Limit your financial risks of retirement
By Kathy Chu
USA Today
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You've saved most of your life so you can kick back in your golden years. Now what?
If there's one challenge as daunting as all those years of squirreling money away for retirement, it's this: making sure you don't run out of money during retirement.
You have to figure out how much to withdraw each year. Whether to get a part-time job. Or an annuity. And if you fail to plan for unexpected healthcare costs, you might have to kiss those exciting travel plans goodbye.
"It's what I refer to as the unexpected marathon," says Jim McCarthy, a managing director in Morgan Stanley's retirement group. "I get to 65, and I'm exhausted because I've gone through this long savings phase. Then the guy with the clipboard comes over and says, 'The starting line is over there.' "
Fading corporate pensions and longer life spans make it hard to generate enough income to maintain your living standard in retirement — a period that can last nearly as long as your working years. Today, a healthy 65-year-old man can expect to live, on average, 19 more years; an average 65-year-old woman will live close to 22 more years. There's nearly a one-in-three chance that one or both will make it to age 95, says the American Academy of Actuaries.
As 79 million baby boomers march into retirement over the next two decades, they risk falling into a trap that Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania, calls "the lump-sum illusion."
"People look at their 401(k) sum and think, 'I have $100,000 or $1 million; I'm rich,' " Mitchell says. "The danger of the lump-sum illusion is that people don't understand how expensive it is to get old, and they withdraw too much."
Living longer than you expected is preferable, of course, to the alternative. But you can limit the financial risks.
Here's how:
In general, financial planners say you need 65 percent to 85 percent of your pre-retirement income after you stop working to maintain the same standard of living. But planners say they're seeing people each year blow through 100 percent of their pre-retirement income — or more — because they're healthier and more active.
Although an origination fee can run high, rising home values have made reverse mortgages more appealing because of increased equity available to homeowners.
Matthew Thorp, 85, says he and his wife, Lynn, "fell into retirement" in the early '90s after she became ill and could no longer work. At the time, the couple had $10,000 and a house worth about $500,000.
Their savings weren't enough to pay for the couple's daily living expenses, Lynn's prescriptions and doctors' visits. So the couple took out a reverse mortgage as their Washington, D.C., home climbed in value. They also pawned family heirlooms, furniture and antiques.
Lynn died in 2001. Today, the house the couple bought for $35,000 in the 1960s is worth more than $900,000.
But don't count on Social Security alone to sustain you. These benefits will replace only 40 percent of yearly pre-retirement income for the average worker, the Social Security Administration says. So you'll likely need other income, too.
