Seven Life Defining Decisions: Things to Think About Special Issues for the Third Age Presented by Anna Rappaport

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Seven Life Defining DecisionsThings to Think
AboutSpecial Issues for the Third AgePresented
by Anna Rappaport

• The Transition Network Prepared with support
  from WISER
• October, 2006

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Retirement in America The Puzzle Today
Premature Retirement Risk
Working in Retirement
Decline of DB Plans
Less Retiree Health
Little Longer Term Thinking
Higher Health Costs
Longer Life Spans
What is Longevity Risk?
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Our Goals Today

• Share Seven Life Decisions ideas
• Understand key data about retirement
• Identify key decisions/questions

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Agenda

• Seven Life Decisions Project
• Key Data and Facts
• The Seven Major Areas
• Next Step Decisions in Transition Period

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Seven Life Defining Decisions A Roadmap for
Security

• Start Planning
• Jobs and Careers
• Marriage and Family
• Home Ownership, Debt and Credit
• Planning for Retirement
• Investing for Long-Term Goals
• Insurance
• WISER and Actuarial Foundation Seven Life
  Defining Decisions project focuses on
  intersection of retirement and life events
• Goal today focus on issues our stage of life

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Purposes of the Seven Life Defining Decisions
Project

• To show you how decisions you make in your life,
  in key areas, can have a big impact on your
  future
• To point out the times in your life when you can
  take steps to a more secure future
• To empower you to take control of your financial
  future
• Use the material and share it!
• Note copies can be secured from Wiser or
  downloaded at www.wiserwomen.org/pdf_files/wiserr
  pt_life_rev_feb04.pdf

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Key Data and Facts

• Demographics The Third Age
• Probability of Living to 80, 90, 100
• Premature Retirement Risk
• Perceptions About Risk

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Demographics The Third Age

• New ways to think about life cycle
• Third age period between full time work and
  total retirement
• During transition period
• Some work and more leisure
• Supplement earnings with retirement resources
• Looks like traditional cyclical life plan
• Key trends
• Living longer
• Healthy longer but not forever

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Probability of Living to 80, 90, 100Projected to
2025
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Context Expected vs. actual timing of retirement
among retirees
Source EBRI/ASEC/Greenwald, 2000-2004
Retirement Confidence Surveys
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Concerns about risk fairly constant
How concerned are you that . . . ? (percentage
very or somewhat concerned)
Source Society of Actuaries, 2001,2003 and 2005
Risks and Process of Retirement Surveys
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1. Start Planning

• Key Decision Points Choosing a career, changing
  jobs, getting married, having children, buying a
  home, starting to save and invest having a
  lifetime financial plan can provide a smoother
  journey.
• In the Third Age where we are special
  planning needs
• Seeing if we have enough assets/income
• Catching up
• Deciding what to do in retirement and what
  retirement means
• Fit investment decisions to life stage
• Risk management strategies
• When to make changes

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Why Worry?

• High poverty rate among older women
• High poverty rate among retirees, especially
  people of color
• Barriers for women to overcome to achieve
  financial security e.g. family care-giving
  needs may mean working part-time and forfeiting
  job opportunities
• Too much debt in retirement
• Poor understanding of many financial issues by
  Americans

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2. Jobs and Careers

• Third Age Issues
• Many people fail to recognize premature
  retirement risk
• Four out of 10 retire before they planned to
• Working in retirement key to new retirement for
  many
• Issues at All Life Stages
• Most job seekers ask about pay, but not about
  benefits, particularly retirement benefits
• Some jobs offer benefits that are worth a good
  deal of money health insurance, pensions and
  retirement savings plans are valuable

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Working in Retirement Importance of
EarningsAges 55 and Over

Source Debra Whitman and Patrick Purcell, CRS
Report for Congress, November 7, 2005
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Choice of Work After Retirement
Percentage of Retirees with Various Work
Experiences (2004)
Source Society of Actuaries, 2005 Risks and
Process of Retirement Survey. Results based on
274 retirees who provided their retirement age.
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Puzzles around longer work

• More than 7 in 10 people say they want to work in
  retirement
• About 4 in 10 people retire earlier than planned
• Dont plan for premature retirement risk
• Higher age displaced workers take longer to get
  jobs
• Other research indicates that older applicants
  get fewer call backs
• Age discrimination? Will this change as
  population ages?
• Future unknown effect of longer work on
  retirement patterns

