Last year, on 1/1/11, the very first baby boomers turned 65; the world welcomes the second wave this year. Happy Birthday, Boomers! If you’re keeping count, between 2011 and 2029, all baby boomers—the cohort born between 1946 and 1964—will have reached the age of 65. In seasons past, that was the age that marked the traditional start of retirement. But it’s a new dawn, a new day, and as Bob Dylan wrote, the times they are a-changin’.
Have you changed with them? If so, and one of your resolutions for the New Year is to save money for your retirement, congratulations! If not, and you are a boomer, then all you have is company to go with your misery, and a future that could be blowin’ in the wind.
Michelle Mast is a professional CERTIFIED FINANCIAL PLANNER™ with AXA Advisors, LLC. She says that in 2011, 60 percent of baby boomers saved less than $100,000 toward their retirement1. Mast received a Certificate in Retirement Planning from the Wharton School of the University of Pennsylvania for completing the AXA Equitable at Retirement program. But you don’t need a certificate from Wharton to know that this statistic does not paint a pretty picture. Mast recalls that the rule of thumb used for projecting a person’s retirement plan once called for them to set aside 75 percent of what it cost to live in the manner to which they are accustomed. (We’ll talk in a moment about that.) Today, she says three factors have conspired to drive that projection from 75 percent up to 100 percent: mortality (people are living longer), inflation (‘nuff said), and health care expenses (ditto).
This is enough to send a person diving underneath the sofa cushions—if not to look for loose change, then to hide from the wolf at the door.
I recently spoke with Mast about strategies that might help those who haven’t saved enough for retirement.
TMSW: Michelle, the statistic about the number of boomers who don’t seem ready for retirement is pretty sobering.
MM: I know. And that’s the upside. Research also shows that during the same year, 36 percent of boomers saved less than $25,000 towards retirement, and 29 percent saved less than $10,0002.
What accounts for these low numbers?
There just aren’t as many pension plans today as there were in our parents’ generation. And market volatility may also be playing a role in many cases. But studies show that 14% percent of individuals have no retirement vehicle at all—not even an IRA account3.
This suggests to me that the retirement my generation envisioned may not be the norm.
That’s right. There may be what some people consider to be a “new normal.” A good number of people will be working during their retirement. This is significant: 50 percent of current retirees are finding that their actual retirement spending is equal to or higher than their spending prior to retirement4. Now in some cases, this is because people are doing things they weren’t able to do while they were working—traveling, for example. But people are generally living longer—into their 70s, 80s, and even 90s—especially women. Women have many financial concerns and are an extremely important part of what I’m saying now.
Well, what can be done to turn the tide?
People really just have to focus on savings; there is no such thing as a “retirement loan!” The only way to create the money for retirement is to save the money for retirement. Going backwards, analyze your current cash flow. Are there expenses you don’t have to incur? Can you set aside $10 a month? If so, put this toward an emergency reserve or a retirement account.
Really? Will $10 a month make a difference? I mean, I sometimes think that my nickel-and dime-approach to savings is like rearranging the deck chairs on the Titanic; at the end of each month, I take whatever is left in my wallet, add it to the change I’ve dumped in my little tin can, and put it in a savings account.
There’s no silly way to save. What is important is saving.
Can you talk a bit about that “emergency reserve”? We’ve all been taught how important it is to save for a rainy day. How much should a person plan on setting aside for the deluge?
In the past, the rule of thumb was to have six months of your living expenses in an emergency reserve; that is, in a savings vehicle that’s liquid, where you can access the funds easily if you need to. But in light of all the volatility of the past four years, the conventional wisdom now is that your emergency reserve should be closer to a year’s worth of living expenses. So if you have $3,000 in expenses each month—mortgage, utilities, groceries, etc.—you should have almost $36,000 in your emergency reserve.
I’m going to need more dimes and quarters…You mention a vehicle that’s liquid. You mean like a savings account?
The formula is going to be different for everybody, but yes, a savings account, but also other places where you could house a portion of this money, for example: a money-market deposit account or a certificate of deposit. The idea is to have the money work as hard for you as it can while still maintaining liquidity.
Going back to my measly little $10 a month, if I want to use it to begin saving toward retirement, which investment strategy makes the most sense?
IRAs, or Individual Retirement Accounts, are savings vehicles you can consider for retirement, depending on your particular situation. There are two different kinds of IRAs—a Traditional IRA and a Roth IRA. Here are the key differences:
- A Traditional IRA will give you a tax deduction at the time you make a contribution. The money will grow, tax-deferred, but when you take it out during retirement, it will be considered taxable income. One thing to bear in mind with a Traditional IRA is that when you reach the age of 70-and-a-half, you have to distribute the Required Minimum Distribution.
