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Retirement Ahead

How Do You Determine Retirement Needs Accurately?

Here are the U.S. statistics on how workers plan for retirement:

  • 3% don’t have any idea
  • 47% do their own calculations or use a financial adviser
  • 50% just guess

To help you avoid guessing, I offer two different ways to approach how to calculate retirement needs accurately.

First method:  

  1. Estimate how long your parents and grandparents have lived.  Average the results.  This gives you a fairly accurate age you can expect to live.  In this example, let’s say it’s 83.
  2. Determine the minimum income you will need to live comfortably.  Let’s say it’s $3,000 per month.
  3. Subtract what Social Security is slated to pay and any pensions or other monthly income you can count on. In our example, let’s say it’s $2,000 per month. That leaves $1,000 per month you need on top of these payments for retirement.
  4. Subtract your age at retirement from age 83. In our example, this means you will need $216,000 for retirement.
  5. Divide the total amount needed to be saved by the number of months you have between now and the time you retire and this will give you a fairly accurate amount you need to be saving monthly.  In our example it looks like this:

Math: 65 (retirement age) – 40 (current age) = 25 years left to save; multiple 25 years x 12 months = 300 months; divide the 300 months you have between now and the time you retire by the total amount you need to retire of $216,000 = $720 per month you need to be saving

Second method:

  1. Calculate where all of your income might come from, and then build a spending plan around that amount.  For example, if you will receive $1,850 a month from Social Security, and $400 a month from a pension, along with $800 a month from a rental property, then build a spending plan around $3,050 per month of income.
  2. Adjust your plan to take into consideration variables that you cannot foresee right at the moment. For example, what if you live to age 89 and not age 83, or if you get sick and need medical care costing $23,000? Be thinking about unknowns and build some extra money into the spending plan to allow for them.
  3. Build into the plan how to pay for such things as the following:
  • Long-term care costs
  • Liquidity for emergencies
  • Inflation

If all of these factors require you to work longer than expected, it is better you know today and not find it out in 25 years! For specific help contact me at peter@moneymastery.com.

Why the 401(k) Was Invented and What You Need to Know about It

Do you have any idea how expensive it is for an employer to establish a pension plan for a policeman today?  Let’s say you are a policeman aged 25, and your salary is $40,000 a year.  Your employment contract says that after 25 years of service you are entitled to 75 percent of your pay the rest of your life, including your spouse.  Today, if your average length of life is age 85, that means you and your spouse will live 35 years in retirement, while you only worked 25 years.  Now many police officers, emergency responders, ambulance service technicians and the like will retire at 25 years, but then go into private employment and work for another 15 years, to supplement retirement income.  But the point is, they worked for only 25 years and are expecting a pension for another 35 years. This gets expensive for their employer.

If you are age 25 and will retire at age 50, you will need $811,000 in an24773043 (b:w) investment account to provide $30,000 a year for the remaining 35 years of life.  These are estimated numbers, but that means the city you work for must pay $15,000 a year into your retirement account.  And why shouldn’t these public servants have these wonderful benefits? Police officers put their lives in constant danger to keep communities safe.  Of course offering such benefits is to induce people to become public servants, which can be a very thankless and dangerous job.  But again, what about the cost employers must bear in offering such benefits?

Back in the day, say in the 1940’s, 50’s and 60’s for example, offering such benefits was not as big of a deal for employers. People retired around age 65, then men died at age 69 and women at 72, on average. People worked their whole life only to retire and die four years later! That meant that the employer only had to provide a pension for around four years and maybe pay the surviving spouse for another three years. The employer only had to pay into a pension $1,200 a year, from age 25 to age 65, or 40 years.  You can see from the numbers that offering a pension was more doable then.

But because people today are living 20 and 25 years longer than they did 50 and 60 years ago the option to provide a pension becomes almost impossible. Living longer presents and exacerbates a whole new set of problems.  First, the contrast of only paying $1,200 a year, rather than $15,000 is a lot less money for the employer to come up with!   Second, retirement income must be provided 30 more years than it once was in the good old days. Also, back in the 40’s and 50’s people would never change employment; they worked for 40 years at the same place.  But from 1970 until today, innovations have come on the scene rapidly and technology has improved at almost an exponential rate.  Gigantic industries have been born and then died.  How many industries can you think of over the last 30 years that have cropped up and then suddenly become obsolete? Because technology is so rapidly moving, people and industries have had to move with it, becoming much more mobile and flexible in the workforce than they once were. Many private-sector companies that promised pensions are now defunct!

