Playing the role of Maggie in the movie classic “Cat on a Hot Tin Roof,” Elizabeth Taylor delivered the line, “You can be young without money, but you can't be old without it.” As Maggie implies, the end game for most people is achieving a financially secure retirement. But there are obstacles to overcome and important decisions to make along the road to retirement. And some of the decisions are irrevocable.
The central question is: Can consumers take aim at and achieve a comfortable retirement on their own without the help of a professional advisor? Are they able to make critically important decisions just by reading consumer financial publications, visiting a few websites on the Internet or listening to the advice of a friend or two? For most the answer is clearly “no.&rdquo help. The stakes are just too high to risk going it alone, they say.
The rewards of achieving a financially successful retirement are being able to do what you want, when you want—until the end of your life. The penalties for miscalculations are cruel, daily, financial compromises that you must make in accepting a diminished lifestyle.
Aging without enough money is a frightening experience.
Maggie knew that aging without enough money is a frightening experience. Consumers are beginning to recognize this also, as they discover the limitations of the Internet and the financial self-help magazines. For a while, they thought the solution to all of their financial problems could be found there. But when the bull market finally exploded, many were left with deep financial wounds seared into their memories and on the pages of their financial statements.
Here are a few of the important questions and dilemmas consumers must resolve on their road to retirement:
- Human nature: Humans are natural consumers, not natural savers. They must be offered incentives not to consume all their income and then be given the tools and encouragement to save and invest for the future. How much should they save? What investment options should they choose? Are their goals and expectations realistic?
- Social Security: Some observers suggest that Social Security will provide about one-third of the income required for a comfortable retirement. Others argue that it plays a much smaller role in retiring comfortably. Can Social Security be counted on to be there when they retire? Should benefits be taken early (age 62), at normal retirement age or postponed until later?
- Mortgage: Many people hope to have their mortgages paid off when they trade in their briefcase for their golf clubs. While this is certainly a worthy goal, there is another option. Could it make sense to have an affordable mortgage during retirement? With interest rates at near record lows, could retirees earn more on invested home equity than they pay in mortgage interest? Will they need the tax deduction that goes with a mortgage when they retire?
- Retirement plans: Most Americans are offered some type of retirement plan at work, or they are eligible for self-employed plans or IRAs. Often there are several plans to choose from and many investment alternatives. Which one should they select? How old should they be to begin participating? Should they enroll in the plan if their employer does not match their contributions?
- Asset allocation: The mix of investments differs for each individual based on his goals, risk tolerance, health, family circumstances and other factors. Should investors maintain the same asset allocation throughout retirement or should it vary as they age? Should their portfolios be rebalanced periodically? What percentage should be in stocks, bonds or mutual funds?
- Pension plans: Pension plans are not offered by many private employers anymore, having been replaced instead by 401(k)s or similar plans. Which irrevocable retirement income option should be selected: single life annuity, joint and survivor or other? Should life insurance be considered as a way to maximize pension benefits?
- Retirement income: Americans are routinely living into their late 80s, and many wish to retire before 65. How much income will it take to maintain their standard of living? Some magazines say 70 percent of current income is needed; others say it could be as much as 100 percent. How much income will it take for them to retire comfortably? In which order should they spend accumulated assets to fund their retirements?
- Reverse equity mortgage: Sometimes retirees find themselves with more expenses than income. While often overlooked by retirees, reverse equity mortgages can allow clients to live their remaining years in their own homes with an additional stream of income. How do they know if this is right for them? How much income could they receive? Where do they go to get a reverse equity mortgage?
This is just a partial list of some of the questions both pre- and post-retirees must answer to have a financially secure retirement. Can they go it alone without professional advice? For most, the answer is “no.” Just remember Maggie's foreboding words.
James P. Ruth, CFP, is
a registered representative and president of Potomac Financial Group, Gaithersburg,
Md. Contact him at 301-948-3900 or firstname.lastname@example.org.