Allen Ostrofe: Gen X’ers, Millenials, Boomers biggest obstacle to retirement … you!
Matt and Ingrid, husband and wife, born 1948, called last week, worried about their pending retirement. Both decided to retire at age 62, because it “Felt like the right thing to do!”
Ingrid, a retiring engineer, saved in her tax-deferred 401k, only up to the matching level of her employer. Matt, a professor, relied only on contributions made for him in his CalStrs tax-deferred pension plan. Both qualify for future distributions from our Social Security program.
They are the “sandwich generation,” taking care of both their kids, and aging parents at the same time. Neither had a professional calculation what it would cost to retire. Neither considered augmenting their retirements with savings to protect them against potential future medical costs not covered by insurance (a subject very sensitive to them, since they have been caring for parents for the last three years).
How do we avoid that being us?
Consider four action items:
Ask your Certified Financial Planner to create a “cash flow analysis” projecting your income and expenses, adjusted by inflation and investment rates of return to determine what dollar amount (aka “your number”) of monthly contributions you need to retire. Growing your accounts, and investment account management are important, but cash flow will now be number one.
Be cautious about your confidence in the underfunded portions of your retirement. Large public plans like The California Public Employee’s Retirement System currently has just 68 percent of what they need to pay future benefits. The California State Teachers’ Retirement System is even worse with only 35.5 percent of what it needs (Wilshire Consulting, Dec. 1, 2016). Social Security is woefully underfunded, and was never meant to be your primary source of retirement. (Vanguard Funds May. 21) Ask your advisor for a personalized Social Security calculation as to when (between ages 62 to 70 years) is your “optimal financial start date.” Relying on underfunded plans, alone, is not prudent planning.
Once you know your number, seek help in identifying additional tax-deferred or tax-free retirement options to make up your “shortfall.” Consider adding more to your 401k, than only the amount being matched by your employer. Consider additionally making Individual Retirement Account contributions whether they provide a write-off, or not. Consider whether you qualify to make Roth IRA contributions. Consider whether you qualify to make 403b (Tax Sheltered Annuity) contributions (eligible may include teachers, non-profits, hospitals, etc). Self-employed? Consider a “Simplified Employee Pension (SEP), or a “Solo 401k Plan”, which are generally open to employers with no employees. In many cases, individuals can contribute to not just one, but two of the above at the same time. Most importantly, fund the above with automatic monthly contributions, leaving nothing to memory. Pay yourself first!
Be mindful that once we reach age 70, over 20 percent of our expense, on average, will be directly related to healthcare (Wall Street Journal Oct. 16, 2016). Check with your advisor whether you are eligible to set up a “Health Savings Account” to invest tax-free for future medical costs. And since we, on average, have a 60 percent chance of someday needing long-term health care (Lincoln Life April. 25), which is not covered by Social Security, Medicare, or ordinary medical insurance, ask your financial advisor whether a “Traditional Long Term Care Policy”, or “Asset-Based Long Term Care Policy” is an option to protect you and your beneficiaries.
Every day, 10,000 Americans retire, changing strategies from accumulation to distribution. The Chinese have a savings rate of 50 percent, Americans only 5 to 6 percent.
Winston Churchill said it best, “Americans always do the right thing … but only after exhausting all other options!” Investment behemoth, Vanguard Funds states that we can get 1.5 percent more performance out of our retirement investments by behavioral management … getting out of our own way. (Vanguard Funds May. 21).
Are you ready to change your financial behavior?
The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by Notional Principal Contract (NPC). To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
Health Savings Account withdrawals used for non-qualified medical expenses may be subject to ordinary income tax and if taken prior to age 65 may also incur a 20 percent federal penalty tax. Excess contributions are taxable and may incur a penalty.
Allen Ostrofe, MBA, CFP®, Accredited Investment Fiduciary® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor, managing over $208 million in assets, with clients in 29 states. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.
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