 percent for households with annual incomes of $20,000 to $50,000 and to 79 percent for those with incomes of less than $20,000.
Over all, 60 percent said they needed to save more.
The typical American household had total net assets of $71,700 — most of it in home equity. But net financial assets, or assets minus debt, totaled only $9,850 per household, including money in retirement savings plans. Among low- and moderate-income households, the median net financial assets amounted to less than $1,000.
Older Individuals Will Work More in the Future: The core dilemma that many economists are projecting for America is a very large drop in the percentage of adults who are working, a scenario that translates into a very large drop in the number of taxpayers supporting not just Social Security but education, defense, Medicare, and every other public program. The Urban Institute's Eugene Steuerle and Adam Carasso argue that older persons will actually work more in the future. Excerpt: "Economists argue that as a society grows richer, citizens will opt for more free time. However, the broad data indicate a rise in labor force participation rates, or reduced leisure, among all adults in recent decades. Conceivably, individuals in a well-developed society might demand goods and services that provide similar benefits to leisure rather than leisure per se. Certainly, people aren't content to do nothing in retirement. In our view, as people's real resources grow, they do not necessarily want more free time as much as they want better living conditions, more exciting work, more stimulating recreation, and more freedom. These expectations, especially in today's relatively flexible workplace, can be met through jobs as well as through leisure activities. If we are right and the labor force participation of older workers grows in response to demand, then society's adjustment to the aging of the population may not be as tough as anticipated."
Retirement: (WSJ 2001) According to the U.S. Census Bureau, only about 4.5% of Americans 65 or older moved during 1999, down from about 5.3% a decade earlier. (Census data on mobility for 2000 won't be available until later this spring at the earliest.)
Across the country, older Americans appear to be rethinking where they retire. Many are simply buying a second home while holding on to their original house. Others are staying put entirely, and some that moved to states like Florida years ago are moving back to the places where they raised their children.
The American Association for Retired Persons in Washington says its surveys show 89% of respondents more than 55 years old desire to "age in place," up from 84% in 1992.
Drug costs: (National Institute for Health Care Management Foundation 2001) As an aging population coped with arthritis, diabetes and high cholesterol, spending on prescription drugs rose 18.8 percent last year, to $131.9 billion. Two dozen products accounted for half the increase, which occurred not just because drugs are becoming more expensive but because doctors are writing many more prescriptions for higher-cost drugs. The average price for a prescription for one of the top 50 drugs was $67.15, while the average for other drugs was $36.
The elderly will face more and more increases. Unless you have a lot of money, retirement for many will be difficult indeed if you are in poor health.
Retirement (Employee Benefit Research Institute and the American Savings Education Council 2001) Americans are less optimistic about retirement, and fewer believe they will have enough money to live comfortably. At the same time, fewer are saving to do something about it as the economy has sagged, a survey shows. Sixty-three percent of workers say they feel confident they will have enough to live comfortably in retirement, down from 72% in 2000.
Seventy-one percent of those polled said they have saved for retirement, down from 75% last year.
Among minorities, 54% of blacks, 50% of Hispanics and 78% of Asians said they have saved for retirement.
Better Retirement: (WSJ 2001) AARP found that today's retirees and people preparing for retirement are in better shape financially than those in the same age group 20 years ago. Median net worth for this age group, which starts at 50 years old, increased 36% between 1983 and 1998, to $134,000, adjusting for inflation. Net worth is the amount by which assets, such as homes or stock portfolios, exceed debts and other liabilities. Total wealth of people 50 years and over increased to $20 trillion in 1998 from $7.6 trillion 15 years earlier.
Meanwhile, inflation-adjusted family income grew by 17% during the past two decades and the poverty rate for retirees fell to an all-time low of less than 10%. Minorities made some of the largest strides
The report also cites rising health-care costs as an increasingly important financial constraint on many retirees.
Income rich and poor (NY Times) the Congressional Budget Office found that the share of pretax income going to the top 20 percent of households rose to 53.2 percent in 1997 from 45.9 percent in 1979. In that period, the share of income going to the bottom 60 percent fell to 26.9 percent from 32.2 percent. For the bottom 20 percent, the share of income fell to 4 percent in 1997 from 5.3 percent in 1979.
Average pretax income for all households rose to $62,400 in 1997 from $48,500 in 1979, an increase of 28.7 percent. For the middle 20 percent, income rose to $45,100 from $41,400, a gain of 8.9 percent.
As they have earned more, upper- income households have assumed a larger share of total federal tax liabilities. The top 20 percent of households paid 64.7 percent of taxes in 1997, up from 57.1 percent in 1979.
The top 1 percent of households — about one million of them — paid 23 percent of total federal taxes in 1997, up from 15.5 percent in 1979.
The top 1 percent of households, representing 15.8 percent of pretax income, paid 32.9 percent of individual federal income taxes in 1997. In 1979, the top 1 percent, representing 9.3 percent of pretax income, paid 18.7 percent of income taxes.
The poorest households benefited from changes in tax policy that reduced their tax bills and in many cases provided larger cash payments to working families through the earned-income tax credit. The share of tax payments of the bottom 20 percent of households declined to 1 percent in 1997 from 1.9 percent in 1979.
Old parents (Census bureau 2001) 5.6 million grandparents live with their grandchildren; 42% (2.35 million) of those grandparents are responsible for the youngsters. More grandmothers (62%) are on full-time duty than grandfathers (38%). Almost one-fifth (19%) of grandparents responsible for their grandkids live below the poverty level. "The real surprise was the extremely large proportion of grandparents who are doing this . . . for three, four, five years or more," said Martin O'Connell, chief of the Census Bureau's Fertility and Family Statistics Branch. "It's clearly a situation where this is really a growing and developing family."
Workplace Report on Retirement Planning: Key Findings (Cigna pdf 2001)
Transamerica retirement poll: The 2001 Transamerica Retirement Survey, as well as a follow-up poll taken after Sept. 11, reveal nearly nine in 10 think most Americans do not salt away enough money to live comfortably throughout their retirement years. More than half the employees polled say they are somewhat or very likely to trim their lifestyles to set aside more for retirement. The polls indicate that retirement programs like 401(k) and profit-sharing plans are extremely popular benefits, poll data also show many small businesses still don't offer them, and many employers do not realize how important these benefits are to employees. While less than one-quarter of workers say they are familiar with the recent tax law changes regarding retirement savings, when asked about specific retirement provisions, many workers express an interest in the enhanced retirement savings opportunities.
two out of three employers who are familiar with the increased contribution limits and catch-up provisions think these new opportunities will have an impact on their companies and their employees. However, the survey data also show that many employers are not yet aware of the enhanced pension provisions, less restrictive requirements and tax credits offered through recent tax legislation to small businesses setting up new retirement plans.
the vast majority of workers (86 percent) surveyed report they do have some retirement savings and half started saving before age 30. Seventy percent report that their company offers a retirement savings plan, such as a 401(k) or profit-sharing plan, and among workers whose company offers a plan, 80 percent say they participate. In addition, six out of 10 workers currently save for retirement outside of work, such as in an IRA or mutual fund.
Credit (Financial ENews 2001) "The IRS is reminding qualifying employees to begin making plans now to benefit from the new Saver's Credit, which will become available in 2002. This tax credit, which will be available from 2002 through 2006, will help offset the cost of the first $2,000 contributed to IRAs, 401(k)s and certain other retirement plans. The Saver's Credit is available to individuals with incomes up to $25,000 and married couples with incomes up to $50,000. The available credit ranges from 10% to 50% of the contribution amount, depending on income. Participants in 401(k) plans may want to set up their deferral elections prior to January in order to spread their contributions throughout the year."
Pension Plan Options for Small Firms
Retirement Planning After New Tax Law
METLIFE study of Employee Benefit Trends (PDF 2001) Vital information to everyone involved in employee benefits / voluntary employee benefit plans.
Not saving enough: (Allstate 2001) Baby Boomers have saved, on average, only 12 percent of what they believe they will need to meet basic living expenses during retirement. Seventy-six million strong, Baby Boomers (ages 37-55) make up 29 percent of the U.S. population. By the year 2030, there will be 70 million people aged 65 and older -- more than twice the population for that age group in 1999, according to the U.S. Bureau of Labor Statistics.
Fully 78 percent of the Baby Boomers surveyed believe they are prepared to meet the financial aspects of retirement, and 69 percent say they are confident that they know how much money they need to save in order to maintain the retirement lifestyle they want.
those surveyed said they would need $30,000 per year for basic living expenses during retirement. To have $30,000 per year, Baby Boomers will need approximately $1 million upon retirement, factoring in an 8 percent return on savings and an average 4 percent rate of inflation. But surveyed Baby Boomers have saved an average of approximately $120,000 -- a mere 12 percent of what they'd need for a 20-year retirement, spending $30,000 a year (adjusted for inflation).