- A Roth IRA is different in that respect; you actually don’t ever have to take money out of it, which makes it a nice legacy to pass on. But if you do take out a withdrawal, the good news is that the money you take out is not taxable income, because Roth IRAs are funded with after-tax dollars. There are, however, no tax deductions for the money you contribute to a Roth IRA; nevertheless, that money will grow tax-deferred, just like the Traditional IRA. This is important to bear in mind: studies have shown that any tax-free benefits during retirement are generally good features. In fact, increasingly 401(k)s are including a Roth feature. Keep in mind that your choice of retirement planning strategies should be based entirely on your individual needs, goals, risk tolerance, and particular situation.
You can also combine distributions when you reach 70; take some funds out of each type of IRA account to minimize your taxable cost.
I’ve heard the term “dollar cost averaging,” but I’m not sure I understand what it means. Can you shed some light on the subject?
Market volatility might cause investors to shift their investment strategy away from equities (stocks). But history suggests that a down market may be a good time to consider investing—and dollar cost averaging (or systematic investing) can be effective because it essentially provides the opportunity to purchase more shares less expensively. With dollar cost averaging, the amount you invest on a regular basis is always the same, meaning that you buy more shares when the price is low and fewer shares when the price is high. This spreads out your cost basis over several years, which helps provide insulation against short-term changes in market price; a lower average cost can ultimately equal a higher return when the market goes back up. First, you’d decide exactly how much money you feel comfortable investing each month, but be sure that you’re financially capable of keeping that amount consistent. You’d next select a long-term investment in which you would like to invest your money. Then, at regular intervals (weekly, monthly, or quarterly), you would invest that money into the investment you’ve chosen. Of course, generally speaking, all investments in equities are subject to fluctuation in value and market risk, including loss of principal—and it’s very important to understand that while dollar cost averaging has the potential to reduce the average cost of a share of stock, it does not guarantee a profit or protect against loss in declining markets. To be effective, there must be a continuous investment regardless of price fluctuations, and you must consider your financial ability to continue making purchases through periods of low price levels.
Some people might be fearful of meeting with a financial professional because they think they cannot afford it. Does a person pay a fee, the way one would pay a doctor or a lawyer, to obtain financial advice?
I experience this question often. Generally speaking, there are three ways that financial professionals get paid: fee-based, commission based, or a combination of both. All are fine; it just depends on the client’s objective and needs. For example, if a person only wants financial advice and doesn’t necessarily want to purchase investments, then he or she would consider a fee-based adviser.
At the end of the day, you want a financial professional who will be unbiased. I’m not going to recommend one account or fund or investment institution over another because of how it might affect my commission. I’ll suggest an account or a provider to you because I believe it’s the best for you.
Michelle, thank you so much for taking time away from your busy schedule to speak with me about these important money matters.
You’re welcome, Marci! It was my pleasure.
1Source: 2011 Retirement Confidence Survey conducted by The Employee Benefit Research Institute (EBRI).
2Source:2011 Retirement Confidence Survey (EBRI)
3Source: Bankers Life and Casualty Company Center for a Secure Retirement, Middle Income Boomers, Financial Security and the New Retirement, 2011.
4Source: 2010 Retirement Confidence Survey, March 2010, Employee Benefit Research Institute, 2010.
Michelle Mast is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Chartered Life Underwriter designation. She has been associated with AXA Advisors for more than 24 years. She works with individuals as well as corporations on both a personal and corporate basis in developing and implementing financial strategies to help them work toward their financial objectives and goals. Mast works in individual financial planning, retirement planning, risk management, college education funding, and strategies for estate planning. She has received the title of Qualified Plan Specialist based on her successful completion of an internal AXA Advisors training program and a written assessment, as well as the title of Retirement Planning Specialist by AXA Advisors, based upon the successful receipt of a Certificate in Retirement Planning from the Wharton School of the University of Pennsylvania for completing the AXA Equitable at Retirement program. Previous work experience includes positions in the accounting and banking field. During her tenure with AXA Advisors she has received numerous awards, including being named to the company’s Hall of Fame and being named a Centurion Leader, and earning the National Growth award and Hallmark honors. Mast was one of 30 select women to participate in the AXA Women’s Council to further women in financial planning and management. She also focuses on assisting women in financial planning and works to incorporate women’s financial concerns with regard to divorce and widowhood. She conducts workshops on financial matters. Mast is a member of the Financial Planning Association and has earned a Bachelor of Science Degree in Accounting from New York University and a Master of Business Administration degree in Finance from Hofstra University.
Michelle Mast CFP®, CLU, offer securities through AXA Advisors, LLC (NY, NY 212-314-4600) member FINRA, SIPC. Investment advisory services are offered through AXA Advisors, LLC, an investment advisor registered with the SEC. Annuity and insurance products offered through AXA Network, LLC. Individual Financial Professionals may transact business and/or respond to inquiries only in states(s) in which they are properly registered and/or licensed. AXA Advisors, AXA Network, and AXA Equitable Life Insurance Company (NY, NY) are affiliated companies and do not provide tax or legal advice. Be sure to consult your own tax and legal advisors regarding your particular circumstances.