Factors in Retirement-Longevity and Working Career

In previous postings, we discussed some of the factors facing prospective/current retirees. These factors were classified in three general categories: 1) factors over which we have total control, 2) factors over which we have some control, and 3) factors over which we have no control. The second category (factors over which we have some control) included:

1. Longevity, and
2. Employment earnings and duration.

The second category is the subject of today’s posting.

 

Longevity

 

Genetic factors play a significant role in how long we live; so do life style choices. While individual life spans are difficult to predict, actuarial data allow us to view life spans in aggregate. First, women live longer than men and life span has been increasing.

 

Average Life Expectancy at Age 65¹

Year	Women	Men	Difference
1990	84.1	80.1	4.0
2015	85.5	83.1	2.4

Second, if you are 65 today, then:

Probability of Living at Least to (or Beyond) a Specific Age²

Age	Women	Men	Couple (1 alive)
75	85%	73%	97%
80	73	63	90
85	55	43	74
90	33	22	48
95	13	7	20
100	3	1	4

These figures are mid-points, not an end-point. The bottom line: you may need to plan on living much longer in retirement (perhaps as long as your working career). Consequently, a portion of your investment portfolio should be structured for growth in order to maintain purchasing power over the retirement years.

Employment Duration

Income in retirement has been compared to a “three legged stool” composed of pensions, Social Security, and investment/savings. Now a fourth leg has been added (a chair??) with employment income in retirement. As the population ages, the percent of older people in the work force has been increasing. In 1994 there were 31 million people age 65+ in the civilian population; that number had risen to 45 million in 2014 and is projected to be 62 million in 2024.³  By age groups, the number working is even more interesting.

Percent of Individuals in the Civilian Labor Force³

Age	1994	2004	2014	2024 (Est.)
65-69	22%	28%	32%	36%
70-74	12	15	19	23
75-79	7	9	11	14

People work in retirement for various reasons:

Major Reasons People Work in Retirement⁴

Reason	Need	Desire
Buy extras	26%	-
Make ends meet	25	-
Keep insurance/benefits	23	-
Decreased value of savings/investments	21	-
Stay active/involved	-	56%
Enjoy working	-	54
Job opportunity	-	24
Try new career	-	8

Finally, the age at which one retires is not always the date of anticipated retirement. Sixty-seven percent of workers expected to retire at age 65 or older. Only 23% retired as planned; the actual median retirement age was 62.⁵ Reasons for earlier retirement included the following:

Reasons for Retiring Earlier Than Planned⁵

Reason	Percent
Health problems/disability	60
Employer changes (downsizing/closings)	27
Other work related items	22
Care for spouse/family member	22
Superannuated work skills	10
Ability to afford early retirement	31
Choose to do something else	17

The Bottom Line

The “law of large numbers” whereby we look at aggregate statistics can provide some information for use in financial planning. Those “large numbers” indicate that an individual may have a much longer time in retirement than anticipated, and there may be fewer working years to save for retirement. Individual circumstances vary of course; please see us at Paragon Financial Advisors to review your “retirement readiness.”  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

¹ Social Security Administration 2016 OASDI Trustees Report

² Social Security Administration Period Life Table 2013 (published 2016)

³ Bureau of Labor Statistics, Monthly Labor Review, December 2015

⁴ Employee Benefit Research Institute, Matthew Greenwald & Assoc. Inc. 2014 Retirement Confidence Survey

⁵ Employee Benefit Research Institute, Matthew Greenwald & Assoc. Inc., 2016 Retirement Confidence Survey

Navigating Retirement

Ahhh—the good ole’ days. We’ve heard that expression applied to many things. It used to apply to retirement. Work 35 to 40 years for the same company, get a gold watch at retirement, then collect a pension check from the company for the rest of your life. But things changed. Pension plans (defined benefit plans) were phased out in favor of 401k plans (defined contribution plans). This change essentially shifted risk for providing retirement benefits from the employer to the employee. In addition, employees began changing jobs/careers more frequently; the long-term employee with a single company became the exception rather than the rule. Retirement resources historically were a “three-legged stool”—the benefits came from 1) a pension from the employer, 2) personal savings, and 3) Social Security.

 

Today’s retirement picture is significantly different. Let’s look at today’s retirement factors but do it in a framework of “control.” There are some factors over which we have complete control, some factors over which we have partial control, and some factors over which we have no control. For example:

Complete Control

1. Saving- today’s worker has complete control over the amount he/she chooses to save and when that saving starts (the sooner the better!!).
2. Spending-spending choices directly affect the amount saved; again, a choice made by the individual. Less spending means invested funds last longer.
3. Asset allocation-with 401k plans, the plan participant chooses how the money is invested. A greater the allocation to stock means a greater possible gain (or loss).
4. Location-cost of living in retirement varies significantly by geographic location. Relocation may mean a reduced need for daily living expenses. Of course, there are social considerations (friends, family, etc.) that affect this choice.