And listen to this- sixty percent of Baby Boomers anticipate that, in their retirement, they will have more financial obligations than their parents' retirement, and nearly three out of five Baby Boomers (58 percent) surveyed will be in debt during retirement. -- Twenty-seven percent expect to pay on a mortgage, 37 percent on car payments, and 25 percent on credit card debt during retirement. -- Many Americans expect to be responsible for some kind of financial support for family members during retirement. Fifteen percent of those surveyed will provide for elderly parents and/or in-laws, and 29 percent will be financially responsible for children or grandchildren over 18 years old.-- One in five Baby Boomers surveyed expects to pay tuition for one or more of their children during retirement.
Social Security only replaces approximately 40 percent of the average person's salary.
Large Pension Plans: (Committee on the Investment of Employee Benefit Assets (2001) DB plan benefit payments continued to represent about six percent of year-end assets for the sixth consecutive year, while DC plan benefit payments represented nine percent of year-end assets, exceeding contributions for the sixth consecutive year. - Both DB and DC plans were substantially invested in equities. DB plans had 60 percent allocated to equities; DC plans had approximately 70 percent in equity investments of all types. - At year-end, 17 percent of DB plan and 16 percent of DC plan assets were managed internally. Most DB plan assets (81 percent) were actively managed, while 42 percent of DC plan assets had active management. - DC plan contributions averaged almost $6,000 per active employee with 30 percent provided in employer match. - Participation in DC plans by eligible employees continued to increase, reaching 85 percent in 2000. - The percentage of plan sponsors using Web sites to communicate with plan participants increased significantly -- from 66 percent in 1999 to 86 percent in 2000. - While more than 80 percent of plan sponsors provided some type of investment education, access to investment advice was limited. Less than 30 percent of the surveyed companies make individual financial planning available and only 21 percent provided some type of interactive software advisory program.
Virtually all (99 percent) of CIEBA's members offer both DB and DC plans, and DB plans continue to represent the primary plan type for CIEBA members. These types of plans had 66 percent more assets, covered 74 percent more participants and paid out 18 percent more in benefits compared to DC plans. Although DB plans continue to be the dominant plan type for CIEBA members, the number of participants in DC plans continues to increase at a significantly faster rate than in DB plans. Under a DB plan, the employer commits to provide a specified level of benefits to plan participants. In the private sector generally, plan sponsors pay for these benefits, directly manage investment of plan assets and bear any investment risk. (Basic benefits in DB plans are federally insured.)
Under most DC plans -- particularly 401(k) plans -- employees provide much or all of the funding, although the employer may and commonly does provide a match for employee contributions. In many 401(k) and other DC plans, plan participants direct the investment of their accounts among a number of investment choices.
No more benefits?: (USA Today 2001) Employers, battling recession, are saving millions of dollars by slashing employee benefits such as life insurance and retirement plans. Many are eliminating their matching contributions to 401(k) plans; others are eliminating life insurance. There will be a lot more of this as companies struggle for profits.
And per the NY Times and William M. Mercer , Employers nationwide are requiring workers to pay a larger share of their medical costs. Forty percent of large employers, those with 500 or more employees, said they would require workers to pay a higher portion of the total cost in 2002. Cost increases averaged 11.2 percent, to $4,924 for each employee in 2001. Company officials expected an even steeper increase, 12.7 percent, in 2002. For large employers, costs rose 12.1 percent, to $5,162 for each employee.
In the most popular type of managed care, preferred provider networks, at least half the nation's smaller employers had deductible charges of $500 or higher this year, double the $250 median in 2000. Workers at one in six small companies faced even higher deductibles: $1,000 or more.
Retirement 2002:
* For defined benefit plans, the maximum benefit increases from $140,000 to $160,000.
* The defined contribution maximum increases to $40,000 from $35,000 this year.
* 401(k) limits increase from $10,500 to $11,000, SIMPLE limits increase to $7,000 from $6,500 and maximum 457 plan contributions jump to $11,000 from $8,500 in 2001.
* employees over age 50 will be able to contribute an additional $1,000 to 401(k) plans and an additional $500 to IRAs in 2002.
Retirement: (Allstate 2002) Baby Boomers who already feel sandwiched between financial obligations to children and aging parents can look forward to more of the same, plus unprecedented levels of debt for themselves in retirement. Findings indicate that 37 percent will be financially responsible for parents or children during retirement and 7 percent will be responsible for both. The survey also revealed that Baby Boomers have saved an average of only 12 percent of the total they will need to meet even basic living expenses in retirement.
Some parents may be on Social Security before their children get out of high school. Consider: In 1999 over 14,000 women over age 40 had babies; the 1989 the figure was just over 9,000; 11% of all newborn babies in 1999 had a father age 40 or over; the 1989 the figure was under 8%. This report is from Prudential, Plc. via Sweden. The numbers may be even higher in the U.S.
Retirement (NY Times, Stephen F. Venti and David A. Wise 2002) It has long been known that most Americans do not save much. What is more remarkable is that even a substantial fraction of relatively wealthy people do not save much. The bottom 20 percent of every income group has zero or negative wealth, with the only exception being the households with the highest lifetime income.
Households were generally aware that their savings were inadequate: over three-fourths of the respondents said they had saved too little, and virtually none said they had saved too much. Most people were worried by their minimal savings: only a quarter of them thought that "Social Security or employer pensions would take care of my retirement income."
Retirement Plans (EBRI 2002) In February 2001, 67.8 percent of wage and salary workers ages 21-64 worked for an employer that sponsored a pension plan, up 4.6 percentage points from February 1995, and 54.8 percent participated in a pension plan, up 3.8 percentage points from February 1995.
The percentage of workers who said they did not participate in a pension plan because of ineligibility decreased from 63.3 percent in February 1995 to 56.6 percent in 2001. The percentage of workers who chose not to participate in a plan for which they were eligible increased from 25.1 percent to 31.1 percent over the same period.
The percentage of both male and female wage and salary workers participating in a pension plan increased from 1995 to 2001. However, the percentage of male participants remained higher (56.3 percent in 2001) than that of females (53.2 percent in 2001), although their rates of working for an employer that sponsored a plan were virtually identical. A reason for this difference may be that more females who were working for an employer that sponsored a plan were not eligible to participate in the plan.
In 2001, 71.7 percent of whites worked for an employer sponsoring a plan, compared with 47.2 percent of Hispanics. While all demographic groups experienced increases in the percentages of workers participating in a pension plan from 1995 to 2001, the increases were smaller among minority groups. A leading factor in this discrepancy seems to be an increase in the percentage of eligible Hispanics and blacks who chose not to participate. In 1995, 32.4 percent of blacks and 32.2 percent of Hispanics who worked for an employer that sponsored a plan and did not participate in the plan reported that they had chosen not to do so. By 2001, these percentages had increased to 38.2 percent for blacks and 39.8 for Hispanics.
Younger working Americans (ages 21-34) had faster increases in participation than older working Americans (ages 35-64) from 1995 to 2001. However, in 2001 the percentage of workers ages 45-54 who participated in a plan was more than twice the percentage of workers ages 21-24 (65.4 percent compared with 27.3 percent).
Among full-time workers, 59.2 percent participated in a pension plan in 2001, while 37.2 percent of part-time workers did so. Among full-time workers who worked for an employer sponsoring a plan, 36.6 percent choose not to participate in the plan, compared with 19.9 percent of part-time workers.
Among public-sector workers, 81.6 percent participated in a pension plan in 2001, compared with 49.4 percent of private-sector workers. However, the percentage of private-sector plan participants increased from 44.5 percent in 1995 to 49.4 percent in 2001, while the percentage of public-sector plan participants increased from 80.1 percent to 81.6 percent.
2002 Retirement Plan Contributions
| 401(k) Limits | |
| 401(k) Elective deferrals | $11,000 |
| Annual Defined Contribution Limit | 40,000 |
| Annual Compensation Limit | 200,000 |
| Catch Up Contribution limit | 1,000 |
| Highly Compensated Employees | 90,000 |
| Other limits | |
| 403(b)/457 Elective Limits | 11,000 |
| 403(b)/457 |Catch up Deferral | 1,000 |
| Simple Employee Deferrals | 7,000 |
| Simple Catch Up Deferral | 500 |
| SEP minimum Compensation | 450 |
| SEP Annual Compensation Limit | 200,000 |
| Social Security Wage Base | 84,900 |
OLD (NY Times 2002) The 50-plus age group is the fastest growing segment of the population.
• Seniors control 48 percent of all discretionary spending; 43 percent of new cars are bought by seniors.
• The net worth of seniors is five times that of other Americans; people over 50 had a total net worth of $20 trillion in 1998, up from $7.6 trillion 15 years earlier, according to data from AARP, an organization of retired people and those approaching retirement.
