Should pre-retirees lower their expectations?

http://www.marketwatch.com/story/should-pre-retirees-lower-their-expectations-2013-12-23

Travel to Europe and the Far East. Take up golf. No question that with more free time your retirement years can be costly.

I have been on the radio circuit of late promoting my book “Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing” (McGraw Hill), and have been consistently asked ” what’s the magic number people need in savings to retire?” My answer has more to do with figuring out expenses, goals and needs and less to do with an actual number.
New data has been released and both pre and new retirees should pay close attention. According to the data, 53% of American households are at risk of not being able to maintain their standard of living. As such investors should scale back their retirement aspirations, as they may not have enough money to fund their newfound life of leisure.
Slower increase

While individuals IRAs and 401(k)s have recovered since the financial crisis, property prices have lagged behind. According to research from the Center for Retirement Research at Boston College, directed by Alicia Munnell, “As of 2010, the National Retirement Risk Index (NRRI) showed that, even if households worked to age 65 and annuitized all their financial assets (including receipts from reverse mortgages on their homes), 53% of American households were at risk. Since 2010, in inflation-adjusted terms, the stock market has increased by 45% and house prices have risen by 6%.”

I have always intuitively felt that most people’s net worth is tied up in their home. The research backs me up,” And equities are only a minuscule amount of the wealth of low-income households and only 6% of the wealth of those in the middle-income group; only for the top third of the income distribution are equities a significant portion of total wealth.”

The obvious question is how are people worse off if they have most of their wealth in property, and that property has risen by 6%? The answer is due to lower interest rates. “lower interest rates mean that households get less from annuitizing their wealth, and the NRRI assumes that all wealth (financial wealth, 401(k) balances, and the money received from a reverse mortgage on the household’s primary residence) is annuitized at retirement.”

Reverse mortgages

Munnell and her department are notorious for their support of reverse mortgages to insure people have enough money to retire. As a financial adviser, I am not a fan and tell clients to steer clear.

Dave Ramsey nails it when he says, “I do not recommend them under any circumstances. The reverse mortgage is loaded with gotchas. The interest rates that they’re calculated at are horrendously bad. They are not a good product. The concept isn’t extremely bad except for the fact that we’ve got old people who’ve worked their whole lives to get completely out of debt, and now what are they going to do? Some goober in the financial planning field tries to talk them back into debt. That’s enough to make you mad right there. Aside from that, the concept of every month, you’re going to get a little check and every month, you’re going a little deeper in debt on your home is probably not the end of the world if someone’s completely broke. But when you add in the fact that these things have got rip-off fees like you wouldn’t believe, interest rates are horrible, and I guess because it’s largely the elderly who are doing it, the fraud rate on these things is unbelievable. I just tell you to stay away from them.”

Now what?

The news isn’t all dreary. There are steps to take that will enable you to achieve the standard of living that you want during retirement. For those of you who currently look to be short on funds, here are a few tips that can help you immensely.

Delay retirement

While this may not be the most cheery advice, it may be the most effective. Delaying retirement by a few years can be a huge factor in being financially able to retire. By working not only do you push off tapping your retirement funds, but you can keep saving for a couple of more years. According to the Oblivious investor, “Whether it’s sticking it out for an extra couple of years at your current job or picking up part-time work in a more enjoyable field after leaving your job, retiring later is often the highest-impact thing you can do for your retirement finances. Each additional year of work is one more year to accumulate savings and one fewer year of spending from your savings.”

Maximize Savings

You might say that you can’t save any more money. Well as you get closer to retirement there is a good chance that your kids may be out of the house which means that you can save on tuition. It’s also important to create a budget where the first expense item is to “pay yourself first.” If you create a disciplined budget with an increase in built in savings, you will be surprised at how much you will be able to sock away. It may not be fun, but you have no choice if you want to be able to retire comfortably.

The Wall Street Journal ran an article about retirement and said, “The place to start is by being aggressive about saving. More is always better, but even relatively small amounts of money can make a difference. And with the kids out of college and hopefully out of the house, being disciplined about budgeting and potentially downsizing a home sooner rather than later could free up helpful amounts of money from each paycheck. Financial Engines looked at retirement scenarios that included a 50% company match and Social Security payments. For a 50-year-old earning $65,000, putting 6% of that salary per year in a mix of stock and bond funds, would likely lead to a portfolio at age 65 that should generate $31,700 of income annually for life. Bump that savings rate up to 8% — an additional $100 each month — and income at age 65 would be $33,500. That’s an additional $150 more in income per month.”

Delay Social Security

While you can start taking Social Security benefits at age 62, for those still working and trying to build savings for retirement income, it pays to wait on taking your benefits until you reach the age of 70. By doing this you can raise the amount of monthly payment by almost 80%.

If you are worried that you won’t be able to achieve the standard of living that you desire to have during retirement, don’t delay. Get your retirement plan on track, and you will be able to visit Asia or play a round of golf at Pebble Beach.