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Managing INCOME in RetirementPlanning With Purpose
By Kevin R. Sullivan
AuthorHouseCopyright © 2012 Kevin R Sullivan
All right reserved.
Chapter OneThe Retirement Landscape
There are over 77 million reasons why you should read this book. If you're a Baby Boomer, nobody has to tell you that you are. There have been countless books written about you, to you and for you. It seems that everybody has you in their sights from exercise videos to business opportunities, to convenient diets, the clothes you wear, the cars you buy, the homes you purchase, the second homes you want, the lifestyles you wish to live, to the legacy you wish to leave. There are almost as many books written to your generation than the expansive number you represent in our country. There are over seventy seven million baby boomers of which approximately 10,000 of per day will turn age 65 for the next 19 years (SOURCE: "The American Dream"). We've seen your generation create, innovate, accommodate, and drive changes in our country and over the entire world. Your generation's effect has been felt in every walk of life, every product we sell, every business run, and every subject around the kitchen table. It's not hard to spot a generation of 77 million people strong. Retail companies saw you coming and developed products and services just for you. From Gerber baby food, the hula hoop, Levi Jeans, to the latest social trends, you have changed the course of history and left your mark on today's world economy.
Baby boomers control over 80% of personal financial assets and
More than 50% of discretionary spending power. (The Cowling Report Sept. 30, 2011 Baby Boomer Facts)
They are responsible for more than half of all consumers spending.
They buy 77% of all prescription drugs,
61% of over the counter medications and
80% of all leisure travel (Baby Boomer statistics on population)
If you think our baby boom generation is huge, you may want to check out China's. As of a 2010 census, there are over 50 million men and 55 million women in China age 65, and over, right now. China's population is just under 1.4 billion people in 2010 (Source: 2010 census, Wikipedia). Now that's a boom!
As people age, needs change. There are changes that are going on daily as it pertains to the needs of baby boomers and the world at large. It's been said, "the only constant, is change". If you're not willing to accept change, you'll get blown away and left behind while the world advances without you.
How does all this relate to "Managing Income in Retirement?" This is what we will discuss throughout this book. However, before we get into that, let me share with you some top concerns of baby boomers, according to a research report by Allianz, in 2010, called "Reclaiming the Future."
61% of Americans ages 45-75 said they were more afraid of outliving their assets than dying. That number rose to 82% for those in their late 40's with dependents.
People can no longer retire on what were once considered "secure sources" of retirement income such as defined-benefit plans. This means that many more people now are "PERSONALLY RESPONSIBLE" for their retirement saving, leaving them vulnerable to market fluctuations. (Advisor Today 2010)
92% of Americans ages 45-75 think there is a "Retirement Crisis." That number rose to 97% for those in their late 40's.
32% of pre-retirees feel "OVERWHELMED" and are in survival mode and feel unprepared for retirement
27% are "RESILIENT" and have a "take charge" attitude. However, they are worried about outliving their income.
20% are "ICONIC" and feel that they are prepared and confident their income will last throughout retirement.
14% are "SAVVY" and are either living comfortably in retirement or will retire comfortably.
7% are "DISTRACTED" and have seen their net worth drop significantly, but haven't changed their course.
These, above all, are startling statistics but it only begins to tell the story. It only begins to start to show the challenges that await you as you move into your retirement years. Which one are you? Are you overwhelmed, resilient, iconic, savvy, or distracted? There is hope, but you have to plan for your success.
To break it down to brass tacks (as my mother used to say), the top two baby boomer concerns are: (Inflation Baby Boomers' Top Concerns, Jonathan Burk, May 2008)
1. Outliving their money
2. Healthcare costs
Other top concerns of baby boomers are:
Having enough energy to do what they want
Overall financial "health"
Taking action to prevent disease
Getting good advice from doctors
Baby boomers are faced with many challenges as they move into their retirement years. With the looming deficits in the United States and other concerns abroad, such as, the possible Greece default or even bankruptcy, to the unrest in the Middle East in Egypt, Syria, Libya, Iran, Iraq, Pakistan, and Afghanistan, it sure has given all of us reasons for concern. Our deficits in the United States are staggering and it seems like the news media and politicians throw around the "T" Word (trillion) like it's just another hundred dollar bill. Most of us cannot even fathom what one trillion dollars is, let alone what it looks like or what one trillion dollars is capable of doing. As nice as Megabucks or Power Ball seems, those numbers of lottery winnings are only in the millions, let alone billions, and certainly not trillions.