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Leaving a Job

• When leaving a job what will happen to your
  retirement plan?
• Defined benefit plans usually vest in 5 years.
  The longer you stay, the more valuable the
  benefit
• Defined contribution plans usually vest in 3-6
  years/ leave your money in the plan or have it
  automatically rolled over to another plan or an
  IRA
• Think about keeping your skills and contacts up
  to date so you can re-enter the workforce

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3. Marriage and Family

• Retirement plan needs to work for you as a couple
  and for each of you separately
• Decisions made at time of marriage, during the
  marriage and at its end affect your security
• Marriage most assets that you or your spouse
  acquire during the marriage will belong to both
  of you
• Stay aware of your spouses debts they may
  become yours some day
• When others are depending on you for support,
  consider life, disability and health insurance
• Work through a household budget and who will pay
  for what before you get married and review it
  periodically
• Both spouses should share responsibility for
  major financial decisions

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Marriage and Family continued

• Divorce can change finances dramatically. To
  claim a share of an ex-spouses retirement
  benefits, you must obtain a Qualified Domestic
  Relations Order at the time of your divorce.
• Pensions can be the most valuable asset to
  divide, but are frequently overlooked
• Couples living together, but not legally married,
  do not receive same legal protections or have
  same access to benefits as legally married
  couples
• Some employers extend health insurance and other
  benefits to domestic partners, but this is
  uncommon
• Social Security provides spousal benefits to
  individuals in common law marriages if recognized
  under state law

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4. Home Ownership, Debt and Credit

• Home is largest asset for many Americans,
  important in determining retirement
  options/resources
• A reverse mortgage on a home can help give you
  much needed retirement income
• Buying a home is the largest transaction most
  people make
• You may be able to use your home as a source of
  income later, by trading down for a less
  expensive home or tapping into equity
• Think carefully about mortgage debt in retirement
• Views differ as to desirability of having
  mortgage in retirement

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4. Debts and Credit

• Debt is a factor in financial security in
  retirement, many Americans get to retirement with
  significant debt. Try to avoid getting in debt by
  setting aside 3-6 months of expenses for
  emergency fund
• If you have credit card debt, try to pay off your
  cards as soon as possible. Pay off the one with
  the highest interest rate first, then move on to
  the others
• Find out what is in your credit record and check
  for errors
• You can get a free copy of your credit report by
  calling 1-877-322-8228 or go to
  www.annualcreditreport.com

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5. Planning for Retirement

• If you want to have adequate funds for the
  future, you need to save during your working
  years
• One rule of thumb is to save 15 of pay over a
  long period of time. Dont get discouraged if
  you cant save that much. Save a smaller amount
  now and try to increase it later
• As you near retirement
• Focus on risk management and the distribution
  phase
• Think about how much you need, what you have and
  how to fill the gap
• Think about when you can retire

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Sources of Retirement Income

• 5 legged stool
• 1. Social Security
• 2. Pensions
• 3. Savings
• 4. Earnings
• 5. SSI Supplemental Security Income

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Pension Basics Beware of Important
Decisions/Traps

• Taking money in a lump sum and spending too soon
• Not focusing on benefits in divorce
• Not saving enough to get the company match
• Not participating if the plan is voluntary
• Taking benefits too early thereby getting a much
  smaller benefit
• Leaving before you are vested
• Not understanding what you will really get and
  over-estimating benefits
• Not considering tax issues
• Not considering minimum distribution rules

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6. Investment Basics Third Age Issues

• Will need to start using retirement funds
• Revisit asset mix and way to investment
• Think about annuities that guarantee life income
  as well as traditional investments
• Making Your Money Last a Lifetime helping you
  think about the annuity decision
• Consider professional advice but be sure advisor
  aware of retirement issues
• Know how advisor is paid and what issues she will
  focus on
• Asset classes
• Stocks, bonds, money market funds, and others
• Mutual funds offer means to pooled investments

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7. Insurance

• Health benefits and insurance
• Disability protection
• Long-term care insurance
• Life insurance

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Next Steps Evaluate, Plan and Decide

• Evaluate
• Have I saved enough?
• How can I catch up?
• What risks do I face and how do I manage them?
• Does my plan work for me as an individual?
• Plan
• When can I retire?
• Will work be part of my retirement? How do I
  make that work?
• What funds will I use and how?
• How do taxes affect me?
• Decide

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Have You Saved Enough?

