Gone are the days when people could retire at age 62 and live off the income from their bond portfolios.
Roger Roemmich, a CPA, long-time wealth manager and author of “Don’t Eat Dog Food When You’re Old,” said that people heading into retirement are focusing on the wrong variables. They should pay attention to investment hazards, asset allocation and how much money they have set aside for retirement, he said, but the one missing component in their planning is cash flow.
“In my view, if they would focus on cash flow and continuing cash flow versus expenses as opposed to how high they have to pile their assets, they wouldn’t make mistakes about retiring at the wrong point in life,” Roemmich said. “Too many people in my generation, I would say 80 percent, are retired at age 66. That’s a mistake. A lot of people will experience problems cash flow-wise.”
Numerous predictions have pointed to people living well past 100 years old in the future. If that happens, many people will run out of money. Nobody plans to live that long in retirement. Most people hope their retirement savings will last them through 20 years of retirement, but that figure is slowly creeping up to 30 years and it could go higher with advances in medical science.
In 1990, the maximum Social Security check was just shy of $1,000. That’s now about $1,800 on an inflation-adjusted basis. Back then, a 6-month CD earned 7.5 percent and a 10-year Treasury was just short of 8 percent.
Now, the 6-month CD would get 1/10 the yield and the 10-year Treasury would get one-third the yield, he said.
“So people expected to get much better return on their investment assets than they’ve got and that’s why Social Security Administration statistics show that one out of two single people who are retired live solely on Social Security. For married couples, the statistics are one in five, which is not nearly as bad, but still, both of those are pretty sobering,” Roemmich said.
He added that, “it is only going to get worse in this low-interest-rate environment, and more people are retiring without pensions. We have a serious problem. Qualitative easing solved some of the country’s problems but created a problem for senior citizens because of the low interest rates.”
So what can people do to retire comfortably?
The number of people who have access to employer-sponsored plans but don’t participate is appalling, he said. Older people who should still be contributing think that it would be useless for them to put money into an IRA or a company plan when they are going to take it out in a few years anyway.
What they don’t realize is that if they have $10,000 and they put it toward their retirement account that, for a typical worker, costs them $7,000 out of their cash flow. When they retire they have $10,000 versus $7,000 at 6 percent which is quite a difference. It equates to more than 1.4 times the cash flow.
“So, if they think in terms of cash flow instead of what the liquidation value would be, they wouldn’t make the mistake of underutilizing their tax-qualified investing toward the end of their working life,” he said.
Social Security planning before retirement is also a must. Roemmich points out that if people are married, one of them should begin drawing half of their spouse’s Social Security payment when they reach full retirement age at 66, while they let their own account grow to age 70.
Hardly anybody takes advantage of this opportunity, he said, only about one in 10 even know about it.
Roemmich, who leads many seminars with financial professionals teaching them how to work with clients on financial planning, says advisors don’t know much about Social Security themselves.
“They are never encouraged to learn about Social Security when they are in school or continuing education programs. A lot of people are playing a lot of catch up with Social Security and Medicare and a lot of things,” he said.
Individuals also need to purchase long-term care insurance. Many insurance companies include this as part of a life annuity and Roemmich said it is a crucial piece of the retirement puzzle.
Long-term care costs are exorbitant. Roemmich highlighted one of his clients who was placed in a nursing home at $7,000 a month. His family wanted to pay for home care for him instead, but once they found out it cost about $13,000 a month for that option, they left him in the nursing home.
“Very few people could afford this,” he said.
About 90 percent of Americans do not have long-term care insurance, he said.
“If you live well into your 80s or 90s, it is almost inevitable at some point you will have that long-term care,” he said.
Many in the industry believe that single people need long-term care insurance more than married couples do, but Roemmich disagrees. If a couple doesn’t have long-term care insurance and one of them ends up in a home, the expense could eat up all of the couple’s money, leaving the other spouse destitute.
Many life annuities come with a long-term health insurance rider. If that money doesn’t get used up for long-term care, it can be used for retiree cash flow instead, he said.
“I’m very focused on people doing their planning in a way that their cash flow in retirement is protected,” he said.
Roemmich believes people should go into retirement with some equities exposure. They will still need to grow their assets in retirement if they want to retain their quality of life.
“The problem I have with target-date funds is that bonds are supposed to be there to provide income and to lower risk and they’re not doing that in 2014. Both the income is lower and the risk is higher, so we’re having to look at alternative investments, different places to get that cash flow,” Roemmich said.
Generation X is the next generation that needs to be thinking more clearly about retirement. The best thing this generation can do is establish a pattern of consistent contribution to IRAs and 401(k)s and other tax-qualified plans, he said.
Educators seem to retire in better shape than most because for years their plans have required employees to contribute something to their retirement plans and most receive an employer contribution.
“They don’t think of it as part of their income because they never see it in terms of cash flow and yet it is amazing that a lot of people how never made a lot of money wind up in pretty good shape for retirement because they were consistent contributors to an IRA, 401(k) or 403(b),” he said.
When people determine when they will retire, they need to look at how much money they have coming in now and in the future and how many expenses they have now and in the future.
“They need to protect against things that would cause cash expenses to skyrocket, like Medicare supplements and long-term care,” he said. “If your cash flow is adequate today but not for the future, you are not ready to retire.”