The New Rules of Retirement

Strategies for a Secure Future

Robert C. Carlson

• Publisher: Wiley
• Year: 2016
• Print ISBN: 9781119183556
• eBook ISBN: 9781119183495
• Edition: 2
• Topic: Personal Development
• Subtopic: Personal Finance

Create the retirement you desire with proven financial strategies

The New Rules of Retirement throws away the rules of thumb, clichés, and obsolete ideas. It provides a proven, updated approach to retiring successfully in today's world. In this new second edition based on independent, objective research, retirement expert Robert C. Carlson uses proven, profitable techniques to coordinate all the factors that lead to financial security and independence. You'll learn how much you really need to save for retirement, how to invest that nest egg before and during retirement, and how to establish a wise and sustainable spending strategy. Carlson will explain how to overcome the threats to lifetime financial security, such as longer life expectancy, low investment returns, higher taxes, and more. Importantly, you'll learn how to plan for the wildcards of retirement planning: health care and long-term care expenses. This edition covers changes in key areas such as annuities, IRA management, estate planning, and income taxes. You'll learn how to merge these insights into your plan to enhance financial security and to provide for loved ones in the future.

Retirement no longer means being put out to pasture. Today's retirees are traveling the world, attending classes, developing new skills, starting businesses, mastering neglected hobbies, and more—well into their golden years. This guide helps ensure you have the financial independence to pursue the retirement you want through smart planning and effective financial strategies.

• Know and overcome the threats to retiree financial security
• Learn the right way to estimate retirement spending
• Develop a sustainable spending strategy
• Invest your nest egg to make it last
• Plan for potential long-term health care
• Leave a legacy for loved ones

The retirement is now a new phase of life, not a winding down. It's a time to live your best life and do things you couldn't before. But all the financial aspects of retirement have changed. To maintain financial security and create the retirement you desire, you need to be on top of the changes. The New Rules of Retirement provides the latest, proven strategies that help put the shine in your golden years.

Chapter 1
The New Rules of Retirement

1. Keep my principal secure.
2. Pay me income.
3. Protect me from inflation.

These are the goals of more and more Americans age 40 and above. As Americans enter or approach their post-career years, their focus shifts from earning higher income and investment returns to preserving their hard-earned nest eggs. They want to receive steady cash flow from their nest eggs and control their expenses. They want to ensure they'll have enough income and assets to meet their lifetime goals.

Steady, secure income means financial independence. That's why interest in developing a continuing, stable stream of cash is booming.

Unfortunately, your job is becoming harder than ever. Your job is to establish and maintain financial security and independence in those post-career years. Not too many years ago, it was fairly easy to establish and maintain financial independence in retirement. Retirees had assistance and support from former employers and the government. Most of them had pensions. It also was fairly easy to convert a preretirement portfolio into a reliable stream of cash flow that helped replace your working years' income. Things are different now.

Much has changed and continues to change in the economy, the markets, government policies, and employer practices. The Federal Reserve has kept interest rates dirt low since 2008, and it is likely to be years before rates return to historic average levels. The government is cutting programs and increasing fees and taxes. Employers are slashing benefits. Wall Street and the markets aren't helping much. The rules and choices are becoming more complex. All the factors of retirement finance are changed or changing.

Tough, complicated decisions need to be made about IRAs, 401(k)s, medical insurance, investments, taxes, estate planning, and more. Many of the decisions are irreversible. Make a bad decision or two, and the rest of your retirement plan might not matter.

In 1989, only 30 percent of Americans ages 30 and older were on track to be financially unprepared for retirement, according to the Center for Retirement Research. In 2015, 52 percent of Americans over 30 were considered unlikely to be able to maintain their living standards in retirement. About two-thirds of those aged 45 to 60 said in 2015 they will retire later than they had planned, according to the Conference Board. In 2011, that number was only 42 percent. Government data show that after many decades of declining, the average retirement age has been increasing.

