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Careful planning can make the difference between enjoying your golden years or struggling to just get by. When Mary Johnson of Romulus decided she was tired of going to work every day, she retired. “Just like that,” she said. With little advance planning, the 60-year-old divorced mother of 13 – six children of her own and seven stepchildren – quit her job as a nurse at the state psychiatric center in Northville. “I just didn’t want to work so hard anymore,” she said. Four months into her retirement Johnson has a few regrets. “I didn’t make any preparations. I know I know I should have. “I should have attended more of the meetings they were always having on planning for your retirement. I didn’t realize at the time how important they were.” Planning a retirement is among the most important decisions in a person’s life. But many retirees go into it with too little planning and wind up making mistakes. Among the most common: Ignoring InflationWhen workers retire, thy generally have pensions as well as savings accounts, mutual funds, Individual Retirement Accounts and 401 (k) plans. But the only income that is likely to be indexed to keep pace with inflation is the Social Security benefit. Income from the rest of the resources may remain fairly flat. Considering that the average 65-year old man can expect to life another 15.5 years, and a woman can live close to another 20 years, you may need more money that you think. Investment must generate a total return beyond inflation and taxes; otherwise, the retiree actually ends up going backwards. The key is a purely diversified portfolio that provides for both growth and income, or a pension option that offers cost of living increases. An income that provided a fairly comfortable lifestyle the first few years of retirement may prove inadequate 10 years later. Underestimating Expenses Dick Tracht of Plymouth is using his retirement to do all the things he didn’t have the opportunity to do while he was working. Tracht, 62 retired last June. “It was a beautiful year. I spent the time boating and fishing; I love the water and bought a bigger boat,” he said. But boats or whatever may interest you - cost money. That makes careful planning of a retirement budget critical. “Many people underestimate the amount of money they need to maintain the lifestyle they enjoy,” said Phyllis Wordhouse, a wealth coach in Plymouth. Some expenses do go down when you retire. You no longer need the expensive suits or money for commuting expenses. At the same time other costs rise. Utility costs may increase because you spend more time at home. You may spend more on the recreational activities whether it’s for travel, the movies or daily golf outing. One of the most significant expenses will be medical care, Kathryn and Ross Petras, authors of The Only Retirement Guide You’ll Ever Need, estimate medical and dental costs, including drugs may rise up to three times what your are currently paying. That’s not even counting the cost of health insurance. If you are 65 and eligible for Medicare, you’ll likely have to buy a supplemental policy. But if you or your spouse is younger than that you may have to pay $400 or more a month for coverage unless your employer has specifically agreed to pay health insurance. In general, a retired person needs 75 percent of his or her pre-retirement after tax income to maintain the present standard of living. Mark Rogers, senior vice president I the retirement management group at Smith Barney in Farmington Hills, said the key is to start tracking expenses before retirement. “You’ll have to do something serious calculations about what you’re spending now and what expenses you’re likely to have in the future,” he said. Over-Aggressive InvestingRetirement is the time to become more conservative. If you keep too much of your money in company stack for example, and the value of that stock declines dramatically, you may net be able to afford to stop working when you planned. When interest rates are rock bottom, as they were the last few years, retirees may be tempted to put their saving into more aggressive investments. That may be a mistake, since the retiree has fewer options for recovering losses, With Treasury bills and CDs constantly rising and falling, those on fixed incomes are under pressure to take risks. Not Protecting a SpouseMany retirees jump at “pension maximization”’ offers that may deliver less than expected. Under the pension maximization plan the retiree opts for a higher monthly pension payment that provides benefits for his or her lifetime only. After the pension holder’s death, the retiree’s spouse can’t collect benefits. Under many plans the extra money can be used to buy a life insurance policy that lists the spouse as a beneficiary. Wordhouse and Rogers say the insurance investment don’t always provide as much income as expected. In addition, the spouse losses survivor’s rights to the pension, including any cost of living increases and health insurance that goes with it. Health insurance is another area to make sure your souse is protected. Someone retiring at age 62 may get extended health insurance benefits from his or her employer until age 65, when Medicare kicks in. But their non-working spouse, if younger, may loose health insurance coverage at that time. Also, find out if health insurance will continue for your spouse, after your death. In many cases, it won’t. Be informed – and get all promises about health care in writing. Retiring Too SoonMost people begin drawing Social Security at age 62, even thought the benefit is only 80 percent of what they could draw by waiting until age 65. That can make a big difference in how comfortable you live. The general rule of thumb is: If you will depend on Social Security for more that half you income, or if you have less than $100,000 in cash assets, you may be better off waiting until age 65. Also, Social Security uses 35 years of earnings to determine benefits. Workers with a shorter work history will receive a lower monthly benefit than a worker who was employed longer. You may need the extra three years to put up the benefit. Call Social Security (800) 722-1213 and ask for Personal Earning and Benefits Estimate Statement form. Stepping Into a Tax TrapIf a lump sum distribution check from your employer is made out to you, your company is required to withhold 20% for taxes. Avoid the mandatory withholding by having the check make out directly to the brokerage firm, Mutual Fund Company or other firm with whom you plan to open your IRA.
The Detroit News Monday, January 30, 1995 By Noreen Seebacher
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