• Getting Your Ducks in a Row
• Estimate what you have currently in Social
  Security, pensions and other sources of
  retirement income
• Convert 401(k) balance and other savings into
  yearly income from annuity or scheduled
  withdrawals
• Aim to have 100 of your current income in
  retirement. Calculate the gap between current
  income and what you have in savings and
  retirement benefits.
• Use WISERs calculator on the website at
  www.wiserwomen.org to find out how much to save
  starting now, to close the gap
• Review your savings and expenditures and put a
  plan in place to save the necessary amount
• If you cant do it all right now, concentrate on
  eliminating debt and saving something, even a
  small amount

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Secure Retirement Action Steps

• Develop a budget
• Determine how you can economize
• Develop a Savings and Catch-up Plan
• Eliminate your debt first
• Set aside a certain amount each month for savings
  and then dont touch your savings
• Choose Investment Opportunities
• Employer offered 401(k) or pension
• Traditional or Roth IRA
• Mutual Funds
• Savings Bonds

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More Helpful Information

• What follows is additional information for
  reference purposes

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Context The work and retirement experience

• People say they want to work longer
• Many work after retirement
• Often part-time or part-year
• Of those who are not in labor force at 50-61
• 67 of men are disabled
• 40 of women are disabled
• Job options and innovative practices are needed

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Context Major information sources

• SOA Research
• 2005 Study of Risks and Process of Retirement
• Focus groups on investment of retirement assets
• Retirement confidence study
• Government data
• AARP studies
• Staying Ahead of the Curve 2003

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Financial hazards to avoid on the road to
retirement

• Mistakes women make
• They quit working too soon
• They give up retirement security in exchange for
  the house in a divorce
• They count on returning to work, after
  child-rearing, at the same or higher pay
• They dont start saving or investing early enough
• They save for kids college instead of retirement
• They invest too timidly
• They amass too much debt late in life
• Source USA Today with information provided by
  Judy Shine

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Top Money Mistakes

• Not making your finances a priority
• Using your hard earned money for items that you
  do not really need and you could use to put into
  savings such as purchases at the grocery and
  drugstore that you had not planned on purchasing
• Not saving for the future because you help
  everyone else first and you save first for your
  children or grandchildrens education
• Getting discouraged and not saving at all because
  you think you dont have enough money or you
  think it is too late

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Road Map ? for moving through life

• Understanding the challenges, and making a plan
  to overcome them, is key
• Best to start planning early in life
• Keep records
• Review and adjust your financial plan over time.
  Develop the discipline to stick with a financial
  plan
• Focus on long term goals such as
  education/home-buying
• Look for a job with good benefits
• Keep actively involved in financial decisions if
  you marry or live with someone
• Avoid accumulating credit card debt/keep credit
  record in best possible shape

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Roadmap continued

• Learn all you can about saving for retirement
  IRAs, 401(k)s and pensions
• Learn the investment rules of the road and start
  saving early in life
• Explore options to protect yourself and your
  family life, disability, health and long-term
  care insurance
• Understand risks later in life
• Plan for using your assets just as you plan for
  building them

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Job Benefits

• Health insurance not only protects your health
  but may help you from paying out of pocket costs
  that will free up more income for saving for the
  future
• Retirement plans lay the groundwork for a secure
  old age while you are working and able to build
  and acquire assets
• Disability insurance protects you and your family
  if you are unable to work temporarily or
  permanently buy on your own if not provided
• Long-term care insurance will pay for services
  you need when you are unable to care for
  yourself. Some employers allow you to cover other
  people in your family

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Caring for Parents

• Caring for an elderly parent can complicate
  financial plans
• Talk to your parents ahead of time and find out
  their wishes and plans
• Ask how they have prepared their finances for the
  future
• Talk to your siblings and see if they will help
  your parents with care
• Find out what insurance coverage your parents
  might have
• If you need help, contact Eldercare Locator or
  your local Area Agency on Aging
• Eldercare Locator www.eldercare.gov or
  1-800-677-1116

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Social Security Retirement Benefits