Even those who think they're prepared for retirement often aren't. Almost half of all Americans die with financial assets of less than $10,000, according to recent research by James Poterba, an MIT economist. Many Americans enter retirement with what seemed to be substantial and adequate financial assets, but because of mistakes and unforeseen events they spend faster than they anticipated or should have. They end up with few assets.

It doesn't have to be that way for you.

You can be financially secure during your post-career years, free of the worries that will plague many others in the coming years.

But you can't rely on what worked in the past. Following tired “rules of thumb” and traditional cookie-cutter approaches is the road to income insecurity. Don't travel that road. The markets and economy, tax law, estate planning, health insurance, Medicare, Social Security, long-term care, annuities, and all the other financial aspects of your post-career life are being transformed. You need to use strategies and tools that are different from those that worked for previous generations of retirees.

Six Threats to Lifetime Income Security

Most importantly, you need to know how to deal with today's six key threats to lifetime income security. Most of the threats aren't new, but they've been increasing, and so is the danger to your financial security.

Retirement Threat #1: The Foundations Are Crumbling

For decades, Social Security and Medicare provided the secure financial foundation of retirement. They still do. Today, however, those programs are in financial trouble, and they will have to change at some point.

You know about Social Security's problems. If changes aren't made by 2036, a 23 percent cut in benefits will be required to maintain the system, according to its chief actuary. The specifics of its financial condition and potential benefit cuts change annually as estimates are updated, but the general condition doesn't change.

Many people say they don't expect to receive anything from Social Security and aren't including it in their plans. Those are mistakes. Too many people underestimate the importance of Social Security to retirees. Even for many higher-income people who earned at least the maximum Social Security wage base for 35 years, the program replaces 28 percent of preretirement income. For low-income beneficiaries, it replaces 90 percent of preretirement income. On average, Social Security benefits are estimated to provide about 40 percent of the average retiree's income. Also, Social Security is the only income most retirees have that is indexed for inflation.

Most current retirees report depending more and more on Social Security as the years pass. They tend to spend down other assets or see the purchasing power of income and assets dwindle because of inflation. That's why it is important that you understand the role of Social Security and maximize your benefits.

If the program goes under or benefits are reduced substantially, many people will have to make major adjustments. I suspect most benefit reductions would be limited to those who aren't already retired or within 10 years of retirement, except for higher income people. Don't give up on Social Security. Instead, realize its importance to your retirement and plan to maximize and protect your benefits.

Medicare is in even worse shape and is closer to insolvency. Without change, Medicare will be bankrupt by 2022, according to the Congressional Budget Office. (Again, the specific estimate changes annually.) In recent years, there have been a few changes in the program, but more are likely. There are likely to be higher premiums, reduced benefits, more means-testing, and a later eligibility age.

Like it or not, Social Security and Medicare are the foundations of the American retirement, and you'll have a tough time replacing them.

In this book you'll learn how to shore up these foundations of your retirement plan. You'll learn to maximize the benefits you receive from these programs and avoid making the mistakes that thousands of retirees make every year. Learn the facts about Social Security and Medicare and they can be valuable assets, effectively adding many thousands of dollars to your nest egg.

Retirement Threat #2: You're on Your Own for Medical Care

Retirement medical and long-term care costs are prime worries of most Americans. About 67 percent of Americans ages 55 to 65 said medical expenses were the top retirement concern, according to a 2012 survey by Allianz. Many other surveys over the years reported similar results. And rightly so. Medical expenses are the retirement plan wild card.

