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The US retirement system is about to face its biggest challenge. The baby boomers are starting to retire. What can the baby boomers do to prepare for retirement? What will they do with themselves during their long retirement?

Retirement Revolution is PBS show hosted by Paula Zahn. The first part airs on PBS for the first time on March 31, 2008. The second half “On Our Own” airs on PBS Monday April 7th, 2008 for the first time. I watched the second episode via the website and I’ve outlined the highlights of part two below.

Note that this is the information presented by the Retirement Revolution. I’ve made commentary where I felt it was appropriate.

Part Two: On Our Own

Baby Boomers’ Challenge

The baby boomers face many risks going into retirement. These include longevity risks among others.

There are three legs of the retirement stool: social security, employer retirement plansand finally personal savings and home equity. This is what most boomers have for retirement.

Boomers have a lot of financial options and many are seeking advice from financial planners. When you are looking for a planner ask some question: How will the advisor get paid, what is their benefit for managing your money?

Mike and Mary Bahr are a couple in their early fifties facing some challenges. They seek the help of a fee based planner. A fee based planner only gets paid an hourly or fixed rate. He doesn’t sell any financial products. This helps cut down on conflicts of interest.

Mike Bahr had union pension benefits. But they changed the rules b/c all the union members were retiring, except him. Defined benefit pension (traditional pension) plans are being replaced by 401(k) programs

Marry Bahr has a better situation. She has 401(k) and 403(b) plan. The 401(k) wasn’t planned by the government. It came about as a consultant found the obscure tax code that let his clients offer an alternative to a pension plan. It has of course blossomed into the premier retirement options for more than half of Americans. The 403(b) plan is for non profits like schools and health care facilities. My wife has one as an early childhood educator.

A 401(k) is usually a great deal so why do so many people turn down or not fully fund their 401(k)? Some of the excuses: I’ll do it later, I’m busy now. I have other needs for the money. I’m confused by the plans.

Now firms can reduce paperwork by automatically enrolling employees, automatically increasing employee contributions every year and by matching contributions. Congress hopes these changes in the rules will lead to more people enrolling in 401(k) plans.

The Bahrs have most of their money in their house. Homes can be the best investment for “most people.” This is simply because most people buy houses and after 30 years their mortgage is paid off so they have equity in their house.

Some retirees are turning to reverse mortgages. These mortgages pay you money every month. The mortgage holder is repaid when you “cease to occupy” the home. This can be a good deal for people who are house poor; they have little money but a lot of equity in their home.

Getting Older

Longevity risk is the risk involved in getting old. The risks include running out of money and long illness.

Insurance can help mitigate this risk. Will someone suffer financially from your death? If so then you need life insurance.

Boomers are looking at long term care insurance. Boomers see themselves as the sandwich generation because they are caught in the middle. They have to care for parents and kids in college. They don’t want their kids in the same situation. Long term care insurance can provide for either nursing home care or home based care.

You also need disability insurance. Most people think disability insurance is for accidents on a manufacturing job. However 30% of people will have long term disability in their lifetime. It’s not just on the job injuries not just injuries but illness (cancer, stroke, etc).

I have been on long term disability and I’m only in my thirties. I had a collapsed lung and it required surgery. I was out of work for over a month. Luckily my job provided long term and short term disability.

Annuities are another form of insurance. Annuities pay out money during your life until you die. Most people understand life insurance but few understand annuities. However some annuities can be a bad idea. I’ve included a link to the SEC page on annuities in the article links below. Social Security can also be considered an annuity. Instead of an insurance company, it’s the government who is guaranteeing benefits.

SIDENOTE: It seems most of these people are getting into retirement plans because of the tax benefits. Most people really seem to be forced into long term savings because of short term savings consideration. This is an area for future research.

Personal savings are now at a negative rate. We hear two conflicting messages. Spend to keep the economy going but save for your own future. Some people are natural spenders and some people are natural savers.

SIDENOTE: Author David Bach seems to have some good advice. I will have to read some of his books sometime.

The longevity risk implies that you might outlive your money. So what do you do? Inflation eats up the returns from traditional savings because the return is so low on savings accounts.

People have many options with mutual funds. One of the newest varieties is the target date maturity fund. These funds are diversified among several assets classes. The asset mix or allocation becomes “safer” or more conservative as the target date for retirement (or another savings goal like college) approaches.

With retirement planning you have to assume bad things can happen. In every asset you are invested in assume that the worst thing that has ever happened can happen again. For instance if you are invested in real estate, anticipate a real estate crash in your planning.

Sidenote: Jeremy Siegel of the Wharton School of Business at the University of Pennsylvania seems to have some sensible advice. I will have to make a note to read some of his work also.

Working into Our 70’s

Be careful with your nest egg. Don’t take money out of you retirement to invest in a house, “that’s insanity!” Don’t take money out of your 401(k), its just that simple. You will pay taxes and penalties.

Make sure you roll over your lump sum payment from your previous retirement plan when you change jobs. Tax sheltered money is like an egg shell, “when you break it its over.”

The Roth IRA is a great deal. You pay taxes on the money before it goes into the plan. The money you take out is tax free. However there are rules you have to follow. If you take money out before 59½ there is a 10% penalty on the returns only. Also there is a limit on how much you can contribute each year. If you have a relatively high income, you could be excluded from contributing to a Roth altogether.

In a traditional IRA you are required to take distributions after you turn 70½ . If you don’t you could face a 50% penalty for money that should have been taken out. This penalty DOES NOT apply to a Roth IRA and you could feasibly contribute until you die, at which point the money would pass to your heirs.

Keep in mind you can take your principle out of a Roth at any time. You’ve already paid taxes on it, it’s your money. However, the investment profits, dividends, etc, are taxable and are penalized if you withdraw them. A Roth can be inherited. Heirs can take out money tax free when they inherit a Roth.

Make sure you name a person as a beneficiary on any IRA. The money goes directly to that person. Make sure you update this as your situation changes. If you get divorced, your spouse dies or you have kids you may want to update the beneficiaries on your retirement accounts.

The golden rule of retirement planning: Keep your money away from the government for as long as possible.

There are more entrepreneurs over 50 than under 50 according to AARP. Older people are more ready to try new things or have been pushed out of their jobs. They need to make their own jobs.

Boomers also get seconds jobs to stay active or fund their retirement accounts. They are getting used to the idea of working into their 70’s. Half of AARP members are working at least part time.

Are woman more likely to have to work in retirement? Lower paying jobs, relying on husbands and living longer than their husbands may cause financial hardships. (Plus they buy a lot of crap. I hope my wife isn’t reading this!)

Boomers are not just working and playing. They are also volunteering. They are focusing on their families.

Conclusion

Boomers have to be more financially savvy than their parents.

What did the financial planner tell the Bahrs? Pay of their mortgage and get long term care insurance. Mike is setting up a business. He should start a retirement plan through his business. And use a separate credit card for the business. Also be more aggressive with their investments. They are in their early fifties should be able to retire in their late sixties if they follow the planners advice.

It’s never too early or too late to start saving for retirement. Boomers will work longer either b/c they have too or want to. 78 million baby boomers are moving into retirement. The next few decades will at least be interesting.

I give the second part 4 out of 5 stars. There is more information in the second half that should be fairly useful those looking to retire. It's at least better than watching House re-runs, right?

Article Links

Retirement Revolution Website pbs.org

Watch Retirement Revolution Online wttw.com (You'll have to click on "part two" to watch it, I couldn’t find a direct link to part two)

SEC Page on Annuities sec.gov

Tags    401(k)    baby boomers    Insurance    Retirement    Roth

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