Retiring? Expect the unexpected

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Norma Rita Berry,71, sits before the start of a rally for US Democratic
presidential candidate Senator Hillary Clinton (D-NY)
in St. Clairsville, Ohio, February 27, 2008
Photo By Shannon Stapleton

By Linda Stern
Reuters

WASHINGTON – Life is kind of crazy and unpredictable, and that doesn’t stop when you retire. You could still win the lottery or get hit by a bus, or anything in between.

That’s why traditional straight-line retirement planning does not address much of what goes on during real-life retirement. The old guidelines of “put this in every month until you retire, then take this much out every month,” just don’t cut it anymore. In order to protect your life style no matter what happens, you have to cover a lot of bases.

The best financial plans offer retirees “maximum flexibility” to respond to the unexpected, a recent study by the MetLife Mature Market Institute found. To give yourself that flexibility, you might need to create a whole portfolio of products and approaches.

Here are some situations that could challenge that straight-line retirement, and how to prepare for them:

– You could be forced to retire before you’re ready. Maybe you’ve planned to work until you are 66, but your company has other ideas. Roughly two of every five people retire before they planned to, according to LIMRA, a life insurance industry group.

The fix: “You need a back-up plan,” says Katie Libbe of Allianz Life. That could include a little side business that enables you to make some money if you are forced out of your job — anything from consulting to running errands for neighbors. And it could also include a tighter-budget life style, at least for a few years. Knowing that you could downsize your home or cut back on some travel or auto spending in a pinch could see you through those early years.

– You could end up paying way more taxes than you expect. Baby boomers have been taught to plow as much as possible into tax-deferred accounts like 401(k) plans and individual retirement accounts. That means that in retirement, you will have to pay income taxes on everything you withdraw to live on. Couple that with prospects for tax increases and technical aspects of the way Social Security benefits are taxed, and you could end up in a higher tax bracket in retirement than you are now.

The fix: Diversification by tax treatment, suggests Libbe. If you keep some money in a taxable account, some in a Roth IRA and some invested directly in stocks, you buy a lot of tax flexibility. As you withdraw money in retirement, you can be strategic about when to sell stocks, when to pull money out of an after-tax account and when to take the tax hit by making withdrawals.

– You could live long and prosper. It costs a lot of money, month in and month out, to live a very long time and stay healthy and independent.

The fix: This is the scenario that annuities work best for. Take some of your savings and buy a stream of income that will pay you for the rest of your life. You do give up some flexibility; you cannot cash in your annuity for an emergency. But because you are pooling risks with all the other people buying the same annuity, you can get bigger monthly withdrawals than you’d be able to get on your own, suggests consulting actuary Lane West. He recommends longevity annuities; typically, you buy them in your 60s, but they don’t start to pay off until your 80s.

Another fix for a long life: Invest like a younger person. Don’t avoid the stock market altogether and lock up all of your funds in bonds and bank accounts when you retire. Some money should be invested for growth.

– You could live long and need a lot of help. If you end up with a chronic disease and require years of daily care, an annuity would only be helpful at the margin. Assisted living facilities that cost $6,000 or more a month will blow through that monthly annuity benefit.

The fix: Save as much as possible all through your retirement so you have a solid chunk of cash left at the end. If you need to use it for care, you can. You could also buy a long-term care policy that would cover the care. That would allow you to save less along the way.

– Your timing could be off. A lot of research has shown that retiring in a bear market can really hurt. Because you start withdrawing assets while they are declining in value, it’s hard to recoup them. For example, the American Academy of Actuaries did some math around the 2008-2009 debacle. They found that on January 1, 2008, a person with $1 million could have bought an annuity that locked in $92,800 a year for life. But one year later, that person would have had only $800,000. At the same time, interest rates (priced into the annuity) would have fallen as well. The bottom line? The same person would only have been able to buy an annuity promising $68,700 for life, a 26 percent reduction in lifetime income.

The fix? If your retirement date coincides with low annuity rates and falling stock prices, live as lean as possible in your early retirement years. Don’t lock big money into annuities early; spread out those purchases so you may end up with higher paying policies later. Earn money around the edges with pick-up work and give your nest egg some time to recover.

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