How To Make Your Retirement Money Last

 One of the most important problems facing a person at the cusp of retirement is how to survive financially during the golden years. A healthy 65-year old man will live about 19 more years, on average. A healthy 65-year old woman will live about 22 more years, on average. Those are just averages. Some won't make it that far. Others will live to their 90's. There's no simple answer to the problem of financing a long retirement. Much depends on the person's individual circumstances. Perhaps you, your parents, or your grandparents are facing this question. Here are a few thoughts. 

 1. Most retiring Americans will have less than $100,000 in savings and a house. They will be entitled to Social Security, and the lucky ones will get a pension. The pension will probably not be adjusted for inflation. A person or family in this situation should try to live on Social Security and any pension payments. Hold onto the savings and the house for the big expenses that may well be coming. Many health care costs (like assisted living) aren't covered by Medicare or Medicaid. Also, large purchases like a new car are best made with cash. When you're 70, you don't want to enrich banks with interest payments. 

2. For retirees with substantial savings, such as $500,000 or $1,000,000, the conventional wisdom is that if you retire around 65, have your money invested in a diversified portfolio and figure on living about 20 more years, you can withdraw about 4% of the savings the first year of retirement, and then adjust the amount of withdrawals for inflation each year thereafter. For example, if you start with $1,000,000, withdraw $40,000 in year one of your retirement. We'll assume that inflation remains at its historical average of about 3% per year. In year two, withdraw $41,200 (the original $40,000 plus $1,200 or 3%, for inflation). In year three, withdraw $42,436 ($41,200 plus $1236, or 3% more, for inflation). Remember that you'll also have Social Security and perhaps a pension, so the withdrawal probably won't be your only income. If your family has the longevity gene and you figure your retirement might last 30 years, start with a 3% withdrawal and adjust for inflation. To use our $1,000,000 example, withdraw $30,000 in the first year of your retirement, and adjust upwards for inflation in succeeding years. Where do these 3% and 4% numbers come from? A mathematical technique called a Monte Carlo simulation. It is a way of calculating probabilities--in this case, the probability that you might outlive your retirement savings. Is the Monte Carlo technique foolproof? Not more so than anything else that human beings have come up with.  The 4% concept has been criticized, but often as being too cautious.  So it's probably a reasonable approach.

4. Another approach to managing retirement savings is the time-honored rule of spending the earnings, but never touching the principal. One advantage to this approach is you will always have your principal. Your spending may fluctuate widely from year to year, especially if the stock market does one of its periodic belly flops. But your principal will remain. Its value will erode because of inflation. You can counteract the inflation by not spending all your income in good years. Set some aside and give your principal a boost. You'll be glad you did if, later on, you hit choppy water. Spending only investment earnings and preserving principal will mean that, on average, you'll probably spend less than the 4% initial level approach prescribed by the Monte Carlo approach. But if you get more peace of mind from never touching your principal, then don't touch your principal. Your retirement years should be as worry-free as possible. 

5. Some people advocate the use of annuities to make retirement savings last. There are many types of annuities, and most of them are suitable only for wealthy people. But if you have $500,000 or more, certain kinds of annuities might make sense. Ones that provide a predictable monthly payment (such as a lump sum immediate fixed annuity or a lump sum inflation adjusted annuity) might help you avoid spending the rest of your savings too fast. But remember that you lose the money you invest in the annuity if you die early. For example, if you are 65 and invest $200,000 in a lump sum immediate fixed annuity, and get hit by a truck the next month, you lose all $200,000. (There are annuities that mitigate this problem, but at the cost of lower monthly payments to you.) And there's also the risk that the insurance company that sells you the annuity may go out of business. If so, you could lose at least a large part of the money invested in the annuity. Annuities may be right for some people. But you have to think about them carefully.

 6. Work as long as possible to build up your Social Security credits, and your pension credits if you're entitled to a pension. The more continuing income you have, the less you'll need to tap into savings. To learn about how Social Security determines your credits, go to https://uncleleorumbles.blogspot.com/2007/05/mysteries-of-social-security-retirement.html. Also consider delaying the time when you start to collect Social Security benefits. That will increase the size of your monthly payment (until you reach age 70, when these increases stop and you should therefore start taking Social Security no matter what). See https://uncleleorumbles.blogpost.com/2007/05/mysteries-of-social-security-retirement_02.html.  