Here is a sample break down of what one trillion dollars would look like: If you wrapped one hundred dollar bills together in bands of ten thousand dollars, you could fill a brief case with one million dollars. One billion dollars wrapped in this way could fit in a regular sized SUV. One hundred billion dollars could fit in an average school bus if you took out all the seats, of course. Here's the staggering part. The giant leap to one trillion dollars, would have these same ten thousand dollar bands of hundred dollar bills fill an entire football field about six feet high. Layer the enormous United States deficit of approximately fifteen trillion dollars and you can see what we'd have to do with our illustration. One football field completely covered, ninety feet high. If congress cuts a mere program that saves one hundred billion, would that make any dent in the deficit as I just described? Would it shave even one layer of hundred dollar bills off the top of this massive football field, ninety feet high? Our new "Super Committee" in congress, certainly has their work cut out for them.
To find out what our national debt is in "real time" go to www.usdebtclock.org. Here's a sample of what the website looks like:
Dave Ramsey, whom I admire greatly, recently broke down what our current U.S. deficit would look like to the average American family.
If the U.S. government was a family, they would be making $58,000 a year. They spend $75,000 per year and are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their level of spending to $72,000 per year.
You and I both know that if we ran our household budgets like this, we'd be in the bankrupt line before even showing up to the unemployment line. $58,000 a year of earnings, and we'll reduce our spending to $72,000? That's some fuzzy math, for sure. How long would it take a family to pay off credit card debt of $327,000 on that annual income? How about never!
Do you know how long it would take to count to one trillion? One may say, one trillion seconds. However, that's not the case. It is impossible to count to one trillion with one number in each second. The larger the numbers are, the longer they take to pronounce. According to University of Houston, Jim Granto, it would take more than 31,000 years to count to a trillion under this hypothesis. Therefore, we cannot take the "T" word lightly.
I have spent my 23 years as a financial advisor and business owner trying to help my clients "increase their financial knowledge" at every turn. No longer can you stay seated and expect things to turn out right for your needs and goals. You have to begin to take an active role in your investments, your planning, and the execution of your goals.
"You have to begin to see yourself as the CEO of your own financial empire and plan accordingly." Kevin R. Sullivan
Since the 1980's, traditional pension plans, also known as defined benefit plans have dwindled considerably and the rise of the 401k took off to where it is today. Under a defined benefit plan, your company would have a determined retirement benefit waiting for you when you retire. As the name indicates, there is a "defined benefit" for you as a worker. Think of your parents who had a Ford, GM, or XEROX pension. They worked for 25-30 years and walked out the door with a pension. With longer life expectancies requiring companies to pay pensions longer, the need to make some changes were evident. Then there is the issue of unfunded pension liabilities that companies have to make good. For instance, if your company was planning on a 7% return on the pension funds, and they only received a 4% return, they would have to make up the difference and "fund" that pension to bring it back to good standing. Funding pension liabilities was what GM struggled with in their program. It was extremely difficult to pay workers who were already retired with longer life expectancies against the back drop of earnings on the pension funds.
Thus, many companies in the 1980's started introducing "Defined Contribution" plans. This put the ownership and responsibility back on the worker to make a "defined contribution" to their retirement on their own behalf. It took the responsibility off the company and placed it back on to the worker. Now workers had to set a contribution without knowing what the outcome would be. Companies started to match employee contributions with a 3% or 4% match, to assist in retaining good employees, and helping them reach their goals; but the corporations didn't have the end responsibility for your personal retirement.
Under ERISA, (Employee Retirement Securities Income Act, 1974), financial advisors cannot provide "advice" to 401k plan participants. They can only provide "guidance," and there is a difference!
"Advice" states that you should put your money here; invest this way; do it like this. "Guidance" is a broad brush like saying "most 30 year olds invest in growth because of the time they have to stay in the markets before they retire." It's more like speaking in generalities versus specifics. This makes it hard for people who "just want to know what to do." There are numerous questionnaires you could fill out to try to find your risk tolerance, but barring that, no advice on a 401k plan is given. "Take the quiz, find out what your allocations should look like based on your answers to the questions, and find the nearest match in your 401k line up", they'd say. Doesn't that make you feel good?
According to the Bureau of Labor Statistics, in 1974 nearly 31 million workers were covered by private pensions, with 27 million enrolled in defined benefit plans. Private retirement plans had become the major source of income for many retired workers. Back then, your parents in fact, did work for a company for 20-30 years. According to The Numbers Guy, a report from September 4, 2010, the widely held number of careers you'll have in a lifetime is seven and maybe even more. If you're like one of these people in this statistic, you'll have changed jobs or careers seven times or more in your working lifetime. This is another reason why defined benefit plans are becoming more obsolete. Other factors complicating this pension process was keeping track of all the information through participant requirements, vesting, break-in-service provisions, survivor benefits, requirements for normal retirement, requirements for early retirement and forced retirement. You can see how challenging the whole process is. For some, you may not care and wish you had one of these traditional pension plans for yourself. I cannot blame you for that. Most of us are simply looking for some certainty in an uncertain time.
