How much do I need? How will I pay for health care? Retirement requires complex decisions. Ellen McGirt and Andy Serwer offer answers.Article Sections
· Part One
· Part Two
FORTUNE on Retirement
· Effect of the Boomer Bust
· Ready for Your Second Act?
· Death of Pension Plans
· Ultimate Fund Portfolio
· The Happy Retirement
· Best Stocks to Buy Now
How will I pay for health-care expenses?
McGirt: Ah, paying for replacement parts. According to Fidelity's 2006 Retirement Index, the typical American worker retiring today without employer health coverage will probably need $200,000 - yup, that's a big number - for expenses not covered by Medicare throughout retirement. And there's more: Since most people retire at 62 and Medicare doesn't kick in until 65, retirees start their golden years with a significant coverage gap.
Part-time work may offer the best solution: a bit of income, a bit of stimulation, and access to health benefits at a reduced cost. If your spouse is still working and has employer coverage, joining the plan of the working spouse is also an easy fix.
Another option is to continue your group coverage through the federal COBRA (Consolidated Omnibus Budget Reconciliation Act, 1986). Anyone who works for a company with more than 20 employees is eligible. You'll still pay out of pocket for premiums, up to 102 percent of the cost, but it may be cheaper and better than anything you can get on the open market - particularly if you have pre-existing conditions.
Your COBRA coverage will last for only 18 months. After that, you'll be entitled to purchase a policy with no pre-existing exclusions in the open market. But they can be pricey. One bright idea in the private market: high-deductible health plans linked with tax-advantaged health savings accounts. For those in good health, HSAs offer a nifty way to save for health-care costs over time, and premiums on high-deductible plans can be significantly lower than those on ordinary plans.
(Sources: Naic.org; Ehealthinsurance.com; HSAinsider.com; Nahu.org; healthdecisions.org)
How much should I worry about inflation?
Serwer: Some - but not too much. Let Fed chairman Ben Bernanke do the worrying for you.
Many pros - like Harvey Hirschhorn, portfolio strategist with Bank of America - say inflation jitters will continue over the short term, but they are confident that the Fed will be able to tame this dragon. Still, Hirschhorn says, inflation over the next decade or so could well be modestly higher than it has been over the last decade.
Hirschhorn recommends Treasury Inflation Protected Securities (widely known as TIPS); both the face value and the payout rise in value with inflation. While TIPS won't give you the kind of superheated gains that investors have gotten recently from commodities, which are also perceived to be a hedge against inflation, Hirschhorn believes they are a safer bet at this point.
McGirt: Ah, paying for replacement parts. According to Fidelity's 2006 Retirement Index, the typical American worker retiring today without employer health coverage will probably need $200,000 - yup, that's a big number - for expenses not covered by Medicare throughout retirement. And there's more: Since most people retire at 62 and Medicare doesn't kick in until 65, retirees start their golden years with a significant coverage gap.
Part-time work may offer the best solution: a bit of income, a bit of stimulation, and access to health benefits at a reduced cost. If your spouse is still working and has employer coverage, joining the plan of the working spouse is also an easy fix.
Another option is to continue your group coverage through the federal COBRA (Consolidated Omnibus Budget Reconciliation Act, 1986). Anyone who works for a company with more than 20 employees is eligible. You'll still pay out of pocket for premiums, up to 102 percent of the cost, but it may be cheaper and better than anything you can get on the open market - particularly if you have pre-existing conditions.
Your COBRA coverage will last for only 18 months. After that, you'll be entitled to purchase a policy with no pre-existing exclusions in the open market. But they can be pricey. One bright idea in the private market: high-deductible health plans linked with tax-advantaged health savings accounts. For those in good health, HSAs offer a nifty way to save for health-care costs over time, and premiums on high-deductible plans can be significantly lower than those on ordinary plans.
(Sources: Naic.org; Ehealthinsurance.com; HSAinsider.com; Nahu.org; healthdecisions.org)
How much should I worry about inflation?
Serwer: Some - but not too much. Let Fed chairman Ben Bernanke do the worrying for you.
