The Rising Price of Retirement

As more people work part-time rather than hit the greens, the formula for how much they need to live on is changing. Their tax rate may not fall, and expenses may be higher than planned.

Mention the word "retirement," and most people shudder. The term seems synonymous these days with the phrase, "you can't afford it." More than half of workers in the 2011 Retirement Confidence Survey by the Employee Benefits Research Institute say the total value of their household's savings and investments, excluding the value of their home and any defined benefit plans, is less than $25,000. Housing wealth has vaporized for many households. More than 27 percent of all residential properties with a mortgage—13.4 million homeowners—had negative-equity or near-negative-equity mortgages at the end of 2010, according to CoreLogic, an information and analytics firm.

Times remain tough even though the stock market is up 97 percent from its March 2009 low and the economy is gathering steam. The government's broadest measure of unemployment, and underemployment, is at 15.7 percent, and household budgets are being squeezed by rising food and oil prices—not to mention miniscule yields on savings. It all reinforces the fact that one must confront huge areas of uncertainty when planning for the last stage of life. The answer to the question "how much will you need?" depends on a series of imponderables, from the timing of your death to your health in old age.

Nevertheless, the pervasive gloom about retirement is overdone. Fact is, people are quite creative at coming up with solutions. Case in point: An aging generation isn't really retiring, at least not in the traditional sense of the word. (Think golf.) They may say goodbye to their employer and colleagues for the last time, but they're continuing to work, usually part-time. (Think consulting.) Call it the partial retirement or the job-tirement. It allows savings to compound longer. Delaying taking Social Security benefits locks in a more generous payout. "People aren't slowing down in their 60s and 70s," says Ross Levin, a certified financial planner (CFP) and president of Accredited Investors in Edina, Minn. Adds Joel Larsen, a CFP with Navion Financial Advisors in Davis, Calif.: "If you really like what you're doing, why retire?"

WHEN INCOME REPLACES SAVINGS

Just ask Don Lambert, age 67. The engineering manager retired from Fisher Controls (now Emerson Process Management, a division of Emerson) in 2002. He spent 32 years with the company, half of it abroad, mostly working on projects in the Middle East and Africa. He lives in Ames, Iowa, and when he retired he set up a consulting firm with Fisher as a client. He spent two years on contract with Fisher in Saudi Arabia, where the only thing he had to pay for out of pocket was his "newspaper and haircuts." He still works about two days a week and spends the rest of his time doing community volunteer work with the Rotary International, Meals on Wheels, and the Iowa Council for International Understanding. Lambert has a defined benefit pension plan, Social Security, savings, and no debt. He takes out roughly 3 percent of his savings a year. "I don't need to draw on a lot of my savings yet," he says.

The twin benefit from a higher Social Security benefit and returns that have compounded longer is striking. The Social Security payout rises 8 percent a year for every year of delay after age 62 and before age 70. Laurence Kotlikoff, finance professor at Boston University and head of ESPlanner, an online financial planning website, ran a simulation. Among the key assumptions: A couple is 60 years old, each earns $100,000, and they have a total retirement portfolio worth $2 million. If they elect to take Social Security at age 62 in 2013, they draw on enough of their savings for a total income averaging around $140,000 for the next 38 years. That means they can maintain their standard of living at 70 percent of preretirement income.

Yet if the same couple shifts to part-time work in 2013, making $30,000 each for four years, draws on their 401(k)s, and waits until age 70 to file for Social Security, their discretionary spending jumps by 14 percent, to nearly $160,000 over the next four decades. "To get the same living-standard-hike, the couple would need to find $455,000 lying on the street," says Kotlikoff.

UNDERMINING OLD RULES OF THUMB

But (you knew the "but" was coming, didn't you?) working longer complicates everyday money management by upending a few critical and common assumptions. A traditional benchmark is that in order for households to maintain their standard of living in retirement, they need approximately 70 percent of preretirement income. The lower figure comes from the assumption that a retiree will drop into a lower tax bracket, have more time to shop for deals, and won't incur many expenses associated with work. For instance, economists Mark Aguir of the Federal Reserve Bank of Boston and Erik Hurst of the University of Chicago delved into household data on food gathered by the U.S. Agriculture Dept. from the late '80s and early-to-mid '90s. They found spending on food fell 17 percent among retired households while the time spent making meals rose by 53 percent. There was no real difference between eating out at table-service restaurants for those aged 60 to 62 (pre-peak retirement) and those 66 to 68 (post-peak retirement), except that the retired household spent 31 percent less on fast food and diners.

