As corporations and the government continue to shift the responsibility for retirement savings to workers, employees at all economic levels must develop a personal plan to ensure a financially secure retirement. In Double Your Retirement Income, financial professional Peter Mazonas provides readers with the tools and information needed to overcome retirement obstacles. Beginning with a broad overview of the economic realities readers will face, this comprehensive guide helps them take a step back and make an honest assessment of what it’s going to take to retire on their terms. Filled with in-depth insight, expert advice, and illustrative charts and graphs, Double Your Retirement Income shows readers how to effectively manage Defined Contribution Plans, understand Defined Benefit Pension Plans, buy and hold a balanced portfolio of no-load, and much more.
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About the Author
PETER MAZONAS has thirty-five years of experience as a tax and financial consultant and wealth manager. A CPA, he founded the Executive Financial Counseling Division at Bank of America and also created their Private Banking Division. Mazonas also founded Transamerica HomeFirst, a reverse home mortgage company. He is currently a consultant to financial service companies on wealth management, product design, and customer service.
Read an Excerpt
Double Your Retirement Income
By Peter Mazonas
John Wiley & SonsISBN: 0-471-71401-1
Chapter OneFacing Reality: What's It Going to Take to Be Able to Retire?
Seventy million American workers and their families are dependent on their individual ability to save enough during their work years to fund their own retirement. The average 60-year-old worker with 30 years of continuous service has only $146,000 of retirement savings, enough to add only $400 per month of income on top of Social Security. This has occurred because the average worker changed jobs 9.6 times in the 1980s and 1990s, often forfeiting eligibility for retirement programs. The problem is multigenerational, but the baby boomers (born between 1946 and 1964) will be the first to be confronted with this harsh reality. The oldest of the 80 million baby boomers will begin to reach age 65 in 2011, but more than half of them will not be financially able to retire.
Let's examine the root of these problems, the probable outcome of these cumulative misdeeds, and the winning strategies you can initiate now to avoid becoming a poor retiree.
The One-Way Tide of Change
Ever since the early 1980s, the financial ground rules for retirement have been changing. Employers have quietly been shifting the responsibility for retirement savings from the corporation to the individual worker. This self-serving shift created a short-term boost to corporate earnings and share price and filled budget gaps ingovernment spending, but was not accompanied by a sufficient caution to workers that if they did not force themselves to save, their retirement income would be limited to Social Security and the proceeds from selling their homes. Employers and policy makers who have had the most to gain from shifting this funding responsibility to employees have done so silently and without intervention by regulators. The time for silence is over.
Today 80 percent of American workers must rely on self-directed contributory pension plans to fund their retirement. In addition to the plans commonly known by the Internal Revenue Code sections that established them-401(k), 403(b), 457-there are individual retirement accounts (IRAs) and other contributory pension plans. Simply put, if you do not contribute to these plans out of current income, you do not develop any retirement savings. If you are over age 30 (and don't stand to inherit a substantial sum of money), you must make retirement saving a central issue or you may never be able to retire. It's that simple.
Balancing home expenses, children's education, and retirement savings necessitates a plan. In this chapter we look at the economic realities facing you while developing a strategy to help you reach your goals. Once you decide on a strategy, your job is to be consistent in how you save and how you invest.
Most of us hope for:
* Our own house.
* A comfortable lifestyle.
* Well-educated children.
* Good health care.
* Retirement years to pursue favorite or new activities.
Achieving all or most of this is a tall order requiring discipline and planning.
Some common myths often prevent people from achieving these goals. Each myth will be examined, and either dispelled or put in perspective:
* I can't save any money.
* I will never be able to afford my own house.
* I earn too much to qualify for college financial aid.
* Scholarships are for only the best students.
* I can't afford to send my child to an expensive private college.
* When I start, I will be able to save enough to retire.
* Strong future economic growth will bail out my mutual fund portfolio.
* I will postpone retirement until age 70 when I will be more financially able to retire.
Baby boomers came of age in an era of abundant housing, access to new model cars and merchandise for every need. Their freewheeling consumption transformed our nation and the rest of the developed world into a consumer-driven economy. The economic run-up to the bursting of the tech bubble in March 2000, combined with events since then, has changed this country to our, and most likely our children's, detriment. Seven key elements affecting our changing economic climate are:
1. Executives and the stock prices of their companies get punished if quarter-over-quarter earnings don't beat analysts' expectations.
Result: Companies cut costs (jobs) and don't add them back until there is shareholder perception that the economy has turned positive.
2. Much of the tech boom was fueled by companies investing in automation that promised near-term positive impact. But the positive impact took years longer than anticipated to be successfully realized by these companies.