Retirement?: (NY Times 2002) While their parents stopped working at 65, the children are finding that they must stay on the job until their late 60's or early 70's if they want to live as well in retirement. Forty percent of the people who have saved for their retirement and are now 67 are still on the job. That's compared to only 20 percent of the 67-year- olds with company-financed pension plans.
The employer-financed pensions, combined with Social Security, produced a retirement income at age 65 equal to nearly 60 percent of a typical worker's preretirement pay.
Part of the reason is this- Life expectancy for 65- year-old Americans is 84 years, up one year since the 1970's. To collect 60 percent of preretirement income through age 84, people will have to continue working, and saving, to age 69.5. "You lose 4.5 years of leisure but you gain a year of life expectancy, so the net loss is 3.5 years of leisure." That's the reason I focus so heavily on the actuarial lifetime with about 5 years extra depending on health. Then you have to add in for long term care costs, etc. And medical bills will keep piling up until the U.S. has a national plan. Even if it finally does, only the most indigent will get it for free so figure that medical care will still be quite costly for anyone now age 50 forward. (Frankly, I think it will always be this way).
Unprepared: (2002) A recent survey found that 70 percent of Baby Boomers are relying on their own resources to take care of their long term care needs. In addition to this often inadequate approach, Boomers were found to be misinformed and unsure about the basics of long term care planning.
Boomers appear to be confused or procrastinate in planning for long term care needs in their old age, even as most of them (71 percent) admit to a fear of not having enough money as they grow older. Among the Baby Boomer population findings:
-- 70 percent believe that they, themselves, should be most responsible for taking care of their long term care needs; -- 75 percent have no idea how much long term care insurance actually costs, with most overestimating the cost of premiums by more than 300 percent; -- Only 7 percent have actually purchased long term care insurance and 76 percent have not had anyone recommend the purchase of long term care insurance; -- 71 percent fear not having enough financial resources for retirement and 85 percent are highly concerned with maintaining control over care options and where they live.
Seventy-seven percent, for example, say that their children should play a minimal or no role in providing financial support for long term care. Specifically, less than one percent cited their children and only 14 percent cited the government as being most responsible for taking care of their long term care needs.
Retirement Savings Becoming Risky Business (2002) - In the past, through traditional defined benefit (DB) pension plans, many employees were guaranteed a steady stream of income in retirement. Employers assumed the longevity and investment risks, hiring experts to manage these risks. In recent years, with the rising popularity of defined contribution (DC) plans, such as 401(k) plans, most employees must bear the burden of their retirement security. In fact, in 1978, 38 percent of American workers were covered by DBs and only 7 percent participated in DCs as their primary retirement plans. By 1997, the numbers had shifted with 21 percent participating in DBs and 25 percent participating in DCs as their primary plans.(1)
71 percent of retirees who reported having had a financial advisor five years earlier say they are very satisfied with their retirement vs. 59 percent of those who did not have an advisor. Similarly, when asked if they ever attended any meetings on retirement planning, 71 percent of those who had attended meetings report being very satisfied with retirement vs. 55 percent who did not.
Sixty-five-year-olds today will on average live 4 years longer than those in 1960. Since people tend to retire younger today than they did in 1960, their period in retirement is more than 4 years longer and longevity of Americans continues to rise.
the study found health and long-term care played a significant role. When asked what the chances are that medical expenses will use up all of their savings in the next 5 years, the average response was nearly one-third (31 percent). Similarly, when asked the chances they will move into a nursing home in the next 5 years the average response was 15 percent. In fact, 71 percent of those with long-term care insurance coverage vs. 57 percent of those without this coverage reported being very satisfied with retirement. ``With the rise in health related costs, particularly driven by prescription drugs and long-term care, many retirees today struggle to fit these expenses into already tight budgets or find their assets quickly deleting.
2002 Retirement Confidence Survey (RCS). The new results show that 82% of respondents access those resources for guidance. Sixty-eight percent of employees turn to newsletters or magazines. Seminars (66%), financial planners (61%) and workbooks or worksheets (58%) round out the top five.
By age, 40-59 year olds are more likely to read newsletters and magazines for financial advice than those aged 20-39 (72% vs. 58%). And those in the 20-39 age group are more likely to obtain financial information through online services than persons aged 40-59 (57% vs. 38%).
And a GE study that gives a grade of "F" to consumers.
Challenges Ahead for an Aging Population
Retirement: (Labor Department 2002) Roughly half the workers on private payrolls don't have any employer-sponsored retirement plans at all. About 74% of the best-paid fifth of American workers participate in some form of pension plan on the job, but only 17% of the worst-paid fifth do,
In 1980, 64% of all retirement-savings money went into old-style pension plans (defined benefit). In 1999, 85% went into accounts over which workers had control (defined contribution).
Try not to get old: (2002) As the estimated 76 million baby boomers born between 1946 and 1964 become elderly, Medicare, Medicaid, and Social Security will nearly double as a share of the economy by 2035. Estimates suggest the future number of disabled elderly who cannot perform basic activities of daily living without assistance may be double today's level.
Spending on long-term care services just for the elderly is projected to increase at least two-and-a-half times and could nearly quadruple in constant dollars to $379 billion by 2050
Over 60 percent of expenditures for long-term care services are paid for by public programs, primarily Medicaid and Medicare. Individuals finance almost one-fourth of these expenditures out-of-pocket and, less often, private insurers pay for long-term care. . . . In 2000, Medicaid paid 45 percent (about $62 billion) of total long-term care expenditures. . . . In 2000, nursing home expenditures dominated Medicaid long-term care expenditures, accounting for 57 percent of its long-term care spending. . . . In 2000, nursing home expenditures dominated Medicaid long-term care expenditures, accounting for 57 percent of its long-term care spending. . . . Expenditures for Medicaid home-and community-based services grew ten-fold from 1990 to 2000-from $1.2 billion to $12.0 billion."
• Individuals' out-of-pocket payments, the second largest payer of long-term care services, accounted for 23 percent (about $31 billion) of total expenditures in 2000. The vast majority (80 percent) of these payments were used for nursing home care. • Medicare spending accounted for 14 percent (about $19 billion) of total long-term care expenditures in 2000. While Medicare primarily covers acute care, it also pays for limited stays in post-acute skilled nursing care
Retirement numbers: (2002) Method for determining retirement calculation
| Guessed | 39% |
| Completed Worksheet, did calculation | 20 |
| Read/Heard that this is how much needed | 10 |
| Amount calculated for respondent by financial adviser | 10 |
| Estimated based on my current living expenses | 7 |
| Expected earnings on investments | 5 |
Changing retirement: AIG SunAmerica Re-Visioning Retirement Survey 2002
"Ageless Explorers" (27%) personify a new ideal for retirement. Retirement can be seen as an exciting new phase in their lives as they would rather be too busy than risk being bored. These retirees have high levels of education and the highest net worth. They have saved for retirement an average of 24 years, feel prepared financially for retirement, and appear psychologically prepared to make the most out of this stage of their lives.
Comfortably Contents" (19%) seek to live the traditional retirement life, where they relax and enjoy their golden years. They aren't as interested in work or in contributing to society, and are less willing to risk feeling stressed in retirement. They saved an average of 23 years and spend their time on travel and other recreational activities.
"Live for Todays" (22%) aspire to many of the same new retirement ideals laid out by Ageless Explorers, and, in fact, they may be even more interested in personal growth and reinvention. Unfortunately, they appear to have been focused on living for the "here and now" and are burdened with worry that they did not adequately prepare financially for retirement. This group saved an average of only 18 years and they are likely to continue working in retirement.
"Sick & Tireds" (32%) are living the worst possible retirement scenario. Less educated and with fewer financial resources, they have low expectations for the future. They are more likely to have been forced into retirement by poor health, took few steps to prepare for retirement, and saved very little for the least number of years - 16. Of all the groups, this segment is less likely to travel, visit family, participate in community events, or tap into their human potential.
The concept of retirement as a "winding down" or "extended vacation" is obsolete. Less than a quarter (22%) of those surveyed agree at all with the idea of relaxing and doing nothing in their retirement years. Rather, they see retirement as a whole new life (38%) or a continuation of life as it is (40%).
Retirement no longer means the end of work. Approximately 95% of pre-retirees expect to work in some capacity during their retirement, either by choice or necessity. Nearly half (49%) said they would work in retirement even if they were paid little or nothing at all.
Satisfaction is positively related to the number of years one saves for retirement. More than 60% (61%) of those who saved for 25 years or more reported being extremely satisfied with retirement. Half (51%) of those who saved for 15 to 24 years were extremely satisfied, and only 46% of those who saved for less than 15 years were extremely satisfied.
Sometimes these are good and then sometimes....... (USA Today 2002) Series EE savings bonds issued on or after May 1997 will now earn 3.96%, down from 4.07% that had been in effect since November 2001.