Many pros - like Harvey Hirschhorn, portfolio strategist with Bank of America - say inflation jitters will continue over the short term, but they are confident that the Fed will be able to tame this dragon. Still, Hirschhorn says, inflation over the next decade or so could well be modestly higher than it has been over the last decade.
Hirschhorn recommends Treasury Inflation Protected Securities (widely known as TIPS); both the face value and the payout rise in value with inflation. While TIPS won't give you the kind of superheated gains that investors have gotten recently from commodities, which are also perceived to be a hedge against inflation, Hirschhorn believes they are a safer bet at this point.
What's the best way to take money out of my retirement accounts?
McGirt: There are three key points where you don't want to mess up - at rollovers, at the mandatory distribution age of 70½, and at death.
First, the rollover. Because the rules of your 401(k) plan may require you to take your money out at retirement or force you into a distribution schedule that doesn't work for you, you're often better off rolling over your account into an IRA. But one mistake can be costly and irreversible. If you take a check from your plan, you have 60 days to open a new account. A lot can go wrong.
"I've seen advisors steer the money into taxable accounts," says Ed Slott, a New York-based CPA and expert on IRAs. "And plans can be late processing the check, or the consumer doesn't understand the deadline."
Miss the deadline or open the wrong account and your nest egg will get seriously cracked by stiff penalties and unnecessary taxes. Instead, initiate what's known as a trustee-to-trustee transfer, which takes place between institutions. Any bank or brokerage firm can open an IRA and initiate the rollover on your behalf. It should take a matter of days. If it doesn't, pipe up.
Withdrawing your funds takes a bit of planning as well. Although the minimum amount you need to withdraw every year is calculated using a fixed formula based on your age and the account balance, you can choose which account to take the money from.
"You don't have to take the minimum from each account," explains Barry Picker, a CPA from New York. "If you've got multiple accounts, you're going to have to think about which assets to liquidate first, based on your portfolio strategy."
Finally, there's death. "You've got to remember to name a beneficiary directly," explains Slott. If you forget or designate your estate as the beneficiary, you will lose a key tax benefit described as a "stretch IRA," which lets your heirs spread out the mandatory distributions over their actuarial life expectancy - so more money can grow tax-deferred.
(Sources: IRAHelp.com; IRS.gov/retirement/participant/index.html )
What's my best asset mix looking ahead?
Serwer: Of course it's difficult to generalize here. If you really don't want to think about it, go with 60 percent in stocks and 40 percent in bonds and cash. Harvey Hirschhorn of Bank of America breaks it down thusly: "We would have 64 percent in equities at this time, 33 percent in bonds, and 3 percent cash. Of the equities, 15 percent to 20 percent would be international."
Morgan Stanley's model portfolio for investors with between $1 million and $20 million has different flavoring: 46 percent equities (30 percent of it in the U.S.), 29 percent bonds, 5 percent cash, and 20 percent in real estate and REITs, commodities, hedge funds, and inflation-protected securities such as the aforementioned TIPS.
Where does my home equity fit into my plan?
McGirt: There are three key points where you don't want to mess up - at rollovers, at the mandatory distribution age of 70½, and at death.
First, the rollover. Because the rules of your 401(k) plan may require you to take your money out at retirement or force you into a distribution schedule that doesn't work for you, you're often better off rolling over your account into an IRA. But one mistake can be costly and irreversible. If you take a check from your plan, you have 60 days to open a new account. A lot can go wrong.
"I've seen advisors steer the money into taxable accounts," says Ed Slott, a New York-based CPA and expert on IRAs. "And plans can be late processing the check, or the consumer doesn't understand the deadline."
Miss the deadline or open the wrong account and your nest egg will get seriously cracked by stiff penalties and unnecessary taxes. Instead, initiate what's known as a trustee-to-trustee transfer, which takes place between institutions. Any bank or brokerage firm can open an IRA and initiate the rollover on your behalf. It should take a matter of days. If it doesn't, pipe up.
Withdrawing your funds takes a bit of planning as well. Although the minimum amount you need to withdraw every year is calculated using a fixed formula based on your age and the account balance, you can choose which account to take the money from.
"You don't have to take the minimum from each account," explains Barry Picker, a CPA from New York. "If you've got multiple accounts, you're going to have to think about which assets to liquidate first, based on your portfolio strategy."
