Retirement Advice for Upper-Middle-Income Preretirees

The future looks good, although a cushion for healthcare expenses makes sense for singles.

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Upper-middle-income people getting ready for retirement should be relatively well-positioned, particularly if they have pensions. They might consider extending their working lives if they want additional travel and non-basics in retirement, according to a series of advisory profiles of representative preretirees prepared by the Society of Actuaries (SOA). Couples are better-positioned than single preretirees, who are more exposed to unexpected expenses, particularly for long-term care. Here are details of three SOA profiles for upper-middle-income preretirees—a couple, a man, and a woman, all age 60.

[See Retirement Advice for Middle-Income Preretirees.]

There are common SOA assumptions underlying the profiles:

• Retirement age and the age of taking Social Security are both 66.

• Current income includes earned income, Social Security benefits, defined benefit pension income, required minimum distributions, and investment income.

• Financial assets are assumed to be 75 percent tax qualified (401(k)), and 25 percent after-tax savings.

• Social Security benefits are based on a single wage earner, with recognition of spousal benefits.

• Target retirement living expenses are assumed to be 80 percent of preretirement income. Expenses include insurance premiums and uncovered health care costs.

• For those who are already retired, target retirement living expenses are 90 percent of those for preretirees. These may exceed the current income of the retirees, but the analysis provides indications of the amount of additional income or the amount of additional assets that would be needed to support this higher standard of living.

• Essential living expenses are limited to the range of $25,000 to $35,000 for single households and $40,000 to $60,000 for married households.

• Discretionary living expenses are the excess of target expenses over essential expenses, but in no case less than $5,000.

• Defined benefit pension or other earned income is estimated at zero percent, 20 percent, and 40 percent of preretirement income, to provide a range of possible situations.

• Emergency funds are recognized at 50 percent of annual essential required income.

• Net after-tax assets assume taxes at 15 percent on taxable distributions and no tax on sale of a residence.

Profile 1: Couple

Preretirement income: $132,000

Financial assets: $416,000

Nonfinancial assets: $884,000

Future preretirement savings: $60,000

Net after-tax assets: $1,306,000

Essential retirement income needed: $60,000

Discretionary expenditures: $46,000

Additional emergency fund: $30,000

Social Security income: $42,000

Defined benefit pension or earned income: $53,000 or $26,000 or $0

Amount needed at retirement: $714,000 or $991,000 or $1,258,000

Advisory Summary

• A primary question will be the age of retirement.

• The $1,306,000 of net assets is sufficient to cover the net retirement and emergency fund needs in almost all circumstances.

• It will be necessary to extract value from the $884,000 of nonfinancial assets (borrowing against or selling a home, for example).

• Social Security income covers most essential expenses. It could be appropriate to purchase an income annuity with a portion of the financial assets to cover an additional share of essential expenses.

• Nonfinancial assets (home equity) can be relied upon for emergency funds.

• The amount of financial assets ($416,000) suggests that long-term care insurance would be appropriate.

• Appropriate assets to consider in some combination based on the moderate amount of the financial assets, include:

• Low-risk, simple investments and investment approaches: certificate of deposit, U.S. government bonds, money market fund, fixed deferred annuity, single premium immediate annuity, deferred income annuity (ALDA), home equity loan, under appropriate circumstances.

• Low-risk, more complex investments and investment approaches: TIPS, equity-indexed deferred annuity, deferred income annuity, reverse mortgage, under appropriate circumstances (after age 62).

• Medium-risk, more complex investments and investment approaches: individual municipal bonds, mutual funds or variable annuities that are invested primarily in bonds, real estate investment trust, single premium immediate variable annuity, variable annuity with GMIB, GLWB, GMWB, GMAB, or GPAF features.

• Medium-to-high-risk investments and investment approaches: individually purchased corporate bonds, balanced mutual funds or variable annuities, mutual funds or variable annuities that are invested primarily in equities, mutual fund withdrawal program, preferred stock.

[See Finally, Retirement Help for the Rest of Us.]

Profile 2: Single woman

Preretirement income: $58,000

Financial assets: $116,000

Nonfinancial assets: $299,000

Future preretirement savings: $30,000

Net after-tax assets: $429,000

Essential retirement income needed: $35,000

Discretionary expenditures: $11,000

Additional emergency fund: $18,000

Social Security income: $23,000

Defined benefit pension or earned income: $23,000 or $12,000 or $0

Amount needed at retirement: $245,000 or $337,000 or $437,000

Advisory Summary

• A primary question will be age of retirement.

• The $429,000 of net assets is sufficient to cover the net retirement and emergency fund needs in most circumstances, although it may be necessary to reduce expenses if there is no pension or earned income.

• It will be necessary to extract value from the $299,000 of nonfinancial assets.

• Social Security income covers almost all of the most essential expenses and the financial assets are limited; consequently, an annuity income to cover essentials may not be practical.

• Nonfinancial assets (home equity) can be relied upon for emergency funds.

• The amount of financial assets ($116,000) suggests that long-term care insurance may be uneconomic and that Medicaid may need to be relied upon for long term care expenses after savings are depleted.

• Appropriate assets to consider in some combination, based on the limited amount of the financial assets, include:

• Low-risk, simple investments and investment approaches: certificate of deposit, U.S. government bonds, money market fund, fixed deferred annuity, deferred income annuity (ALDA), home equity loan, under appropriate circumstances.

• Low-risk, more complex investments and investment approaches: TIPS, equity-indexed deferred annuity, reverse mortgage, under appropriate circumstances (after age 62).

• Medium-risk, more complex investments and investment approaches: mutual fund or variable annuity invested in bonds or with a guarantee.

• Medium-to-high-risk, more complex investments and investment approaches: balanced mutual fund or variable annuity.

Profile 3: Single man

Preretirement income: $79,000

Financial assets: $116,000

Nonfinancial assets: $349,000

Future preretirement savings: $40,000

Net after-tax assets: $490,000

Essential retirement income needed: $35,000

Discretionary expenditures: $28,000

Additional emergency fund: $18,000

Social Security income: $25,000

Defined benefit pension or earned income: $32,000 or $16,000 or $0

Amount needed at retirement: $373,000 or $495,000 or $616,000

Advisory Summary

• A primary question will be age of retirement.

• The $490,000 of net assets is sufficient to cover the net retirement and emergency fund needs if there is significant pension or earned income. Otherwise it will be necessary to reduce expenses, seek employment, or defer the retirement date.

• It will be necessary to extract value from the nonfinancial assets.

• Social Security income covers most essential expenses and the financial assets are limited; consequently, an annuity income to cover essentials may not be practical.

• The amount of financial assets ($116,000) suggests that long-term care insurance may be uneconomic and that Medicaid may need to be relied upon for long term care expenses after savings are depleted.

• Appropriate assets to consider in some combination, based on the limited amount of the financial assets, include:

• Low-risk, simple investments and investment approaches: certificate of deposit, U.S. government bonds, money market fund, fixed deferred annuity, deferred income annuity, home equity loan, under appropriate circumstances.

• Low-risk, more complex investments and investment approaches: TIPS, equity-indexed deferred annuity, reverse mortgage, under appropriate circumstances (after age 62).

• Medium-risk, more complex investments and investment approaches: mutual fund or variable annuity invested in bonds or with a guarantee.

• Medium-to-high-risk, more complex investments and investment approaches: balanced mutual fund or variable annuity.

[See 8 Money Trends Shaping Seniors' Lives.]

Twitter: @PhilMoeller