Who doesn’t dream of retiring while still young and healthy enough to enjoy the rewards of years of hard work? Those dreams generally envision a standard of living at least as good as your current standard of living. But have you thought about how you’re going to support that standard of living? To ensure a comfortable retirement, you need to start planning now.
- At age 65, the average man will live almost 19 more years, while the average woman will live another 22 years. You will probably spend 25% to 30% of your life in retirement, requiring vast sums of money to support yourself.
- Social security and pensions replace 40% to 60% of the average retiree’s pre-retirement income.
- A recent study indicates that individuals between the ages of 25 and 44 are only saving 34% of the amount needed to support their current lifestyle in retirement. The study, conducted by two Princeton professors, indicates that individuals without a pension should have savings equal to four to eight times their peak annual earnings. Those covered by a pension plan need two and a half to six times their pre-retirement annual earnings.
- Only 57% of those eligible to contribute to 401(k)s do so, less than 15% of the 67 million workers eligible to contribute to a fully deductible IRA do so, and only 12% of the self-employed have Keogh plans.
- If you’re serious about retiring in style, you need to read the rest of this section now.
Retirement. The word has wonderful connotations.
Traditionally, retirement has signified a release from the drudgery of work. Retirement has always meant freedom and, with luck, an active, carefree leisure. It has meant rest, relaxation and the chance to pursue long-postponed dreams and ambitions. Retirement, after all, is the period when those of us who have worked a lifetime finally have a chance to relax and do what we want. At retirement, the doors to the world of freedom from having to work, normally closed to all but the privileged few, are suddenly thrown open to everyone. But that is only one side of retirement.
For there is another less pleasant, even ominous side to retirement. Retirement means giving up one’s principle job.
Nobody likes to get benched and, on one level, retirement can seem just that. The idea of no longer enjoying a place in the workaday world can be downright disturbing. In a society as geared towards work as ours, the place of someone who no longer works is poorly defined. Society promotes the idea that older people have less to contribute by mandating retirement at certain ages. If you happen to be President, like Ronald Reagan, or a member of the Supreme Court, age may not be a problem. After all, President Reagan served well into his seventies, surviving an assassination attempt, while Supreme Court justices often serve well into their 80s.
For most of us, however, working for others becomes increasingly difficult once we pass the age of 60. Normally, by 65, we are expected to have cleaned our desks, packed our boxes and left. Yet in today’s society, with prices steadily increasing and our government’s finances in a precarious state, retirement can seem a questionable reward for a lifetime of work. Social security alone is no longer enough to insure freedom from economic worries.
Vague fears about retiring will prove more than justified if a couple or individual has failed to provide financially for the future. Moreover, retirees face challenges even when they possess all the money they need. They may have to sell a house — perhaps in a difficult market, uproot themselves from friends and family or undertake other traumatic changes in their lives. Furthermore, the prospect of retirement inevitably conjures up what lies beyond it, namely the possibility of declining health and, eventually, death.
Retirement books like to call this part of retirement planning for the inevitable.
For a moment, however, let’s put aside the negative side of retirement. Despite the challenges of adjusting to retirement, the overwhelming majority of people view retirement as something to look forward to. The simple truth is that retirement, if properly managed, can be everything it is cracked up to be and more. Today, the average man who lives to age 65, can look forward to another fifteen years on the planet while the average woman can anticipate two more decades of life. As a result, the retirement phase of a person’s life can represent as much as a third or more of his or her time on earth. Will these years prove the golden ones they can be or a period of dwindling resources? Retirement Angles is designed to give you the knowledge you need to insure that your retirement period is the luxurious, rewarding period it should be.
It gives you all the angles you will need to get ahead and get the most from your well earned retirement.
Before going any further, we should state right off the bat that some of the conclusions we will present in the pages that follow may seem counter intuitive. Others are down right controversial.
However, when carefully examined, you will see that all of them pass the test of common sense.
Some will seem surprisingly straightforward. As you read through this book, a few of the angles we present may seem so obvious you will say, why didn’t I think of that earlier. Still others may strike you as complex and require you to get out your pad, pencil and calculator. Some are easily accomplished. Others will require you to roll up your shirtsleeves and go to work.
However, all are proven techniques, guaranteed to enhance your financial resources and improve the quality of your retirement years. All of these techniques have helped others retire successfully.