Finally, there's death. "You've got to remember to name a beneficiary directly," explains Slott. If you forget or designate your estate as the beneficiary, you will lose a key tax benefit described as a "stretch IRA," which lets your heirs spread out the mandatory distributions over their actuarial life expectancy - so more money can grow tax-deferred.
(Sources: IRAHelp.com; IRS.gov/retirement/participant/index.html )
What's my best asset mix looking ahead?
Serwer: Of course it's difficult to generalize here. If you really don't want to think about it, go with 60 percent in stocks and 40 percent in bonds and cash. Harvey Hirschhorn of Bank of America breaks it down thusly: "We would have 64 percent in equities at this time, 33 percent in bonds, and 3 percent cash. Of the equities, 15 percent to 20 percent would be international."
Morgan Stanley's model portfolio for investors with between $1 million and $20 million has different flavoring: 46 percent equities (30 percent of it in the U.S.), 29 percent bonds, 5 percent cash, and 20 percent in real estate and REITs, commodities, hedge funds, and inflation-protected securities such as the aforementioned TIPS.
Where does my home equity fit into my plan?
McGirt: Tie it into a safety net, not a noose. Unlike retirees of yesteryear, many boomers are trading up. "People now want to buy bigger or second homes in retirement and take on more debt," says fee-only planner Stan Johnson from Durango, Colo. Crazy talk. Instead, stay put or pick a smaller house that you can buy with no mortgage or a low one, and use any leftover cash to pay off other debt and pad savings.
Your home equity should be the ultimate failsafe. "Your savings and pensions will secure your retirement," says Tignanelli. "If something should go wrong, you still have the equity in your home."
What if I don't want to retire?
McGirt: When my distinguished co-conspirator, Andy Serwer, asked me what I wanted to do when I retired, I drew a blank. (Answer: My editors will be prying my computer keyboard out of my cold, dead hands.) Truth is, I love what I do, and I want to keep doing it--at least part of the time. Turns out, I'm not alone.
A new survey by Merrill Lynch suggests that 71 percent of us hope to work in our golden years. But there's a mismatch here: Only 24 percent of employers, Merrill estimates, are ready to manage the wave of retiring baby-boomers by accommodating older workers.
So until employers get with the program, you'll have to get serious about yours. Think about, and budget for, the new skills, equipment, or training that you may need to stay relevant in the workforce. Keep professional licenses or other designations current. And remember, it doesn't have to be a paying gig--tap local nonprofits and houses of worship for special opportunities to keep yourself busy and give to the greater good.
"It's about engagement and contribution," says Nancy Johnson of AARP. People who continue to work in retirement report feeling healthier and have a greater sense of well-being.
Sign me up for that.
(Sources: Aarp.org/bestemployers; SCORE.org)
Return to Money & Finance Main
Your home equity should be the ultimate failsafe. "Your savings and pensions will secure your retirement," says Tignanelli. "If something should go wrong, you still have the equity in your home."
What if I don't want to retire?
McGirt: When my distinguished co-conspirator, Andy Serwer, asked me what I wanted to do when I retired, I drew a blank. (Answer: My editors will be prying my computer keyboard out of my cold, dead hands.) Truth is, I love what I do, and I want to keep doing it--at least part of the time. Turns out, I'm not alone.
A new survey by Merrill Lynch suggests that 71 percent of us hope to work in our golden years. But there's a mismatch here: Only 24 percent of employers, Merrill estimates, are ready to manage the wave of retiring baby-boomers by accommodating older workers.
So until employers get with the program, you'll have to get serious about yours. Think about, and budget for, the new skills, equipment, or training that you may need to stay relevant in the workforce. Keep professional licenses or other designations current. And remember, it doesn't have to be a paying gig--tap local nonprofits and houses of worship for special opportunities to keep yourself busy and give to the greater good.
"It's about engagement and contribution," says Nancy Johnson of AARP. People who continue to work in retirement report feeling healthier and have a greater sense of well-being.
Sign me up for that.
(Sources: Aarp.org/bestemployers; SCORE.org)
Return to Money & Finance Main
