The experts agree. Retirement is getting more complicated.
The defined-benefit plan seems headed for the museum. What will Social Security and Medicare provide a decade from now? With people living longer, will their retirement income last?
Soon-to-be retirees may not be prepared for this harsh new world. Authorities consistently stress the importance of planning. But figures from the Employee Benefits Research Institute show only 46% of workers have calculated how much money they will need in retirement and how much they must save to accumulate that amount.
When asked if retirement planning is indeed more difficult today, Scott Albraccio at CUNA Mutual’s Executive Benefit Division quickly replied, “By all means.”
“You look at what’s been going on in the stock market on a daily basis, with ups and downs.” he noted. “You need to be more sophisticated in the investment choices you make. Credit union CEOs have a lot of questions. You have to remember the credit union hired the CEO to run the credit union. They’re dealing in a different realm of investments–institutional investments with larger sums, shorter durations, things like that.
“[But] we do have a lot more opportunities, especially on the executive side, with the solutions we can make available. It’s no longer just the 401(k) you have at the credit union and your personal investments.”
The concerns he hears from credit union CEOs, Albraccio said, are those other retirees share. They worry about outliving their income. With longer life expectancy, they may need extended care, an issue not talked about 30 years ago.
Typically, Albraccio tries to benchmark retirement income at 70% of what the CEO was earning before retiring. He also wants to see proper insurance in place that will provide care if the CEO faces a major health issue such as a stroke.
“It all starts off with a gap analysis,” he explained. “Each credit union and each CEO is different. Because of the uncertainty in the market and the dip we had in returns in 2008 and 2009, a lot of retirement accounts have been knocked down by 30% to 40%.”
“So the executives have had to start preparing to work longer. Ten years ago they may have planned to retire at age 62. That may not be economically feasible for them right now, so they may be looking to retire at 67 or 70. We need to examine that, look at their 401(k). With the laws that are in place, the CEO can’t maximize the investment they’re making into the 401(k) compared to a teller. It’s capped at a certain percentage of their income.”
While publicly traded companies can offer stock options, that isn’t an option for credit unions. A 457(b) program is one way to fill that gap. It offers the executive the possibility of putting aside $16,500 of his own money to make up the shortfall.
Are credit unions keeping up with the changes that have taken place? Overall, Albraccio said, they recognize the shortfalls and are working to make adjustments.
Jack VanDerhei, research director at the EBRI, agreed that–among other issues–deciding when to retire is no longer a no-brainer. When Social Security and the employer’s defined-benefit plan clicked in at 65, that marked retirement age.
“That has changed significantly, primarily because of the shift from defined-benefit to defined-contribution plans,” VanDerhei said. “Now, in essence, there is no retirement age. The decision is not quite as simplistic. There is the situation where some people have retired too early without sufficient financial resources. Unfortunately, they find out after they are in their 70s they are not going to have enough money to make it through retirement. At that point it is very, very difficult to get back into the workforce.”
VanDerhei said it’s difficult to determine whether people are deferring retirement because of the economy. Some may simply want to continue working. Someone in their 40s who declares they will work until they are 70 may change their mind.
What is the biggest mistake people make in their retirement planning?
“There are two groups of people,” he said. “The first would be those who are many years away from retirement. For a huge percentage of them, planning would be too optimistic a word. If they have a 401(k) they’re probably putting in as much as their employer will match, and that’s the extent of their strategy. When it’s too late to do much, they eventually sit down and see how much they have and how much they need to have. They realize they’re probably going to be far short of what they require to sustain their standard of living in retirement.”
“At that point, you get to the individuals who, simply because they’ve hit 62 or 65, pull the trigger without any calculation or without seeking any professional advice. They go through their account balances, in many cases sustaining the same standard of living they had pre-retirement. Not surprisingly, they get into a situation where they’ve gone through that money far too quickly.”
VanDerhei urges even financial professionals such as credit union executives to seek advice from someone who devotes their career to financial planning. EBRI research shows that workers who have done a retirement needs calculation tend to be considerably more confident than those who have not about their ability to reach their goal, despite the fact that those doing a calculation tend to name higher retirement savings goals.
Andy Sheeter, president of Sheeter Consulting, cites post-retirement health care as a key issue. Very few retirees are in good shape when it comes to paying their medical bills in retirement.
“There are a few lucky ones out there who may have had a spouse who was in the military or worked for the school system,” he indicated. “But those are few and far between. The vast majority of people are really on their own.”
“The issue with Medicare is you still have to pay for Part B. That costs about $1,200 a year, depending on your tax bracket. It could be as much as $4,800 a year. Medicare Part D, which is your prescription drug coverage, costs about $1,000 a year. A really good supplement is about $3,000 a year.”
Sheeter said what he’s been able to do for his clients is to implement for the credit union a retirement health care plan that takes care of Medicare premiums without creating a tax obligation.
Isn’t post-retirement health care a vanishing benefit?
“It really is,” Sheeter agreed. “That goes back to 1991 when new accounting treatment was introduced for post-retirement health care plans. Those plans became extremely costly. Since then we’ve seen an exodus from post-retirement health care plans that cover all employees. The nice thing about the plans we design is they don’t fall under those accounting regulations.
“Usually we’re designing a plan for the CEO. In one case we’re in the process of putting in place a plan that covers any employee who has 30 years of service with the credit union.”
Sheeter expects health care will continue to be an issue. Somebody has to pay for the research and development taking place. He is frequently asked what will happen if there are major changes to Medicare. His response is that no matter what happens to health care, you’re ultimately going to have to pay for it.
Some additional EBRI figures underscore Sheeter’s concern. Thirty-six percent of current workers expect to receive post-retirement health care insurance, but only 27% of retirees say they are actually receiving such benefits. The institute notes many employers are eliminating health care coverage for future retirees, so those who expect it may be disappointed.
Sheeter has some advice for CEOs approaching retirement. Find ways to create fixed benefits for yourself. Everyone now working is pretty much on their own. They may be putting money in 401(k)s, but those accounts will fluctuate in value. There are supplemental executive retirement plans that will pay a fixed retirement income.
Look for a financial planner who will customize a plan and ask questions such as, “What you want to accomplish?”
Bob Martinez at Platinum Wealth Planners in Tampa finds many clients have a wish list–travel, hobbies and other activities they want to pursue in retirement. They have a pretty good handle on Social Security and their pension income.
“But what I’m running into a lot, like Will Rogers said, it’s not what we don’t know that’s the problem, it’s what we know for sure that isn’t sure,” Martinez said.
“Things don’t happen as planned. Assumptions made 10 years ago aren’t necessarily correct today. A lot of plans that were made for retirement were made from an optimistic view of things. The times are very dynamic. There are things you can’t change. The economy. Inflation. The political situation.”
Health and health care costs, he continued, will affect retirement more than any other single factor.
“We should take responsibility for addressing those needs that we can address,” Martinez advised. “Make sure you will have income to support your expectations. Take into account the impact of health and longevity. All it takes in one tremendously expensive year during which one has to draw down from an IRA unexpectedly for the entire financial planning exercise to go awry.”