What You Can Do Now to Guarantee a Great Retirement
What You Can Do Now to Guarantee a Great Retirement
Ralph Warner, Attorney and Richard Stim, Attorney
February 2008, 1st Edition
A great retirement isn’t just about having your financial situation in order.
It’s easy to be preoccupied with stock portfolios, 401(k) balances and saving options, but true happiness in retirement comes from simpler, more enjoyable things like an active social life, family time and leisurely travel.
In Retire Happy: What You Can Do Now to Guarantee a Great Retirement, author Rich Stim and Nolo co-founder Jake Warner show you how to become rich in the ways that matter most. They encourage you to balance financial concerns with a lifestyle you always envisioned for yourself.
The book advises you on how to estimate real retirement needs and create a workable savings and investment plan. Even more importantly, it advises you to make personal preparations for life after work, including:
- cultivating interests outside work
- leading a healthier lifestyle
- revitalizing family relationships
- spending more time with spouses
- embracing spirituality or meditation
- nurturing friendships and making new friends
All the money in the world won't make for a happy retirement unless you're satisfied with the rest of your life. So start today.
Will You Really Retire?
1. Start Your Planning (and Dreaming) Now
- The Four Things You Need in Retirement
- Look Outward and Inward
2. Invest in Your Health
- Four Conditions You Should Treat Now
- Exercise and Diet
- Three More Tips
3. Strengthen Family Ties
- How Strong Are Your Family Ties?
- Five Ways to Improve Family Function
- Couples Power: The Tie That Binds
- If One Spouse Retires Before the Other
4. Appreciate Friends, Old and New
- Friends: Many Concepts—One Goal
- Four Paths to Friendship
- Members of Couples: Find Friends Who Are Yours Alone
- Those Furry Friends
5. Develop Lifelong Interests and Activities Now
- Do the Things You Always Meant To
- Educate Yourself
6. Figure Out Your Number
- Using Online Retirement Calculators
- The Choices and Variables Underlying Your Number
- A Do-It-Yourself Retirement Calculator
7. Convert Debt Into Retirement Savings
- Can You Avoid Car Payments?
- Heading Into Retirement With Credit Card Debt?
- Should You Prepay Your Mortgage?
8. Where Will the Money Come From?
- It’s Not Too Late to Begin
- What to Expect From Social Security
- Employer Pension Plans
- Individual Retirement Savings Plans: IRAs and 401(k)s
- Withdrawing Money From Your 401(k), IRA, or Annuity
- Savings and Investments
- Inheritances and Gifts
- Early Retirement Incentives and Buyouts
- Reverse Mortgages
- Immediate-Fixed Annuities
9. Growing and Protecting Retirement Assets
- The Safe Withdrawal Approach
- What Are Your Investment Choices?
- Cash: Lowest Risk, Low Returns
- Bonds: Low to Moderate Risk, Low to Moderate Returns
- Individual Stocks: High Risk, Varying Returns
- Mutual Funds: Varying Risks, Varying Returns
- Making Choices, and Sticking by (Some of) Them
- Investing in and Profiting From Real Estate
- Getting Help: Financial Planners, Advisers, and Brokers
10. Working After Retirement
- Start Planning Now
- Whether to Work and Collect Social Security
- Legal Rules Protecting Older Workers
Start Your Planning (and Dreaming) Now
The Four Things You Need in Retirement
A network of friends and family
Engaging and enjoyable activities
Look Outward and Inward
Picture your retirement. Do you see yourself swinging contentedly on a hammock, a great-grandchild smiling in your lap, your golf clubs nearby? Or do you see yourself counting off the hours on your new gold-plated watch, fearful that you’ll outlive your savings?
In his book Stumbling on Happiness, psychologist Daniel Gilbert explains that when it comes to prospection (looking forward in time), humans have conflicting impulses. On one hand, we like to daydream about a future in which we’re “achieving and succeeding rather than fumbling or failing.” On the other hand, we have a tendency to create futures that are frightening. Our forecasts become “fearcasts,” whose purpose is “not to predict the future so much as to preclude it.”
Neither of these approaches works well for retirement planning. If you want to retire happy, you’ll need to put away the crystal ball and look in the mirror. That’s because the true predictors of a satisfying retirement—money, health, social connections, and interesting activities—are controlled more by what you do today than what you think you’ll do when you retire. Though it sounds like a cliché, retirement is truly a journey, not a destination. And by beginning your journey today, you’ll be a seasoned and happy traveler when you finally pass through the retirement portal.
