Making Sure Money’s Still There When It’s Needed

by John Wasik

In years past, retirement was guided by simple arithmetic. You knew exactly how much Social Security, savings and your defined-benefit pension would pay you, then cut back any unaffordable expenses when you hit 65.

Now that Social Security and Medicare are being eyed for cutbacks and 401(k)’s produce ever-varying lump sums, the retirement planning process requires a more sophisticated strategy.

Hobbled by two recessions and major market downturns in the last dozen years, future retirees are frustrated about their ability to plan ahead. They may not have enough money to maintain a comfortable lifestyle and need to make adjustments.

This new retirement reality is reflected in the fact that only 14 percent of Americans polled in the 2012 Retirement Confidence Survey conducted by the Employee Benefit Research Institute said they were “very confident they will have enough money to live comfortably in retirement.”

Because of this widespread pessimism, more than half those surveyed said they had not even tried to calculate how much money they will need in retirement. With the stock market and economy rebounding this year, perhaps that will change.

There are plenty of routes to address retirement planning needs, ranging from simple online calculators to employer-provided preretirement services. Financial advisers, including certified financial planners and chartered financial analysts, also offer their services to create customized comprehensive plans and portfolio management. Whatever avenue you choose, it’s going to get complicated.

Stephen J. Lansing, chief investment officer for Financial Soundings in Alpharetta, Ga., has found that “the vast majority of people don’t take the time or make the effort to plan for retirement and many who try do a poor job of it.” His company provides retirement planning services to employers.

The complexity can be daunting. How much money will you need, given your investments, rates of return, life expectancy and amount of risk you’re taking in your 401(k) portfolio? Mr. Lansing’s company and others will provide a range of probabilities of employees meeting their goals, then give advice on what they need to do. Many financial advisers, mutual fund companies, brokerage houses and planners also provide this service.

For many people, Mr. Lansing said, the preretirement profile shows a “funding gap,” indicating that changes in behavior are needed to meet objectives. This Rosetta stone of planning is essential because it may necessitate increased contributions to retirement plans, a larger allocation to stocks or greater outside saving.

“The biggest problem is people don’t save enough,” Mr. Lansing added. “Sometimes they have to save two to three times more than they are currently setting aside.”

At the very least, preretirement planning or a “readiness profile,” will tell you if you’re on track to retire when you want to. It will also tell you if you have to bolster your nest egg, adjust your portfolio or scale back your retirement objectives.

Most boilerplate retirement models assume you’ll need to replace 80 percent of your preretirement income. Yet you may need less than that if you downsize your home, move to a state with no income tax (Florida, Nevada, New Hampshire, Texas or Wyoming) or broadly cut your living expenses.

Here’s what a basic retirement analysis might tell you: Based on your salary before retirement of $125,911, you’ll need $100,729 in your first year of retirement to replace 80 percent of your income. If combined savings, pension income and Social Security can’t match this number, you’ll need to address the shortfall.

Your retirement comfort number, of course, will change depending on what happens to Medicare and Social Security. Several proposals have been floated in the last year, ranging from Medicare “premium support” plans that will give you money to buy privately issued insurance policies to means-tested benefit reductions for higher-income retirees. In nearly every benefit-cut assumption, though, you’ll most likely dig deeper into your pocket.

Just what will happen with any of these proposals will depend largely on what happens in the November elections, which will shape the direction Congress will take.

In many cases, simple math can provide answers on how to fill the gap. You can tell your employer to raise your pretax contribution to your retirement plan. You can also invest on your own by creating a portfolio of low-cost index funds. Retirement vehicles abound: Roth individual retirement accounts for tax-free withdrawals; conventional I.R.A.’s, and mini defined-benefit pension plans you can set up if you’re self-employed. You can also set up taxable portfolios in brokerage accounts that buy dividend-paying stocks.

Aside from crunching the numbers to define a comfortable retirement, “softer” questions — often neglected in planning — require contemplation. The International Foundation for Retirement Education (infre.org), found in a retirement readiness survey that only “one-third say they have some plans but are mostly just looking forward to having more time for leisure activities.”

“What is the money for?” Robert Stammers, director of investor education for the CFA Institute, said investors should ask themselves. “What does retirement mean? Clients need to tell their advisers what they want to do when retired, although that’s difficult for most people.”

For some people, full retirement may not be an option — or even desirable. You may want to work longer or part time. You may even consider a phased retirement where you gradually reduce your working hours. Or you may have a need for social engagement and find being a full-time volunteer desirable.

It may be helpful to talk not only with your partner or spouse and a trusted adviser but also to do a more comprehensive breakdown of social, personal and wealth goals in retirement. Still, much will depend on how healthy you are and how you plan to occupy your time. The latter can be planned better than the former. Thoughtful preretirement planning may even lead you into another career or several new pursuits.

If life expectancy continues its upward curve, you’ll have your work cut out for you, because you may need to think about what you want to do in your 10th and 11th decades. If you’re fortunate, you’ll have plenty of time to think about it.

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