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Finance Lessons Should Accompany Retirement  

By John Zich, USA Today

November 9, 2005

Unless you're lucky enough to retire with a generous monthly pension, managing your retirement could become a full-time job. Skills required: investment know-how, risk management, the ability to project price increases and a keen understanding of the tax code. 

Some retirees relish the challenge. Charles Abbott, 73, of Cincinnati, manages a portfolio of individual stocks, stock mutual funds and fixed-income investments. 

He subscribes to investment research firm Morningstar, reads Value Line at the library, and uses tools provided by Fidelity Investments, where he has his brokerage account. "I enjoy it," he says. "I'm on the computer a couple of hours a day."

Even if you don't share Abbott's enthusiasm for portfolio management, you may not have a choice. Only 21% of private-industry workers are covered by traditional pensions, according to the Bureau of Labor Statistics.

If you're not eligible for a pension, you'll probably have to rely on Social Security and personal savings, such as 401(k) plans and individual retirement accounts. You'll have to figure out how to make that money last 30 years or more. And unlike younger investors, you won't have a lot of time to recover from your mistakes.

Herb Paske, 66, of Riverwoods, Ill., is one of the lucky ones. A former school administrator who now works as a financial adviser, he retired from the school system with a pension. He also has an investment portfolio, but managing money is "a lot easier when you have a steady stream of retirement income," he says. 

Many of his retired clients don't have that advantage. 

For retirees who would rather go bowling than study price-earnings ratios, there are alternatives: 

. Invest in a pre-mixed fund. These funds allocate your savings among stocks, bonds and money market funds based on your appetite for risk. They've become popular with workers who don't want to worry about rebalancing their 401(k) plans.

There are also pre-mixed funds for retirees. For example, the T. Rowe Price Retirement Income fund invests in a mix of T. Rowe Price funds, with about 40% of the portfolio in stock funds and 60% in bond funds and other income-producing investments. Vanguard's Target Retirement Fund invests nearly 75% of its portfolio in bond funds, 20% in stock funds and 5% in money market funds.

. Buy an immediate annuity. Buying an immediate annuity is like creating your own pension plan. You give an insurance company a lump sum and, in exchange, you get monthly payments for the rest of your life or a specific number of years.

Proponents of immediate annuities say they guarantee you'll never run out of money. The downside: Your annuity payments may not keep up with inflation, and you give up control of your money. You usually can't withdraw extra funds to cover unexpected expenses, says Joseph Birkofer, a financial planner in Houston.

Retirees need "flexible access to their assets," Birkofer says. "They need it for health care issues, they need it for lifestyle change issues, they need it for peace of mind." (Related: How do you make it last?) 

. Many financial firms are rolling out financial products and services targeted at retirees. Mike Strutzel, 52, a sales manager in San Jose, Calif., is using Fidelity Investment's Income Management Account, a tool that helps retirees analyze their spending and manage their portfolios. He hasn't decided when he wants to retire, but he wants to be prepared because there's a good chance he could live into his 90s.

"It's kind of sobering when you start to think your income has to last that long," Strutzel says. (Related: Caring for your nest egg: 4 tips to keep money flowing) 
If you'll need to manage your retirement, there are some talents you'll need. 

Actuary 

Unless you possess extraordinary psychic powers - in which case you should stop reading and get your own reality TV show - you don't know how long you'll live. But by making an educated guess, you can make better decisions about spending your retirement savings.

With an immediate annuity, for example, you're giving up control of your money in exchange for a lifetime guarantee or guaranteed income over a set number of years. The value of that guarantee depends on how long you'll be around to claim it. 

Insurance companies have invested an enormous amount of money in estimating longevity, leading some critics to argue that people who buy annuities are betting against the house. But nobody knows you like you do. You know your family history: If your relatives typically live into their 90s, there's a good chance you will, too. Your health is also a factor: If walking to the refrigerator to get a beer leaves you short of breath, you're probably not a good candidate for an annuity. For a realistic look at your prospects, go to www.realage.com. 

