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Gail MarksJarvis: Stretching your next egg for a comfortable retirement

McClatchy-Tribune Information Services

January 5, 2015


Are you ready for retirement?

I’m not talking about the feeling that you’d like to chuck your job or the daily grind of commuting. Rather, do you know if you have enough money to retire and how to stretch what you’ve saved so the money lasts?

If you are like most Americans near or in retirement, you don’t have a clue. That’s the finding of a national survey of people ages 60 to 75 by the American College of Financial Services, a nonprofit that educates financial advisers. The researchers found that just 20 percent of retirement-age Americans, with at least $100,000 in savings, can pass a basic quiz on how to make their nest eggs last throughout retirement.

Perhaps the most disturbing finding is that most people are fairly confident that they are on the right track. So they are likely to retire and find out when it’s too late that they’ve spent more than they should early in retirement and are in a bind later.

Even those with financial advisers are in the dark, suggesting that at least some advisers might be more focused on selling products than educating their clients about what they will actually need and how to make it last.

For example, a rule of thumb followed by many certified financial planners involves what’s known as the 4 percent rule. It pertains to how much you can afford to remove from your savings each year of a 30-year retirement and avoid the risk of running out of money. Yet, despite the importance of not draining your savings too quickly in retirement, the American College of Financial Services quiz found that 69 percent of Americans near, or in retirement, had no idea what was safe to withdraw from their savings each year.

Under the 4 percent rule, a retiree removes 4 percent of savings during the first year of retirement, and then each year after that tweaks the amount slightly higher based on the inflation rate at that time. So if a person had $500,000 in savings, he or she could use $20,000 of it for spending money during the first year of retirement, and if inflation were 3 percent, could remove $20,600 of savings for living expenses in the next year.

The 4 percent rule was designed by financial planner Bill Bengen of San Diego in the 1990s. He assumed that a person would invest their nest egg 60 percent in stocks and 40 percent in bonds and average an 8 percent return on the money annually. Since that’s an average annual gain, and some years are worse or even negative, he tested whether money would last during a multitude of 30-year periods in history, and found it would. He also found that people removing 5 to 6 percent a year would be at risk of running out of money.

Yet, in the retirement quiz, 16 percent thought they’d be safe using 6 to 8 percent of savings a year.

Lately, some studies have suggested that even the 4 percent rule could leave people vulnerable in a period of low returns on stocks and bonds. Some research suggests buying a low-cost immediate annuity at retirement, or a deferred annuity that kicks in at 80 or 85, could help cover basic living expenses late in retirement. Yet, many annuities include high fees and penalties, and given the naiveté of people quizzed, there’s a risk they would be sold annuities that were more advantageous to the broker than the individual. Among those quizzed, 65 percent said they had little knowledge about immediate annuities.

Of course, the key to having enough money is to understand upfront what likely expenses there would be. But only 39 percent said they’d given a lot of thought into their retirement budget. And without that, they have no idea whether they will have too much or too little money. Further, since women tend to live longer than men and almost half of married women live to 90, they are going to be vulnerable because only 33 percent have thought carefully about the impact that a spouse’s death will have on their money.

A death can mean that a person gets less, or nothing, from a spouse’s pension, and Social Security also can be reduced. Yet, people are failing to appreciate how much control they can have over retirement money if they pay attention to when they start collecting Social Security. Only half of the respondents knew that it would be best to wait until 70 to start collecting Social Security if they could. This is especially important for people with a long life expectancy based on their health and their parents longevity.

Some books that will help: "You’re Fifty-Now What?" by Carrie Schwab-Pomerantz, "The AARP Retirement Survival Guide" by Julie Jason and "The Hard Times Guide to Retirement Security" by Mark Miller.