Partial Control

1. Employment earnings during working years-choice of jobs, education, work location can affect career earnings significantly. Aptitudes and personal preferences play a role here.
2. Duration of working career-how long one chooses to work significantly affects life style standards in retirement. Working longer means greater contribution to savings and fewer years those savings must cover in retirement.
3. Life span-while everyone has a genetic makeup that affects life span, so does life style choices. Proper diet, exercise, etc. can affect both longevity and quality of life in retirement.

No Control

1. Investment returns-asset allocation is an individual choice relating desired goals with acceptable risk. However, the actual performance of investments in each of those asset categories (stocks, bonds, etc.) is something over which we have no control.
2. Governmental polices/regulations-tax policies (and rates) and government regulations have an impact in retirement. Individuals with significant holdings in qualified plans (IRAs, 401ks) have a significant partner in those plans—the Infernal Revenue Service (note: not a typo)!

We at Paragon Financial Advisors assist our clients in navigating the path to and through retirement. Possibilities and pitfalls abound; please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 



   

Road Map To Retirement

The 2016 elections have certainly brought about some changes in the political landscape. One thing hasn’t changed however—an ageing population that is moving toward retirement. Baby boomers began turning 65 in 2011 and their number is increasing by about 10,000 per day. In 2017, the leading edge of the boom will turn 70 (complete with required minimum distribution requirements from retirement accounts). Considering this trend, we are beginning a series of postings on navigating the road to (and through) retirement.

First, we’ll look at some of the possibilities facing individuals as they approach retirement. Will older Americans continue working? How long is “retirement”? What about Social Security? How should one plan for spending and inflation?

Then, we’ll look at some of the “pre-retirement” planning that should be done. How much should one save for retirement? Should it be done in company savings plans? IRAs (traditional or Roth)

Spending in retirement is a key factor. How much is “too much” for investment withdrawals? Tax management (for investment withdrawals, taxes paid (income-federal and state; and local (personal property, real property) are no minor consideration. Health care (and long term care) costs are also an item of uncertainty and concern.

Finally, how does one pay for retirement? The reduction in defined pension plans and replacement with 401k plans has put the investment risk on the retiree. Quality of retirement is, in large part, how successful one is in managing his/her financial resources. We will begin some discussions on these topics.

“Plan your work, then work your plan.” That is the basis of financial planning that we at Paragon Financial Advisors assist our clients in doing. Please call us to discuss your specific circumstances, and stand by for more discussions on navigating the retirement road. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

The Long Goodbye

The associate minister at my church once said he lost his mother twice—once when she no longer recognized him and once when she passed away. His mother suffered from Alzheimer’s disease. According to the Alzheimer’s Association “2015 Alzheimer’s Disease Facts and Figures,” more than 5 million Americans are living with Alzheimer’s disease. It was the fastest growing cause of death by disease diagnosis in the U.S. from 2000 to 2013 (up 71%). Currently no way exists to cure, prevent, or effectively slow the progression of Alzheimer’s and other forms of dementia. In addition, more the 15 million Americans are providing care for an individual suffering from Alzheimer’s or another type of dementia. In 2015, dementia and Alzheimer’s was estimated to cost approximately $226 billion (with about $153 billion of that being borne by Medicare/Medicaid). Planning for this type of disease poses many challenges; we will discuss some of them here.

Warning Signs of Dementia

According to the Alzheimer’s Association, the disease has ten warning signs. These signs do not always indicate Alzheimer’s but may be useful in diagnosing the problem. Every individual will not necessarily have all ten symptoms. These ten signs are as follows:

1. Memory loss that disrupts ordinary life—forgetting dates/events or asking the same questions repeatedly.
2. Difficulty with planning or problem solving—monitoring and paying routine bills.
3. Difficulty in completing routine tasks—driving to a familiar place or repeating common tasks at work.
4. Confusing Time and Places—forgetting where they are and how they got there.
5. Trouble understanding visual images and spatial relationships—the inability to judge distances (a significant problem in driving).
6. Having a problem with words in writing and speaking—not remembering the name of common items.
7. Misplacing items—putting an item in an unusual place (car keys in the refrigerator) and not remembering how they got there.
8. Declining or poor judgement—large, unnecessary purchases or donations to telemarketers.
9. Withdrawing from work/social activities—no longer participating in long standing activities which previously had brought enjoyment.
10. Changes in personality---becoming more easily upset, depressed, or confused.

Stages of Decline

Dementia is a progressive disease. The earlier the identification and diagnosis, the easier to plan effectively.

In the early stage, financial mismanagement is one of the most frequently displayed signs of the disease. The inability to manage a bank account or inability to pay routine bills becomes more obvious. Misplacing items and trouble remembering things becomes more prevalent. Family members may begin to see these signs first; this situation becomes more problematic if they lack direct contact with individual on a routine basis. At this stage, work with the individual to begin preparations. Since dementia will progress, a finite “window of opportunity” exists to establish all planning and legal work necessary to prepare for care.