Other decisions that are influenced by your expected lifespan:

. The amount of money you should withdraw from your savings each year. If you expect to live for a long time, you'll need to limit withdrawals from your savings, especially during the early years. For example, if you have $300,000 in savings and invest in 40% stocks, 40% bonds and 20% short-term securities, you need to limit withdrawals to $1,020 a month, according to T. Rowe Price's Retirement Income Calculator. Otherwise, you risk running out of money. If you expect to be around for only 20 years, you can afford to withdraw $1,380 a month. (Run your own simulations at www.troweprice.com.)

. When to start taking Social Security. You can start taking benefits as early as age 62, but you'll receive a smaller amount. Wait longer and your benefits will be larger. If you think you'll live into your 80s, you'll get more out of your benefits by waiting. Conversely, if you have a serious health problem that could shorten your lifespan, taking benefits earlier may be the wiser choice: You'll get more from Social Security and have money to pay for health care. (Related: When should you start collecting?)

Many baby boomers assume they'll slow down in their 70s and 80s and spend less money. But don't be so sure, says Bill Ramsay, a financial planner in Raleigh, N.C. Ramsay says many of his sixtysomething clients say they feel as good now as they did when they were in their 40s. "You might feel the same way when you're 80," he says.

There are lots of calculators on the Internet that will help you estimate your longevity. The Living to 100 Healthspan Calculator, based on studies of people who lived to be 100 or more, is available at www.agingresearch.org/calculator. 

Accountant 

When you're young and earning a good salary, taxes are a constant irritation. But taxes can provide even more angst during retirement.

Many boomers will retire with a smorgasbord of 401(k)s, taxable savings and Roth and traditional IRAs. All are potential sources of retirement income, but the order in which you withdraw the money can have a big impact on your tax bill. (Story, 9B.) 

Conventional wisdom suggests you should use your taxable savings first, then tap your tax-deferred plans, such as traditional IRAs, and save your Roth IRA, which offers tax-free withdrawals, for last. But those rules don't apply to everyone, or every situation. Suppose you need to withdraw a large amount of money from your savings to buy a new car. If you tap a traditional IRA or 401(k) plan, you'll pay taxes on the money, and the large withdrawal could push you into a higher tax bracket, Ramsay says. If you take the money from a Roth, you won't have to worry about shifting into a higher tax bracket because Roth withdrawals are tax-free.

While you're wearing your accounting hat, don't forget to keep track of your expenses. You can use a computer software program, your checkbook, or just a Big Chief tablet, says Birkofer. The key is to get a handle on how much you spend and put together a budget, because that will determine how much you need to withdraw to maintain your standard of living.

Economist 

Nobody likes to pay more for groceries and gas, but workers can put in more hours or lobby for higher pay. Retirees living on a fixed income don't have those options. For that reason, it's important to understand what inflation can do to your savings and how to stay ahead of it.

Inflation should play a role when you estimate how much you can afford to withdraw from your savings each year. For retirees, some cost increases matter more than others, says Ray Ferrara, a financial planner in Clearwater, Fla. 
For example, if you own your home or plan to downsize, rising home prices may not affect you much, Ferrara says. But increases in health care costs, which typically grow faster than the overall inflation rate, could have a big impact on your savings. 

To stay ahead of inflation, you need to hold your breath and invest in stocks, planners say. 

If you stash all your money in low-risk investments, such as certificates of deposit or Treasury bonds, you'll avoid scary stock market downturns, but you probably won't earn enough to make your money last. 

Ramsay says most of his retired clients have at least 45% of their savings invested in stock mutual funds, and some have up to 60% in stock funds.
If you lock up your savings in low-risk investments, you won't lose money, but you won't make any either. 

Accept the fact that "life and the world are constantly changing," Ramsay says. "It would be incredibly boring if that weren't the case."