The rates are market-based and are adjusted on May 1 and Nov. 1. The rate is 90% of the average of five-year Treasury note yields for the preceding six months.
The government's inflation-indexed Series I bonds earnings rate fell to 2.57% from 4.40%. The indexed bonds are meant to protect investors from the ravages of inflation.
"Beneficiaries May Take Distributions Over Oldest's Life Expectancy" (2002)
The Service has ruled that designated beneficiaries of a trust may take minimum required distributions out over the oldest beneficiary's life expectancy. The Service concluded the distribution to the charitable entities would not affect the required distributions to the other beneficiaries and that the minimum required distributions would be calculated based on the life expectancy of the wife, as the oldest beneficiary.
New Required Minimum Distribution Rules (National Underwriter) 2002
Single and joint life expectancies are longer. For instance, under the uniform table that governs most lifetime distributions, the distribution period for participants at age 70 is increased from 26.2 to 27.4 years. The age 70 single life factor increased from 16.0 to 17.0 and the joint life expectancy for two individuals who are both age 70 increased from 20.6 to 21.8. These changes are the result of a directive by Congress in EGTRRA 2001 that the tables used for RMD calculations be amended to take into account the longer life expectancies indicated by the most recent census figures.
The 2001 regs indicated a change of position by stating that a surviving spouse had to be the sole beneficiary of an IRA in order to treat the IRA as his or her own. Since this contradicted a number of private letter rulings, some commentators speculated that it was a mistake. But the new regs make it clear that the Treasury meant what it said, adding that the surviving spouse must "have an unlimited right to withdraw amounts from the IRA" and that if a trust is named as beneficiary, this requirement is not met, even if the spouse is sole beneficiary of the trust
The regulations state that the new method can be used to calculate substantially equal periodic payments under Section 72(t).
Marital status of participants will be determined as of January 1 each year. Thus, if the participant marries, or becomes widowed or divorced during the year, the change in status will not affect his distributions until the following year.
Following the death of a participant, the date for determining the identity of the designated beneficiary will be September 30 (of the year after the year the decedent died) instead of December 31. This allows a 3-month period for calculating and making the required distribution by December 31.
Under a transition rule, many beneficiaries who defaulted to the 5-year rule under the 1987 regs will be able to switch to a life expectancy payout. However, any missed distributions will have to be taken by the earlier of December 31, 2003 or the end of the fifth year following the decedent's death. This will be a great planning tool for some participants who missed the chance to stretch out distributions under the old rules.
In calculating an individual's first distribution (generally due by April 1 of the year after he reaches age 70½), the account balance will no longer be reduced for distribution amounts received from January 1 to April 1.
A new deadline has been added for the documentation requirement that applies when a trust is named as beneficiary. The documentation required under prior law must be provided by October 31 of the year after the decedent's death. (Since this deadline is new, a transition rule applies through 2003.)
New reporting requirements that appeared in the 2001 regs for IRA custodians and trustees were clarified. Instead of being required to report to the IRS the amount of the individual's required distribution to the IRS (as was stated under the 2001 rules), IRA custodians will be required to identify each IRA for which a minimum distribution is required. However, the custodian will be required to calculate the individual's required distribution, upon a request by the individual.
Regulations were issued in temporary and proposed form for annuity payouts from defined benefit plans, since these were not addressed in the 2001 regulations. Changes include an expanded number of options for providing increasing payments (such as cost of living adjustments).
Overdosing on options (Employee Benefit News 2002)A second year of disappointing stock market returns has left employees at many of the largest public corporations holding worthless stock options, forcing companies to reassess compensation plans that hinge on a constantly rising stock price.
Women and retirement: (2002) Only about 12 percent of the elderly are below the poverty line, but fully 74 percent of those below the poverty line are women
TOP 5 REASONS WHY RETIREMENT IS A CHALLENGE FOR WOMEN WORKERS
Over two out of three working women earn less than $30,000 per year.
Nearly nine out of ten working women earn less than $45,000.
Half of all women work in traditionally female, relatively low paid jobs without pensions.
Women retirees receive only half the average pension benefits that men receive.
Women's earnings average $.73 for every $1 earned by men - a lifetime loss of over $300,000.
Women and pension rights in a divorce (2002) Women's Institute for a Secure Retirement. Good oversight on retirement, widowhood and divorce
The 12 worst mistakes lawyers make in preparing pension orders are:
1. The lawyer doesn’t ask for the important information about the husband’s pension and retirement benefits soon enough.
Long before you sign a property settlement agreement or go to court, your lawyer should obtain the plan document (that is, the full set of rules) or the summary plan booklet for each pension plan. The attorney should also ask for the plan’s procedures for "domestic relations orders." Among other features, the plan may have certain options or restrictions about when the former spouse’s share can be paid to her under a domestic relations order. These sorts of details can make a difference in your negotiations with your husband.
Note: The rules for most government retirement plans (federal, state, and local) are usually found in publicly-available statutes and regulations rather than a "plan document." Your lawyer should be familiar with these laws.
2. The lawyer fails to prepare any pension order.
If you are entitled to a share of your ex-husband’s retirement benefits, it is important that your lawyer makes sure the court signs a pension order at the time of your divorce. Otherwise, years later, you may have to pay another lawyer to finish the job. In the worst case, if your ex-husband has died, retired, or remarried, you may lose some of the benefits you could have received if a pension order had been prepared beforehand.
3. The lawyer fails to obtain information about every retirement benefit of the husband’s that might be marital property.
These days, many employees are covered by more than one pension or retirement plan at the same time. For example, an employee in a large company may be covered by a pension plan, a "401(k)" savings plan, and an employee stock ownership plan (ESOP). Benefits under all of these plans may be marital property, and your lawyer needs information about each of them. Also, your husband may still have benefits coming from previous jobs. If necessary, your lawyer should ask the court to issue a subpoena (an order to provide certain documents or information) to each employer or former employer asking for details about all retirement benefit plans.
4. The lawyer fails to obtain information about all the features of a particular pension plan.
Benefits under different pension and retirement plans vary widely, with some plans paying more than one type of benefit. For example, some plans provide cost of living increases to retirees. Others will pay specially-enhanced benefits to employees who agree to retire early, meaning that your husband’s benefit might suddenly increase when he reaches a certain age or number of years of service. If your pension order doesn’t specifically name each type of benefit, the plan administrator may not be obligated to pay you a share of them.
5. The lawyer fails to ask for a survivor benefit or doesn’t advise the wife that none is available.
Be sure to ask whether your former husband’s death will have any effect on your benefit. What if he dies before he starts collecting his own benefit? In many situations, a former spouse will share in her husband’s pension only as long as he is living, unless the court has also specifically awarded her a survivor pension. Also, some state and local government plans won’t pay survivor pensions to divorced spouses under any circumstances.
You need to know how your retirement income will be affected. If you learn that pension benefits won’t continue after your husband’s death, you may want to try to get him to buy a life insurance policy with you as beneficiary to protect your retirement income.
6. The lawyer fails to explain to the wife how retirement benefits are usually divided under state law.
State marital or community property laws usually specify how pension and retirement benefits are to be divided at divorce. How is your marital share figured? When can it be paid? Your lawyer should explain to you how these laws apply to your situation. If state law isn’t very helpful to divorcing women, could you negotiate something better? For example, even if state law says you have to wait to collect your pension share until your husband actually retires, you may be able to work out an agreement with your husband that will let you collect your benefits right away, if that would be more favorable to you.
7. The lawyer fails to explain to the wife what the former husband might do in the future that would reduce or eliminate her share of the benefits.
What if your ex-husband never applies for his own pension? What if he is injured on the job or disabled? What if he waives his rights to his pension? Would these or other acts affect your benefits? If so, what legal recourse would you have? Make sure that your property settlement agreement allows you some options if the worst happens. As an example, you may want to be able to ask the court to require your former husband to pay you alimony or other property if he interferes with your right to the pension benefits.
8. The lawyer fails to explain what effect your remarriage may have on your benefits.
Some federal, state, and local government employee benefits will stop if the former wife remarries. For example, both federal civil service and military survivor pensions terminate if the former spouse remarries prior to age 55. Also, any pension benefits that have been awarded to you as alimony or spousal support, rather than marital property, will likely terminate upon your remarriage since alimony and support payments are usually cut off when the former spouse remarries.
9. The lawyer is unaware of unusual requirements or loopholes in the law that could result in the pension order being rejected by the plan administrator.
Some pension and retirement plans are not required to accept any court order transferring benefits to a former spouse. These include many benefit plans for highly-paid company executives as well as certain "deferred compensation" plans for state and local government employees. Likewise, federal government retirement systems have many unexpected requirements for paying pensions to former spouses.