Thus the 401(k) was born. When employers got squeezed for more profits in the 1970’s, they switched to offering only a match or no match “retirement” plan and no pension, or in other words the 401(k) program.  These tax-deferred plans must invest funds in the stock market where there are real risks the average employee has no clue about. The chance of losing most or all of your retirement funds if they are all sitting in a 401(k) is very possible — just ask all those who lost everything in the crash of 2008. The days of pensions that an employee GameOverdid not have to contribute to, ever, are long gone!  Now days, pensions are mainly for school teachers, nurses, police officers and emergency responders.  They have very good benefits because their salary is not as attractive in the private workplace.  Pensions for the average worker are good to have, but not likely now that 401(k)’s have been around for 35 years and cost employers little to nothing to offer. 

My point in giving you a history on pensions and how 401(k)s came about is to help educate people who have ignorantly bought into the notion that these tax-deferred contribution plans are the only way to save for retirement. Nobody thinks about what they really are — a poor substitute for the now-extinct pension plan.  The 401(k) and IRA are not the be-all, end-all of retirement planning. They should be considered only one of many ways you could be funding your retirement, but only if you don’t have a ton of debt. If you are in debt, the amount of interest you earn on usually conservative investments of your 401(k) cannot keep up with debt interest expense, and therefore are probably not doing you a whole lot of good.

If you want to get serious about real options for funding retirement call me to discuss the Money Mastery system at no cost to you: peter@moneymastery.com, 801-292-1099.

The Government Pension Time Bomb is Ticking…

The state of Illinois is broke.  That is according to economist, James Dale Davidson, who just spoke yesterday on what is happening to employees that have worked for the state, stating that their retirement paychecks will not be sent out next month.  What’s the problem in Illinois that could be a factor in other states as well in the future?

Consider these facts:

  • The number of Illinois state university employees, teachers and administrators actively working is 80,845.  The retired employees are over 50,000.  The average pension paid annually is $37,261.  The unfunded liabilities exceed $20 billion.  
  • The retired teachers in Illinois exceed 10,000, with an average annual pension of $50,494.  The unfunded liabilities for teachers exceeds $57 billion.
  • The number of retired state employees is 53,478 who are receiving an average of $33,115 annually.  The unfunded liabilities for retirees with pensions is $24 billion.

How would you like it if you had worked your entire life and had been receiving a monthly income for the last five years, only to find out that all of it will end in just 30 days? What would you do?  What will Illinois state retirees do?  And what will those currently working for Illinois do today, knowing they may not receive anything at retirement?

What about California’s retirees, and any other of the 50 states?  If you shutterstock_128683532 (534x800)are a government worker who is expecting a pension, it might be wise to begin asking for accountability from your employer. With trouble brewing in places like Illinois, it is only a matter of time before more audits begin to be conducted in other states and the media jumps on top of this story about how bad things are becoming in Illinois and many other bankrupt cities, counties, state and federal agencies.

Working for the government has always been considered a “safe” place as it doesn’t terminate very many employees and the benefits are great, when compared to private employment. But as soon as Illinois stops paying their retirees, this will all change.

We can learn from this, I am sure.  While it may be too late for some, each of us needs to re-examine what we are doing for retirement and make hard choices.  Learning the Money Mastery Principles will be the key to making the right ones.  As the Money Mastery program teaches:

  • Know the rules (Principle 5)
  • The rules are always changing (Principle 6)
  • Always look at the big picture (Principle 7)

While planning your own retirement, you can save a lot of heartache by not assuming others should know the rules for you or that things will never change. Be prepared by looking at the overall big picture so you can anticipate problems before they arise.

Keep Emotions Out of Financial Decisions

At the following link, you can compare U.S. cost of living and income city by city.  The calculator shows, for example, that a $90,000 salary in San Francisco or Seattle is like having a $50,743 or 66,949 salary, respectively, in Salt Lake City. Here is the link:  http://money.cnn.com/calculator/pf/cost-of-living/?iid=EL.  Play with it and just see the incredible difference it makes where you live, or perhaps where you might want to retire!

An acquaintance from Boise called me a few years back lamenting that her salary was half that of a co-worker living in California.  Her co-worker received a 5 percent match on her 401(k), just as she did but of course the lady in California was getting a much bigger distribution based on her larger salary.  She cried how unfair this  was.  I asked her if she could transfer to California.  She said yes so I encouraged her to put the numbers on paper and only make a decision based on income, expenses, taxation, and cost of living, not just on how she felt.

Let’s stay unemotional and just use mathematics to further analyze this example.

  • Federal tax on $100,000 of income received in California will be taxed twice as much as $50,000 of income in Boise, Idaho.
  • State tax in California is double that of Idaho’s.

