Planning for Retirement - Getting Close

1. Planning for Retirement- Getting Close George F. McClure IEEE Region 3 Director IEEE Annual Meeting 2007

2. Are You Ready? • First Baby Boomers turn 62 in 2008 • But few are financially prepared to retire with 65% to 85% of pre-retirement income • 35% of Early Boomers (1946-1954) ‘at risk’ • 44% of Late Boomers (1955-1964) • 49% of Generation Xers (1965-1972) • Ratio varied, marital status, hsehold income • Ref.: 2004 Survey of Consumer Finances

3. Median Nest Egg • Household heads approaching retirement: • $60,000 in 401(k) + IRA balances • Defined Benefit (DB) pensions add to that, but fading fast • Most of working age have no other savings

4. Boomer Retirement Attitudes • Trivent Retirement Survey, 2,500 polled • Money #1 concern for 71% • Health issues #1 for 13% • No formal retirement planning for 59% • Used an advisor: 16% • Rest did own serious calculations Harris Interactive poll, 2006, ages 45-64, not retired, population-weighted, 95% confidence

5. Why More Boomers Will Work • Fewer covered by DB pension plans • Rapid decline in retiree health benefits (no ERISA mandate to provide them) • Better educated (37% grads vs. 22% pre-war) • Better health; work less physical • Need to augment the retirement nest egg • Delaying retirement by 3 years can add 30% to retirement income

6. Boomer Obstacles to Saving • Starting late in life to save/invest – 35% • Health care/health insurance cost – 32% • Salary too low – 29% • Credit card debt – 28% • Cost of housing – 27% • Medical problems – 22% • Paying for college – 16%

7. Planned Retirement Activities • U.S. travel, to new places – 45% • Spend more time with children, grandchildren – 39% • Take up hobby, craft, activity – 23% • Travel outside the U.S. – 21% • Volunteer more – 20% • Move to lower cost area – 15%

8. Working in Retirement • 43% plan to keep working • 39% will need the money • 30% want to keep busy • 16% expect work will make life easier • 13% will need the health care benefits • One wife’s quote: “I married him for better or for worse, but not for lunch.”

9. What Kind of Work? • 43% - Enjoyable, to keep busy • 20% - Whatever earns a good income • 11% - Whatever provides health insurance • 7% - Meaningful, e.g., non-profit work • 5% - Challenging or risky; new business? • 14% - Not sure

10. Personal Assessment • How is your health? Good genes? • 20% chance of 30 years in retirement • Joint life even longer, esp. if spouse younger • IRS life expectancy at age 70: • Single life: 17 years • Joint life: 21.8 years (more if spouse younger) • Minimum distribution over 27.4 years SSA Table: http://www.ssa.gov/OACT/STATS/table4c6.html Personal calculator: http://www.livingto100.com/

11. When to Draw Social Security? • Early, at age 62 (25% reduction – going to 30%) • Normal, age 66, 67 if born 1960 or later • Late, to age 70 (add 8%/year past normal retirement) – no increase past age 70 • Break-even at age 81 (with 5% return) • Benefit at age 70: 65% higher than for age 62 • Spousal benefit grows, too, if delayed Your mileage may vary- see calculator at http://ssa.gov/OACT/quickcalc/index.html

12. Earnings Penalty • Policy shift: encourage seniors working • Earnings penalty eliminated above normal retirement age • Early retirement earnings penalty: $1 for every $2 above $12,960 (2007) http://www.ssa.gov/retire2/whileworking.htm

13. How Are You Doing? • First milestone: save twice annual salary • Max out on tax-deferred savings • Employer matching is found money • It gets easier later • Use a financial retirement calculator to point the way • Spend less at Starbucks

14. Savings Vehicles • Employer deferral plans: $15.5K, indexed • IRA: $4K + $1K catch-up (if >50) • Tax-efficient mutual funds • Variable annuities – aim to grow then convert • Self-employment: SEP $10.5K

15. Planning and Calculators • Work out a retirement budget • Figure income replacement ratio (80-90%?) • Compare assets with needs • http://choosetosave.org/calculators/#retirement • http://personal.fidelity.com/retirement/index.html?refhp=pr&ut=B21 • http://www.aarp.org/money/financial_planning/sessionseven/retirement_planning_calculator.html • http://nationwide.com/nw/nrri/index.htm?wtgo=retirability

16. Getting to Medicare • Eligible at age 65; elect Part B for doctor visit coverage http://www.medicareadvocacy.org/FAQ_PartB.htm • If still employed, Medicare becomes secondary insurance • Part B premiums are means-tested now • Medicare assigns reimbursements to procedures – Diagnostic Related Groups • Not all physicians accept assignment • Financial Advantage offers Medigap plans

17. Long-Term Care • Not covered by Medicare • Means tests for Medicaid coverage, not feasible for engineers (5 year look-back) • Growing emphasis on home health care • Look at family history, own health • Financial Advantage offers LTC plans and information

18. Rolling Over • Trustee-to-trustee transfer avoids tax risk • Cash out after-tax 401(k) contributions • Sell long-held matching stock for cap gain • Isolate the transfer (separate IRA) if you may go back to another job • Track nest egg investments monthly • New issue: asset allocation • Life cycle funds?

19. Nest Egg Management Strategy • Draw on taxable assets first, wait on IRAs • Both can add to IRAs if one has the income to cover it: 2 X $5K this year • For lifetime income, consider annuities • Single life • Years certain • Joint lifetimes (cover both spouses) • Reverse mortgage another possibility

20. At 70-1/2 • Begin minimum required distribution (MRD) – Ref. IRS Pub. 590 • If self-employed or younger spouse income can continue to add to Roth IRA • Can safely draw ~4%/yr. from nest egg • If larger MRD than needed, convert part to after-tax saving; reinvest tax-efficiently • CRT charitable deduction can reduce tax

21. Pitfalls • Withdrawing too much too soon • Taking cash distribution before age 59-1/2 • 10% penalty • Exception: take as stream of payments • Contributing less than the maximums • Making IRA contributions late

22. Pluses • Self-employment in retirement • Possible tax-deferred account addition • Expenses can include health benefits, LTC premiums • Lower retirement AGI may permit more Roth conversions (no MRDs required) • If beneficiary for IRA is grandchild, may stretch out withdrawals for over 40 years • The second million- easier than the first

23. To Dig Deeper • Stanley & Danko, The Millionaire Next Door, 1996[over 1 M sold] • Thomas J. Stanley, The Millionaire Mind, 2000 • The American Association of Individual Investors www.aaii.com • Center for Retirement Research, http://crr.bc.edu/ • Tax Hotline, monthly newsletter www.BottomLineSecrets.com/pubs • Bottom Line Retirement, monthly newsletter, ibid. • Bottom Line Personal, monthly newsletter, ibid. • Jonathan Clements, “Getting Going,” regular feature columns, www.wsj.com [may be accessible online without subscription. Also writes books on money management.] • Money management tools, http://online.wsj.com/personal_journal/tools?mod=2_0036 Questions, comments? g.mcclure@ieee.org [Put Scottsdale in subject line]