For example, the government won’t pay you a share of military retirement benefits awarded as marital property unless you were married for at least ten years of your husband’s military service. Also, a federal civil service survivor pension is usually not available if the pension order is signed by the court after the divorce is final and the employee has retired.
10. The lawyer fails to have the proposed pension order pre-approved by the plan in advance of being sent to court.
You can not get your pension money until the plan administrator has officially accepted the pension order signed by the court. But if the order does not follow the rules of the plan, it will likely be rejected and your lawyer will have to go back to court to get an amended order that the plan will accept. You can avoid unnecessary delay and legal fees if your lawyer will ask the plan administrator to tell you in advance whether the proposed order will be acceptable.
Most company pension plan administrators as well as many state and local plan officials will informally review a proposed pension order before it has been signed by the divorcing couple or the judge. Federal government plans, unfortunately, usually will not review pension orders in advance.
11. The lawyer fails to follow up after the divorce to make sure that the final pension order is sent to the plan and officially accepted by the plan administrator.
Your pension order should be signed by the judge at the time of your divorce, or as soon as possible afterward. Then your lawyer should mail a copy of the final order to the pension plan administrator – but that’s not the end of it. Sometimes a pension plan will lose a pension order or just let pension orders pile up for months without looking at them. It is very important to follow up to make sure that the plan receives your pension order and notifies you or your lawyers promptly in writing that the order has been accepted, even if you were not expecting to receive your benefits until years later.
12. The lawyer fails to explain to the wife her right to Social Security benefits.
Social Security benefits are usually not treated as marital property by state divorce courts, but if you were married at least ten years, then you may be automatically eligible under federal law for Social Security benefits as a divorced spouse. For this reason, it might be a good idea for your lawyer to ask your husband to provide you with a benefit estimate that he can get from the Social Security Administration.
Older Women Receive Less Pension Income Than Men (2002) Older women have lower incomes and fewer economic resources than their male counterparts, but the difference in income from pensions is especially pronounced. In the 65 plus age group, women are only about half as likely as men to receive income from pensions (including from their husbands' pensions). And the half who do, get about half as much as men. Among today's working women, women are participating in pension plans in greater numbers. For women who work full-time, near equality in participation rates has been achieved. Part-time workers, who are disproportionately women, however, are much less likely to participate in employer-sponsored pension plans. And over their lifetimes, women spend more time out of the labor force than men. This also contributes to the lesser likelihood of older women receiving pension income. And because women still earn less than men, their pensions will continue to be smaller. These findings are from a newly released study by the Institute for Women's Policy Research in Washington, D.C., funded by the U.S. Department of Labor, "The Gender Gap in Pension Coverage: What Does the Future Hold?"
Motivating People to Save for Retirement (Michigan Retirement Research Center (Apr 2002, posted May 2002) This Issue in Brief describes an exploratory investigation that suggests people are not very well informed about their pensions and Social Security, but that their retirement and saving behavior are not very much affected by whether they have been overly optimistic or pessimistic. Even as people approach retirement age, they do not correct their saving strategy or revise their retirement goals to better attain their desired level of consumption in retirement. Rather than save more or retire later, those who have overestimated their benefits are content to accept whatever consumption level their saving will permit in retirement, leaving their behavior unchanged from that planned using earlier misinformation.
How Wealthy Nations Can Avoid a Looming Retirement Crisis (2002) The rapid aging of the world's industrialized nations poses problems for consumer and capital markets, including the risk that individual and government retirement plans will come up short over the next two decades. But the retirement boom will also have implications for the developing world. The global aging problem and the prospect for globally-based solutions were outlined several weeks ago during a conference sponsored by Wharton's Pension Research Council and The Financial Institutions Center.
Aging: (2002) A Dilemma for Parents and Kids WHERE WILL ELDERLY PARENTS LIVE? WHO WILL PAY FOR THEIR CARE? BOSTON-Adult children and their parents are not thinking the same thing when it comes to planning for how parents will be cared for as they get older, or how their care will be financed. Results from the "Long Term Care Partners Survey of American Parents and Adult Children," conducted by Zogby International, show that America's older parents (between the ages of 54 and 84) do not want to move in with their children. A higher percent of adult children, however, feel it is likely their parents will move in with them when they are unable to care for themselves. And both recognize there is a high likelihood adult children will be tapped to help finance their parents' future long term care needs.
Results of the survey showed that parents have a strong desire not to move in with their children should they need care; nearly two-thirds (64%) of parents with children over age 34 stated they would not want to move in with their children in their later years should they need care. Adult children, however, aren't quite so sure. Nearly half (44%) stated they felt their parents would want to move in with them should they need care. And an overwhelming majority (82%) of adult children between the ages of 34 and 65 are prepared to take care of their parents' day-to-day needs if they could not do so themselves.
Additionally, both recognize parents may need financial help with their long term care needs. Nearly one third (32%) of parents believe they'll need financial assistance from their children, while just under half (44%) of adult children expect to help their parents financially. However, children are not advising their parents to purchase long term care insurance (only 23% would consider doing so) and only 12% of parents polled say they have purchased long term care insurance for themselves.
"This study highlights that parents and adult children aren't having conversations about future care needs and/or don't fully understand their options," said Paul Forte, Chief Executive Officer, Long Term Care Partners, LLC. "Parents and children need to talk about these issues before they become crises. Planning before care is needed can help both parties achieve a better outcome in the long run."
Nursing homes are not a popular choice for parents or their children. Almost half (47%) of seniors say it is unlikely they will spend some time in a nursing home or assisted living facility. Adult children agree, with 53% stating their parents will not spend time in a nursing home. Overall, six out of every 10 Americans who reach age 65 will need long term care services. And care can be expensive. According to a 2002 study by the MetLife Mature Market Institute, the average national cost of care in a nursing home is $143 per day for a semi-private room and $168 a day for a private room. Care at home is expensive as well, according to the Institute. The average cost of a home health care aide averages $18 per hour nationally, or $158,000 for round-the-clock care.
"Clearly, children expect to take responsibility for their parents' care and to assume some of their financial obligations," said Forte. "There's a big question, though, as to how they will pay for the care that may be necessary. They ought to be thinking about long term care insurance as a means to help provide more options for them and their parents should care be needed in the future."
Dying: (2002) 10 tips from David Woods, president of the Life and Health Insurance Foundation for Education (LIFE) to make your dying a little less trying for your loved ones.
1. Have a will and update it periodically. The will designates executors, guardians and trustees, which are all important to review periodically. Your executor's first task is to locate your will, and you can help by keeping the original in a fairly obvious place. A good start is to put your will in an envelope on which you have typed your name and the word "Will." You should then place the envelope in a fireproof metal box, file cabinet or home safe. An alternative is to put it in a safe deposit box.
2. Have health care directive (living will). A living will is a medical directive written in advance that sets forth your preference for treatment in the event of your inability to direct care. The document may be drafted to include when the directive should be initiated and who has the decision-making responsibility to withdraw or withhold treatment.
3. Have a power of attorney. You should name your spouse or a close friend or relative to have power of attorney for you. Whoever you designate will be authorized to manage your affairs, typically financial ones, if you're not able to handle them yourself.
4. Have life insurance. Purchase adequate life insurance for yourself now to help your family avoid financial pitfalls later. Having the right amount of coverage will help ensure that the dreams you have for your family will be realized even if you're not there to witness them. Determining how much life insurance to buy can be complicated, so it often helps to seek assistance from an insurance agent or other financial advisor.
5. Review beneficiary designations for your various financial accounts (retirement, life insurance - both personal and through work). Check annually to ensure those named in your insurance policies, 401Ks and the like are still relevant to your needs and wishes. Many people are under the misconception that if they have a will, they are covered. This is not true - beneficiaries designated in documents generally fall outside the scope of a will so it is critical that you keep your records updated.
6. Specify where important financial account information is located (savings, retirement, college funding, mortgage, insurance). It may sound like an obvious thing to do, but few people keep a list of their important records, and fewer still could name them all quickly in an impromptu quiz. Keep a master list and review it annually. Include bank accounts, mortgages, retirement plans, health care plans, investments, creditors etc.
7. Specify where important non-financial information and valuables are located (marriage certificates, birth certificate, titles/deeds for the house/cars, passports, jewelry, safe deposit box key, items in storage facilities)
8. Specify your final arrangements (burial or cremation, where you want to be buried, whether you want to be an organ donor)
9. Have a list of professionals who assist you with your family's legal and financial affairs (insurance agent, attorney, accountant, etc)
10. Explain to heirs how your trust works. Trusts are often a useful legal and estate-planning device for protecting assets from estate taxes and providing a vehicle to be sure survivors gets proper administrative and investment advice and counsel. An attorney is the best source of information about the proper use of trusts and whether one would be appropriate for you.
