If you're a Baby Boomer who's talking to your parents or an older friend about retirement worries, you'd better tread lightly.
They likely believe things weren’t all that easy for them, either. And, of course, they did face some risks.
But you’re right if you think it’s more complicated for your generation.
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The defined benefit plans (pensions) that workers once had when they retired are on a steep decline, replaced by investment accounts (401(k)s, 403(b)s) and profit-sharing plans that are designed to give employees more ownership of their money — but without the certainty of regular payments that will last the rest of their lives.
At the same time, the age for claiming full Social Security benefits is going up (gradually rising to 67 for those born in 1960 or later), which means smaller checks for those who can’t wait past 62 to take payments.
Increasingly, retirees will be expected to live on whatever money they can earn and save themselves. The three-legged stool is a metaphor for how past generations looked at planning for retirement. The three legs represent employer pensions, Social Security and personal savings. For many retirees today, the third leg of retirement income is going to have to carry a lot of weight.
So, it’s more critical than ever for workers to have a game plan for when their paychecks go away.
If you’ve been putting off the planning process because it all just seems too overwhelming — or downright scary — here are some questions to get you started:
1. What age will you take your Social Security benefits, and how much will you get?
You don’t have much control over any future reductions or changes to the program. (The Congressional Budget Office says Social Security’s trust fund will run dry in 2029, making an across-the-board 29% reduction in monthly benefits necessary if no solutions are found.) But you do have some say in how you maximize this crucial income stream.
If you can wait until your full benefit age before claiming or, better yet, hold off until you’re 70, you’ll receive substantially more money. It’s also important to consider how long your benefits will have to last. And if you’re the higher earner, think about your spouse; the longer you wait to claim, the higher your partner’s survivor benefit will be.
2. Will you get a pension?
If so, is it a full pension? (Some workers started employment with a pension and then switched over to a 401(k).) Will you have the option of taking a lump sum vs. regular payments? Give this choice careful consideration. If you can come close to matching the pension’s monthly payment by investing the money yourself, it’s probably worth considering doing so. That way, any money that’s left when you and your spouse die will go to your beneficiaries. (With most pensions, when you both pass, the payments stop.)
You’ll also have more control of the money and can use it as you wish, taking more when you need it and less when you don’t. It’s important to remember that the decision to turn on your pension and Social Security income streams is irrevocable.
3. What kind of lifestyle do you hope to have in retirement?
Once you’ve figured out all your income streams, think about your expenses. Many of the people I talk to expect their living costs to go down in retirement, but this is often not the case. If you’re still working, ask yourself what day of the week you spend the most money. For most people, it’s Saturday. And in retirement, every day is Saturday.
If you don’t want to change your lifestyle, you should think about what kind of income you’ll need to support it. If you require $6,000 a month and your pension and Social Security combined come to $4,000, you’ll have a $2,000 shortfall. And that’s on you. It’s going to come from your savings and investments.
It’s a lot of responsibility to shoulder, and the best way to make the most of your money is with a comprehensive written retirement plan. If you’re five years or fewer away from the age you think you’ll retire, it’s definitely time to strategize. (Although it’s never too early or too late.)
These are just the basics — a little nudge to get you started with the hope that once you begin thinking about these issues, you’ll be motivated to move on with your planning.
If you haven’t already, get in touch with a financial adviser who specializes in retirement income. He or she can help you cover all the bases, from boosting your savings before retirement to leaving a legacy for your loved ones.
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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