Category: Budgeting

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7 Factors That May Affect Your Retirement

man on computer work3In 2010, a Pew Research report indicated that three out of every four members of the workforce expect to keep working for pay after they retire. 60% of them believe this will be by choice, not necessity – but pre-retirees may be more optimistic than justified in their expectations. According to the Center of Retirement Research, less than half of all households are financially prepared for retirement at 65; a quarter will need to work at least one to three more years; and almost one in ten will need to work past age 72 or longer.
 
Whether by need or choice, it’s clear that plenty of folks are likely to continue working in one capacity or another after they officially retire. The decision of whether or not to do so is dependent upon a range of factors.

Factors Affecting Retirement Security

Financial security for American citizens usually results from a combination of government programs, personal assets, and employer benefits. However, each of these factors is undergoing historical transformations right now. Unfortunately, these transformations may mean Americans have to move the goalposts back a bit when it comes to their retirement goals.

1. Investment Volatility

Conventional wisdom suggests that the average annualized return for common stocks over a period of 10 years or more is positive, somewhere between 7% and 9%. However, statistics have a way of disguising inconvenient truths: According to AllFinancialMatters.com, there is actually substantial volatility in the numbers – mainly related to start and end dates.
 
Suppose three brothers work for the same company and each invests $50,000 in its 401k plan over a period of 30 years. Joe, the oldest brother, begins investing in 1966 and – assuming the results mimic the S&P 500 return – retires in 1996 with $1,871,111 in his account. Bill, the middle brother, who began investing in 1976, retires in 2006 with $1,520,397 in his account. And Mike, the youngest brother, begins in 1983 and retires in 2013 with $1,050,416. These figures do not include the effects of inflation or the deduction of fees.
 
Older workers – those most likely to retire in the coming decade – found the impact of the last stock market decline to be especially harmful. Two-thirds of those between the ages of 45 and 60 reported at least a 20% decline, according to one survey. As Gad Levanon, director of macroeconomic research at the Conference Board, observed, “The older you are, it makes it more difficult to make up for [loss of value] and more people are delaying retirement as a result.”

2. Low Interest Rates

Many retirement professionals previously advised that an annual 4% withdrawal rate would result in sufficient funds to last through 30 years of post-work life. In other words, a fund of $1 million could provide $40,000 per year.
 
However, due to lower yields on fixed income investments, many retirement planners now recommend a withdrawal rate between 2.7% and 3.0% in order to achieve a 90% probability of not outliving your assets. Lowering the distribution rate means that income must now be replaced from other sources, and your standard of living must be lowered.
 
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3 Benefits of Downsizing Your Life and Living Lean

live-lean1Americans born after World War II have grown up in a culture that seems to promise them everything. The greatest economy in history was built, in part, by creating an insatiable demand for “more.” Unfortunately, however, its consequences can be measured in part by an unmanageable national debt, the approaching scarcity of many natural resources, increasing class conflict, and the high degree of stress and unhappiness of society at large.
 
Many retirees, as well as those who hope to retire within the next decade, are discovering that their resources may not be able to provide the lifestyle they’d anticipated. For some, there is little alternative except to severely cut back expenditures and lower expectations. For those who have not yet reached those years, there is another option: living lean.

The Lure of Possessions and Immediate Gratification

Younger Americans often find themselves at a crossroads in life: They must choose whether to maximize their immediate pleasures, or balance them with their future needs. Unfortunately, too many opt for the former. They often do so because they believe the following.

1. You’re Only Young Once

If you don’t grab all you can now – big homes, expensive cars, extravagant vacations – you may not have another chance. However, what folks with this mindset don’t realize is that adventure, excitement, passion, and satisfaction are not exclusive to a particular age, or even income.
 
Former President George H.W. Bush recently celebrated his 90th birthday by skydiving, a feat he has performed every five years since turning 65. Boone Pickens, at age 86, is leading a national campaign to replace petroleum with natural gas and wind energy. Mick Jagger is still touring with the Rolling Stones. Grandmothers and grandfathers fill golf courses, ski slopes, and universities learning new skills and pursuing dreams.
 
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The truth is, there is no single age or stage of life that is better than another. And being young is not an excuse for irresponsibility.

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Is Dental Insurance Worth It?

teeth and dollarsParents spend thousands of dollars on orthodontics to ensure their children have what’s arguably the clearest physical indication of prosperity: a straight, white smile. George Washington was certainly prosperous, but he also endured the agony of poorly fitted wooden dentures for much of his life. And James Brown, the Godfather of Soul, claimed that if a man had his hair and teeth, he had it all.
 
It’s not surprising then that an entire industry is devoted to keeping our teeth healthy, clean, and attractive. Aside from a big boost in self-confidence, the condition of your teeth plays a major role in your overall health. As with many things, many people are willing to pay for those benefits. But is purchasing dental insurance the best way to go about doing it?

Problems With Adult Teeth

Fortunately, many dental problems can be avoided or delayed with proper attention, such as every mother’s admonition to floss. However, even with regular care, some dental problems do naturally arise with age:

1. Dental Decay. Cavities can deteriorate into root canals and crowns when left untreated.
2. Gum Disease. Plaque causes gums to recede, potentially exposing them to disease. Poor dental hygiene can exacerbate the problem.
3. Accidents. Teeth can be broken or cracked as a result of being hit or simply biting down on an olive pit or cherry stone. This can require removal of the injured teeth in favor of bridges or implants. In extreme cases, dentures may be required.
4.Oral Cancer. Smoking not only stains teeth, it increases your risk of cancer. Gum disease can also trigger oral cancer, along with other health problems.
 
In addition to good dental hygiene, regular checkups and cleanings are always necessary – and, unfortunately, these cost money. But beyond the pestering costs of basic maintenance lurk far more significant dental operations which have the potential to devastate your personal finances.
 
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Stretching Your Income to Meet Expenses

Coin stacksIf you just retired, congratulations. You’ve received the gold watch, relished the looks of co-workers who envy your new freedom, and begun to plan that long-awaited European tour you had always hoped to take. Life is good, but you do have concerns – mainly, whether your future income can sufficiently cover your basic living expenses, plus those little extras that make retirement special.
 
Financial experts generally calculate that you need between 70% and 85% of your pre-retirement income to maintain your lifestyle. Even if you were diligent about saving during your working years, it’s likely that your investment portfolio has not yet fully recovered from the recession, and returns are still lower than you expected them to be. How do you ensure that your nest egg is big enough to meet ongoing expenses?

Significant Future Income Increases Are Unlikely

Your future income will be a combination of Social Security benefits and the systematic liquidation and withdrawal of your retirement assets over the remaining years of your life. At age 65, you can expect to live, on average, another 19.1 years, according to the Centers for Disease Control and Prevention (CDC). If you are genetically gifted, however, you may live to 100 or longer – the number of centenarians in the U.S. rose to 53,345 in 2010, a 65.8% increase from 1980.
 
Your initial retirement calculations were probably based upon an annual withdrawal rate of 4% of asset value, a figure most financial planners had generally agreed would provide a stable income for 30 years. Nowadays, however, that percentage is considered by some to be too liberal. Recent studies have suggested that in the current economic environment, withdrawing income at a 4% rate could increase the risk of depleting your assets during your lifetime. Since the level of your future income is uncertain and may be lower than originally anticipated, it would be prudent to reduce your living expenses where possible so that less income is needed to provide the same quality retirement for your remaining years, however long that may be.
 
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