New retirees: "The research found that traditional notions of what retirement means are pretty much out the window. 'Even the language of retirement is changing,' said Dr. Dychtwald, who is also the author of 'Age Power:
"Here are the four categories of retirees found in the study, which was based on a telephone survey 2001 of 1,003 people 55 and older:
"THE AGELESS EXPLORERS These retirees represent 27 percent of those surveyed and are the leaders in creating a new definition of retirement. They see themselves in an exciting new phase of life and would rather be too busy than risk being bored. They have the highest level of education and have saved for 24 years, on average, for retirement. They have an average household income of $64,800 and an average net worth of $469,800.
"THE COMFORTABLY CONTENTS This group (19 percent) aims to live the traditional retirement life of leisure; its members aren't as interested in work or contributing to society. They have saved, on average, for 23 years and spend their time on travel or other recreational activities. Their average income is $61,200; their average net worth is $367,500.
"THE LIVE FOR TODAYS These people (22 percent) aspire to be Ageless Explorers and may be even more interested in personal growth and reinvention. But they have always focused on the present and didn't devote much time to retirement planning - having saved for only 18 years, on average. They have a great deal of anxiety about their finances and are likely to continue working during retirement. Average income is $46,300, and average net worth is $222,600.
"THE SICK AND TIREDS The largest of the four groups - 32 percent - its members are in the worst circumstances. They are less educated, have fewer financial resources and have low expectations for the future. They are more likely to have been forced into retirement by poor health and are less likely to travel, participate in community events or tap into their potential. They have saved for, on average, just 16 years; averÐ"
Retirement Budget: When first surveyed by Charles Schwab and Co., 64% of Americans ages 45-65 with household incomes of at least $75,000 said they were confident they will have enough money for a comfortable retirement. However, after having their retirement needs assessed by Schwab's Center for Investment Research, confidence levels plummeted by half, to 32%.
Schwab analysts estimate workers need to save $230,000 for every $1,000 in monthly retirement income. According to these calculations, $1 million in savings provides $50,000 in annual retirement benefits. At an average age of 52, 56% of survey respondents have less than $250,000 saved, and 31% have banked less than $100,000.
Boomers are also increasingly worried about the cost of health insurance coverage in retirement, according to Allstate Insurance Co.'s second "Retirement Reality Check" survey. The number of respondents concerned about health care costs soared from 39% in 2001 to 67% in the latest poll. The survey also found that 52% of women and 45% of men worry about getting sick, concerns aggravated by the costs associated with obtaining health care coverage and long-term care in retirement years.
Retirement Value (NY Times, Institute for Social Research at the University of Michigan) Since 2000, retirees' portfolios have shrunk by about $678 billion.
William Rodgers, an economics professor at the College of William and Mary in Williamsburg, Va., and a former chief economist for the Labor Department estimated that retirees who ranked in the top 20 percent in earnings during their careers typically have more than one-third of their assets tied up in the stock market, and another 20 percent in pension funds. Those who were in the bottom 20 percent are less likely to need to return to work, because about 80 percent of their income comes from Social Security. "It's the higher-income retirees who are out seeking jobs."
The number of people 55 and older in the work force rose by more than 7 percent, to around 20 million, in the 12 months ending in July, according to the Bureau of Labor Statistics, while the number of workers in all other age groups declined.
Spouse May Roll Over Decedent's IRA Left to His Estate: (2002) Even though the deceased spouse left his IRA payable to his estate, because his wife was the executrix and the sole beneficiary of his estate, the Internal Revenue Service ruled in this Private Letter Ruling that the new required minimum distribution regulations released last year do not preclude her from rolling amounts distributed from his IRA into her IRA, provided she do so within 60 days from the date she receives the distribution.
Retirement : (2002) A majority of Americans are unprepared for retirement, even though they may have done a good job of accumulating assets, according to survey results released today by ING's U.S. financial services. And, successfully planning and preparing for a comfortable retirement has become a sensitive issue for many Americans, given challenging equity markets and weakened economies. This sensitivity is likely heightened for those who are quickly approaching the retirement phase of their lives.
69%(2) of 50-70 Year-Olds Do Not Have a Plan for Their Retirement Paycheck - According to ING's research, approximately 75 percent(1) of respondents either do not understand, or haven't considered, how to successfully plan for the withdrawal of their retirement savings -- and maximize the options available to them to best meet their personal needs. And, even more alarming, ING's research reveals that most pre- and post-retirees (69 percent(2) of 50 to 70 year-old Americans) have no plan in place for their 'retirement paycheck.'
"Americans have become conditioned to think that by building a retirement nest egg they are financially prepared to retire, but there's more - a comprehensive retirement plan does not end there. "The retirement paycheck is a monumental issue because according to our research, 86 percent(1) of Americans expect to have a comfortable retirement."
They emphasized that individuals need to plan how to best convert their nest egg into a long-term income stream they won't outlive. The consequences of careless decisions stemming from inadequate planning can undermine years of successful scrimping and saving.
Baby Boomers Need A Wake-Up Call on Retirement Readiness - "Roughly a decade ago, Baby Boomers heard the wake-up call about the need to take personal responsibility to accumulate savings for retirement. However, if Boomers think that saving is all they need to do to retire ready, then it's time for another wake-up call. Individuals also need to take responsibility for planning their retirement paycheck."
Industry data shows that there are approximately 14 million households in the U.S. with between $100,000 and $1 million in investable assets(3) with many of those households nearing retirement and looking for a helping hand.
Insufficient planning and consideration for the impact of taxes, accessibility, and diminished growth potential can significantly compromise an individual's retirement experience. "Mistakes can be costly and painful -- consider a person who retires at 62, transfers $250,000 to a bank savings account in a lump sum from their 401(k) plan and unwittingly suffers a major tax penalty -- and loses a sizeable portion of their life's savings. It likely took that person many years to accumulate those assets, but they would likely lose more than a quarter of their savings because of one uninformed decision. Americans need to plan and get the help they need to prepare for their retirement readiness."
Major change in retirement budgets- (USA Today) By 2031, companies are expected to pay less than 10% of total medical expenses for retirees. Large employers now typically pay more than half of total retiree medical expenses. About 20% of employers studied have eliminated retiree medical plans for new hires and 17% will require new hires to pay the full premium for coverage.
45% of employers cap contributions for new hires while 39% do so for current employees. Only one in four employers cap contributions for current retirees. The median employer contribution cap of $2,000 for current post-65 retirees — that is those who have Medicare coverage — drops to $1,740 for future retires. The median of $4,450 for current pre-65 retirees drops to $3,900 for future retirees.
Nine of 10 large employers that offered retiree medical benefits to supplement Medicare for workers over age 65 in 1984 required service of five years or less. Last year, only about a quarter offered that benefit
Near Elderly Increased Health Coverage in 2000: New figures from the U.S. Census Bureau show that 2000 was a pretty good year for health coverage for the "near elderly." The percentage of U.S. residents between the ages of 55 and 64 who had some kind of public or private health coverage in 2000 increased to 86.3%, from 85.5% in 1999. The percentage of near elderly residents who were completely uninsured fell to 13.7%. That was the lowest level since 1995, according to an analysis by Paul Fronstin of the Employee Benefit Research Institute. But Fronstin warns in the analysis that the good times for the near elderly might be ending. "The currently slow economy, combined with erosion in retiree health benefits for future retirees and lack of a Medicare prescription drug benefit, will have profound implications for public policy,"
Retirement survey (American Express 2002) 30 percent did not invest for retirement in their company's 401(k) plan. Of the 2,000 adults interviewed for the random telephone survey, one out of four had experienced a job transition in the last five years.
The survey revealed that young workers, by a wide margin, were the least likely to be saving for retirement. Almost half of those who didn't invest in their 401(k) plan were between the ages of 18 and 24, and 30 percent were between the ages of 25 and 34. Income was another contributing factor. More than half of those surveyed, who were not saving for retirement earned less than $25,000; another one-third reported an annual income between $25,000 and $50,000. Another key finding in the American Express survey revealed that one out of every four workers who invested in their 401(k) left their retirement assets in their former employer's plan after they left their job, despite a number of other options that may have been more financially beneficial.
The survey also revealed that 16 percent of workers who left the workforce rolled their money into an IRA, and the overwhelming majority of those who rolled their assets said they would make the same decision again. Eleven percent of those surveyed said they cashed out of their retirement plan because they needed the money to pay off debt or for everyday living expenses - a decision half said they regretted.
But I bet it still will not include 'diversification by the numbers'. (WSJ) The Treasury Department is proposing new regulations that would give workers more information about their pension choices, a change that could benefit millions of employees by spelling out which option would pay them the most money after they leave a company.