The Four Things You Need in Retirement
Let’s look closer at those four factors that are so important for a happy and satisfying retirement:
• a network of friends and family, and
• engaging and enjoyable activities.
Where did we get this list? It’s derived from common sense, scientific studies, and from the insights and reflections shared by many retirees who coauthor Ralph (Jake) Warner interviewed. We’ll discuss each of these in more detail in later chapters, but first, take a closer look.
You can’t retire happily without money, right? Like financial guru Suze Orman says, “Nothing more directly affects your happiness than money.” Or maybe rocker David Lee Roth said it better: “Money can’t buy you happiness, but it can buy you a yacht big enough to pull up right alongside it.”
Accumulating an appropriate amount of money for your retirement years is inescapably important. We’ll discuss what’s needed—your “Number,” as it’s referred to in the media—and ways to shield and grow your savings. We’ll also discuss what to do if you can’t seem to hit that magic number—a burden many eventual retirees are carrying.
But this book diverges from those financial experts and retirement advisers who believe that the accumulation of a giant nest egg should be your sole retirement goal. With a narrow outlook like theirs, you could find yourself like the insecure couple profiled in a 2007 USA TODAY article, unsure whether they had enough money to retire, even with nearly $2 million in assets, a monthly stream of income of $4,200 from Social Security and pensions, and a paid-off home and partial ownership of two rental co-ops.
Yes, money is important. But it’s only one element of the retirement picture, and it’s possible that you don’t need as much as you think you do. It’s best to approach the dire warnings about how much money you’ll need in retirement with a dose of skepticism, keeping in mind that some of those warnings come from people who’d like to make money off your retirement planning. One of our interview subjects, Babette Marks, a retired teacher, expressed it succinctly: “Most people now in their 40s and 50s will have more than enough money if they will just adjust their lifestyle to what they have, which, of course, is already much more than most people in the world will ever have and probably far more than their own grandparents enjoyed.”
You can start your financial planning now by following the advice in subsequent chapters (especially Chapters 6 through 9). Our goal is to provide clearheaded financial advice based on common sense, historical patterns, and financial discipline.
You may believe that by middle age, it’s too late to reverse the damage created by an unhealthy lifestyle. Not true. Miriam Nelson, associate professor at the Friedman School of Nutrition Science, told USA TODAY, “All the research shows that what you do now is far more important than what you did when you were younger. We work with people well into their 80s and 90s. The body’s capacity to get stronger and to be healthier and happier is still there.” Still, old habits can be hard to break, so don’t wait. Your health at age 65 is determined to a great extent by how you behave today.
Is It Too Late to Start Retirement Planning? Never!
It’s possible that—like many Americans approaching retirement—you feel there’s no way you can save enough money this late in the game, so why bother? Here are three answers:
Money is only one aspect of retirement happiness. With or without money, it’s not too late to set the stage for a healthy, active, socially satisfying retirement. And with your health and happiness on an even keel, you may even cut your spending on doctors and therapists. So please keep reading no matter your current financial condition.
Many financial situations are reversible. Even if you’re drowning in debt, there are approaches that may help to pull you out. We discuss some of these in Chapter 7. What we’ve learned from interviewing retirees is that financial discipline—the ability to constrict your budget when times are lean and expand it when times are good—is the key to weathering financial storms.
Work it through. For a lot of people, retirement will include some sort of part-time or full-time employment. In addition, many people are delaying their retirement from full-time jobs in order to build up a proper retirement nest egg. An analysis by the Center for Retirement Research at Boston College found that workers who had no retirement savings needed to work only about 3½ years longer to avoid a steep drop in their standard of living in retirement.
As Dr. Thomas Perls, the lead author of Living to 100: Lessons in Living to Your Maximum Potential at Any Age, explains, “Many people still believe the myth that ‘the older you get the sicker you get,’ when in fact our studies and those of other researchers are revealing that it is much more accurately the case that ‘the older you get, the healthier you’ve been.’”
We’ve included a chapter on health, because we believe—and statistics verify—that by investing in your health now, you can improve your odds of both living to retirement age and enjoying it once you get there.
You can start improving your health now by reviewing the four most common and fixable health issues for retirees—high blood pressure, smoking, high cholesterol, and obesity—and making changes to your habits and diet. In addition, and perhaps more importantly, you can start an enjoyable exercise routine that will carry you into retirement, even if it’s just brisk daily walks. We provide more health solutions in Chapter 2.
