FINANCIAL ISSUES IN

LATER LIFEBill Taylor

University of Wyoming Extension Community Development Area Educator

April 2014

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REFERENCES Barbara O’Neill, Ph.D. CFP, Rutgers

Cooperative Extension; eXtension\Personal Finances\Estate Planning at http://www.extension.org/personal_finance Financial Recovery in Later Life

Catch-Up Retirement Planning Strategies for Late Savers

Creating a Retirement “Paycheck”

How to Make Minimum Withdrawals from Retirement Savings Plans

Making the Most of IRAs and Other Tax-Deferred Retirement Savings

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FINANCIAL RESILIENCE

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FINANCIAL RESILIENCE is the ability to withstand economic life events, both negative and positiveLoss of jobBirth of grandchild

Essential because nothing is static

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FINANCIAL CHALLENGESUnemployment

Job retraining often necessaryHealth insurance often lost

COBRA provides for continuance of coverage for 18 months

Expensive – 102% of full premium

Only w/ employers w/ 20+ employees

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FINANCIAL CHALLENGES (cont.)

Poor/uncertain healthRequires revised

retirement saving analysisAdjust life expectancy &

retirement savings plan contributions

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FINANCIAL CHALLENGES (cont.)

Death of spousePossible less incomeRequires many decisions &

adjustmentsDelay major decisions

Place funds in CD or money mkt mutual fund until there is time to explore long-term alternatives

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FINANCIAL CHALLENGES (cont.)

Investment lossesMaintain patience & long-

term perspectiveEven at 55, you may have

another 30 years of investing

Limit withdrawals during mkt downturnsAvoid risk of outliving assets

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INCREASING FINANCIAL RESILIENCEMonetary resources

Emergency savingsHealth insuranceGood-paying

job/retirement benefits

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INCREASING FINANCIAL RESILIENCE (cont.)Human capital

KnowledgeSkillsExperiencesHealth

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INCREASING FINANCIAL RESILIENCE (cont.)Social capital

Support system/emotional supportFamilyFriendsCo-workersNeighborsOthers

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STRATEGIES

1. Maintain a low debt-to-income ratio

Consumer debt limited to 15% of monthly take-home

Above 20% - in danger zonei.e. $275 debt payments

divided by $2500 net pay = 11% ratio

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STRATEGIES (cont.)

2. Maintain an emergency fund

At least 3 months expenses

Liquid cash – savings, money market mutual fund, short-term CD

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STRATEGIES (cont.)

3. Keep skill set sharp Never consider

education or training finished

Keep developing marketable skills

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STRATEGIES (cont.)

4. Purchase adequate insurance

Life & disability insuranceTry to always have health

insurance through employer, COBRA, public benefits or individual policy

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STRATEGIES (cont.)

5. Practice good health habits

Diet, weight, exercise, sleep, etc.

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STRATEGIES (cont.)

6. Increase knowledge of financial topics

Learn basic investment principles, characteristics of specific securities

eXtension Investing For Your Future at www.extension.org/pages/Investing

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CATCH-UP STRATEGIES FOR LATE SAVERS

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THREE PROFILES

1. Procrastinators – didn’t bother or had to put off building retirement fund

2. Saving, but got late start – trying to make up time

3. Been saving, but lost ground due to markets or emergency

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MAKE-UP PRACTICESCan be divided into 2

basic strategies:Take action before

retirement to increase savings

Take action after retirement to decrease amount of savings required

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BEFORE RETIREMENT: Saving more money Reducing expenses & saving the

difference Accelerating debt repayment “Moonlight” for extra income Investing aggressively Automating investment deposits Maximizing tax-deferral opportunities Preserving lump-sum distributions by

rolling into another tax-deferred savings plan

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AFTER RETIREMENT:Trading down to smaller homeMoving to less expensive

locationDelaying retirementWorkingReverse mortgage or sale-

leaseback on homeTax efficient asset withdrawals

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TRADE-OFFS

Catching up requires trade-offsi.e. spending less now to

have more later

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COMBINING STRATEGIESExamples:

Investing more in 401(k) & moving to less expensive location

“Moonlighting” while delaying retirement

Investing more aggressively & downsizing to smaller home

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MOST EFFECTIVE CATCH-UP TECHNIQUESWorking 2-3 years longerPostponing collection of

Social Security until full retirement age

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ADDITIONAL HELP

Guidebook to Help Late Savers Prepare for Retirement by National Endowment for Financial Education at www.smartaboutmoney.org

(type Late Savers Guidebook in search box)

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RETIREMENT “PAYCHECK”

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A Retirement Paycheck is income received on a regular basis after retirement. Easier to pay monthly billsProvides more financial

security & peace of mindContinues monthly money

management system used before retirement

“Safe” withdrawal rate from retirement funds

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“SAFE” WITHDRAWALWithdrawal amount

adjusted to reduce risk of outliving assets

Inflation-adjusted withdrawal of 4% of 50% stock- 50% bond portfolio balance will generally last 30 years

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“RETIREMENT PAYCHECK” STRATEGIESAutomatic Withdrawal Plans

– available w/ mutual funds, until balance is depleted

Income Replacement Mutual Funds – actively managed funds w/ choice of maturity dates pay monthly income until balance is depleted

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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Bond or CD Ladder –

staggered portfolio w/ different maturities; as each matures, proceeds are reinvested at longest interval

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“RETIREMENT PAYCHECK” STRATEGIES (cont.)

Regular Withdrawals from Cash Assets – set aside 3-5 year’s income in cash assets (money mkt funds, CDs, savings accounts) to ride out recessionsRemainder of assets in stocks,

bonds, mutual fundsCash assets replenished regularly

from stocks, bonds, or mutual funds

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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Post-Retirement Age Income

– continuing employment past retirement ageProvides money for daily livingAllows for continued deposits

into retirement fundsEarns higher Social SecurityPostpones withdrawal of

retirement assets

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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Annuities

Investor pays into contract w/ life insurance company and company make regular payments for investor’s life

Shop for low expense fees w/ high financial stability rating

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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Reverse Mortgage – can remain

in home while receiving cashBased on equityMust be 62 or olderMust be primary residenceNo minimum credit or income

requirementCan be received as lump sum,

cash payments, or line of credit

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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Monthly Income

Paymentsi.e. rent or mortgage

paymentsCould rent out land,

garage or buildings, part of residence

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FOUR-LEGGED CHAIR“Three-legged stool” of

pension, Social Security, personal savings is commonly being converted to “four-legged chair” by adding later employment.

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QUESTIONS? COMMENTS?