Result: Many of the 2.7 million worker layoffs in the past three years may well be permanent, resulting from technology allowing people to work more efficiently and moving jobs offshore as the so-called positive impact trickles down in companies. Of the nine million out of work, 20 percent are managers and specialty workers.
3. As a nation we are on a track to annually spend 4 percent of gross domestic product (GDP)-the sum of all the goods and services we produce-while collecting only 3 percent in taxes and other revenue to cover our costs, meanwhile just selling more bonds to other nations.
Result: Escalating debt and the loss of confidence in our economy by other nations may push interest rates up, affecting housing prices and the cost of corporate debt for continued expansion and adding more volatility to the stock markets.
4. In 1980, 58 percent of American workers' pensions were provided by company-funded pension plans. Today only 13 percent of American workers' retirement depends solely on these vanishing defined benefit company-funded pension plans. Eighty percent of American workers today rely on their own contributions and some employer matching to provide for their retirement income.
Result: Seventy million American workers and their families are dependent for retirement on their individual ability to save, plus modest matching contributions from employers. Although they should be better informed, many of these workers have no idea how much money they must save in order to retire.
5. In the mid-1990s, Larry Kotlikoff, a professor of economics at Boston University, predicted that baby boomers would inherit $10 trillion from their parents in the greatest wealth transfer in the history of the world.
Reality: The stock market plunge and the continued reduction of corporate and government spending on programs for today's middle-class seniors have brought new meaning to the bumper sticker: "I Am Spending My Children's Inheritance." Today only 15 percent of boomers surveyed by AARP expect to receive an inheritance. The average baby boomer stands to inherit $90,000, with the median at $30,000-not a meaningful supplement to retirement savings.
6. It is estimated that large employers will pay only 10 percent of retirees' medical costs by 2031, as opposed to 68 percent coverage in 1988 and 38 percent medical cost coverage for retirees in 2003. Over the same period the cost of Medicare Part B health insurance will escalate from 6 percent of Social Security payments to 10 percent-a 70 percent increase.
Result: The Employee Benefit Research Institute (EBRI) estimates that a 65-year-old who retires today and lives to age 80 will pay well over $100,000 for health care. Aretiree living to age 100 can expect over his or her retired lifetime to pay $700,000 for health care.
7. Eighty million baby boomers, the oldest of whom are age 59 and will start retiring in six years, expect to start collecting Social Security and participating in Medicare.
Reality: During the baby boom era, six workers paid into Social Security to fund the benefits for each worker who had retired. By 2011 there will be only 2.8 workers funding the benefits anticipated by each retiring worker. The Bush administration is waging war against the AARP and its 32 million members over the future of Social Security.
Shocker: A study prepared in 2002 for Treasury Secretary Paul O'Neill, but never released by the government, predicts a $44 trillion budget shortfall in Medicare and Social Security (now $51 trillion because of the new Medicare drug benefit), based on current government revenue and spending. Put in perspective, this is the equivalent of one entire year's world GDP, or, closer to home, the equivalent of all the money that would be collected from a fire sale of all stocks, bonds, and residential real estate in the nation. As Larry Kotlikoff points out, this gap can be closed only by major tax increases and/or spending cuts. Martin Feldstein of Harvard University adds to this list "or change the way we finance the system." The latter method means contributing more for benefits you already paid for, plus a dramatic reduction in future benefits.
Bigger Shocker: Today, the portion of our official cumulative national debt amassed through good and bad times since Benjamin Franklin's times in 1776 is about $14,000 for each man, woman, and child in the country. Add the future impact of Medicare and Social Security and it explodes to $159,000 if paid today-more than the $146,000 the average 60-year-old has saved for retirement. Wait 15 years to pay it and the amount swells to $76 trillion with interest (more about the positive effects of compound interest later).
Changing also is the composition of the average household. While married couples account for 50 percent of households, breadwinner dads and stay-at-home moms now account for only 1 in 10 households. 21 Sixty-two percent of two-income households have children between the ages of 1 and 6. They believe they can start saving for retirement after they satisfy their near-term home and family needs. Unless they change their saving habits by age 35 and certainly by age 40 when they have their first home and two kids, they won't be able to put enough away in their 401(k) type accounts to retire at age 65. This is where the two-income household has a distinct advantage if it contributes to two retirement plans. Unfortunately, much of this extra money goes to support a lifestyle. Being able to just pay the bills leaves very little to save for anything, let alone retirement-a concept way out in your distant future.