• You can receive full benefits at normal
  retirement age, age 65 to 67, depending on when
  you were born
• You can receive reduced benefits at age 62, if
  you want to retire early
• You can collect higher benefits if you wait
  longer. (There is a big penalty for taking early
  retirement benefits 20 if you retire 3 years
  before normal retirement age.)
• The amount you will receive is adjusted each year
  for inflation

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Social Security Benefits for Divorced Women

• A divorced woman who was married at least 10
  years can receive Social Security based on her
  ex-husbands work record.
• This has no impact on what he or his current wife
  receive
• You will get the larger of what you would get as
  a worker and the benefit based on 50 of your
  former spouses benefit
• You can also receive a divorced widows benefit
  after a spouse dies

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Social Security Benefits for Widows

• A widow/widower receives the full workers
  benefit at retirement age
• A widow/widower can receive reduced benefits
• at age 60, or
• age 50 as a disabled widow/widower
• A widow/widower of any age, caring for children
  under 16 years old, can receive benefits. The
  children can receive benefits until they are 18
  years old

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Social Security Disability Benefits

• Social Security provides lifetime,
  inflation-adjusted benefits for those with
  disabilities equivalent to 200,000 worth of
  insurance.
• You can get disability benefits if you are
• Less than the full retirement age,
• Have enough Social Security credits, and
• Have a severe medical impairment that prevents
  your doing substantial work for a year, or a
  condition expected to result in death.

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Pensions and Retirement Savings Plans

• Defined Benefit plan many large company and
  public sector workers have this type of plan
• The employer invests money and pays you a set
  benefit at retirement
• Benefit usually based on years worked and highest
  average pay level. Most valuable to long-term
  employees
• You must stay until you are vested, usually 5
  years, to receive a benefit. Leave before
  vesting and lose your benefit
• Third Age Decisions include
• When to start taking benefits there may be
  special provisions for early retirement
• Some plans offer a choice of a lump sum new
  WISER publication is coming about this choice
• Whether to take survivor income

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Pension and Retirement Savings Plans continued

• Defined contribution 401(k), 403(b) and 457
  plans these are really savings plans
• Generally, it is up to you to decide to have
  money taken out of your paycheck to invest in
  savings account
• Some employers will match savings up to a limit
• You, the employee, choose from investment options
  and bear the risk
• Third Age Issues
• Possibility of added catch-up contributions in
  some plans
• When to take funds out and how to use them look
  for new WISER publication
• Making your money last a lifetime

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Pension Basics Divorce

• Under all state laws, a pension earned during
  marriage is a joint asset, but it is NOT
  automatically divided
• You need a separate court order at the time of
  the divorce stating your right to a portion of
  your exs pension a qualified domestic
  relations order or QDRO
• Remember
• Check to see if the spouse has more than one
  pension from a current job or previous jobs
• Find out how much was earned in pension benefits
  under each plan
• You may want to have the benefits valued by a
  pension actuary or accountant
• Dont forget to include survivor benefits in the
  pension order

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Social Security and Pensions What You Can Do

• Learn the Facts
• Understand the decisions you will need to make
  and when you can make them
• Focus on benefits you earned and those your
  husband earned
• Think longer term check to see what may happen
  if you live to ages 80, 90 or even 100
• Know your basic legal rights at the workplace,
  as a spouse, widow(er) or ex-spouse
• Call 800-772-1213 to ask for your Social Security
  Statement, an estimate of your future Social
  Security benefit. Social Security also mails you
  an estimate of your future benefits each year
  around your birthday

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Individual Retirement Accounts

• Individual Retirement Accounts (IRAs) are
  accounts you open on your own at a financial
  institution like a bank or credit union
• For 2006, you can contribute up to 4,000
  annually or 5,000 if you are over 50. You
  contribute before-tax money, and pay taxes when
  you take the money out
• You pay a penalty if you take the money out
  before age 59½
• You must start taking out money by age 70½
• You can roll over money from an employer
  sponsored plan

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Roth IRAs

• In 2006, if you are eligible, you can contribute
  up to 4,000 earned income annually or 5,000
  if you are over 50. You contribute after-tax
  money
• You will not pay taxes when you withdraw your
  funds after retirement Roth IRAs grow tax free
• Income limits determine eligibility

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