As you approach retirement, you'll need to locate your sources of guaranteed income. Pensions are one source of guaranteed income, along with Social Security. However, those two by themselves may not be enough to sustain your current lifestyle or your needs, for that matter. In most cases they won't.
Financial planners have stated for a long time that you should plan to hit a target of approximately 75-80% of your pre-retirement earnings to live comfortably in retirement. I would suggest that you find a way to plan for 100% of your pre-retirement earnings. Could you cut your budget down to the 75%-85% range right now if you retired today and survive; maybe, but most likely not. The cost of living never gets any cheaper, prescription drugs do not get less expensive; neither does your heating bill, electricity bill, car payments, etc...
401k plans entered the scene which is what a "defined contribution plan" is. You were thrust into a menu of investment choices to choose from with little or no experience as to how to make sound financial choices for your needs. There was nobody in an office at your company that had the heading on the door, "401k Specialist." You had to rely on the materials that were provided to you by the company or by calling the 800 number to the 401k plan provider. If you were lucky, there would be a team of professionals that would come into your company once a year to give an "investment workshop." They may have shown great knowledge of the plan, but sometimes delivered that knowledge in a way that was difficult to understand. I can vouch for that, as I have had numerous clients, and participants tell me over the years, that a lot of financial advisors talk over their heads. "They're more interested in showing off their knowledge, rather than helping me understand what it means to me", they said. It can be tough though. If someone came into my office once or twice a year and started telling me how to be an engineer, I'd have a hard time following what they were trying to say. I wouldn't understand their career, or the industry, especially if they used engineering "lingo."
Before I get every financial advisor in the United States mad at me, there are thousands of financial advisors that do everything in their power to break things down in understandable terms and concepts and are extremely successful in doing so. This is a great profession and one that I am very proud of. It is a very rewarding profession in that I have a direct impact on my clients' lives let alone their financial lives. Every day I strive to make their lives a little bit better through the advice I give and the attention to the unique details of their lives. People don't really care how much you know, but they do care about how much you care and how much you can relate what you know to a level they can identify with.
So here you are, trying to cope with the stock market and bond markets on your own and trying to figure everything out. Embarking on a 401k defined contribution plan was and sometimes feels like you're shooting in the dark. You're charged with the personal mandate to take care of yourself, plan for your own financial future and you have no idea how that's going to turn out. Then given the fact that you have no control over the stock market, makes the task seem daunting at best. As we go through this book, always remember this when investing and your behavior towards investing:
You cannot control the markets, but you can control your reaction to the markets.
It's how you respond to the markets "ups and downs" that will make all the difference in the world. If I could summarize the words of the great portfolio manager, Peter Lynch, it would be this: Investment performance is determined by your behavior after you've made the investment rather than the investment itself.
What will retirement look like for you?
Will you continue working?
Will you postpone your retirement date
Will you take Social Security at age 62 or wait until you're eligible to receive full benefits?
Will you turn your hobby into a small business opportunity?
Will you return to your former employer as a consultant in the same line of work you used to perform?
Will you move in with your children?
Will you travel across America?
Will you work as a greeter at Wal-Mart?
These are real life questions that you need to force yourself to think about. I say "force" because it is human tendency to put these off and not deal with them when they need to be dealt with the most. Actually, a fact is the sooner the better. It's always better to act "sooner" than later! People who plan have choices later on.
I remember getting into the business when I was 23 years old. I saw some investment materials that illustrated a younger person filling out a check and putting it into his mailbox, an investment he was making in his future. The illustration then showed the "older person" of the same man years later, coming to his mailbox, taking out the envelope from his mailbox of monthly income.
That had such an impact on me at an early age. It became a lifetime quest to send money on ahead and to tell others to do the same. More importantly, show them how to do it. To take it a step further, to show them how to stick with it through good times, good markets, bad times, and bad markets. At the end of the day, the impact I have had on countless others over 23 years has been profound. It's what drives me daily to come into the office and ask "who's next?" Taking care of people is of utmost priority.
Excerpted from Managing INCOME in Retirement by Kevin R. Sullivan Copyright © 2012 by Kevin R Sullivan. Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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