Brightening the Finances for the Golden Years : Retirement: Senior citizens often spend their nest eggs before realizing the benefits of financial planning.
An elderly widow, left with a sizable stock portfolio, refuses to make any changes for fear her late husband wouldn’t approve. Her frozen finances ultimately spell fiasco.
A retired grocery-chain owner continues to turn over hundreds of thousands of dollars in certificates of deposit. Despite substantial taxes on the interest, he enjoys the sense of power of personally negotiating rates with bank officials.
A paper company executive is nudged into retirement six years early and left with 40% of his final salary the first year. Can he continue to support himself and his wife in their accustomed style or must he find a new job?
It has been said that the only difference between the “olden” and the “golden” years is one letter--the one from Uncle Harry making you his heir. Yet even people of means can get confused or anxious about money for want of financial education or counseling.
Workers now live longer and retire earlier than their ancestors. A quarter of one’s lifetime may be passed in retirement. Money--how long will it last?--becomes the second most important concern after health, say sociologists. Though there is undoubtedly more financial advice available today than ever before, little is specially tailored to retirees.
A fortunate few can afford to entrust their money matters to lawyers, accountants, brokers and bankers. At the other end of the scale, government or community-sponsored credit counseling and bill-paying services are offered for the poor, as well as state-appointed guardians for the incompetent.
That leaves the majority of the older population ill-served on managing money, from budgets to investments.
Investment advice in popular books too often consists of explaining “types,” such as Treasury bonds or commodity futures. Newsletters with investment recommendations are directed at all ages. Consumer-oriented financial seminars often are too general to serve as a guide for individual money management. Moreover, they frequently are vehicles for selling products.
Personal financial planning, which can cost thousands of dollars, primarily is geared to the accumulation of wealth through saving and investing to reach certain goals: reducing taxes, educating children, providing for retirement. The next event, chronologically, is estate planning, which may not become applicable for 20 or 30 years. What about the interim?
Medicine and law have gerontology specialties; but few financial planners yet devote their practice to seniors.
“I think it will become a specialty in the future,” predicts Patricia Tengel, who runs a Montgomery County seminar on money management for women, sponsored by the U.S. Department of Agriculture and the American Assn. of Retired Persons (AARP).
Pre-retirement counseling comes closest to educating people on how to manage their money for the rest of their lives.
“It’s not unusual for a long-time employee earning $25,000 to get a lump sum of $350,000 (from pension and savings plans),” says Charles Katz, president of University Research Associates, a retirement planning firm in Tempe, Ariz. “Often people like that don’t have a clue as to how to make their benefits last 25 to 30 years.
“It’s scary,” Katz says, “how they go out and buy a new luxury car and a vacation home, and in a matter of a few years (their nest egg) is gone. So financial education is invaluable even at that stage.”
Yet only 10% to 20% of all corporations offer financial planning-counseling on the eve of the golden handshake. Half of those, notes Katz, hire financial institutions or planners to provide the free service, often in exchange for not-so-subtle product promotions, such as annuities or mutual funds.
Failure to plan adequately is reflected in a recent study of 6,000 union members who voluntarily retired before age 65. Almost a quarter thought they had retired too early for a number of reasons; the retiree’s deteriorated financial condition was a major factor, notes Philip W. Wirtz, George Washington University associate professor of management and one of the study’s authors.
“It’s a black hole,” says Jim Thompson, AARP’s manager of consumer affairs, referring to the dearth of financial guidance in retirement.
Light may be about to be shed, however: Madison Avenue has discovered the mature market. Wall Street and Main Street are not far behind. Innovations such as tax-deferred annuity certificates and reverse mortgages are pitched to seniors along with municipal bonds. Increasingly, customers are targeted not only by age group, from pre-retirees to the frail elderly, but also by affluence and life style.
Sen. Lloyd Bentsen (D-Tex.) has suggested that the surtax on Medicare catastrophic illness premiums could be lowered because of higher revenues due to the “previously understated number of elderly in higher income classes.”
The average net worth (assets minus debts) of the population over 55 was $208,000, according to a 1986 survey by the Federal Reserve Board. For those over 65, it reached $238,000. The average is pushed up by a few extremely wealthy people who “own the world,” says survey director Arthur Kinnickell. (Median figures give another picture. Just half of Americans aged 55 to 64 had net worth of over $74,000; for those 65 and up, half had more than $55,000.)
