Retirement Readiness

Welcome to our inaugural column designed to help you, a valued participant, prepare for retirement and help you make healthy decisions. Whether retirement for you is around the corner or a long way into the future, we will share with you some helpful retirement readiness tips. Please note that if you need additional guidance or have specific questions, we are here to help you, just an email or phone call away. Please refer to the bottom of this article for our contact information. The Center for Retirement Research at Boston College created the National Retirement Risk Index (NRRI) several years ago. The NRRI measures the percentage of working age households that are at risk from being able to retire with an income level comparable to their standard of living. Some of the critical findings indicate that the current working population, pre-retirement, do not expect to be nearly as prepared for retirement as current retirees. In fact, the study calculates that 51% of our pre-retirement households are at risk. If health care is included the percentage moves to 61% and incorporating long term care costs drives the number to 65%. We take this seriously and want to provide you with tools and guidance to shift the odds in your favor.

So let’s discuss the importance of the need to plan for retirement. I select the word “need” intentionally. Through my volunteer work in the Minneapolis Public Schools I teach Junior Achievement classes to our young children and the 1st grade lesson is to understand the difference between needs and wants. A kitty or puppy is clearly a want and food and shelter are clearly needs. So I am positioning planning for retirement as a need because if you don’t do it for yourself, who will? Unfortunately, if you are not prepared, the consequences could be dismal to devastating, to not only you personally, but your family as well.

The traditional view of retirement has been changing and evolving rather quickly, particularly in the last couple of decades. This is significantly driven by the fact that as a society we are living on average well past the traditional retirement age of 65. Studies are showing that even if a person retires from their profession, they are either working part time for additional income or for fun, some are starting businesses and some actually go back to school and some pursue work in a “dream” job. It is my observation that staying engaged contributes to an individual’s longevity. “60 is the new 50” or “80 is the new 60” and onward. If you were born in 1900 you would have had an average life expectancy of 47.3 years. Children born in 2007 have an average life expectancy of 77.9 years.1 In fact, men that turned 65 in 2004 have an average of 17.10 years of life remaining and if you are a woman, it is 20 years.2 Those of us that do not smoke should expect even more years tacked onto our life expectancy. I would surmise that most of us know someone in their 90s and many of us know of a few centenarians, as well. Living longer not only translates to needing a larger savings account but it typically results in increasing medical costs. It is no surprise that the greatest expenditure for health care occurs in the latter years of a person’s life and this corresponds to the period that the person is not working and technically living off of savings and a finite amount of money. So it is never too early to start planning and saving for retirement because you are going to need a bucket of money that will last longer than what your parents or grandparents needed and by living longer you will likely require more money to pay for your possible increasing health care needs as you age.

So what are the typical sources of retirement income? We have all grown up knowing about Social Security and mandatorily contributing to Social Security from the time that we started collecting a paycheck. However, Social Security was only intended to provide a portion of an individual’s retirement income and the more that you earn, the smaller that portion is in relation to your projected income replacement need. Additionally, one of the most likely changes in the program will be an increase in the age that you will qualify for full benefits. This will be required in order to keep Social Security from bankruptcy. Qualified retirement plans sponsored by your employer is the most common vehicle used today to save for retirement and increasingly defined contribution plans, most of which are known as 401(k) and profit sharing plans are replacing the traditional defined benefit or pension plan. The primary difference between these two plan formats is who funds the contributions. The traditional defined benefit or pension plan, soon to be almost extinct, is fully funded by the employer. Defined contribution plans are funded by employees primarily, with additional employer contributions that vary from employer to employer. This funding shift over time has resulted in placing most of the onus on you to save for retirement. The third primary source of retirement income is personal savings outside of the plan and work after retirement.

Retirement tip: 1. Try to save between 12% - 15% of your income – you can include your employer contribution to this number. Please refer to the Summary Plan Description to determine your contribution formula eligibility. 2. Do not cash out your account when you change jobs – this is known as “leakage” and is one of the biggest deterrents to meeting your retirement goals next to not saving or participating in the plan.

Source: Presented by: Susan M. Stiles CFP®, AIF®,ChFC®, Stiles Financial Services, Inc., Edina, MN, provides advisory services to the Sample Retirement Plan and their employees. They can be contacted by phone or email; 952-988-0452, 866-401-7374, Stiles Financial Services, Inc. is a Registered Investment Advisor. Securities & Advisory Services offered through Cambridge Investment Research, Inc, Member FINRA & SIPC. Cambridge Investment Research & Stiles Financial Services, Inc, are not affiliated.

  1. Source: National Center for Health Statistics. Deaths: Final Data for 2007, May 20, 2010.
  2. Source: National Center for Health Statistics, National Vital Statistics Reports, Volume 56, Number 9. United States Life Tables, 2004. December 28, 2007

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