Perhaps Youll Be Able to Retire After All

David K. Carboni, Ph.D., CFP

Weve all seen advertisements on TV suggesting you need $2 million dollars (or more) to retire comfortably. With day-to-day family expenses pressing, its easy to get discouraged when planning for retirement. Yet, if you look at "retirement" differently, the future may not look so bleak.

A few years ago Fred Brock wrote a provocative book, Retire on Less Than You Think (NY: Henry Holt & Co., 2004). Rather than lament the possibility of never being able to retire, he offered people some practical strategies to afford "retirement" without enduring too much pain and deprivation. The "watchword" of his message is flexibility on what retirement can mean to you. Ive listed below are suggestions to consider to make retirement affordable.

□ Plan to work in retirement…at least part time. This may include staying in your primary career (or job) longer than you had planned. Though some people may feel "cheated" if they have to work longer than planned, increasing numbers of people are recognizing the benefits of working in retirement." These include: retaining lower cost group health insurance coverage until at least 65 when eligibility for Medicare begins; delaying making withdrawals from portfolios to meet every day expenses; saving more for retirement; staying engaged socially; keeping minds active, not to mention the benefits of having some time apart from partners, or as the bumper sticker reads, "retirement: not enough money and too much spouse!".

□ Separate "necessary expenses from "nice to have" expenses. Many people have never sat down and seriously figured what its really "costing them to live." When you remove the extras, your basic expenses may be far less than you imagined. Though "the extras" can be what makes life worth living, it can be reassuring to know that you could cut back without dramatically reducing your life style. This exercise can also be a good way to distinguish between activities you really enjoy from those which you do by habit. Knowing "your necessary expenses" can also help you more accurately calculate your retirement income needs.

□ Delay Collecting Social Security. In 1984, an Alan Greenspan led committee gradually increased the eligibility to collect a full Social Security benefit (known as your "Full Retirement Age") from age 65 to age 67. The committee simultaneously increased the permanent penalty (in reduced benefits) for collecting "early" at age 62. Therefore, with people living longer, it has become increasingly important to delay collecting benefits to maximize your Social Security benefits. Furthermore, Social Security provides extremely generous "delayed retirement benefits" if you postpone collecting until age 70. This "enhanced" benefit (in some cases nearly 70% higher than your age 62 benefit) not only enables you to receive larger annual costs of living increases, but also can significant increase the survivor benefit your spouse could collect if you die first.

□ Consider Relocating. Most of us already know that Southern New England is among the costliest areas to live in the USA. Therefore, it only makes sense to consider relocating to a less expensive area. Not only will your dollar "stretch" further elsewhere, but seven states (Alaska, Nevada, South Dakota, Wyoming, Florida, Texas, and Washington) levy no state incometaxes. Furthermore, 75% of all states (unlike Connecticut) exempt Social Security benefits from state incometaxes. Many areas are 30% less expensive to live for the typical retiree, so it certainly makes sense to consider moving. A special capital gains tax exemption against federal incometax is also available if you sell your primary residence ($500,000 for married couples filing jointly and $250,000 for single filers). Likewise, recent legislation allows you to immediately buy a home elsewhere and take out a reverse mortgage on the new primary residence to supplement your income.

□ Consider Annuitizing Some of Your Assets. One of the biggest concerns many have is the fear of "outliving their money." This results in some retirees needlessly scrimping to protect against the possibility of "living too long," while others withdraw too much too soon from their portfolios and face the possibility of fully depleting it (while theyre still living and need income). One way to protect yourself from this dilemma is to convert a portion of your portfolio into a life-time income. You do this with a "payout annuity" by a process called "annuitizing." In most cases, you cannot outlive this income. Just as life insurance protects your family from your dying "too soon," a payout annuity protects you against "living too long." Along with the income Social Security provides, you could annuitize just enough of your nest egg to meet your basic expenses. The remainder of your portfolio you can invest to draw from later to pay for discretionary expenses and to protect you against inflation.

- 7/24/2011