Medical expenses and health care are among the most misunderstood and underestimated expense for retirees. Consider this:

• Many Americans believe that Medicare or their employer's insurance will cover most retirement medical expenses and long-term care expenses they need. That's not even close to the truth.
• Only 28 percent of employers with more than 200 employees provide retiree medical coverage (compared to 66 percent in 1968). Most of those that still offer retirement medical benefits are reducing benefits and moving retirees to privately run insurance exchanges. Smaller employers often don't provide any retirement medical benefits.
• Medicare pays only 80 percent of covered expenses, so you're on the hook for 20 percent of covered expenses with no limit. Plus, there are many medical expenses that aren't covered by Medicare. You need ways to pay for all of those.
• Medicare covers only about half of the average member's annual medical expenses. The average retiree will pay $6,000 to $8,000 out-of-pocket each year for medical care, depending on whose estimate is used. That's the average, so many pay more and some pay considerably more.
• A married couple age 65 today is estimated on average to need more than $270,000 over the next 20 years to pay for their medical expenses that aren't covered by Medicare. Of course, those with above-average needs or who live past age 85 will need more.
• Long-term care expenses generally aren't covered by Medicare. The truth is, Medicare pays for only 25 percent of total nursing home expenses in the United States, and those payments largely are for short-term rehabilitation after an illness or injury. Residents, their families, and Medicaid pay most nursing home expenses.
• Most prescription drugs aren't covered by basic Medicare Parts A and B.
• Medicare now is means-tested. The higher your income is, the higher your Medicare premiums will be for both traditional Medicare Part B and for prescription drug coverage under Part D.
• The Affordable Care Act shifts money away from Medicare, especially the popular Medicare Advantage program, reducing benefits and increasing costs for beneficiaries.

Medical expenses will be one of the three biggest post-career expenses for most people, and they'll only increase as the years go on.

Even many of those who understand they are largely on their own for medical care need to know more than they do. Many pay far too much for Medicare supplement, Part D prescription drug, and long-term care insurance. Recent surveys found that many owners of these policies pay up to twice what they need to.

It doesn't do much good to save and invest for a comfortable retirement and build a legacy for your loved ones only to spend most of your nest egg on medical care and overpriced insurance. You need to stay up to date about Medicare, Part D prescription drug coverage, long-term care, and every other aspect of paying for retirement medical care.

Retirement Threat #3: Avoid the #1 Retirement Planning Mistake

“We didn't realize how much everything would cost, Bob. That's the mistake we made.”

Those were the words of a woman who shared, with her husband, a large lakefront house (with an indoor swimming pool) in a secured golf course community in central Virginia. They also owned a condo in Florida to be near one set of grandchildren in winter.

They weren't scrounging for money. But after five years of retirement, the couple were concerned that they had underestimated the cost of retirement. He took some part-time consulting work, and she also found part-time work.

This is not unusual. Ask many retirees what their biggest retirement planning mistake was, and a high percentage will say that they didn't do a good enough job of estimating retirement spending. Ask financial professionals, and they'll also say that most people don't have a good handle on how much retirement costs.

One-third of U.S. adults who haven't retired say they'll need 25 to 50 percent of their preretirement income in retirement, while another third say they'll need 50 to 75 percent, according to a TIAA-CREF survey.

The traditional rule of thumb used by financial advisors is your annual retirement spending will be about 80 percent of your preretirement income....

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• Dedication
• Preface
• About the Author
• Chapter 1: The New Rules of Retirement
• Chapter 2: Start with Spending
• Chapter 3: Securing and Maximizing Guaranteed Lifetime Income
• Chapter 4: Tapping Your Nest Egg
• Chapter 5: Managing Your Nest Egg
• Chapter 6: Handling the Medical Expense Wild Card
• Chapter 7: Dealing with the Crisis in Long-Term Care
• Chapter 8: Managing IRAs to Last
• Chapter 9: Beware the Retirement Tax Ambush
• Chapter 10: Handling Employer Retirement Plans
• Chapter 11: The Grandkids Need Your Help More than Ever
• Chapter 12: Estate Planning Is More than Taxes
• Chapter 13: Avoiding Financial Scams and Abuse
• Chapter 14: Choosing the Right Retirement Location
• Chapter 15: Keys to a Successful Retirement
• Index
• End User License Agreement