A network of friends and family
Studies have shown that the most powerful predictor of life satisfaction after retirement is the size of your social network. So, whether it’s your family, your church, or your book club, maintaining a quilt of family and friends will be an essential and comforting aspect of retirement.
But how many of us are spending enough time with friends and family now, in order to develop or maintain that network? Just making a living and dealing with day-to-day events can easily absorb all our time. Yet ignoring social contacts at the expense of gathering your nest egg can backfire, and you may find that it’s impossible to renew relationships that have atrophied.
You can start improving your social network now by assessing your current relationship with friends and, if possible, mending broken relationships with family members. In case you’re out of practice, now may also be the time to relearn how to make new friends. We discuss family and friends in Chapters 3 and 4.
What’s Your Retirement Age?
A few decades ago, the answer was 65. That’s when people left their full-time job, began accepting “full retirement age” Social Security benefits, and applied for Medicare. But now the age at which people “officially” retire is not so clear.
With so many people contemplating working into their 70s—estimates range from 30% to 80% of baby boomers—many now claim that the actual median age of retiring (that is, leaving full-time employment) will soon move to 67 or 68. Whether this is a good idea depends on how much you like your job, how long you expect to live, and the size of your savings.
In addition, full retirement age for Social Security benefits for baby boomers—those born between 1943 and 1954—has been raised to 66. You can still retire at age 65 (in fact, as early as age 62), but the amount of your benefit check will be permanently lower than if you’d waited. And if you delay claiming benefits until you’re 70, your benefit amount will increase by almost 30% over what you would have received at full retirement age.
Of course, not everyone is excited about working into their late 60s and 70s. At the other end of the spectrum are members of the “early retirement” movement, which encourages semiretirement for people in their 50s. The general principle is that you can retire from full-time work by combining solid investing, a 4% limit on withdrawals from your savings, part-time work, and sensible spending.
The table below looks at the ages that normally (or legally) trigger various retirement events.
The “Ages” of Retirement
The period commonly associated with “early retirement,” as recommended in books such as Work Less, Live More, by Bob Clyatt. Fifty-five is also the median age when most people begin seriously funding their retirement nest egg. As USA TODAY reporter Dennis Cauchon noted, “most wealth accumulation happens rapidly and late in life—after the kids leave, when income is high, debts drop, 401(k) accounts fatten, and home equity swells.” Income typically peaks at age 57, and wealth (a person’s net worth—assets minus debts) tops out at 63, according to the Fed’s Survey of Consumer Finance. Some pensions may offer payouts at age 55.
The age at which you can begin withdrawals from tax-deferred accounts (IRAs and 401(k)s) without paying the 10% early withdrawal penalty. (There are some exceptions permitting early withdrawals without penalty, as described in Chapter 8.)
If your spouse has died, you may be eligible for Social Security retirement benefits at this age.
The age when you can elect early retirement benefits from the Social Security Administration. If you claim benefits at this age, you will receive 20% to 30% less in Social Security annually than if you wait for full retirement age (and you may receive even less if your work income at the time exceeds government limits). For more on Social Security, see Chapter 8.
This age, traditionally associated with retirement, is when you qualify for Medicare. Some people during their 65th year (those born before 1943) will reach full retirement age for Social Security benefits.
For baby boomers (born 1943 through 1954), this is the “full retirement age” for Social Security retirement benefits. (For those born after 1954, the full retirement age moves from 66 to 67 and remains at 67 for those born after 1960). If you don’t claim at full retirement age, each year you wait, your benefits will increase by 8% annually until age 70.
This is the median age at which baby boomers are expected to leave full-time employment.
At this age, IRA and 401(k) withdrawals become mandatory and you can no longer make contributions to an IRA or 401(k) (with the exception of Roth IRAs, see Chapter 9).
These are the median ages of death for men/women who have lived to 65. Another way to look at it: 28% of men who reach 65 will live to 90, 11% will live to 95, and 2% to 100. 40% of women who reach 65 will live to 90; 19% will live to 95; and 5% will live to 100.
Engaging and enjoyable activities
In 2006, USA TODAY reporter Mindy Fetterman wrote that when life spans were shorter, social scientists and financial planners saw two phases to retirement: “Go” and “No Go.” “In the first phase you took maybe a couple of vacations, visited your grandkids, and messed around in the a) garage or b) garden. Then your health declined, you slowed down and, well, you know the rest.”
