Seven Life Defining Decisions: Things to Think About Special Issues for the Third Age Presented by Anna Rappaport

ANNA RAPPAPORT CONSULTING

STRATEGIES FOR A SECURE RETIREMENTSM

Seven Life Defining Decisions:Things to Think About

Special Issues for the Third AgePresented by Anna Rappaport

The Transition Network — Prepared with support from WISER October, 2006

Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation

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Retirement in America: The Puzzle TodayDec

line o

f DB P

lans

Premature

RetirementRisk

Less

Ret

iree

Heal

th

Working in

Retirement

Longer

Life Spans

LittleLonger TermThinking

Wha

t is

Long

evity

Risk

?

Higher

Health Costs


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Our Goals Today

Share “Seven Life Decisions” ideas Understand key data about retirement Identify key decisions/questions


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Agenda

Seven Life Decisions Project Key Data and Facts The Seven Major Areas Next Step: Decisions in Transition Period


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Seven Life Defining Decisions: A Roadmap for Security

1. Start Planning2. Jobs and Careers3. Marriage and Family4. Home Ownership, Debt and Credit5. Planning for Retirement6. Investing for Long-Term Goals7. Insurance

WISER and Actuarial Foundation Seven Life Defining Decisions project focuses on intersection of retirement and life events

Goal today — focus on issues — our stage of life


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Purposes of the Seven Life Defining Decisions Project

To show you how decisions you make in your life, in key areas, can have a big impact on your future

To point out the times in your life when you can take steps to a more secure future

To empower you to take control of your financial future

Use the material and share it!

Note: copies can be secured from Wiser or downloaded at: www.wiserwomen.org/pdf_files/wiserrpt_life_rev_feb04.pdf


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Key Data and Facts

Demographics: The Third Age Probability of Living to 80, 90, 100 Premature Retirement Risk Perceptions About Risk


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Demographics: The Third Age

New ways to think about life cycle– Third age: period between full time work and total

retirement– During transition period

Some work and more leisure Supplement earnings with retirement resources Looks like traditional cyclical life plan

Key trends– Living longer– Healthy longer but not forever


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Probability of Living to 80, 90, 100Projected to 2025

Projection to 2025 – 1983 Mortality projected 40 years

Survival Age Female 65 Male 65 Both

SurviveEither

Survive

survive to 80 0.84 0.69 0.58 0.95

survive to 90 0.52 0.30 0.16 0.67

survive to 100 0.14 0.04 0.01 0.18


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Context: Expected vs. actual timing of retirement among retirees

36%39%

43%39% 37%

55%

49% 50% 50% 52%

6% 6% 6% 6% 6%

2000 2001 2002 2003 2004

Earlier than planned About when planned Later than planned

Source: EBRI/ASEC/Greenwald, 2000-2004 Retirement Confidence Surveys


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46%

52%

46%

57%

48%

46%

43%

55%

47%

43%

51%

NA

75%

61%

79%

78%

66%

71%

58%

63%

54%

59%

65%

NA

How concerned are you that . . . ? (percentage very or somewhat concerned)

You might not have enough money to pay for adequate

(2003/2001: good) health care

You might not be able to maintain a reasonable standard of living [for

the rest of your life]

You might not be able to keep the value of your savings and

investments up with inflation

You might not have enough money to pay for [a nursing home/

nursing care at home]

Source: Society of Actuaries, 2001,2003 and 2005 Risks and Process of Retirement Surveys

Retirees(2005 n=302)

Pre-retirees(2005 n=300)2005 2003 2001

Concerns about risk fairly constant


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1. Start Planning

Key Decision Points: Choosing a career, changing jobs, getting married, having children, buying a home, starting to save and invest; having a lifetime financial plan can provide a smoother journey.

In the “Third Age” — where we are — special planning needs– Seeing if we have enough assets/income– Catching up– Deciding what to do in retirement and what retirement

means– Fit investment decisions to life stage– Risk management strategies– When to make changes


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Why Worry?

