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January 18, 2010

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All in all, I'd reckon that the two single biggest factors facing people today are going to be:

1) debt in retirement
2) investing too conservatively.

I am constantly amazed at the retirees and near retirees I meet who are not only still in debt, but more in debt than they ever have been! Mostly because they subsidize their children's education and lifestyle, but that's another topic...

I think overly conservative investing is going to bit a lot of people after the recent crash... fear, panic and misunderstanding still abound in the average investor..

I think that a lot of seniors don't plan on the cost of health care, especially medicines, when they retire. For my grandparents, medications were a huge expense. I am not sure how the Bush medicare medication benefit affects this problem.

Wow awesome stuff... no mortgage is awesome!

And yes, those are pretty common sense tips, but then again, most of personal finance is. The problem is that most people have no common sense I guess.

The most important contributor of all to a Great Retirement is something that wasn't even mentioned. It is a Great Marriage!
I have been retired for 18 years and married for 53 and we are now 75 and 76 respectively.
When you are retired, and especially as you get up in years you will find that you do not mix and socialize with anything like the number of people that you do when you are a young and vital member of the workforce. Gone are the 24/7 responsibilities of raising children, going off to work every day, getting the satisfaction of doing a wonderful job for your employer, performing challenging and creative work, and socializing with all of your co-workers, instead you will find that you will be spending the vast majority of your time in the company of your wife and your major responsibilities are to just stay as healthy and happy as possible and to enjoy your travels.

In a great marriage the togetherness can be wonderful - in a poor and shaky marriage I can just imagine how miserable it might become.

As for investing, my experience has been that there's a time to invest very aggressively and a time to invest very conservatively but unless you make the effort to become a serious student of the technical analysis of stockmarket trends and keep abreast of many economic and market indicators you can easily get out of phase and do very poorly. The most important two things that you need to fully understand are "The future effects of taking a big loss" and "The principal of compounding".
To put it clearly in perspective, I have been investing since 1960, so if I were to take a 10% loss on my portfolio, that amounts to losing 10% of all the compounded gains that I have made over the last 50 years. On the other hand if I make just 5%, that's 5% of all of my compounded gains over the last 50 years which now amounts to 370% of the largest gross annual salary I ever earned, and with no debt that's obviously far more than we can ever spend.

Retiring debt free and saving as hard as you can, from as early an age as you can are no-brainers. If you have any mathematical skills it doesn't take long to run the numbers and vary the parameters to estimate what you will need to accomplish before you are financially able to retire. These days there are spreadsheets that you can use. I preferred writing small programs using the BASIC language to calculate the future effects of compounding my contributions and savings at various rates of return to estimate the amount of money that I might have at retirement at different ages. I also wrote a small program to do the same thing for retirement, based upon my known income and estimated expenditures, for a range of investment returns. That's how I was able to retire with an unplanned golden handshake at 58. As it turned out I could have retired much earlier because the once in a lifetime effect of the DOT.COM bubble on my investments far exceeded the rosiest of my expectations.

Great reminder. It all starts with spending less than you make. Most of us don't know where the money goes. Right into the pockets of someone else!

@Old Limey - I was waiting for your post. You have shown the rest of us a great example. I have a question for you though, it sounds like you estimated your retirement costs in your planning, how did your estimates fair? You hear all sorts of experts say a broad range of numbers but you hear many retirees say that expense were higher than expected. Should we go more conservative or less on expense estimates?

@texashaze
Our retirement costs have really not increased that much.
One thing that helped a lot for us in California is that Proposition 13 was enacted in 1978 and it limits the increase in home property taxes to 1% of the assessed valuation and annual increases are limited to 2% per year. The purpose was to not price retirees out of their homes. It is somewhat unfair in that because we bought our home in 1977 for $107K we only pay $2,200/year on a home worth $1.1M. A neighbor a few doors away has a comparable home that he bought about a year ago and his taxes will be about $12,000/year. The only downside is that there is a strong incentive to stay put even when you could afford to move up.

Our utility bills have remained very affordable since retiring in 1992, as have insurance costs and food costs. We drive a lot less these days so gasoline is a minor expense. We retired at 58 and both took Social Security at age 62 so that helped out.

At age 65 we went on Medicare and my Lockheed/Martin group insurance plan offers a choice between several Senior HMO's or a PPO plan. Here I am very fortunate - the monthly cost for the two of us over the last 4 years has gone from $122 in '07, $147 in '08, $163 in '09, and $222 in 2010 in addition to Medicare Part B which is withheld from our SS checks. I would say that healthcare costs could be a major consideration for future retirees. My wife uses two inhalers with a combined retail price of $4,400/year but our health plan provides them for $400/year because we are on Medicare. Thus the period to be concerned about is between when you retire and when you can go on Medicare. If you live in an area with a high enough population density that it offers several HMO's, unless you are hung up on a particular doctor that isn't in an HMO then the HMO's are the way to go. We are members of a very modern state of the art facility near Stanford University called the Palo Alto Medical Foundation that has everything except hospitalization under one roof including all the diagnostic equipment and all the specialists. All of our medical records are available through the Internet and we can communicate back and forth by e-mail if necessary. We couldn't be happier with our current healthcare and have mixed feelings about having the government change it.

