By MARY DEIBEL
Scripps Howard News Service
May 25, 2005
Compounding these uncertainties is the question of how much you'll need in retirement to last the rest of your life.
With Social Security officials predicting that Americans will live to their mid-80s by 2080, you'll likely need more money than your parents or grandparents to cover your retirement years.
"It used to be you worked to 65, retired for two years and died, but it's not your father's retirement anymore," said wealth-planning strategist Susan Hirshman of JPMorgan Asset Management. "We're looking at 20- and 25-year retirements now, and in an age of uncertainty, I plan with what I know."
What Hirshman knows is that you need a better handle on retirement income beyond the old approach of figuring what your investments will yield based on an average annual rate of return.
Instead, sophisticated "Monte Carlo" computer simulations let you run thousands of scenarios for achieving retirement-savings goals and stretching out withdrawals. Online Monte Carlo retirement calculators can be found at:
- FinancialEngines.com, an independent financial-planning service founded by Nobel laureate William Sharpe, to which many employers provide free access although individual investors pay a fee.
- Mutual-fund manager T. Rowe Price has offered a free Monte Carlo retirement income calculator since 2000 at http://www3.troweprice.com/ric/RIC/.
Other mutual-fund families, financial planners and brokers offer similar online calculators now, too.
Include your tax-deferred 401(k)-style retirement-savings plan from work, any Individual Retirement Accounts you saved outside or rolled over from former employer plans, plus mutual funds and other investments in your portfolio. But remember: Monte Carlo simulation is based on past performance, and wouldn't have predicted the impact on your retirement income had you retired the day of the 1987 stock-market crash or at the start of the 1967-1983 bear market.
After you check out your portfolio and work up a spending plan that budgets at least 70 percent of pre-retirement income, add in other sources of retirement cash:
- Consider earned retirement income from part-time work or a second career. Surveys show that most of the 76 million baby boomers plan to work in retirement, and the Bush administration is soliciting ways to fit in phased retirement with pension and retirement-savings payouts. But Dallas Salisbury of the Employee Benefit Research Institute notes that most workers retire at 62 because they have to, not because they want to.
- Figure in your Social Security. The agency sends annual benefit estimates just before your birthday and has an online calculator at www.socialsecurity.gov so you can figure your monthly benefit check. But remember: Social Security has been the one leg of the three-legged retirement-income stool to provide guaranteed retirement income - and for people 55 and older, President Bush promises that won't change. Anyone younger should keep an eye on Congress as it drafts overhaul plans this summer.
- Add in your pension if you're among the 44 million workers and retirees who still can draw a monthly retirement check for life from your employer. However, as the record pension default by United Airlines dramatized last month, many defined-benefit pension plans are under-funded and under pressure.
Check your plan's financial status at www.pbgc.gov, the site of the Pension Benefit Guaranty Corp., which insures private pensions. However, the data can confuse. And know that employer groups are warning they may scuttle pension coverage if the Bush administration and Congress raise their pension insurance premiums too much to erase the PBGC's $23 billion deficit.
Against this shifting backdrop of retirement-income sources, JPMorgan's Hirshman suggests considering an annuity like her 67-year-old mother bought, using some personal retirement assets to buy a policy that pays a monthly check for life.
"An annuity can buy peace of mind," Hirshman said. "An annuity in essence creates your own personal pension plan, but it depends on your circumstances and you do give up control of some of your nest egg."
Annuity products are undergoing big changes and could be revolutionized if Bush gets his way and requires that workers buy low-fee, inflation-indexed annuities on retiring with money from their private Social Security account.
Meantime, careful planning for retirement plus saving over your working years are key for younger workers as well as boomers, the first of whom draw their first Social Security retirement checks in less than three years.
A new Oppenheimer survey of 1,000 boomers with household income of at least $75,000 finds that most regret not saving more. "Boomers need to take a step back and evaluate how they've saved so far, gain a true understanding of future expenses and formulate a plan or re-evaluate an existing one," OppenheimerFunds' Jim Ruff said.
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