Does the $100,000 salary look as appealing now? As we talked, the lady in Boise added more information to our discussion.  She said she has a 401(k), but she also has a pension that takes the top three income years and multiplies it times 40 percent  to determine her income at retirement.  I asked her if she wouldshutterstock_110004506 like living three years in California?  She agreed that she could.  She prepared the numbers as if she did transfer to California for three years and then retire.  She would have a 27 percent increase in her 401(k) and would absolutely double her pension income.  The math says $100,000 times 40 percent  = $40,000 of income for life.  If she continues to live in Boise, $50,000 of income times 40 percent = only $20,000 of income for life.  For doing the same work in California as in Boise, she can more than double her lifetime income at retirement.  She can also retire three years earlier and she will have much more in her 401(k).  She will also have a dramatic increase in her cost of living, so she will need to consider that as well, because this will affect the potency of her increased salary.

Eventually this woman did decide to move to California. She looked for an area that would allow her to transfer and still maintain a fairly reasonable cost of living. She moved to the San Luis Obispo area and has really enjoyed it.  The costs are so much higher than Boise, but she will be doubling her income for life after a few short years.

I realize that not everyone has access to a transfer.  But this is my point:  Don’t get emotional about financial decisions.  Get the numbers in front of you so you can make the best decision possible. Don’t just sit back and do nothing. Check out your options.  Money Mastery Principles 5 (Know the Rules), 7 (Always Look at the Big Picture), and 9 (Understanding Taxation Allows You to Keep More of Your Money) are involved here in making proactive, logical, and systematic decisions that will help you get the most out of your money.  I hope you can see how valuable these principles are and how they can keep you unemotional so you can make the best choices going forward.

Pensions Are Creating a Huge Financial Risk for Cities, Counties, and State Goverments

A few weeks ago I noted in my blog, The Real Reason for the U.S. Retirement Crisis, a lack of stable income as the reason most Americans will not be able to count on a decent retirement — it will be the next big financial shoe to drop in this country.  This lack of stable income has come partly because of the elimination of the good old American pension plan… and that seems to now  include government pension plans as well, retirement options for government employees that until recently were thought to be untouchable.

City, county, state, and federal government pension plans are now in trouble due, in part, to a bit of greed by government employees, but mostly due to mismanagement by government entities of the tax dollars they used to fund these pensions. What happened to bring about this crisis? Let’s look at an example of a city entity to help explain how things have gotten so bad for many government retirees.

Pensions were set up by the government employer so that employees, after 20 years of service, would get 60 percent of their highest three years of income while they were working. The employee would pay nothing out of their compensation — it was entirely the responsibility of the city, county, or state (which, by the way, is how the pension worked in private sector companies until these all but disappeared in recent years as well).  The process to establish a pension plan for a city employee worked like this: the city manger would  approach the city council to explain the amount of money needed to pay in order to recruit aRetirement Ahead certain quality of employee to work for the city.  The city council would negotiate for a lower salary and try to justify it by offering a fully funded pension plan paid entirely by the city.  The city justified this by using tax dollars to pay for the services the employee provided.  So far so good, except the employee came to work and learned that elected officials don’t last very long and that the turn-over is huge with every election.  The employee then started getting the feeling that he/she was not indispensable.  So employees started negotiating  a higher pension plan so that after 25 years of service they would get 70 percent of their highest three years of income.  The elected officials only had to agree to this in the moment, but did not have to fund this for 25 years into the future (since they wouldn’t be around to worry about it anyway).  This made it easy for the employee to get a commitment at the time. This worked for a while until many city employees got greedy and wanted to add a 401(k) plan, which is called a defined contribution plan, to their benefits package. Many U.S. cities have commonly dealt with these defined contribution plans by stating that they will match anything an employee contributes to his 401(k), or 403(b), or 457 retirement plan up to 4 percent. Some city managers, in order to keep employees from jumping ship, pointed out to the city counsel that other cities and counties were offering 401(k) plans and that they better offer one too!

It has now been over 30 years since this process has been in practice and governments have had thousands of employees work to get their pensions and 401(k) retirement funds.  The city of Stockton in California got to the point where over 70 percent of the city’s pay outs were to previous employees, leaving only 30 percent to pay for ambulance services and garbage collection.  The mayor decided to file bankruptcy so all the contracts for pensions and 401(k) were terminated. This meant that immediately 70 percent of the money going to retirees was available to take care of city services, and of course Stockton citizens were happy again, especially because they did not have their taxes go up for the first time in 25 years. Of course Stockton city employees were mad, and some became destitute and had to go back to work at a time in their lives where, for some,  their health prevented this.  This caused great alarm for other government workers in the surrounding counties and the state of California.

