Should your retirement plan be to work longer?

Here’s the good news: we’re living longer. And here’s the bad news: we’re living longer. According to the Society of Actuaries, Americans who reached age 65 in 2011 are projected to live another 21 years to age 86, on average. If these same Americans reach age 86, their life expectancy would extend to age 93! As a result, the U.S. population aged 65 years and older is growing rapidly. In 2010 (the most recent year for which data is available), older Americans comprised 13 percent of the population. But as baby boomers creep up in age, population projections for those over 65 explode within two decades. In 2030, older adults are expected to number 72 million, almost 20 percent of the country’s total population.

While 75 may be the new 55, there are some significant ramifications of the population boom. Whereas previous generations could plan on retirement lasting 10 or 15 years, today we have to count on 25 or 30 years, making the task of saving enough a mighty difficult one.

When most people think about retirement planning, there are three basic strategies: save during your working years; spend less in retirement; and delay the age of retirement. While saving early and consistently is the oft-prescribed remedy, it’s not always easy to implement. In fact, pre-financial crisis retirement planning often consisted of relying more on an increase in home equity and a steady rise in investment accounts, than on increasing contribution levels. But the financial crisis and Great Recession of 2008-2009 blew up those assumptions, forcing some to reduce or abandon contributions and in extreme cases, to spend down a substantial portion of their nest eggs to survive.

These folks are looking at ways to squeeze their current and future expenses, but many have determined that the only way they will be able to fund a lengthy retirement is to work longer. According to a recent Associated Press poll, 82 percent of working Americans over 50 say it is at least somewhat likely they will work for pay in retirement, and 47 percent of working respondents now expect to retire later than they previously thought. Respondents plan to call it quits at about 66, or nearly three years later than their estimate when they were 40.

Given what has transpired over the past five years, those results should not surprise anyone. Among those who report retiring before the Great Recession, the retirement average age was 57, while the average for those who retired after the crisis is 62. The dramatic turn in financial circumstances, combined with living longer and healthier lives, has led many to remain in the workforce. According to the U.S. Bureau of Labor Statistics, about 18.5 percent of Americans age 65 and over were working in 2012, almost 8 percentage points higher than in 1985, when just 10.8 percent of Americans over age 65 were still at work. By 2020, an estimated one-quarter of workers will be 55 or older, up from 19 percent in 2010.

But just because you want to work, does not mean that you will easily get a job. The AP poll found that 22 percent of adults, age 50 years and older have searched for a job in the last five years. Of that group, over half have found the job search to be moderately or very difficult. With 11.3 million Americans seeking employment, the competition is obviously stiff.

In fact, a third of retirees told AP that they did not feel they had a choice except to retire. They may have wanted to work longer, but without steady income, they were forced to file for Social Security benefits early. Although doing so permanently reduced their benefits, a lower monthly check is far better than no check at all.

One glimmer of hope is that as the recovery continues, more jobs will become available and as the folks in charge of hiring examine the applicant pool, they may find that a robust 55 year old will be a more appreciative and loyal employee than a younger counterpart.

Distributed by Tribune Media Services

Investor Survival Kit

While many are saying that the U.S. has never defaulted on its obligations, that’s not exactly the case. Historians say that technical default has occurred five times in the country's history. In 1779, the government was unable to redeem the continental currency issued during the Revolutionary War; in 1782 the Colonies defaulted on the debt they had assumed to pay for the war; in 1862, the Union failed to redeem dollars for gold at terms stated by the debt contracts; in 1934 FDR defaulted on the debt issued to finance World War I; and in 1979, a bureaucratic snafu resulted in missed interest on some small bills. But you get the point -- default is rare and is certainly unprecedented in the age of electronic trading and an interconnected globe. In the unlikely event that politicians can’t pull it together, stocks could plunge; short-term interest rates could spike; business and consumer confidence would falter, which would cause an increase in unemployment and potentially push the economy into recession.

Since you can’t control any of those dramatic events, here are seven things you can do to prepare for the worst…while of course hoping for the best!

1. Review and replenish emergency funds: Make sure that you have an emergency fund of 6-12 months worth of expenses. If you have less than that amount, you may want to sell securities from your taxable portfolio and replenish.

2. Rebalance your investment and retirement accounts: Do not arbitrarily sell all of your investments or cash out of your retirement and college plans! But if you have not rebalanced your accounts in a while, this week would be a perfect time to do so. Make sure that your allocation matches your time horizon and your risk tolerance and don’t forget to sell company stock that has increased to more than 5 percent of your portfolio’s value.