High poverty rate among older women High poverty rate among retirees, especially people of color Barriers for women to overcome to achieve financial

security — e.g. family care-giving needs may mean working part-time and forfeiting job opportunities

Too much debt in retirement Poor understanding of many financial issues by Americans


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2. Jobs and Careers

Third Age Issues Many people fail to recognize premature retirement risk

– Four out of 10 retire before they planned to Working in retirement — key to new retirement for manyIssues at All Life Stages Most job seekers ask about pay, but not about benefits,

particularly retirement benefits Some jobs offer benefits that are worth a good deal of

money — health insurance, pensions and retirement savings plans are valuable


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Working in Retirement: Importance of EarningsAges 55 and Over

Age Group % with Earnings

Mean Annual Earnings

Median Annual Earnings

55-64 66.5% $44,673 $32,00065-69 32.6% 32,792 19,42870-79 16.2% 27,256 12,00080 + 5.1% 21,101 10,000

Source: Debra Whitman and Patrick Purcell, CRS Report for Congress, November 7, 2005


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Choice of Work After Retirement

Source: Society of Actuaries, 2005 Risks and Process of Retirement Survey. Results based on 274 retirees who provided their retirement age.

Did not work for pay, 60%Worked full-

time, 15%

Don't Know, 1%

Worked part-time, 13%

Full-time or part-time part

year, 12%

Percentage of Retirees with Various Work Experiences (2004)


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Puzzles around longer work

More than 7 in 10 people say they want to work in retirement

About 4 in 10 people retire earlier than planned– Don’t plan for premature retirement risk

Higher age displaced workers take longer to get jobs Other research indicates that older applicants get fewer call

backs – Age discrimination? Will this change as population

ages? Future: unknown effect of longer work on retirement

patterns


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Leaving a Job

When leaving a job — what will happen to your retirement plan?

Defined benefit plans — usually vest in 5 years. The longer you stay, the more valuable the benefit

Defined contribution plans — usually vest in 3-6 years/ leave your money in the plan or have it automatically rolled over to another plan or an IRA

Think about keeping your skills and contacts up to date so you can re-enter the workforce


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3. Marriage and Family

Retirement plan needs to work for you as a couple and for each of you separately

Decisions made at time of marriage, during the marriage and at its end affect your security

Marriage — most assets that you or your spouse acquire during the marriage will belong to both of you

Stay aware of your spouse’s debts — they may become yours some day

When others are depending on you for support, consider life, disability and health insurance

Work through a household budget and who will pay for what before you get married and review it periodically

Both spouses should share responsibility for major financial decisions


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Marriage and Family continued

Divorce can change finances dramatically. To claim a share of an ex-spouse’s retirement benefits, you must obtain a Qualified Domestic Relations Order at the time of your divorce.

Pensions can be the most valuable asset to divide, but are frequently overlooked

Couples living together, but not legally married, do not receive same legal protections or have same access to benefits as legally married couples

Some employers extend health insurance and other benefits to domestic partners, but this is uncommon

Social Security provides spousal benefits to individuals in common law marriages if recognized under state law


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4. Home Ownership, Debt and Credit

Home is largest asset for many Americans, important in determining retirement options/resources

A reverse mortgage on a home can help give you much needed retirement income

Buying a home is the largest transaction most people make You may be able to use your home as a source of income

later, by trading down for a less expensive home or tapping into equity

Think carefully about mortgage debt in retirement Views differ as to desirability of having mortgage in

retirement


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4. Debts and Credit

Debt is a factor in financial security in retirement, many Americans get to retirement with significant debt. Try to avoid getting in debt by setting aside 3-6 months of expenses for emergency fund

If you have credit card debt, try to pay off your cards as soon as possible. Pay off the one with the highest interest rate first, then move on to the others

Find out what is in your credit record and check for errors You can get a free copy of your credit report by calling

1-877-322-8228 or go to www.annualcreditreport.com


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5. Planning for Retirement

If you want to have adequate funds for the future, you need to save during your working years

One rule of thumb is to save 15% of pay over a long period of time. Don’t get discouraged if you can’t save that much. Save a smaller amount now and try to increase it later

As you near retirement:– Focus on risk management and the distribution phase– Think about how much you need, what you have and

how to fill the gap– Think about when you can retire


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Sources of Retirement Income

5 legged stool 1. Social Security

2. Pensions

3. Savings

4. Earnings

5. SSI — Supplemental Security Income


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Pension Basics – Beware of Important Decisions/Traps

Taking money in a lump sum and spending too soon Not focusing on benefits in divorce Not saving enough to get the company match Not participating if the plan is voluntary Taking benefits too early thereby getting a much smaller

benefit Leaving before you are vested Not understanding what you will really get and over-

estimating benefits Not considering tax issues Not considering minimum distribution rules