Saving is difficult when at every turn another need is tugging on your wallet. You do this by learning what you will need financially to attain each goal and alternative ways to pay for it. By balancing reality with both your short-term goals and the desire to put something away for the long term, my aim is to keep you focused on your biggest, most often overlooked long-term need: retirement savings.
Imagine the Year 2025
Fast-forward to the year 2025 when the oldest of the nation's 80 million baby boomers begin to turn 80.
For many middle-class baby boomers this is the year they never expected to see. After all, the actuarial tables all say one-half will be dead before age 80, so most continued to live as if they expected to be in that half. In more than 70 percent of married couples, however, at least one spouse will survive to age 85. No matter that 50 percent more women than men will be alive. Generally, men managed the family money and spent it with only a subliminal fear of the future.
Baby boomers have always been an optimistic generation full of denial about their long-term future. Too late to make a difference, most baby boomers either began to save too little for retirement or threw their hands in the air and continued to rely on the system to protect them. They didn't notice the muted cries to save, nor did they pay much attention to the sleight-of-hand actions in Washington shrinking the social safety net by privatizing programs long thought to be entitlements. These collective misdeeds have coalesced to create a new breed of once middle-class seniors facing poverty without a safety net, but with 10 plus years left to live.
A succession of bad bets by both past administrations in Washington and many ordinary Americans will have made our country a vastly different place by the year 2025. China, India, Europe, and Japan have reacted harshly to the debt our government has taken on by forcing interest rates to an all-time high. These prolonged high interest rates have put a damper on business output and new housing while driving the stock market to uncustomary volatility. All of this world economic turmoil has caused a de facto devaluation of the dollar. The dollar has lost one-half of its value relative to the yuan (China), the rupee (India), and the euro since 2004.
As many people had predicted back in the 1980s, Social Security has failed. The program still exists, but the payout has shrunk to almost nothing relative to the current cost of living. Although in 2005 a married couple could receive $18,000 annually from Social Security, government policies to reduce cost-of-living increases have eroded Social Security's spending power. Legislation passed in 2010 has fully privatized Medicare. But without effective cost controls and with no limits on co-payments, seniors can no longer afford coverage, or have been dropped by insurance companies that are abandoning markets and discontinuing coverage. Meanwhile, medical science is keeping us alive longer, further focusing attention on health care management issues (living with Alzheimer's, arthritis, etc.).
As the illusion of a social safety net disappears, individuals must rely on their own savings.
Seniors with formerly parallel lifestyles now regard each other from opposite sides of a great divide separating the haves from the have-nots. The haves, the minority, either had retirement provided by a big employer or were disciplined savers and took advantage of corporate matching in their 401(k) type pension plans. The other group, the have-nots, to differing degrees, did not put enough money away, nor did they have enough to put away in the first place. Worse, they did not learn how to manage what they did have. They continued to buy mutual funds with high management fees that underperformed the markets and further eroded their savings. They have spent or lost much of their retirement savings.
A new generation of 15-year fixed-term reverse mortgages has come to the rescue, allowing seniors at age 65 to spend the equity in their homes; however, at age 80 the monthly payments to them are stopping before they are ready to move out. Seniors who sought to improve their lifestyle by jumping on this bandwagon early are about to lose this lifeline. Their loans are coming due, and the banks are going to take possession of their homes.
Seniors in this predicament are threatened by a radical change in their living arrangements. With their savings mostly depleted, their possessions sold, and their house gone, these seniors will be forced to rent in a more communal living situation. Widows are especially threatened by unfortunate compromises to their comfort and privacy.
Unprepared for this new form of retirement, seniors are forced to compete for minimum-wage jobs. The same employers who switched to contributory-type pension plans as a way to shift the retirement funding liability to workers now exploit these seniors as part-time workers without providing benefits. As always, the savvy get richer and the legions of poor keep growing.
Excerpted from Double Your Retirement Income by Peter Mazonas Excerpted by permission.
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Table of Contents
Chapter 1: Facing Reality: What’s It Going to Take to Be Able to Retire?
Chapter 2: Budgeting: Finding New Money to Save for Retirement.
Chapter 3: Two-Income Households: Affording a Home and Retirement While Avoiding Bankruptcy.
Chapter 4: Buying a Home.
Chapter 5: Paying for College with Other People’s Money.
Chapter 6: Your Pension Plan = Your Retirement Lifeline.
Chapter 7: The Winning Investment Strategy for the Twenty-First Century.
Chapter 8: Taxable Investing.
Chapter 9: Retirement Redefined.
Chapter 10: Tips to Remember As You Develop Your Strategy: Your Semiannual Checkups.