Now that we’re living longer—20 or 30 years longer than previous generations—the time between “Go” and “No Go” has extended to two or three decades. When asked what they plan to do with this time, potential retirees usually respond with vague lists of activities. The problem is that attempting to narrow in on and start up these activities after you retire can prove frustrating.
You can begin staying active and connected now by assessing your interests and determining whether, and in some cases exactly where, you’d like to work, volunteer, travel, study, or pursue personal projects. In Chapter 6, we explain how to begin.
Ernest’s Retirement Tips: Connect, Create Space, and Stay Healthy
Coauthor Jake Warner’s interview with Ernest Callenbach demonstrates why you should begin your planning well before retirement.
Ernest retired at age 62. Before that he worked as editor of a respected film magazine and the Natural History Guide series, and also authored books, including the best-seller Ecotopia. Jake asked Ernest to imagine that he was to give a lecture entitled “What I’ve Learned About Retirement.” Ernest listed three things:
Stay connected. “The truth is,” says Ernest, “even if you love fishing or golf, you are likely to become quickly bored if those are the only activities on your plate. The key is to find useful ways to connect to the world—otherwise you’ll drive your spouse or anyone else you are close to nuts. Men, especially, often suffer a big dip in their feelings of self-worth once they are no longer working and don’t get all those strokes from colleagues or subordinates. Often this means having to start from scratch to reconstruct one’s self esteem. Fortunately, there are a number of ways to do it—for example, turning an occasional hobby into a small business. Providing service through a nonprofit organization is another good approach. Getting involved in local politics to try and improve the way your community works is a third.”
Create a space for yourself. “When you retire, assuming you’re married or live with someone else, you must share space in a way you never have before. And I mean all types of space, including even using the telephone. Especially for men, who have typically seen the home as being more a woman’s environment, this can be a huge problem. Whether it’s in the basement, attic, spare room, or out of the house altogether, everyone needs their own defensible space. And I would add that once a domestic partner retires, a spouse who mostly managed the home also feels his or her space has been invaded, so by creating a space for the recently retired person, the spouse also minimizes conflicts created by the change.”
Ernest’s Retirement Tips:
Connect, Create Space, and Stay Healthy, cont’d.
Stay healthy. As with all of his retirement tips, Ernest recommends starting now. “If you don’t, you may not even live that long. Not only will paying attention to your physical well-being likely result in your living longer and feeling better, it will also save you a pile of money in expensive medical care. But in addition to eating better—less salt, fats, and sugar—you need to be active, to exercise every day. Whether you join a gym, ride a bike regularly, or just walk briskly doesn’t make a big difference as long as you really do it. Also, look at your life and find ways to accomplish your daily rounds more actively. For example, instead of getting in the car to drive to the neighborhood market or a friend’s house, walk or bicycle.”
Check out Chapter 10, Listen to What Retirees Have to Say, for more interviews.
Look Outward and Inward
Your retirement years are likely to consist of a number of messy—and sometimes scary—personal transitions, beginning on the very day you retire. Some changes will be unpredictable, such as a stock market downturn, a rise in your blood pressure, or financial requests from a pregnant granddaughter. If these prospects worry you, think back and remind yourself how many major changes you’ve already weathered: perhaps leaving home for the first time, marrying (or forming another close relationship), parenting, changing jobs, or dealing with the death of a loved one.
To deal with life’s curveballs, you’ll need to look outward and inward. An outward view means looking at how people you admire have aged, grown, and changed to meet the challenge of living well in later life.
Start this process now, and when you find older people you admire, arrange to spend some time together. If one of them is so busy that it’s hard to make an appointment, you know you’ve found someone worth talking to. Don’t be afraid to ask tough questions, whether they’re about experiencing loneliness, poverty, a decline in sexuality, boredom, or death itself. We’ve found that most successful retirees have developed strategies to cope with all of these issues—and probably a bunch more you haven’t thought of—and will be pleased to pass them on to you.
But more importantly, they will almost surely provide you with a positive vision of the excitement and growth possible at a time of life when there are fewer day-to-day responsibilities.
At the same time, you’ll need to look inward. A successful retirement doesn’t result solely from a plan; it results from your ability to adapt and modify as things change.
Do some soul-searching about who you are now and who you want to be in retirement. Some people do this sort of thinking by themselves, alone in their car or on a hike in the woods. As part of this exercise, try to ask and answer one essential question: Is the inner me well-prepared for the final one-third of my life?
