|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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I am 53 and my husband is 60. We have managed to have our house
nearly paid for, one car free and clear, the other will be paid off
in 2 years. We have modest savings and some stocks ($30,000). It is
unfortunate that both our careers were in industries that either
made no provisions for retirement or went bankrupt leaving behind
very small pensions. All the articles I have read are for people
wisely planning for retirement early on. Can you give me some
pointers for late comers such as myself and my husband? We truly
have been unwise and are growing old too fast.
Each year about 4 million people
celebrate their 65th birthday. And many of us don't think about how
we're going to finance our retirement until a few gray hairs appear
in the mirror. And the process of retirement planning has gotten
harder. Patricia and her husband might not live into their 90's. But
they need to be prepared in case they do.
The basic problem that Patricia faces
is obvious. They probably don't have enough income to support a
comfortable retirement. The question is: how much do they really
need? Finding out will require estimating after-retirement income
First, how much will Patricia and her
hubby spend after retiring? Traditionally experts figured about 70%
of pre-retirement expenses. That estimate will probably get her
close but she might want to take a look at her current expenses and
calculate work related costs.
One wild card in Patricia's
calculation is the cost of health care. AARP estimates that those
over 65 pay $480 per year for prescription drugs. But that's not as
bad as the $56,000 per year it costs for the average nursing home.
Medicare will cover many, but not all, medical expenses.
Patricia shouldn't worry about
getting an exact number on expenses. For now she just wants to get a
reasonable idea of her after retirement expenses.
Next she'll need to estimate their
income. You can find out how much you'll get from Social Security by
filling out an online form at www.ssa.gov or by sending a request
to: Social Security Administration, Wilkes Barre Data Operations
Center, PO Box 7004, Wilkes Barre, PA 18767-7004. For private
pension plans the plan administrator or your employer should be able
to tell you what you'll get.
Now for the moment of truth. Compare
the income and expenses. Patricia will have three options for any
shortfall. She can trim expenses, earn extra income or count on
income generated from their savings.
Reducing expenses can be hard for
retirees. Once you get past travel and entertainment, there isn't
much discretionary spending. Housing, food and medical expenses can
only be reduced so much.
Earning part of your retirement
income is becoming more popular. As more retirees enjoy good health,
they happily consider some work as part of their lifestyle. AARP
estimated that there are over 30 million workers who have passed
their 50th birthday.
But Patricia will need to be careful.
If she earns too much she'll begin to lose Social Security benefits.
Up to age 65, she'll lose $1 for every $2 earned over a limit of
roughly $10,000 per year. Past age 65 the loss is $1 for every $3
earned once she's reached the limit ($17,000 to $25,000 per year
depending on when you reached age 65).
Patricia is correct. They don't have
enough money saved. If her $30,000 nest egg earns 5% it will only
generate $1,500 per year in income.
Their investment plan is important.
Although CD's are safe, they won't provide the higher return that
Patricia needs. She'll want to find a good stock and a good bond
mutual fund. Approximately two thirds of their savings should be in
the stock and one third in the bond fund. Either fund could lose
money in any given year. But with a 30 year horizon there's time to
recover any losses.
Once they retire they'll take income
from their savings account. About 7% per year is a reasonable amount
that won't deplete the principal.
How much do they need in savings? To
calculate that, take the desired income (for instance $3,000 per
year) and divide it by the rate of return (say 7%). In this case
$3,000 divided by .07 equals $210,000.
Patricia might be overwhelmed by the
amount they need. She can't let that keep her from getting started.
Better to save half of what you need than to have saved nothing at
all. Fortunately, they still have a few years left to aggressively
save money for retirement.
And they might need to get
aggressive. A move to a smaller home or selling a second car might
be in order.
Patricia and her husband do have some
things working for them. They don't have a lot of debt. Social
Security income will provide for most necessities. There are more
job opportunities for people in their 60's and 70's.
Will they live out their golden years
traveling the world? Probably not. But, if they take appropriate
action now, they probably won't end up among the 10% of retirees who
live in poverty.