Post on 29-Jan-2015
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FINANCIAL ISSUES IN
LATER LIFEBill Taylor
University of Wyoming Extension Community Development Area Educator
April 2014
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REFERENCES Barbara O’Neill, Ph.D. CFP, Rutgers
Cooperative Extension; eXtension\Personal Finances\Estate Planning at http://www.extension.org/personal_finance Financial Recovery in Later Life
Catch-Up Retirement Planning Strategies for Late Savers
Creating a Retirement “Paycheck”
How to Make Minimum Withdrawals from Retirement Savings Plans
Making the Most of IRAs and Other Tax-Deferred Retirement Savings
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FINANCIAL RESILIENCE
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FINANCIAL RESILIENCE is the ability to withstand economic life events, both negative and positiveLoss of jobBirth of grandchild
Essential because nothing is static
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FINANCIAL CHALLENGESUnemployment
Job retraining often necessaryHealth insurance often lost
COBRA provides for continuance of coverage for 18 months
Expensive – 102% of full premium
Only w/ employers w/ 20+ employees
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FINANCIAL CHALLENGES (cont.)
Poor/uncertain healthRequires revised
retirement saving analysisAdjust life expectancy &
retirement savings plan contributions
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FINANCIAL CHALLENGES (cont.)
Death of spousePossible less incomeRequires many decisions &
adjustmentsDelay major decisions
Place funds in CD or money mkt mutual fund until there is time to explore long-term alternatives
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FINANCIAL CHALLENGES (cont.)
Investment lossesMaintain patience & long-
term perspectiveEven at 55, you may have
another 30 years of investing
Limit withdrawals during mkt downturnsAvoid risk of outliving assets
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INCREASING FINANCIAL RESILIENCEMonetary resources
Emergency savingsHealth insuranceGood-paying
job/retirement benefits
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INCREASING FINANCIAL RESILIENCE (cont.)Human capital
KnowledgeSkillsExperiencesHealth
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INCREASING FINANCIAL RESILIENCE (cont.)Social capital
Support system/emotional supportFamilyFriendsCo-workersNeighborsOthers
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STRATEGIES
1. Maintain a low debt-to-income ratio
Consumer debt limited to 15% of monthly take-home
Above 20% - in danger zonei.e. $275 debt payments
divided by $2500 net pay = 11% ratio
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STRATEGIES (cont.)
2. Maintain an emergency fund
At least 3 months expenses
Liquid cash – savings, money market mutual fund, short-term CD
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STRATEGIES (cont.)
3. Keep skill set sharp Never consider
education or training finished
Keep developing marketable skills
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STRATEGIES (cont.)
4. Purchase adequate insurance
Life & disability insuranceTry to always have health
insurance through employer, COBRA, public benefits or individual policy
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STRATEGIES (cont.)
5. Practice good health habits
Diet, weight, exercise, sleep, etc.
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STRATEGIES (cont.)
6. Increase knowledge of financial topics
Learn basic investment principles, characteristics of specific securities
eXtension Investing For Your Future at www.extension.org/pages/Investing
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CATCH-UP STRATEGIES FOR LATE SAVERS
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THREE PROFILES
1. Procrastinators – didn’t bother or had to put off building retirement fund
2. Saving, but got late start – trying to make up time
3. Been saving, but lost ground due to markets or emergency
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MAKE-UP PRACTICESCan be divided into 2
basic strategies:Take action before
retirement to increase savings
Take action after retirement to decrease amount of savings required
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BEFORE RETIREMENT: Saving more money Reducing expenses & saving the
difference Accelerating debt repayment “Moonlight” for extra income Investing aggressively Automating investment deposits Maximizing tax-deferral opportunities Preserving lump-sum distributions by
rolling into another tax-deferred savings plan
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AFTER RETIREMENT:Trading down to smaller homeMoving to less expensive
locationDelaying retirementWorkingReverse mortgage or sale-
leaseback on homeTax efficient asset withdrawals
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TRADE-OFFS
Catching up requires trade-offsi.e. spending less now to
have more later
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COMBINING STRATEGIESExamples:
Investing more in 401(k) & moving to less expensive location
“Moonlighting” while delaying retirement
Investing more aggressively & downsizing to smaller home
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MOST EFFECTIVE CATCH-UP TECHNIQUESWorking 2-3 years longerPostponing collection of
Social Security until full retirement age
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ADDITIONAL HELP
Guidebook to Help Late Savers Prepare for Retirement by National Endowment for Financial Education at www.smartaboutmoney.org
(type Late Savers Guidebook in search box)
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RETIREMENT “PAYCHECK”
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A Retirement Paycheck is income received on a regular basis after retirement. Easier to pay monthly billsProvides more financial
security & peace of mindContinues monthly money
management system used before retirement
“Safe” withdrawal rate from retirement funds
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“SAFE” WITHDRAWALWithdrawal amount
adjusted to reduce risk of outliving assets
Inflation-adjusted withdrawal of 4% of 50% stock- 50% bond portfolio balance will generally last 30 years
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“RETIREMENT PAYCHECK” STRATEGIESAutomatic Withdrawal Plans
– available w/ mutual funds, until balance is depleted
Income Replacement Mutual Funds – actively managed funds w/ choice of maturity dates pay monthly income until balance is depleted
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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Bond or CD Ladder –
staggered portfolio w/ different maturities; as each matures, proceeds are reinvested at longest interval
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“RETIREMENT PAYCHECK” STRATEGIES (cont.)
Regular Withdrawals from Cash Assets – set aside 3-5 year’s income in cash assets (money mkt funds, CDs, savings accounts) to ride out recessionsRemainder of assets in stocks,
bonds, mutual fundsCash assets replenished regularly
from stocks, bonds, or mutual funds
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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Post-Retirement Age Income
– continuing employment past retirement ageProvides money for daily livingAllows for continued deposits
into retirement fundsEarns higher Social SecurityPostpones withdrawal of
retirement assets
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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Annuities
Investor pays into contract w/ life insurance company and company make regular payments for investor’s life
Shop for low expense fees w/ high financial stability rating
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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Reverse Mortgage – can remain
in home while receiving cashBased on equityMust be 62 or olderMust be primary residenceNo minimum credit or income
requirementCan be received as lump sum,
cash payments, or line of credit
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“RETIREMENT PAYCHECK” STRATEGIES (cont.)Monthly Income
Paymentsi.e. rent or mortgage
paymentsCould rent out land,
garage or buildings, part of residence
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FOUR-LEGGED CHAIR“Three-legged stool” of
pension, Social Security, personal savings is commonly being converted to “four-legged chair” by adding later employment.
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QUESTIONS? COMMENTS?