We believe that a golden retirement is within the reach of everyone. After all, every year, a select group of people retire in a way that insures years of happiness ahead. However, to be certain that your golden years possess all the lustre they can, it’s necessary for you, the reader, to consider what can go wrong as well as what can go right and plan accordingly. The choices you make will determine whether your retirement is everything it can be or whether you could have gotten more out of this high potential period of your life.
One thing is certain. If you merely do the obvious, you will get only the obvious results. But to a select few, those who plan correctly, retirement can be one of the greatest periods of your life. Retirement, it turns out, is like everything else. What you get from it will depend on the knowledge you have as well as the energy you put into doing things right.
Building your retirement nest egg
While money can’t buy happiness, lack of money will almost always buy you misery. This is true enough in life, but particularly true when it comes to retirement. In this chapter, we will show you a number of ways not only to boost your income at retirement but to actually increase your level of wealth.
Nevertheless, as you grow older, your opportunities to create wealth will inevitably decline. Poverty in youth can be remedied quite easily through action in middle age. However, as individuals or couples approach their 60s, poverty becomes far more difficult to alleviate. There simply is no longer time. As a result, the time to begin building wealth is as soon as possible.
If you have already retired, you may be tempted to skip this chapter. However, we recommend that you look through it anyway.
Many of the techniques are valid even after you retire. Wealth building should be a life long occupation.
Maximizing Your Retirement Income
Our philosophy might be summarized as “let the money do the work.” The essence of our strategy is that you accumulate capital, invest it correctly and then allow it to work for your future. The key to our philosophy is to put time on your side. When you owe money, time is not on your side, it is on your creditors’. You must work like a demon to keep your head above water. That’s what happens when you borrow money on credit cards.
In contrast, when you own assets, time is on your side. All you need to do to make money is to let time and your assets work their magic. To summarize our strategy, we recommend that you
- Continually save money,
- Harness the full power of compounding by avoiding taxes and inflation and
- Don’t lose money.
It’s a relatively low risk strategy. Sure, you might make more money faster if you happened to get lucky betting on a penny stock. You might also lose everything. Our strategy will let you build the money you need to obtain financial freedom in the shortest possible time while incurring an acceptable level of risk.
At retirement, however, a new challenge arises. Let’s say you’ve built the wealth you need. Now you must convert your high growth asset portfolio into one that pays out income. There’s a dumb way to do this and a smart way. If you have enough money, the dumb way may suffice. The dumb way to convert your assets into an income stream at retirement is to sell your house, your business and your other investments and put the proceeds into CDs. Or, if you have a stockbroker, turn your funds over to him. He will probably convert your assets into a portfolio of stocks and bonds that he can churn as his leisure. Every now and then you can expect to get a call to the effect that he knows of a good opportunity for you to make money. He’ll ask for your permission to buy and sell some of your holdings. Unless you’re paying close attention, you may never know if the result actually helps you.
You can be sure of one thing, however: the result of all this churning will help your stockbroker.
We don’t recommend that you do things the dumb way. Sure, if you have enough money, you may not notice a decline in your standard of living. However, if you’re reading this book, you probably are not the type to squander your hard earned capital.
In this chapter, we will examine financial techniques to get the most income out of your overall holdings which is the smart way to generate income. In addition, we’ll show you how to maximize your income while you keep your holdings secure. By employing our techniques, you can dramatically increase the amount of money you receive every month without incurring undue risk.
On one level, you might well ask why should I bother worrying about my estate? The French writer Rabelais, known for his honesty of language, captured this point of view when he penned a note shortly before his death that read: “I have little, I owe much and the rest I leave to the poor.” Rabelais, however, was a bachelor. And, more than anything else, it is probably concern for one’s family that motivates most people to take an interest in their estate. Rabelais also happened to have little money. Had he died rich, he might have looked at things differently. If you have worked hard to accumulate capital you are unlikely to want to see it disappear.
Those who inherit money are also unlikely to want it to vanish (unless, of course, they get to accomplish this goal by spending it.) Plenty of people choose to disinherit their heirs, usually on the theory that poverty is good for character (in particular, the character of others.) Self-made multi-millionaires are particularly prone to punish their ungrateful heirs. However, people who decide to cut off their heirs almost always create a foundation to preserve their memory. Others leave part of their fortune to heirs and create a foundation or endow some charity or project with the remainder. It turns out that failure to plan for your estate is not even an effective way to spite your loved ones since the court will probably give them the lion’s share of your money. Since the court will probably keep the rest of the money for itself, not planning your estate, more than anything else, is a good way to help reduce the federal deficit.