LOL! I'd add to that "Don't get laid off at the height of a recession-that's-not-a-depression when you're too old to get another job!"

And Old Limey has got something: "Live in a state where property taxes are kept under control for EVERYONE living on a fixed income." In Arizona you have to be certifiably indigent to qualify to have your property tax frozen, and so, because taxes and insurance are already on the high side of what I can pay, it's very unlikely I will be able to stay in my home for the rest of my life.

Having watched my mother die horribly in an HMO (for no other reason than that it is not in an HMO's financial interest to admit that a person with an expensive terminal illness is actually sick), I wouldn't go near one. The cost of Medicare Part B + Part D (prescriptions) + Medigap will come to more than eight times what I paid for health insurance through my employer's plan.

So, don't bet that your costs will necessarily go down in retirement. Mine will, briefly, for the simple reason that I will cut spending to the bone from here on out. Eventually, though, increases in taxes, insurance, and utilities will catch up with those economies.

If you intend to keep living in the style to which you've become accustomed, don't get yourself laid off your job at age 65. :-D

Our big worry in retirement is medical expenses so we save accordingly. All of our grandparents are still alive and living comfortably on their savings and have made many suggestions about our savings goals. We also get advice from our parents and find lots of sources online. By taking those suggestions into account along with inflation, my husband and I can feel comfortable that we are indeed saving enough. Living modestly really does seem to be the absolute best advice...you can save more that way and need less when you do retire.

@Crystal
As I stated in my earlier post our healthcare costs have doubled in the last 4 years. They are still very low and very affordable but that's because of two things, 1) We are both on Medicare and, 2) We are in an HMO covered by my ex employer's group plan, but I had to work there for over 30 years to be eligible as a reiree.

There are HMOs and then there are HMOs, they are all not equal by any means. The largest one in our area is Kaiser and we have heard many horror stories about them from Kaiser patients. They stall for a very long time before authorizing joint replacements and they make people jump through hoops before they will authorize brand name prescriptions and this is a real problem for those unfortunate people that need a medication for which there are no generic equivalents. Some of the very newest inhalers for example, the ones you see advertised on TV, are remarkably effective and can make a huge difference in people's lives but in many cases they are not available in generic form for about 12 years. Our HMO provides mail order prescriptions at a cost of 3 month's supply for the cost of a 2 month supply from a retail drug store. Our HMO also provides a 3 tier drug plan that is priced as follows for a 3 month supply: $20 for generics, $50 for brand names, $100 for non formulary drugs. The limit for our "True Out Of Pocket" expenses is very generous and unlike many people we know we are nowhere near falling into the infamous "doughnut hole" where medicare doesn't cover the cost of a prescription. HealthCare for retirees is a hot topic right now so, as a very young person, you are right to be concerned about future costs, and even the age at which medicare will be available. The one thing you can do now is to stay very healthy by not becoming overweight, getting plenty of exercise, and consuming healthy foods and drinks that are low in sugar, salt, and saturated fats - advice that many doctors are reluctant to give their patients.
My wife is currently very healthy and enjoying life, but in the last 17 years she has had three very expensive surgeries that included two hip replacements. Our total cost for these surgeries was $0.00, even including one that was prior to being on medicare, and she received wonderful care at a great hospital from fabulous doctors and nurses.

I'd add one more thing- it's probably ok to invest conservatively if you have a big enough salary and a high savings rate. I'm in the camp the next decade will be pretty dismal on returns in equities just like what happened in Japan. A big stock market loss can really hurt a nest egg.

The point is if your expenses really are very low and you savings rate is high enough you can afford not to take big risks with your savings.

The people with insufficient savings who are relying on big increases in their portfolio like 8% per year (as listed in the retirement calculators) are taking the most risk with their futures. Sure, they might get lucky and score the big payoff just like Old Limey did but they might not. Relying on big returns to hit your retirement number is a gamble. Use a much safer number like 2% and you will be much more likely to hit your retirement goal.

-Mike

Another thing to plan for in retirement is the rising costs in Medicare. For the 2010 enrollment, some people on Medicare faced some unexpected increases. Plan to do lots of research before choosing a Medicare plan. Those who fail to research their Medicare plan options may find themselves with a plan that doesn’t meet their needs.

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