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Pension Tension
By: Suzanne McGee
March 9, 2003 – The financial services industry has spent decades convincing people that they need to save as much money as they can so they can live comfortably in their old age.
But as the first baby boomers approach retirement, financial advisers realize they have forgotten to teach these potential retirees how to spend.
“They’ve spent 25 or 30 years accumulating a nest egg, and now they need to start thinking about how they’re going to earn a ‘retirement paycheck’; how they’re going to spend the next 25 or 30 years living off that nest egg,” says Shaun Mathews, president of ING Financial Horizons, a division of ING, the multinational bank.
An ING survey illustrates the problem: 86 percent of the 1,000 Americans nationwide surveyed expect to live in comfort during their retirement, 75 percent don’t have a clue about the nitty-gritty of how to turn their retirement savings into a stream of income.
Mathews has seen the problem first-hand. When his father retired at the age of 67, after 50 years of work “it was very frightening for him: when his next paycheck didn’t materialize, Mathews recalls. “He knew his pension would kick in, but he ended up going back to work, working a day or two a week so he’d have the comfort of that paycheck. He hadn’t thought about this kind of issue.”
One problem retirees face is that in place of their paycheck they now must grapple with a complex mix of pension or 401(k), Social Security, other investment portfolios, real estate rental income, etc.
The complexity means “this is not a “do-it-yourself” operation”, warns Jodie Hale, vice president of retirement plans marketing at Pioneer Investment Management.
For retirees who aren’t comfortable managing their money, the answer may be buying a fixed annuity that means they know, to the dollar, how much money they’ll get every year for the rest of their lives.
“Some investors can’t sleep at night without this kinda of certainty,” Hale says.
But Barbara Raasch, a partner at Ernst & Young, suggests instead setting up a cash management account that contains six months’ worth of living expenses, giving retirees more flexibility and control. Interest income from the retirees’ investments (those held outside tax-deferred plans like an IRA or 401(k) plan) is automatically deposited in that account monthly.
“That way, your portfolio is sending you a paycheck,” Raasch says. Quarterly, the retiree should sit down with their financial adviser to discuss what assets – starting with taxable portfolios outside the IRA and 401(k) plan and taking individual tax consequences – should be sold to replenish that cash management account.
One of the biggest mistakes a retiree can make – other than not thinking at all about how to design a retirement paycheck – is locking themselves into a post-retirement stream of income that can’t be changed with their circumstances, says Patrick Horan, a certified financial planner in Towson, Maryland.
“All of their situations are different from what they thought they would be” in retirement, Horan says of his clients.
“The goal is to have enough available that you’re not forced to sell when the market is ugly ad you’d have to take big losses,” Raasch says. “You also need to make sure your portfolio is properly invested – that your pool of savings is still growing in retirement, so you don’t need to withdraw more than 3 percent or 4 percent of your capital in any given year.”
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