How to avoid your own retirement crisis

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Elliot Raphaelson

Many of today’s workers will have a hard time retiring at the traditional age while maintaining their standard of living.

A new book on the subject, Falling Short: The Coming Retirement Crisis (Oxford University Press), offers useful insight into the problem. Authors Charles Ellis, Alicia Munnell and Andrew Eschtruth, experts in retirement planning, offer advice both on “what we can do as individuals” and “what we can do as a nation.” Here are some of their ideas.

Here are some of their ideas for individual initiative.

• Work longer. Not everyone has this option, but those who do reap significant advantages. Working longer not only produces current income; it also results in a large increase in Social Security benefits, allows you to contribute more to your retirement plan for higher investment income, and shortens the length of retirement, reducing the lump sum required to maintain your standard of living.

• Save more. This is easier said than done. In a 2014 survey, 36 percent of respondents had not saved anything for retirement, and 56 percent had not even tried to figure out how much they might need.

Making saving “easy and automatic” is the way to go in order to save more. I was able to retire in my 50s because I instituted automatic investments from my salary as soon as I started working, prioritizing my retirement objectives over other expense alternatives.

• Make your 401(k) plan work for you. The earlier you start contributing toward retirement, and the longer you wait before withdrawing funds, the lower the required contribution. Join your employer’s retirement plan as soon as possible, and contribute at least enough each year to receive the full employer match.

• Invest wisely. Don’t stop investing in stocks because of a short-term fall in prices. [Ed: In fact, when prices fall, it may be the best time to buy.] Rebalance your portfolio regularly. Use investment alternatives with the lowest fees. Use index funds and target funds to achieve superior results with low fees.

• Keep the money in the plan until you retire. Too many who invest in retirement plans withdraw funds prior to retirement, particularly when they change jobs. Avoid this; you’ll pay a 10 percent penalty and lose the tax-deferral advantage. When changing jobs, you always have options to roll over retirement funds.

• Consider an advanced life deferred annuity. Annuities are contracts offered by insurance companies that pay monthly payments in exchange for a premium. They can protect you from outliving your assets — and may provide you more annual income than you could obtain on your own.

An advanced life deferred annuity, also called longevity insurance, is designed to ensure a steady income if you live beyond your mid-80s. The authors cite a typical case of a person at age 65. A one-time premium of approximately $12,000 would buy payments of $7,000/year for the rest of their life starting at age 85. This alternative may be suitable for healthy individuals who have other sources of income between 65 and 85.

• Opt for a Social Security “annuity.” Another option for individuals who have sufficient assets at retirement age is to “buy” an additional amount of Social Security by claiming benefits later, up to age 70.

By doing so, you increase your Social Security income by 8 percent per year deferred. This alternative is actuarially superior to a commercial annuity because insurance companies have expenses that add to the cost of the product that Social Security does not charge.

Planning for retirement is not easy. This book is concise, informative and highly readable. It is a valuable tool for anyone planning seriously for retirement (and everyone should be.)

Elliot Raphaelson welcomes your questions and comments at elliotraph@gmail.com.

© 2015 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC