8 Realities of the New Retirement

Economic problems and government deficits argue for defensive approaches to spending and investment.

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The jobless economic recovery was already disappointing before leaders around the world decided that economic stimulus programs had to yield to spending restraints, and at least a modest effort to curb potentially ruinous budget deficits. The markets swooned and the experts began dusting off their more dire predictions -- a double-dip recession, an extended economic malaise or the still-evolving stages of a long-term depression. Whatever you call it, it's bad news for retirees and would-be retirees concerned about living on fixed incomes. As economists restart their advisory machines, so are we. Here are the major realities of the new retirement, updated to reflect stronger doses of conservatism and defensive postures.

[ See America's Best Affordable Places to Retire.] Continue Employment. Continuing to work has emerged as the most recommended strategy of the new retirement. It keeps a paycheck coming and, if you're lucky, employer-provided health insurance, retirement account contributions, and other benefits. And for each year you work, you cut a year off the time your retirement nest egg must last. Lastly, continuing to work may also provide you the ability to delay claiming your Social Security benefits, and each year you can put off taking Social Security, your benefits will rise by about 8 percent. Benefits do not increase once you've turned 70. 

Go Back to School. Even if you leave the work force, this may not be a permanent decision. Many people get bored in retirement and also miss the discretionary spending that a paycheck can provide. Or, you may simply want to embark on a new career. Whatever the reason, your enjoyment and workplace choices can be enhanced by going back to school. Community colleges have been a great bargain but many of them have been hit by budget cutbacks, so shop carefully when considering classes.

Social Security Claiming Strategy. As noted, each year you wait -- from the earliest eligibility at age 62 until you turn 70 -- your Social Security benefits rise by about 8 percentage points. For most people, this means that the benefits they would receive at age 62 would be only 75 percent of what they're entitled to if they wait until the age of 66, which is considered "full retirement age" for most Baby Boomers. And if you wait until age 70, that amount goes up to 132 percent of your age 66 benefits. These are real annual gains, because overall benefits are also adjusted each year to account for inflation. Another key aspect of claiming strategy involves couples. It may be possible for one spouse to begin drawing half of the other spouse's Social Security benefits while still delaying their own claiming date (and thus enjoying those 8 percent annual benefit increases). Check out the Social Security Claiming Guide at Boston College's Center for Retirement Research.

Taxes. The economic and political weight of enormous budget deficits makes it all but certain that your taxes will rise. Already, trial balloons are being floated by the Obama Administration about not extending the Bush-era tax cuts for even all middle-class taxpayers (the President has long said they wouldn't be extended for the wealthy). And the failure of recent Congressional efforts at a modest bump in stimulus spending further illustrates that fiscal responsibility will be a major issue in this fall's elections. As you think about your future after-tax income needs, you should create some alternative budgets that feature 5-percent and even 10-percent cuts in your spending money. What would those trims do to you?

[See Lifetime Income is an Elusive Goal.]

Health Insurance. We are in a challenging no-man's land until the recent health reform law takes full effect in 2014. In the interim, many hard-pressed private insurance plans will feel forced to trim benefits for active and retired employees. Basic Medicare coverages are not being trimmed but the new law did reduce the amount of money available to Medicare Advantage policies. When the new Medicare Advantage plans are revealed later this year, it's widely expected that some insurers will drop out of that market and that remaining policy features will not be so generous. There also are changes in Medigap policies (also known as Medicare supplement), so you ought to research those as well. Good information sources include the government's Medicare site and the non-profit Medicare Rights Center. Reverse Mortgage. Reverse mortgages permit homeowners aged at least 62 to get out from under mortgage payments and remain in their homes. They do so by effectively using the owner's remaining equity in the home to make loan payments to a reverse mortgage lender. Because reverse mortgages are what's known as non-recourse loans, a homeowner can never wind up owing money on a reverse mortgage, regardless of how long he or she remains in the home. Reverse mortgages have been controversial and have carried high fees. But they have grown in popularity as many seniors have faced problems trying to sell their homes, or have seen the value of those homes plummet. There is a federally insured program that has provided stability and credibility to the product, and includes mandatory consumer counseling. Recently, some of the high fees have come down as well.

Revised Glide Path. The glide path is the name given by retirement investment funds to the changing mix of stocks and bonds held by the funds as investors age. Simply stated, most experts advise retirees to adopt more conservative investment objectives as they get older. The reason -- illustrated painfully in 2007 and 2008 -- is that older investors are very vulnerable to market losses and need more defensive investment strategies. In response to the steep market decline, many investors have turned very conservative and so have some funds. However, more and more people are living well into their 90s, reflecting what's known as longevity risk. To guard against outliving your assets, some investment advisers say, retirees should not make the mistake of becoming too conservative in their holdings.

Spending Retirement Assets. The most common advise in making retirement assets last a long time is to spend down no more than 4 percent of your assets a year. That way, you can have confidence you won't outlive your money. A lot of financial advisers think this is overly conservative advice, even in light of the recent market decline. Whatever number makes sense to you, it needs to be accompanied by a strategy to actually manage your retirement assets to produce whatever level of payouts you've selected. This "spend down" or "decumulation" plan receives way too little attention from many retirees. But it's crucial to your future financial stability as well to your peace of mind.

[See 15 Tasks to Become Retirement Ready.]