The article also noted, "Typically, pensions are structured so lump sums are worth far less to most workers than when the pension is taken as a monthly payment -- as much as 50% less. However, 90% or more of departing employees choose the lump sum, rarely realizing it has a far lower value because they lack adequate information to compare the choices, according to lawmakers who have studied the issue. "
Wanna know how to do that? Financial Calculator. Nobody should even remotely try to figure out what to do unless they or an advisers has, and can use, an HP12C or similar
"Employees as a result often receive 20% to 50% less from their pensions than they otherwise would. Those most likely to be affected are long-term employees in their 40s to mid-50s."
"The letter cited an industry publication that encouraged employers to "Ask a few employees, 'At age 65, would you rather have $100,000 or $1,200 a month for life?' You'll likely find far more takers for the lump sum" even though the lump sum is 50% less valuable than the monthly payment. The industry publication also noted that "most American workers are clueless about the financial aspects of retirement," and that "given this massive naivete, it's little surprise that [most] employees who had a choice took lump sum payouts."
The Economic Policy Institute (EPI 2002), a nonprofit, nonpartisan economic think tank, reports that "when the stock bubble burst, it left the average family facing the prospect of having only 43 percent of the income they need for an adequate retirement."
In its study, "Retirement Out of Reach," EPI made several startling discoveries. Among them:
- Most households used the new wealth gained from the stock market to increase debt and consumption.
- Between 1992 and 2000, while the stock market grew by 13.9 percent per year, households increased their debt more than they raised their assets. The ratio of total household debt to income grew from 72 percent at the end of 1992 to 83 percent by March 2001.
- It will take the average household over 30 years to recover the wealth lost in 2000 and 2001.
"One of the saddest things about this situation," says George J. Kourpias, President of the Alliance for Retired Americans, "is that retirees who had their 401(k) funds invested in the stock market do not have the luxury of 30 years to rebuild their so-called wealth. Most of them needed their funds to help pay the ever increasing costs of their prescription drugs."
Health Plans: (2002) The Employee Benefit Research Institute recently released findings on how and why employers make decisions regarding the health care benefits offered to employees.
Retirement: Employed people may put up to $11,000 in a 401(k) or 403(b) plan; those 50 and older can put in an extra $1,000 under new catch-up provisions. Contribution limits for Individual Retirement Accounts are now $3,000, or $3,500 for those 50 and older, up from the long-established $2,000.
many self-employed people could put away more for retirement because the income limits upon which the contributions are calculated have risen this year. For a form of I.R.A. known as a SEP, or simplified employee pension, the limit is $200,000.
Retirement Plan Limits for 2003
Retirees (Ernst and Young) a majority of pre-retirees (adults 55 plus who are still working full-time) are neglecting to account for basic economic conditions and lifestyle changes. According to the survey, 66 percent failed to consider market fluctuations or debt repayment needs (loans, mortgage, etc.), 53 percent did not factor in the impact of taxes on retirement investments and 47 percent did not account for inflation. Even more surprising, 81 percent did not consider the possibility of their parents getting ill, and over half did not account for personal illness (54%) or a sick spouse (53%). Additionally, only one-third (33%) expect to spend more than 20 years in retirement.
, only 17 percent of pre-retirees are very confident their monthly income will sustain their desired lifestyle in retirement and only 16 percent are very confident they have enough assets to meet retirement objectives. Those who do not identify themselves as "very confident" say unexpected lifestyle changes (54%) and negative stock market fluctuations (45%) contribute to their lack of self-assurance. Other factors that shake confidence include a feeling that retirement products are too confusing (28%) and that they lack the inform°
Only 13 percent of pre-retirees say they have changed their expectations as a result of the downturn -- making no financial adjustments and acknowledging and accepting they will have less money to use during retirement. Eight percent say they are actively managed
What would they have done differently- * Forty-nine percent say they would become better educated about retirement products and services * Forty-six percent would develop a better budget to determine exactly how much money they would need to live comfortably during retirement * Forty-six percent say they would plan earlier * Forty percent would take advantage of employer sponsored programs * Over one third (34%) would purchase more guaranteed return products * Nearly a third (31%) would seek counsel from a financial advisor
Ernst & Young Actuarial's Next Generation Retirement Planning Survey (20030 finds that a majority of pre-retirees (adults 55+ and still working full-time) are neglecting to account for basic economic conditions and lifestyle changes. For example, 66% failed to consider market fluctuations or debt repayment needs, 53% did not factor in taxes on retirement investments, 47% did not account for inflation, 81% did not consider the possibility of their parents getting ill, over half did not account for personal illness or a sick spouse. Also, only 16-17% of pre-retirees are very confident they can maintain their desired lifestyle in retirement and only 16 percent are very confident they have enough assets to meet retirement needs.
Big obstacles? Unexpected lifestyle changes (54%) and negative stock market fluctuations (45%).
Here are the percentages of Americans who have saved: (2003)
Current Savings Over $100,000 18%
Current Savings Between $50,000 - $99,999 10%
Current Savings Between $25,000 - $49,999 11%
Current Savings Less Than $25,000 34%
No Current Savings 27%
Retirees (Allstate 2003) When asked to rate their top fears about retirement in Allstate's "Retirement Reality Check" survey, 67 percent of Baby Boomers cited rising health care costs, up from 39 percent in 2001. It also revealed that Boomers' fears of failing health are on the rise: while only a quarter (27 percent) admitted this concern in 2001, almost half (49 percent) now worry that they will get sick during retirement. Surveyed Hispanic Boomers are even more worried, at a rate of 58 percent. Other retirement fears revealed by the survey include not having enough money (52 percent) and Social Security no longer being around (47 percent). Only 10 percent of those surveyed said they had no fears at all. Most of those were probably drinking.
Retirement: About 20% of workers ages 40 to 59 have less than $10,000 in retirement savings, according to a survey 2002 year by the Employee Benefit Research Institute.
Over there, over there...... -- A tremendous tidal wave of new retirees is splashing down across Asia and Europe, creating new opportunities for U.S. financial services firms to sell retirement-savings products abroad. "Aging populations and financial pressures on public and private pension systems across Asia and Europe are creating dramatic needs for retirement products such as variable annuities and 401(k) plans
"The need for older citizens to save and invest for retirement is, in many instances, even greater in Europe and Asia than in the United States. "Japan has the highest percentage of adults aged 65 and older in the world. Italy, Germany, France and Great Britain are not far behind. Populations are aging and people are living longer, putting a premium on the need for retirement savings."the U.S., Japan and Europe account for 86 percent of the world's life insurance and pension markets, which means they offer the best opportunities for sales of supplementary retirement products.
Retirement (Congressional Research Service2003) more than half of workers ages 25 to 64 don't own any retirement savings accounts. About a third work for employers who don't offer retirement benefits.
The 401(k) accounts were the most popular form of retirement savings, with one in three workers participating, the report said. About 19 percent owned an IRA or a Keogh account for self-employed workers. Almost 42 percent owned one or more retirement accounts.
For the 47.1 million workers with at least one retirement savings plan, the average account balance for a single employee was $45,960. For households, it was $71,040.
Of older workers ages 55 to 64, three out of four lived in households with retirement savings of zero to $56,000.
For older workers with savings, the average single-account balance was $71,910 and the household balance was $107,040.
Social Security is projected to start paying more in benefits than it receives from payroll taxes by 2016 because the large baby boom generation begins retiring
National Health Interview Survey's Disability Supplement. Highlights from the report, titled "Trends and Differential Use of Assistive Technology Devices: United States, 1994," include:
An estimated 7.4 million persons in the U.S. household population use assistive technology devices for mobility impairments, the most frequent reason for using an assistive device. Almost 5 million people use canes, the single most utilized assistive device.
Another 4.6 million use assistive devices such as back braces and artificial limbs to compensate for orthopedic impairments.
4.5 million use hearing aids, amplified telephones, closed caption television, and other assistive devices for hearing impairments.
500,000 use these devices for vision impairments.
The majority of persons using these devices were over 65 years of age. Sixty-two percent of persons using mobility devices, 69 percent of persons using hearing devices, and 51 percent of persons using vision devices are over 65 years of age.
Use of assistive devices has increased dramatically over the past decade, in part due to the aging of the population but also due to technological advances, public policy initiatives, and changes in the delivery and financing of health care.
MetLife survey (Financial ENews 2003) , 79% of employees surveyed "admit being concerned that they will outlive their retirement savings" and 55% of those with children estimate that they are "significantly behind in their education savings goals."
Pension Plans: (2003) investments by the pension funds have fared poorly in recent years. As the prices of stocks and other investments have fallen, so has the return on the money set aside for the more than 44 million current and future private-sector retirees who qualify for traditional pensions.
At the same time, unusually low interest rates are further undermining pension plans. The effect of the bond rates is on the financial calculations used to determine the present value of the pension liabilities, not on the pension funds' return. Falling rates make future pension obligations look bigger on current balance sheets. To meet their obligations to workers, and to stay in compliance with pension laws, companies have been forced to set aside more money.