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6. Investment Basics –Third Age Issues

Will need to start using retirement funds Revisit asset mix and way to investment

– Think about annuities that guarantee life income as well as traditional investments

– “Making Your Money Last a Lifetime” — helping you think about the annuity decision

Consider professional advice but be sure advisor aware of retirement issues– Know how advisor is paid and what issues she will focus on

Asset classes– Stocks, bonds, money market funds, and others– Mutual funds offer means to pooled investments


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7. Insurance

Health benefits and insurance Disability protection Long-term care insurance Life insurance


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Next Steps: Evaluate, Plan and Decide

Evaluate Have I saved enough? How can I catch up? What risks do I face and how do I manage them? Does my plan work for me as an individual?Plan When can I retire? Will work be part of my retirement? How do I make that

work? What funds will I use and how? How do taxes affect me?Decide


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Have You Saved Enough?

Getting Your Ducks in a Row:– Estimate what you have currently in Social Security,

pensions and other sources of retirement income– Convert 401(k) balance and other savings into yearly

income from annuity or scheduled withdrawals

Aim to have 100% of your current income in retirement. Calculate the gap between current income and what you have in savings and retirement benefits.– Use WISER’s calculator on the website at

www.wiserwomen.org to find out how much to save starting now, to close the gap

– Review your savings and expenditures and put a plan in place to save the necessary amount

– If you can’t do it all right now, concentrate on eliminating debt and saving something, even a small amount


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Secure Retirement Action Steps

1. Develop a budget Determine how you can economize

2. Develop a Savings and Catch-up Plan Eliminate your debt first Set aside a certain amount each month for savings

and then don’t touch your savings3. Choose Investment Opportunities

Employer offered 401(k) or pension Traditional or Roth IRA Mutual Funds Savings Bonds


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More Helpful Information

What follows is additional information for reference purposes


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Context: The work and retirement experience

People say they want to work longer Many work after “retirement”

– Often part-time or part-year Of those who are not in labor force at 50-61

– 67% of men are disabled– 40% of women are disabled

Job options and innovative practices are needed


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Context: Major information sources

SOA Research– 2005 Study of Risks and Process of Retirement– Focus groups on investment of retirement assets

Retirement confidence study Government data AARP studies

– Staying Ahead of the Curve 2003


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Financial hazards to avoid on the road to retirement

Mistakes women make They quit working too soon They give up retirement security in exchange for the house

in a divorce They count on returning to work, after child-rearing, at the

same or higher pay They don’t start saving or investing early enough They save for kids’ college instead of retirement They invest too timidly They amass too much debt late in life

Source: USA Today with information provided by Judy Shine


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Top Money Mistakes

Not making your finances a priority Using your hard earned money for items that you do not

really need and you could use to put into savings — such as purchases at the grocery and drugstore that you had not planned on purchasing

Not saving for the future because you help everyone else first and you save first for your children or grandchildren’s education

Getting discouraged and not saving at all because you think you don’t have enough money or you think it is too late


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Road Map ▬ for moving through life

Understanding the challenges, and making a plan to overcome them, is key

Best to start planning early in life Keep records Review and adjust your financial plan over time. Develop

the discipline to stick with a financial plan Focus on long term goals such as education/home-buying Look for a job with good benefits Keep actively involved in financial decisions if you marry or

live with someone Avoid accumulating credit card debt/keep credit record in

best possible shape


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Roadmap continued

Learn all you can about saving for retirement — IRAs, 401(k)s and pensions

Learn the investment rules of the road and start saving early in life

Explore options to protect yourself and your family — life, disability, health and long-term care insurance

Understand risks later in life Plan for using your assets just as you plan for building them


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Job Benefits

Health insurance not only protects your health but may help you from paying out of pocket costs; that will free up more income for saving for the future

Retirement plans lay the groundwork for a secure old age while you are working and able to build and acquire assets

Disability insurance protects you and your family if you are unable to work temporarily or permanently; buy on your own if not provided

Long-term care insurance will pay for services you need when you are unable to care for yourself. Some employers allow you to cover other people in your family


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Caring for Parents

Caring for an elderly parent can complicate financial plans Talk to your parents ahead of time and find out their wishes

and plans Ask how they have prepared their finances for the future Talk to your siblings and see if they will help your parents

with care Find out what insurance coverage your parents might have If you need help, contact Eldercare Locator or your local

Area Agency on Aging Eldercare Locator: www.eldercare.gov or 1-800-677-1116


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Social Security Retirement Benefits

You can receive full benefits at normal retirement age, age 65 to 67, depending on when you were born

You can receive reduced benefits at age 62, if you want to retire early

You can collect higher benefits if you wait longer. (There is a big penalty for taking early retirement benefits — 20% if you retire 3 years before normal retirement age.)