How you approach the problem of managing your retirement money is a matter of personal choice. Some want to live it up while they are still healthy. They travel a lot and get to know many maitre d's. They don't care about leaving an estate behind. Others want to make sure they don't run out of money and spend cautiously. They know it's hard to recover from financial setbacks when you're 75 or 80. Early spending in retirement is costly to your long term financial security, but it's not wrong. Whatever your choice, make sure you understand the consequences.  If all this makes you queasy, save some more before you retire.  Retirement's financial problems are always easier the more savings you have.

Unclaimed Money

There are billions of dollars worth of unclaimed assets in America. It's important to marshal your assets, particularly as you approach retirement. If you've been careful about your finances, chances are that you have everything that you're entitled to. But there are places you can check to make sure you haven't left any money on the table. Remember that you may have money coming to you directly, or perhaps from a deceased family member through inheritance. That means you should check under your name and the deceased person's name. And if your spouse is busy unloading the dishwasher, you may want to check for them as well.

Old bank accounts, shares of stock, insurance policy assets and payments, annuities, uncashed checks, unredeemed money orders or gift certificates, security deposits, contents of safe deposit boxes, customer overpayments, and other financial assets must be turned over to the state of the customer's last known address, if the customer has not made any contact or engaged in any activity for a period of time (such as a year or more). You can search at www.missingmoney.com. Also, you can go to www.unclaimed.org to get more search options (this site can link you to each state's treasurer, which allows you to search individual states). If you search individual states, make sure to check all states where you, your spouse, your kids, your late parent, or your deceased wealthy uncle, aunt, grandparent, cousin, sugar daddy, sugar mommy or other potential benefactor lived, as far back as you have information.

Remember that there is a chicken and egg problem with unclaimed property. You may have forgotten to cash a check. Maybe a small bank account slipped your mind when you moved some years ago. You may not know that you're a beneficiary of a will or insurance policy. Or you may not realize that your late parent, in the forgetfulness of old age, lost a number of checks without depositing them. You can't get what you've forgotten or never knew about in the first place. States, facing severe budgetary pressure, have become aggressive about getting these assets from insurance companies, corporations, banks, and so on. While the states are looking out for themselves, the consolidation of all this unclaimed property into the hands of state treasurers gives unknowing beneficiaries and claimants centralized places to look for assets to which they may be entitled. So don't be shy about poking around. You have nothing to lose.

You can check for an unclaimed federal income tax refund at www.irs.gov. Use the "Where's My Refund" feature on the front page. State tax agencies usually provide a way to check online for the status of a refund.

If you think you may have a claim to a matured U.S. Savings Bond, check at http://www.treasuryhunt.gov/.  You might locate bonds you bought yourself but forgot, and bonds that your parents, relatives or others bought for you.

If you worked 10 years or more for an employer with a pension plan, you may have earned the right to a pension, even if you no longer work there. You can check with the employer. If it has gone out of business, its pension may have been taken over by the Pension Benefit Guaranty Corp. This is a federal agency that guarantees pension benefits up to a limit (which varies depending on the type and terms of the pension). You can check at http://search.pbgc.gov/mp/ to see if you might have a pension claim. Even if your name doesn't appear in this search, you may want to find out if the pension plan is now being administered by the Pension Benefit Guaranty Corp. Search at www.pbgc.gov/workers-retirees/find-your-pension-plan/content/page676.html. There's always a chance your name is spelled differently in the government's records, so you should find out who's taken over the plan and then figure out how to establish any claim you may have. Another resource for finding or dealing with a pension plan would be a regional pension counseling project. These projects are listed by the Pension Rights Center, a nonprofit organization, at http://www.pensionrights.org/counseling-projects. You can also try the federal Employee Benefits Security Administration at 1-866-444-3272 or http://www.dol.gov/ebsa/. You can get the address and phone number of a local EBSA office where you could seek assistance. If you need help figuring out whether the amount of pension benefits your employer promises is correct, you can get four hours of free assistance from the American Academy of Actuaries. See https://www.actuary.org/content/pension-assistance-list-pal.

What if an old employer had a 401(k) plan, and you want to check to see if you have an account? Contact your old employer. If your old employer has gone out of business, you can search a Department of Labor website for information: www.askebsa.dol.gov/AbandonedPlanSearch.

Of course, keep track of your Social Security benefits. Use the resources available at www.ssa.gov. Remember that not only do you get benefits, but your spouse and perhaps even your dependent children may get benefits. This is something we discussed at uncleleorumbles.blogspot.com/2007/05/mysteries-of-social-security-retirement_03.html. Make sure everyone in your household gets the benefits to which they're entitled.