Retirement plans (WSJ)
Here's a look at retirement savings plan contribution limits that were raised under the Economic Growth and Tax Relief Reconciliation Act of 2001.
Tax Year 401(k), 457(b), 403(b) 401(k), 457(b), 403(b) Catch-Up (Age 50+) IRA/Roth IRA IRA/Roth IRA Catch-Up (Age 50+)
2002 $11,000 $1,000 $3,000 $500
2003 12,000 2,000 3,000 500
2004 13,000 3,000 3,000 500
2005 14,000 4,000 4,000 500
2006 15,000 5,000 4,000 1,000
2007 15,000* 5,000* 4,000 1,000
2008 15,000* 5,000* 5,000 1,000
2009 15,000* 5,000* 5,000 1,000
2010 15,000* 5,000* 5,000 1,000
* Amounts will be adjusted for inflation.
Required distribution for retirement; (IRS)
Retirement planning: (2003) Assume a portfolio in existence for 30 years ending in 1998. Over that period, if the average return of 11.7% had been earned each year, an individual who retired in 1968 with $250,000 could have withdrawn 8.5% or $21,250 annually pretax. That amount could even have been increased by 3% each year with the resulting income being maintained through 1998, at which point the assets would have been depleted.
However, a rather sizeable surprise materialized—the rather nasty bear market of 1973-1974. The consequences of that downturn could not have been, and in fact were not considered in the above portfolio planning process. Consequently, over the first 13 years, the "actual" portfolio performance averaged only a 6.9% return. While this was offset to a degree by a 15.3% average annual return during the 1982-1998 stage, the earlier, unexpectedly weak performance did irreparable damage. So much so, that had the original 8.5% withdrawal rate been maintained, the portfolio would have been drained of all assets by the thirteenth year.
using those same percentage numbers, had the timing been reversed, with the stronger return performance beginning in 1968 and the mediocre performance applying to the later years (sustaining the same average return of 11.7%), the actual performance would have been more than satisfactory. Using that scenario, the same 8.5% withdrawal rate would have left a pretax balance of $1.2 million at the end of the 30-year period.
According to Business Week, using traditional methods, a 40 year old with a $300,000 portfolio in a 401(k) matching market returns, can easily achieve a goal of retiring on $120,000 a year. These results, typically recommended by a financial advisor using the traditional forecasting system, will imply a 100% probability success rate. However, a Monte Carlo simulation calculates that the worker has only a 40% chance of realizing that target retirement income. To the average intelligent investor, those odds would be unacceptable.
Pensions: (2003) 44 million employees still covered by traditional defined benefit pension programs.
Pensions (NY Times 2003) about half of the Fortune 100 companies offer their employees a traditional pension with the sole option of lifetime monthly payments, compared with almost 90 percent of such companies in 1985. Of the remaining half, about 30 percent offer defined-benefit plans that let employees choose between lifetime monthly payments and a lump-sum payment. (Some companies allow retirees to take part of the pension as a lump sum and the rest in reduced monthly payments.)
Given the choice, most employees will turn down an annuity in favor of managing their own funds. This is partly due to widespread misunderstanding about the annuity as a financial instrument, according to AARP. They noted that when people chose a lump sum over an annuity, "Most are not even sure of the value of what they're choosing between."
Retirement: (2003) The slumping stock market has destroyed the nest eggs of millions of people in the last three years -- erasing at least $678 billion in U.S. retirees' savings, according to the University of Michigan's Health and Retirement Study.
Retirement: (2003) 93% of those surveyed believe it is up to individuals to ensure their own financial security during retirement. The problem is that 70% of this same group say they are unable to save as much as they would like and only 8% indicated they could/would save more by reducing expenses.
Pensions: (Watson Wyatt 2003) The percentage of employers with fully funded pension plans declined from 84 percent in 1998 to 37 percent in 2002. In 1992, 57 percent of companies were funding their plans at the ERISA minimum, compared to 30 percent in 2002.
Elderly health: (Journal Psychosomatics 2003) How much an elderly person complains about pain, gastric symptoms and other body problems may be tied more to overall well-being and life satisfaction than to actual physical health, says new research published in the . A German team of psychosomatic and gerontology researchers assessed 251 general hospital inpatients' body complaints and how those complaints related to demographic factors (such as age and marital status), age-related changes, life satisfaction and doctors' ratings of problems. Body complaints studied included exhaustion, gastric symptoms, pain, cardiovascular complaints and other symptoms. The patients' average age was 75 years, and more than two-thirds (68.1 percent) of the patients were women.
The researchers found that only three factors were significantly associated with the elderly persons' body complaints: self-assessment of life satisfaction; self-assessment of age-related changes related to activities, cognitive performance and state of health; and doctors' ratings of somatization -- that is, patients' physical complaints that cannot be explained by a bodily cause. Age, gender, marital status, living arrangements and objective health-related variables were not associated with the level of subjects' body complaints. "Complaints of psychosomatic symptoms in elderly patients have been receiving increased attention," Dr. Schneider and colleagues write. "Our results confirm those of other studies that have shown a correlation between subjective body complaints, subjective well-being, depressive mood and psychiatric disorders."
Bad retirement: (2003) nearly one-quarter, 24%, of workers ages 45 or older say they plan to postpone their retirement — up from 15% in 2002, according to the annual Retirement Confidence Survey released Friday. And 16% of workers say they are not at all confident that they will have enough money saved for retirement — up from 10% a year ago.
the percentage of workers who say they are somewhat confident or very confident that they're saving enough for retirement remained relatively high at 66%, vs. 70% last year. But that may simply be an indication that many workers don't really know or don't want to think about how much they need to save for retirement.
many workers remain unaware that the eligibility age for full Social Security benefits is gradually increasing from 65 to 67. As a result, about half of all workers think they will be eligible for full benefits before they actually will.
Retirement budget: (2003) Medicare beneficiaries are expected to spend $1.8 trillion on prescription drugs over the next decade. Seniors enrolled in Medicare HMOs are facing more cost-sharing and tighter limits on supplemental benefits like prescription drugs.
Nearly 82 percent of enrollees this year, for instance, have some sort of cost sharing for being admitted to the hospital. Ninety-one percent have to pay more than $40 for a trip to the emergency room. Sixty-three percent must shell out more than $15 to see a specialist. Even for some routine services, seniors have to dip into their own cash, the study shows. About one in six seniors has a co-payment on x-rays. About one in eight is charged a co-pay for lab services.
And another deficit: (2003) The Pension Benefit Guaranty Corp deficit has swelled to around $5.4 billion in the first six months of its fiscal year, from $3.64 billion in 2002.The PBGC which backs the pensions of 44 million Americans, said it had already absorbed most of the troubled plans in the steel industry and now faced exposure to underfunded airline and auto industry pensions.
Of the $300 billion-plus in underfunding, $60 billion was attributed to the auto industry -- defined as automakers, autoparts producers and tire and rubber makers. Airlines accounted for another $26 billion in underfunding, adding that large network airline pension plans were only about 50 percent funded, on the average.
The PBGC had started fiscal 2002 with a $7.73 billion surplus but burned through that and more under the weight of large pension bailouts in the steel industry. Low interest rates have dealt a particularly heavy blow to pension plans, which have been required to use the 30-year U.S. Treasury bond to calculate how much money is needed to guarantee future benefit levels. But Treasury ended sales of the 30-year bond in October of 2001, and Congress last year gave companies temporary leeway to use an interest rate as high as 120 percent of the 30-year Treasury yield to determine plan funding requirements.
Retirement (Allstate)- Retirement savings dropped form $120,000 in 2001 to $93,000 in 2002.
The survey said that 66% of retirees were comfortable making their own financial decisions. But I submit that 0.05% know what diversification is by the numbers. So most of them are just kidding themselves.
Retirement (Pru 2003) found that 79 percent of pre-retirees are not as financially "fit" as they should be at a critical stage of preparing for a secure retirement. "Too many of those polled are not financially ready to retire comfortably," said Judy Rice, president of Prudential Investments. "In fact, when rating their financial health, a mere 21 percent are considered to be in 'excellent' shape. The rest are not as fit as they should be, including a significant 34 percent in outright 'frail' financial health." The study, using a 16-question behavioral assessment tool, revealed other worrisome trends, including: -- 76% of pre-retirees have either not established or not updated a formal investment plan. -- Half of those polled have not set clear goals on how much they will need to save to retire comfortably. -- Slightly more than one in four pre-retirees between the ages of 50 and 54 do not contribute regularly to retirement savings programs. -- Almost half of those polled worry they may have to work at least part-time during retirement to make ends meet.
Nearly two-thirds find today's investment information confusing and often contradictory, and 45 percent admitted that they feel less comfortable making investment decisions