How much money you will get in retirement depends mainly on your pension and investments. The Bureau of Labor Statistics (BLS) reports that income for those 65 to 74 averaged 63 percent of that of those a decade younger.
Householders 55 to 64 had an average annual income of $28,413 in 1986 and spent 84 percent of it. In the 65-74 age group, income amounted to $17,893, of which expenses ate 94%.
How much will you realistically need? The bigger your working income, in general, the smaller the percent required to maintain the same standard of living. A couple earning $50,000 would need 75 percent--or $37,500--$9,000 of which would typically come from Social Security benefits, $17,500 from a corporate pension and $11,000 from savings, according to Lawrence J. Kaplan, author of “Retiring Right.” On an $80,000 income, the post-retirement equivalent is $48,000. A single person earning $50,000 would need about 65 percent of that.
Estimates are based on the assumption of lower expenses. On average, BLS reports, expenses for those aged 65 to 74 amounted to 71% of those a decade younger.
However, Margaret Miller Welch, a certified financial planner with Alexandra Armstrong Advisers in Washington, observes: “My clients’ needs up to at least 75 seldom decrease unless there is ill health involved. Most . . . are quite active travelers, theatergoers, like to eat out more often and their expenses remain as high after retirement as before.”
The overriding question of how long the money will last depends on how it is invested and how spent. Four of five traditional corporate plans offer retirees annuities rather than lump sums; other retirees buy their own. The chief advantage of annuities is safety, usually a guaranteed sum for life. But they make little sense financially, since inflation erodes annuities.
How seniors safeguard--or squander--their assets was studied by Jeanne M. Hogarth, Cornell University assistant professor of consumer economics and housing.
Her surprising discovery was that eight years into retirement nearly half (46%) of the sample had higher assets. The other half spent down their assets, 20% of them doing so at a rate that guaranteed they would run out of money if they lived as long as expected.
The assets consisted of stocks, bonds, savings, insurance and real estate. Hogarth looked at four typical ways of handling them:
spending all the interest but not the principal;
saving 5% of the interest and spending the rest;
saving all the interest;
spending down in proportion to life expectancy, called “annuitizing.”
Annuitants obviously had the most money left after eight years. Those aside, she found that saving all the interest or reinvesting stock dividends--the most “risk-averse” strategy--turned out to be the worst way because during that inflationary era (1971-79), retirees tended to keep money in bank accounts and other low-yielding investments.
In fact, most people saved a small portion of the interest and spent the rest. The increase in assets primarily was due to the rise in property values.
Figuring an annuity is easy with the help of a table showing life expectancy, interest rate, and percent of principal and interest withdrawn. For example, if you keep $10,000 in a certificate of deposit at 8%, you can withdraw $1,000 annually for 21 years. (The average 65-year-old male is likely to live 14 more years; the female, 18 years.)
Apportioning funds again varies with age and financial status. Judith Headington McGee and Jerrold Dickson, authors of J.K. Lasser’s Personal Investment Annual, recommend budgeting 70% of income for living expenses during the working years, 20% for items such as education and travel and 10% on savings and investment.
In early retirement, she says the 70% could dip to 50% for upper-income people, enabling them to conserve wealth. Over age 75, medical bills typically amount to 15% of expenses, eroding savings.
Conventional wisdom says a worker should keep six months’ salary in the bank in case of emergency. For retirees, Hogarth says, two months’ income in the bank is sufficient if he or she has access to credit, health insurance, a pension and Social Security.
Many of today’s elderly endured the 1929 stock market crash, the Great Depression, the closing of banks without federal insurance on deposits. Consequently, there is a tendency to keep excess cash on hand.
Hogarth found that retired households increased the percentage of their assets kept in savings accounts from half to two-thirds in later years. Probate research, notes Thompson, often reveals multiple passbook accounts of $10,000 each (the old limit on federal insurance).
AARP’s booklet “Managing Your Financial Resources in Retirement” reminds seniors that cash can be readily available from other sources, such as money market funds paying higher rates than banks and often permitting customers to write checks.
Another example is life insurance: Policies bought to protect the family in case of the breadwinner’s death no longer are needed for that or for paying estate taxes since the federal estate-tax ceiling was raised to $600,000. Thus such policies should be cashed in for extra spending dollars or a better return elsewhere.
“Many people always have believed that invading capital is reckless--almost sinful. But if you need more spending money and it is yours to take without reducing the amount of your original investment, it may be just as sinful not to take that route,” says the AARP booklet. But it concludes, “Say ‘no’ if you will be sacrificing your peace of mind.”