The old rule is obsolete for the partially retired. The retiree's tax bracket may not drop. The dry cleaning bill will probably stay the same. They're busy and just as likely to grab a burger before a meeting or stop for a takeout meal on the way home as they did before retirement. "I don't think the 70 percent rule applies," says Moshe Milesky, finance professor at York University in Canada and a wealth management and retirement expert. "It may be higher than that."

The other big change is that an aging, income-earning household needs to save from every paycheck, just like their younger co-workers. After all, the cost of goods and services used by the elderly is going up. True, over the past 12 months the consumer price index is up a mere 2.1 percent. Yet that average masks some critical differences. Fuel oil is up 27.1 percent and medical services 3 percent over the same period—a big blow to the budgets of the elderly—while the price of personal computers is down by 7.4 percent, which may be a boon to younger folks. Mutual fund giant Fidelity estimates a 65-year-old couple retiring in 2011 will need $230,000 to pay for medical expenses throughout retirement (and that does not include nursing-home care). "Every single one of our friends has had some serious financial surprise during retirement that was completely unseen," says Henry "Bud" Hebeler, the former president of Boeing Aerospace. His own "retirement" turned into a career offering retirement and financial-planning advice at his website, Analyzenow.com.

Hebeler has devised his own formula for how much to save in retirement while working. He recommends taking your monthly take-home pay, after all deductions and taxes; multiply it by the number of years you will still work, and divide that figure by the number of years it's possible you have to live. For example, say a 65-year-old plans on working another 10 years, expects to live to 95, and makes $2,100 a month after deductions for Social Security, Medicare, union dues, and the like. The monthly amount she can spend from that paycheck would be $700 (2,100 x 10/30 = $700). The remaining $1,400 should go right into savings. Clearly, this isn't our parent's retirement.

Do You Need Long-Term Care Insurance?

According to the Department of Health and Human Services, those of uswho reach age 65 will have a 40% chance of entering a nursing home, and 10% will stay in one for five years or more. So does this mean you need long-term care insurance? Possibly.
Those numbers don't take into account the millions of aging adults who will need some kind of in-home care as their health falters. By 2020, 12 million older Americans will need long-term care, according to one government estimate. Most will be cared for at home by family members.

Long-term insurance is marketed as a way to fill in the financial gaps if you have a chronic illness or disability and need help with the activities of daily life, like bathing and getting dressed.

"The additional expense of long-term [care] can be $40,000-$90,000 a year," says Rich Arzaga, founder of Cornerstone Wealth Management. "The average American cannot survive this risk and expense." Nor can you count on the government to bail you out when the time comes: Medicare doesn't pay for "custodial care." Medicare pays only for medically necessary, skilled nursing facility or home health care. It may not give you the choice of the best care in your area. And while Medicaid pays for certain types of care for the low-income elderly, who is eligible and what services are covered varies from state to state, and is determined by such things as income and personal resources.

"Many folks wrongly believe that letting the government pay for their anticipated long-term care needs is the best solution, but Medicaid programs are in trouble funding-wise in every state," says Wilma Anderson, a registered financial consultant. "In the future Medicaid may become even harder to qualify for. If you don't plan for LTC, you may have limited or no choices to pay for care when your health changes."

Here are four things to consider when planning for long-term care:

How will you pay the bills?: Many financial planners and elder care experts say long term care insurance is a good place to start. It typically helps pay for things that your medical insurance won't, like in-home care, or remodeling your home so you can stay in it longer. But as with all forms of insurance, it's vital do your research.

Investigate the cost of a stand-alone long-term care policy: The younger you are, the lower the premium will be. The cost really depends on factors like family health history, age, how much insurance you think you'll need, how long you'll need it, where care is received, and more, explains Marion Somers, PhD, author of Elder Care Made Easier: Doctor Marion's 10 Steps to Help You Care for an Aging Loved One.

Shop around for the best policies and prices. Benefits vary: Weigh the scope of coverage, benefit and waiting periods, inflation protection and other factors against your income and health needs.

Read the fine print: "Insurance companies may try to offer added-value features beyond the basic benefits, but most of them don't add much value at all. Be thoughtful and realistic about your needs and priorities," says Ryan Malone, founder of InsideElderCare.com.

Truthfully, says Somers, "Not everyone needs long-term care insurance, but everyone needs a plan."