3. Get ready to accelerate the pay down of adjustable rate loans: From mortgages to credit cards, if the worst-case debt ceiling scenario plays out, interest rates on these types of loans could rise. That may mean that you will need to refocus your available cash flow to paying down higher interest debt.

4. Lock in loans/obtain a commitment letter: Analysts are not sure whether or not longer-term interest rates will rise because of the debt ceiling. There is some evidence that when the world is in turmoil, investors have traditionally flocked to the 10-year treasury, which has kept a lid on rates. That said, since most believe that interest rates are headed higher generally, it would be advisable to secure a fixed loan now. If you have government-guaranteed student loans, you can consolidate them with the Federal Direct Loan Program.

5. Review the terms of small business loans: During the financial crisis of 2008, many small companies learned a bitter lesson: their business loans were callable. Find out the exact terms and conditions of any loans and try to work with your bank to build a contingency plan.

6. Say goodbye to German beer and French cheese: Any destabilizing event like the debt ceiling fiasco could push down the value of the U.S. dollar, making foreign imports more expensive. In those trying times, comfort yourself with Vermont cheddar and domestic beer and wine!

7. Don’t Panic: Time and time again, it has been proven that those who react emotionally at the wrong time often pay the price over the long-term. As the British say, “Keep calm and carry on.”

Radio Show #133: Fed Fake-out!

The Federal Reserve shocked economists and investors by maintaining its $85 billion bond-buying program. Listeners were more interested in kick-starting their retirement savings and putting their cash to work.

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Elizabeth from RI and Nick from NY are in their 20’s, living home and saving lots of money. They both needed help with figuring out how to start investing for retirement.

Judy from CO, Alma from AZ and Mel from MN all have a great problem: where to invest cash? Both Susan and Bonnie had allocation questions, which JM from New York City, asked about the Windfall Elimination Penalty provision.

As Mayor Rahm Emanuel once said, “You never want a serious crisis go to waste. And what I mean by that is an opportunity to do things you think you could not do before.” While Emanuel was talking about politics, we can apply his statement to investor behavior leading up to and during the financial crisis. With five years of distance from the eye of the storm, here is my list of the top 5 lessons every investor can take away:

1. Keep cool: There are two emotions that influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed. If you had sold all of your stocks during the first week of the crisis in September 2008, you would have been shielded from further losses (stocks bottomed out in March 2009). But how would you have known when to get back in? It is highly doubtful that most investors would have had the guts to buy when it seemed like stock indexes were hurtling towards zero.

2. Maintain a diversified portfolio…and don’t forget to rebalance. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. In September 2008, a client shrieked to me that “everything is going down!” But that was not exactly the case: the 10 percent allocation in cash was just fine, as was the 30 percent holding in government bonds. That did not mean that the stock and commodities positions were doing well, but overall, the client was in far better shape because she owned more than risk assets.

3. Maintain a healthy emergency reserve fund. Bad luck can occur at any time. One great lesson of the crisis is that those who had ample emergency reserve funds (6 to 12 months of expenses for those who were employed and 12 to 24 months for those who were retired) had many more choices than those who did not. While a large cash cushion seems like a waste to some (“it’s not earning anything!”), it allowed many people to refrain from selling assets at the wrong time and/or from invading retirement accounts. Side note: the home equity lines of credit on which many relied for emergency reserves vanished during the crisis.

4. Put down 20 percent for a mortgage (and try to stick to plain vanilla home loans (15 or 30 year fixed rate mortgages), unless you really understand what you are doing!) Flashback to 2004 – 2007 and you will likely recall that you or someone you knew was buying a home or refinancing with some cockamamie loan that had “features” that allowed borrowers to put down about 3 cents worth of equity. There’s a good reason that old rules of thumb work. Yes Virginia, house prices can go down. And despite the recovery, please shun the advice from so-called experts like Suze Orman, who are once again saying that 10 percent down is just fine.

5. Understand what is in your target date fund: Pre-crisis, many investors had started to use target date funds, in which the fund manager “targets” your future date of retirement and adjusts the allocation as you near the time that you will need to access the money. Unfortunately, many of these funds were far riskier than investors understood. Whether it’s a target date fund or an age-based investment for your kid’s college fund, be sure to check out the risk level before you put a dollar to work.

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

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