Another example of this pension fund mismanagement is Detroit, which had to file bankruptcy because it could not pay out all its pensions to government retirees. You can Google-search and find that 83 percent of all the debt Detroit had was pension and 401(k) plan payments to city retirees.  I am not arguing the rights and the wrongs done here, and please understand I do not have a dog in this fight, not yet anyway.  I am simply trying to show what will happen shortly all across the United States with cities and counties trying to stay abreast of all their retiree payouts.

I have a client who worked 27 years for Los Angeles County and his annual income was $125,000 a year.  He retired early receiving $12,000 a month for life from his county pension and $480,000 from a 401(k)  plan.  He tried to get his pay increased, but when he couldn’t, he was able to get a huge increase in his pension instead.  He just recently told me he has been notified that his pension will be negotiated way lower in the near future and perhaps be discontinued all together.  He is sick about this.

With all this financial mismanagement, government employees are beginning to see that things are changing and that they can no longer work for the government under the assumption that they will never be fired and that their retirement income is safe and secure.  Government employees should consider making changes to protect their income and retirement money. I have been keeping my eye out to see how many other cities and counties look like they may fail. As I mentioned before, Detroit has bombed and so have 12 cities in California, including Stockton and San Bernardino.  I have not tried to find out all government entities that have filed bankruptcy, but for sure there will be more.

shutterstock_243126268The image of an iceberg says it all — remember what happened to the Titanic — it was thought to be unsinkable but the dangerous ice lurking just beneath the water’s surface did the ultimate damage.  Don’t let unseen icebergs destroy your family’s retirement nest egg — if you have a government pension, investigate thoroughly NOW what is really happening financially with your city, country, or state government. Don’t assume that all is well until you know it really is. If you want to learn how to create a predictable, stable retirement please email me: peter@moneymastery.com.

 

The Real Reason for the U.S. Retirement Crisis

Lack of adequate income at retirement is the next gigantic financial shoe to fall, and it is going to fall hard. 

Consider in 1981 nearly two out of three workers had a quality pension plan, not a 401(k), but a really strong plan where the employer agreed to pay 80 percent of the last 20 years’ salary each month for the life of the employee and their spouse.  This was not a “do it yourself” 401(k) like what is available today to build a so-called “retirement.”  This was not “everyone is on their own,” good luck.  This was not a “you have to be your own investment adviser” plan.  These pensions were cash solid and backed by life insurance companies with guarantees.
Retirement Ahead
Fast forward 30 years to present day. Not even one in five employees has a guaranteed pension plan.  What happened?  More employees have become more mobile, not only changing jobs often, but changing entire careers, some as many as six times in their working life!  This lack of long-term commitment and the high cost of providing traditional pensions did away with such retirement programs. Individuals no longer trade loyal, devoted service to one company for the company’s loyal investment in them in return. Mobility and career freedom have forced employees to be responsible for creating their own “pension” of sorts and statistics show they aren’t doing such a good job of it. According to U.S. census data, the average worker reaching age 65 has less than $60,000 in total assets and the Social Security Administration notes that 90 percent of all retired folks are totally dependent upon their monthly Social Security check, which doesn’t amount to much for most people.

The result of all this poor planning? People now have to work longer, even into their late 70’s, in order to support themselves. But working longer will not help with inflation, out-living savings, needing long-term care assistance, market risk, taxes, and a host of other problems that can affect the value of that income. And what happens if a person is not able-bodied enough to even attempt to work into their 70s?

To be successful in retirement now days requires the ability to create a predictable retirement that can overcome inflation, poor health, market risks, taxes, and other problems. This predictability does not come from 401(k)s or IRAs. To make it possible, you must first get your spending under control so debt can be paid off quickly. Once that is done, then you must next change the way you think about accumulating money for retirement. Instead of focusing on rate-of-return you should start locking down guaranteed income for life.  Without this guaranteed income, those who were ready to retire in 2008, when the big financial crisis hit, lost 40 percent of their 401(k) and retirement account income. If those folks had locked down a guaranteed income (which could include such things as permanent life insurance, real estate investment income, annuities, etc.) they would not have lost a penny. Now they must continue working and wait seven years to get back to where they were in 2008. Don’t be a victim of the next financial crisis. Begin exploring ways you can set up a predictable, guaranteed passive income that will pay you dividends for life, no matter how long you live and no matter what happens to the market. For more information, feel free to contact me: (888) 292-1099.