Veterans of limited financial means may be eligible for an income supplement called the Veterans Pension. This pension supplements other income you have to bring your total income up to levels prescribed by Congress. For those who served during the Vietnam War or earlier, benefits may be available if you had at least 90 days of active service, with at least 1 day during wartime. Veterans whose active duty service began on or after Sept. 7, 1980 need at least 24 months of active service (or the full time period for which they were called up for active duty). For more information, go to the Veterans Administration website at https://www.va.gov/pension/eligibility/. It's very important to note that veterans eligible for a basic veterans pension, who have serious health problems and need assistance from others for personal living tasks, or who have one or more disabilities, may also be eligible for Aid and Attendance or Housebound benefits, which are paid in addition to the basic veterans pension. For a vet facing nursing home expenses, or the costs of home health care, Aid and Attendance or Housebound benefits can make a difference.

For more information about Social Security, read our May 1, 2007 blog uncleleorumbles,blogspot.com/2007/05/mysteries-of-social-security-retirement.html, and May 2, 2007 blog, https://uncleleorumbles.blogspot.com/2007/05/mysteries-of-social-security-retirement_02.html.

To avoid having your money or property go unclaimed, see https://uncleleorumbles.blogspot.com/2008/08/how-to-avoid-having-unclaimed-property.html.

Hope For The Financially Lost

Some people have financial plans, but a lot of people don't.  Those who have plans sometimes find that the plan has been blown up by job loss, illness, elderly parents who need support, or bad investments. Some people simply can't save. Whatever the situation, there remains hope for the financially lost to have at least a decent retirement.  

Boost your benefits. Work as long as possible to build up your Social Security benefits and, if available, your pension benefits. This is especially important for those who can't save. Even if you aren't working, delay taking Social Security benefits as long as possible (until you're 70). Delaying Social Security increases benefits up to age 70. At that point, start taking benefits because delaying won't increase them any longer.  For more, see https://uncleleorumbles.blogspot.com/2007/05/mysteries-of-social-security-retirement_02.html.  

Stay together. Couples generally are better off than singles, because they can pool their resources. Even if their only resources are Social Security benefits, a couple are usually better off together than each would be individually. Of course, togetherness isn't always possible. When it is, there are financial, as well as other, benefits. For more, see https://uncleleorumbles.blogspot.com/2007/05/mysteries-of-social-security-retirement_03.html.  

Get a job with a pension. Government, law enforcement, military and educational jobs usually offer a pension or other retirement plan. Although retirement benefits in many state and municipal jobs are being adjusted to meet fiscal realities, they will still be better than nothing. Not everyone is cut out for these types of jobs. If you find a private sector job with a pension, then try to stay there long enough to accrue meaningful benefits. For those who can't save, a pension is golden. You just have to work long enough for the pension to vest. If you need assistance figuring out if the amount of pension benefits your employer promises is correct, contact the American Academy of Actuaries at https://www.actuary.org/content/pension-assistance-list-pal. They'll give you up to four hours of free help. If you think your benefits are too low, contact a regional pension counseling project for free assistance. http://pensionrights.org/find-help. 

 Buy a house and pay off the mortgage. Buy a house, pay off the mortgage, and don't borrow against the house. This strategy will build equity in a piece of real estate that you can add to your Social Security benefits (and pension benefits, if any).  In retirement, be cautious about borrowing against the house through a reverse mortgages because they can be very costly.  If you need to raise cash, consider selling the house and living somewhere else.  This can raise considerably more cash than a reverse mortgage, especially if the house is in a region with high housing prices.  Then, you can sell the house and move to a region with lower housing costs, and end up better off than with a reverse mortgage.  Also avoid home equity lines of credit.  If you have no savings and Social Security isn't enough, how will you repay the HELOC?  

Move to a lower cost region.  This can be somewhere in the U.S. or another country.  Latin America, Asia and some parts of Southern Europe offer significantly lower living costs in many locations.  However, moving can involve a number of tradeoffs.  Think carefully before deciding, especially about downsides like being without family and friends, having less access to advanced medical care, and how much you'll miss plain old American things like a soda served with a lot of ice (this doesn't happen much in the rest of the world).  Try taking a vacation in the location first to see if it seems like a fit.  Look into the legalities.  Getting permission to stay in a foreign country long term can sometimes involve a labyrinth of legal procedures.  Those who are adventurous and flexible can find living in a foreign country is tremendously rewarding.  But it's not for everyone.

None of these strategies will finance a yacht. Remember that it's never too late to save, even if you're living on just Social Security. Cash is sublime when times are tough.