Retirement planning can be a complex and daunting task. People with small nest eggs are particularly at risk. Their retirement hopes, modest to begin with, have taken a serious beating in recent years. And no one is predicting a return to happier days anytime soon.
When times are tough, however, is exactly when long-term planning and money management skills are most needed. For anyone seeking a structured approach to retirement issues, MyRetirementPaycheck.org is worth a visit. It was developed by the National Endowment for Financial Education (NEFE) in partnership with many leading retirement experts.
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The site divides retirement issues into eight topics that can have a major impact on how much money is available for retirement: debt, fraud, home and mortgage, insurance, pensions, retirement assets, Social Security, and work. It then explains the major issues in each category and adds some valuable insights about the linkages among the eight categories.
One simple example would be the possible effects of delaying retirement and continuing to work for two or three more years. This decision could permit someone to delay taking Social Security, and each year of delay between the ages of 62 and 70 raises benefits by about 8 percent a year. Such a delay can also keep employer-supported health insurance in place, add to retirement plan assets, increase the size of any retirement pension, and reduce the number of years that a person's retirement assets would need to help fund his or her retirement.
The foundation developed MyRetirementPaycheck to help provide basic retirement facts, not to permit sophisticated retirement modeling scenarios. "One of the key pillars of financial security is managing retirement income," says Brent Neiser, NEFE's senior director of strategic programs and alliances. "Understanding post-employment financial strategies is more important than ever." Since the recession, he adds, "people seem to grasp the importance of planning for the future and are taking it more seriously."
The theme of MyRetirementPaycheck is to help people think about putting together a retirement approach that can generate regular payouts that will cover their expenses and provide a stable and secure flow of income in retirement. "It helps people to think about the right questions to ask," Neiser says, and to understand the links between most retirement decisions.
While helping people think about building a retirement paycheck is a main focus of the site, it does not try to generate specific retirement income numbers. "We purposefully did not design this to come up with a number," Neiser says. NEFE's expert advisers were concerned that consumers who have not saved enough or built solid retirement plans—and that describes most Americans—would be discouraged if a quantitative tool told them they needed to build a nest egg that seemed unrealistically large.
NEFE and other experts have noted that most of the advice and emphasis in retirement planning is devoted to asset accumulation—saving and building a nest egg. There is relatively little attention paid to what's called decumulation—the process of spending down assets to generate retirement income.
Here is NEFE's top-level advice for the eight retirement topics:
Debt. To maintain a predictable cash flow in your retirement years, make every effort to pay off your consumer and credit card debt before you retire, and don't borrow money during retirement unless you know precisely how you'll pay it back. Consider the 10 years before retirement as your "debt-reduction" decade.
Fraud. You've worked hard building up retirement assets. Now you need to protect them. Older Americans—even those who are experienced with investing and are financially literate—are highly targeted by scammers, misleading advertising, and fraud, so be on guard. Make no money decisions quickly, and never without getting a second or third opinion from people you trust. If it sounds too good to be true, it almost always is.
Home and mortgage. A house may be your biggest asset, but be careful about viewing the value of your house as if it were a retirement plan. Even if the decline in home values has stopped where you live, the past five years have shown the dangers of counting too much on home equity for retirement funds.
Insurance. Your retirement spending plan is not complete until you know how you will pay for medical and long-term care needs. Insurance companies sell many forms of annuities. Putting at least part of your retirement savings into an immediate fixed annuity that will give you a monthly payment for the rest of your life creates a regular source of income.
Pensions. Your employer pension is an annuity that gives you a steady "paycheck" for your retirement. Even when you're retired, saving some of your pension benefits is a good way to protect yourself from inflation and ensure you have enough money for your later years.
Retirement assets. You do not know whether your retirement will last less than 10 years or more than 40 years. To be prepared for reaching advanced age, continue saving and making wise investments even during your retirement. At retirement, most retirees still need to invest in diversified assets that may need to generate income for decades.
Social Security. Taking Social Security payments too early means receiving less money each month than you would receive if you waited for even a few years. If at all possible, do not begin taking Social Security until you are at least your full retirement age [66 for people now nearing retirement]. If you take Social Security benefits at age 62, your benefit will be approximately 25 to 30 percent less than if you have waited until your full retirement age. For an even bigger benefit, wait until age 70, when your payment will be 75 percent higher than if you started taking benefits at 62.
Work. If you are healthy, aim to work at least until your full retirement age. It produces many benefits, including prolonging any healthcare coverage you have, building your retirement assets, and increasing your ability to reduce debt.