Nevertheless, if is very easy to put off planning one’s estate. After all, thinking about estate planning is a lot like thinking about death. And thinking of death (especially your own) is not very pleasant. But there is another reason. Estate planning is one of the most misunderstood areas of personal finance. After the 1981 tax law, many people were left with the impression that the estate tax had been effectively repealed, eliminating any need to plan for one’s estate. Many others believe that under the laws of the states where they live, everything will automatically go to their spouses without any particular effort on their part. These beliefs, unfortunately, are wrong.
One reason for the confusion regarding estate planning is that it is frightfully complicated. A good estate plan must consider taxes, probate, insurance, investing, charitable giving and family wealth distribution. Estate planning is more than avoiding taxes; it also is determining how you want the property distributed and how that can be done with a minimum of administrative and legal expenses. The following discussion aims to correct many of the misrepresentations and point you toward the biggest tax saving opportunities of your life. Why the biggest? Because estate taxes are your final tax bill and can be the largest taxes your family will ever have to face. You still have to plan to ensure that the assets will go to your heirs, not to the tax collector or lawyers. What’s more, good estate planning can help cut taxes during your lifetime.
The following account outlines the basics of estate tax planning, in language that anyone can understand. But estate planning is a sophisticated area, and it involves more than tax planning. After reading this discussion and identifying areas that are useful to you, take the ideas to a qualified professional. Trying to do-it-yourself in this area could cause a lot of problems.
Finding Your Retirement Havens
Since many retirees’ most significant asset is their house, condo or coop, we have also looked at strategies to tap the equity in your home to get the most from this major investment. However, your choice of a home and place to live will affect more than your net worth and financial profile. Where you live will also affect your lifestyle and sense of well-being in numerous other ways.
There are many options available to retirees. You may decide to continue to live in your present home. Some of the financial strategies mapped out earlier, including renting out a portion of your house, refinancing it or obtaining a reverse mortgage, can make this possible. Alternatively, many people move to a second home, in particular, their vacation home upon retirement. Or you may decide to pick up stakes and move to an area you have only visited in the past, or perhaps a new area entirely.
In a moment, we’ll discuss some exotic locations that offer extraordinary opportunities, locations situated in some of the most wonderful places on earth. As we examine these options in turn, keep in mind a word of wisdom that we offered at the very beginning of this book. Often the most adventurous course may turn out to be the most secure course in the long run.
Keep in mind also that moving to another locale does not consign you to living there forever. Statistics show that every year a fair percentage of those who have retired to a given locale change their minds and move. Why not? If you’re not happy with a place, you shouldn’t stay there, whether you’re 20, 50 or 70. However, by doing the proper amount of homework and study in advance, you can greatly increase the odds that your choice of place to retire will seem just as wise in ten years as it does today. Among factors you should consider are the following: cost of living, weather, people, services and simply your feeling for the place and its character.
Living Better for Less
Time, it is said, is money. In America’s fast paced society, we are continually spending money in order to save ourselves time.
Whether it be transportation, shopping, living or any of life’s activities, we pay a premium to create a few extra minutes or hours in which to cram still more fast paced activities. With retirement, however, our relationship to time undergoes a transformation. Suddenly, we are no longer short of time. Lo and behold, this has important consequences when it comes to the financial side of retirement. Retirement saves us money because retirement gives us time.
When you retire, it is suddenly no longer that critical that you get where you are going in the next ten minutes. Instead of taking a taxi, you suddenly have time to walk. Likewise, when time is no longer of the essence, why shop at a convenience store or that high priced deli at the corner. With a little extra time, it is possible to shop at a more reasonable store. By freeing up time, retirement offers retirees an opportunity to cut costs dramatically.
Thus when you examine your finances and wonder how will I ever be able to live on a retirement income, there is one thing you should remember. Life once you retire will inevitably be less expensive than before. If you move to a lower-priced region of the country, you will see the cost of living genuinely plummet.
Moreover, being a senior citizen entitles you to numerous discounts. However, even without all those techniques, you will be able to save money — thanks to your new relationship with time alone.
There are other benefits to slowing down as well. When you are 60 years old, you can no longer look forward to an unlimited lifespan ahead of you. Why be in a hurry. Instead, it’s more enjoyable to take things in stride. You’ll find that this can also pay large dividends from a financial point of view.