Consult with medical personnel to confirm a diagnosis. Discuss the implications of the disease on the legal, financial, and caregiving items associated with the disease. Elicit comments/preferences from the individual in these matters. Make sure all estate planning documents are up to date and represent the individual’s wishes. Of critical importance is the appointment of powers of attorney (giving another person the power to act on behalf of the diagnosed family member). Ask your family member to take you along on meetings with doctors, attorneys, tax advisors, and financial advisors.

In the second stage of moderate decline, financial skills deteriorate even further. The family member may become more easily frustrated and begin to withdraw socially. Wandering may begin at this stage, and a caregiver may become necessary. At this stage, the appointed power of attorney should become the manager of the family member’s financial affairs. Being the caregiver for a family member at this stage can be extremely time consuming and stressful. If the caregiver is also a family member, preserving the health of the caregiver is extremely important (see below). An excessively stressed caregiver cannot provide the needed care to an affected person in an efficient manner.

In the final stage or severe decline, the dementia patient will have a difficult time remembering (discussions, events, meetings, etc.). Caregivers may notice mood changes or changes in personality, and the patient may need assistance with the activities of daily living (eating, toileting, etc.). At this stage, institutional care may also become necessary.

Caring for the Caregiver

Alzheimer’s patients have an average lifespan of four to eight years after diagnosis of the disease. However, some individuals may not be diagnosed in a timely manner or may have a physical constitution that extends their lifetimes. Caring for family members with Alzheimer’s takes a toll (both physically and mentally) on the caregiver. The Alzheimer’s Association has prepared a list of ten indications of stress on the caregiver:

1. Denial-Mom/Dad doesn’t have this and things will get better.
2. Anger-at the patient (having to answer the same questions over and over again).
3. Withdrawal-from the activities or social life once enjoyed (“I don’t have time for that.”)
4. Anxiety-about what the future holds for both the patient and caregiver.
5. Depression-an inability to cope with the situation.
6. Physical Exhaustion-being too tired to physically perform daily activities.
7. Lack of Sleep-constantly aware of the pressures to avoid the patient’s needs or wandering.
8. Irritability, Moodiness, etc.-things that can lead to negative actions on behalf of the caregiver.
9. Lack of Concentration-pre-occupation that leads to an inability to complete normal tasks.
10. Health Problems-physical deterioration of the caregiver’s own health.

After all, if the caregiver becomes incapacitated, the problems compound. Available resources can help the caregiver. The Alzheimer’s Association Alzheimer’s and Dementia Caregiver Center (alz.org/care) is a good place to begin; it can help gain  a better understanding of what the caregiver can expect as the disease progresses. A support helpline is also available (Alzheimer’s Association 24/7 Helpline- 800-272-3900).

Unfortunately, we at Paragon Financial Advisors have experience with dementia situations. We have worked with clients and/or family members facing these problems on behalf of a loved one. No easy outcome exists, but proper planning can ease some of the stress. If you should see the need in your family, please call us. We can help with the financial preparations required. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

What’s New in Social Security?

Changes in 2017.

Changes in Social Security benefits for 2017 have been announced. The cost of living adjustment is an increase of 0.3% (an increase of $5 per month for the average recipient). A small increase, but an increase none the less; there was no increase in benefits for 2016.

 

Social Security taxes are paid by both the worker and the employer. Each pays 6.2% of earnings (or 12.4% of pay in total) to support the Social Security system. There is a maximum amount of earnings on which that tax is paid (the “taxable wage base”); no taxes are paid on earnings above the taxable wage base. In 2016, the taxable wage base is $118,500. The wage base will rise to $127,200 in 2017.

 

Individuals who elect to start taking their benefits before their full retirement age (66 years or more) have their Social Security benefit reduced for each dollar of earnings they have over a certain amount. For each $2 a beneficiary earns above that amount, Social Security benefits will be reduced by $1. The earnings limit in 2016 is $15,720; in 2017 that amount increases to $16,920.

 

What’s Next?

 

Now that the election is over, President Elect Trump and Congress will face some challenges with the “entitlement” programs of Social Security, Medicare, and Medicaid. According to the Wall Street Journal (Wed, Nov. 9, 2016, pg. A18), those programs account for 10% of the US economy and that percent is rising. The deficit in 2016 is projected at 3.2% of GDP (in an economy growing at less than 2%). Medicaid spending has been increasing with the increased coverage under Obamacare. In addition, the US (and other developed economies) has an increasing population age. More individuals will become eligible for entitlement benefits. Our current system is not sustainable; be on the lookout for more changes to come.

 

We at Paragon Financial Advisors assist our clients in evaluating their Social Security options. Please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.