You may be tempted to answer, “How would the inner me know? It’s never retired before.” But retirement is simply another life transition. So, look at how the inner you coped with previous difficult life transitions. If you didn’t do very well—except perhaps to fool others that you were fine—think about how you could improve your coping skills, maybe by talking to someone about any anxieties and demons.
Breaking through your sense of isolation can be the first real step toward surmounting huge problems. Listening to and learning from the insights and experiences of people you respect is also valuable. Then you’ll be ready to incorporate this knowledge into a new version of yourself—one with a little more humility, flexibility, and hopefully wisdom.
For Women Only
In 2006, USA TODAY highlighted some of the ways that women preparing for retirement are—unlike their male counterparts—hit with a double whammy: Not only do they typically have smaller retirement savings than men, they also live longer. Here are some of the ways this plays out:
Women quit working earlier than men. The average woman retires at age 62, the average man at 63. Married women tend to stop working once their husbands retire, even though the average woman is younger than her husband and will outlive him and have a longer retirement. But by working longer, women could contribute more to retirement savings plans and boost their Social Security benefits.
Divorcing women too easily give up shares in their husband’s pension plan. Some women’s number one priority in a divorce is keeping the family house—but they often give up valuable shares of their ex-spouse’s pension or retirement savings in exchange. If done wisely, there’s nothing wrong with that decision. But before signing off on the divorce decree, obtain as much information as possible from your husband’s employer about the pension plan, to make sure it’s a fair trade. You have a right to this information, but many pension plans won’t provide it without a letter from your lawyer, according to the Women’s Institute for a Secure Retirement. (You should also tell the pension plan administrator that you’re in the process of getting a divorce. That will prevent the plan from paying out your share to your husband before the divorce is final.) Bottom line: In some cases, the financial benefits of the pension may outweigh the home equity. If you do choose the pension, you’ll need a separate court order—called a qualified domestic relations order—which recognizes your right to part of your ex-husband’s pension.
For Women Only, cont’d.
Women invest timidly. Because women tend to have less money to invest, they’re often more fearful of taking losses. But they live longer than men, which means they have longer retirements—and more time to ride out the market and take full advantage of riskier investments, which typically return more over the long term. Because most women can expect at least 20 years in retirement, at least some of their assets should be in stocks.
Women rent instead of own. Women approaching retirement are more likely than male counterparts to rent housing. But there’s a good reason to aim toward owning your own home in retirement: It’s cheaper. For women, who typically have less retirement income and live longer, that’s essential. Housing eats up 33.6% of the income of the seniors who rent and are in the lowest 25% income bracket, according to the Joint Center for Housing Studies at Harvard University. But those who own their own homes use an average of only 18.3% of income to pay housing costs. The reasons are fairly simple. If you rent, your rent is likely to rise year after year, and you have no chance of recovering any of that money. If you own, your mortgage will probably be a fixed amount, and, over time, you could pay it off entirely. Even if you’re buying just a small condo, you’ll build up equity over time, which you may eventually tap using loans or a reverse mortgage. The trick is finding a house or condo you can afford. To do that, you might have to move to a part of the country where housing prices are lower, or settle for a smaller living space.
For Men Only
Why do so many more men than women seem to have a tough time dealing with retirement? Easy. When work stops and physical limitations make it more difficult to participate in recreational sports, many men do not have good family relationships to fall back on. We know men whose careers were highly successful and who are nevertheless lonely and isolated, in significant part because children to whom they paid little attention earlier in life are now returning the favor.
One reason why women, on average, may live substantially longer than men is that so many men—in addition to being members of the more violent and accident-prone sex—are social misfits after they retire. By contrast, women, who have typically developed better social and family skills earlier in life, adjust far better. Many older women seem too engaged in life to be ready to quit it early.
One of the best ways for men to increase their chances of enjoying a fulfilling retirement is to spend more time becoming close to their families during midlife. If there is one key to a man’s ability to really be part of his family, it’s to get involved in day-to-day activities. Intimacy must be earned by reading bedtime stories, helping with homework, driving carpools, volunteering in the classroom, coaching Little League, and even helping a seven-year-old make a new dress for her favorite doll. Children, of course, aren’t the only family members who need your caring involvement. Taking the time to be truly part of the lives of parents, siblings, nieces and nephews, and cousins will benefit all of you, both now and after you retire.
Finally, don’t disregard (or take for granted) the power of a spouse. A married man has 2-1 odds of outliving a never-married man and 3-1 odds of outliving a divorced man, according to the National Center for Health Statistics (NCHS).