The amount you will receive is adjusted each year for inflation


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Social Security Benefits for Divorced Women

A divorced woman who was married at least 10 years can receive Social Security based on her ex-husband’s work record.– This has no impact on what he or his current wife

receive– You will get the larger of what you would get as a worker

and the benefit based on 50% of your former spouse’s benefit

You can also receive a divorced widow’s benefit after a spouse dies


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Social Security Benefits for Widows

A widow/widower receives the full worker’s benefit at retirement age

A widow/widower can receive reduced benefits:– at age 60, or– age 50 as a disabled widow/widower

A widow/widower of any age, caring for children under 16 years old, can receive benefits. The children can receive benefits until they are 18 years old


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Social Security Disability Benefits

Social Security provides lifetime, inflation-adjusted benefits for those with disabilities — equivalent to $200,000 worth of insurance.

You can get disability benefits if you are:1. Less than the full retirement age,2. Have enough Social Security credits, and3. Have a severe medical impairment that prevents your

doing “substantial” work for a year+, or a condition expected to result in death.


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Pensions and Retirement Savings Plans

Defined Benefit plan: many large company and public sector workers have this type of plan

The employer invests money and pays you a set benefit at retirement

Benefit usually based on years worked and highest average pay level. Most valuable to long-term employees

You must stay until you are vested, usually 5 years, to receive a benefit. Leave before vesting and lose your benefit

Third Age Decisions include:– When to start taking benefits — there may be special

provisions for early retirement– Some plans offer a choice of a lump sum — new WISER

publication is coming about this choice– Whether to take survivor income


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Pension and Retirement Savings Plans continued

Defined contribution: 401(k), 403(b) and 457 plans — these are really savings plans;

Generally, it is up to you to decide to have money taken out of your paycheck to invest in savings account

Some employers will match savings up to a limit You, the employee, choose from investment options and

bear the riskThird Age Issues Possibility of added “catch-up” contributions in some plans When to take funds out and how to use them — look for

new WISER publication Making your money last a lifetime


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Pension Basics – Divorce

Under all state laws, a pension earned during marriage is a joint asset, but it is NOT automatically divided

You need a separate court order at the time of the divorce stating your right to a portion of your ex’s pension — a “qualified domestic relations order” or QDRO

Remember— Check to see if the spouse has more than one pension from

a current job or previous jobs Find out how much was earned in pension benefits under

each plan You may want to have the benefits valued by a pension

actuary or accountant Don’t forget to include survivor benefits in the pension order


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Social Security and Pensions –What You Can Do

Learn the Facts Understand the decisions you will need to make and when

you can make them Focus on benefits you earned and those your husband

earned Think longer term — check to see what may happen if you

live to ages 80, 90 or even 100 Know your basic legal rights: at the workplace, as a

spouse, widow(er) or ex-spouse Call 800-772-1213 to ask for your Social Security

Statement, an estimate of your future Social Security benefit. Social Security also mails you an estimate of your future benefits each year around your birthday


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Individual Retirement Accounts

Individual Retirement Accounts (IRAs) are accounts you open on your own at a financial institution like a bank or credit union

For 2006, you can contribute up to $4,000 annually — or $5,000 if you are over 50. You contribute before-tax money, and pay taxes when you take the money out

You pay a penalty if you take the money out before age 59½

You must start taking out money by age 70½ You can roll over money from an employer sponsored plan


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Roth IRAs

In 2006, if you are eligible, you can contribute up to $4,000 earned income annually — or $5,000 if you are over 50. You contribute after-tax money

You will not pay taxes when you withdraw your funds after retirement — Roth IRAs grow tax free

Income limits determine eligibility

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[email protected]: 312-642-4720

Fax: 312-642-4330

ANNA RAPPAPORT CONSULTING

STRATEGIES FOR A SECURE RETIREMENTSM

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Seven Life Defining Decisions: Things to Think About Special Issues for the Third Age Presented by Anna Rappaport