NBR Transcripts-May 26, 2008
Monday, May 26, 2008Get Ready for Retirement
PAUL KANGAS: Retirement. Remember how it once seemed so far away? Well, if you're part of the baby boom generation, it's now just around the corner. Moving into retirement means beginning not just a new stage of life, but an entirely different phase of your financial life. So in this program, we'll look at some important financial decisions that you'll need to make as you get ready to enter your retirement years.
GHARIB: One of the nice things about retirement is that it offers people the freedom to do many things they couldn't consider when they were working. As a result, retirees have lots of options in terms of what to do in retirement, where to live and how to spend their time. So the first decision that a person must make is about a retirement lifestyle. And as Connie Hicks and Joe Collum report, it's a decision with major financial implications.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: For millions of Americans, this is the dream of an ideal retirement: stress-free living in a community that offers lots of sunshine and plenty of leisure activities. Hello, I'm Connie Hicks.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: And I'm Joe Collum. Now, golfing all day would be fine with me, but it may not be your idea of how you'd like to spend your retirement.
HICKS: And when it comes to thinking about your retirement finances, determining your retirement lifestyle is a good place to begin. Because no two people retire in the same way, financial planning for retirement is far from a one-size-fits-all matter.
COLLUM: For example, take Joal Fischer and Deborah Langsam of Charlotte, North Carolina. Leaving careers as a physician and a university instructor, the couple retired while still in their 50s. They're staying put in the same large house where they spent the last decade of their working lives. Now they spend most of their time making gourmet chocolates and volunteering and they say their retirement is based on the idea of living simply.
DEBORAH LANGSAM, RETIREE: In terms of our lifestyle, we'd rather spend a lot less and go on vacation.
JOAL FISCHER, RETIREE: Debbie's a very, very good cook, and so when we want a really good meal, we stay home.
HICKS: On the other hand, Joseph and Sandra Cummings would rather spend less of their retirement in their kitchen and more time walking to nearby restaurants. So they sold their single-family home in Coral Gables, Florida and moved to a smaller condominium in the downtown part of that city.
JOSEPH CUMMINGS, RETIREE: If you travel and we travel, you just close the door and walk away.
SANDRA CUMMINGS, RETIREE: It's just easier here because when you live in a condominium, you pay one check each month for your maintenance and then everything is done.
COLLUM: So how important is lifestyle in making a financial plan for a person's retirement? Certified financial planner Meg Green says its role cannot be minimized.
MEG GREEN, CEO, MEG GREEN & ASSOCIATES: Lifestyle is everything. It's what they do, what they need to spend, how are they going to keep the party going, if you will.
COLLUM: So if you're within a few years of retirement, it's time to start thinking about the type of retirement lifestyle you want. Then you need to figure out its price tag. As "U.S. News & World Report" retirement correspondent Kerry Hannon notes, living your retirement dream often can turn out to be more costly than you think.
KERRY HANNON, RETIREMENT CORRESPONDENT, U.S. NEWS & WORLD REPORT: And experts will tell you also is that retirement is not necessarily a cheaper lifestyle. You may travel more, your hobbies may be expensive, you may choose to retire on that golf course in Florida and the fees are quite high.
HICKS: And being able to meet expected retirement expenses is only part of the equation. Hannon and Green note that one of the challenges of planning for retirement is that there are so many unknowns.
HANNON: You know, for example, if you're saving for a college education for your child roughly what that's going to cost you. You have no way of knowing how long your money is going to last in retirement and you want to be very careful that you don't spend it too quickly.
GREEN: In my planning, I'm always saying, "what is your plan B?" You never can go into retirement without a plan because very often what you think you're getting is not at all what you end up with.
HICKS: Still, Green says it can be helpful to put together a description of how you envision your retirement lifestyle. She says that alone should make financial planning for the transition much easier.
GREEN: It's a totally different story for every person. Everybody has a different set of dreams, a different set of things that they bring to the table. And you have to kind of take what they have and what their dreams are and put them together. And I have never found two exactly alike, ever.
HICKS: So once you've got a better idea of what your retirement lifestyle will be, your next step should be to figure out how much money you'll need to pay for it.
COLLUM: That's a crucial number for anyone who's getting ready to retire and we'll tell you how to come up with it in our next segment. Joe Collum.
HICKS: ...and Connie Hicks, NIGHTLY BUSINESS REPORT, Aventura, Florida.
Figuring Out The Financials
SUSIE GHARIB: Thinking about a retirement lifestyle is the first step in making the transition from working life. But the next step is even more crucial: figuring out if you're financially ready to retire. Since you won't have your usual paycheck, you need to be sure that you can hit the magic number, the amount you need to meet your projected expenses, as Connie Hicks explains.
HICKS: Maybe this is your idea of retirement or perhaps it's traveling extensively to exotic or tropical destinations. Either way, you'll need to find a way to pay for your lifestyle. Deborah and Walter Byars are doing just that. They've been planning for their retirement for years by meeting with their financial planner, Gerald Grant. Their goal is to come up with the magic number: how much money they'll need to retire comfortably.
GERALD GRANT, JR., DIR. OF FINANCIAL PLANNING, AXA ADVISORS: Retirement is like a permanent vacation.
HICKS: But vacations don't always cost what they're supposed to, so coming up with the right magic number for retirement can be tricky. The idea is to make sure your retirement expenses are covered by your retirement income. That's usually what you get from Social Security or a pension, plus the amount you can take out of a 401(k) account and other savings. Where do you start? Here's one method. Begin with your annual earnings when you retire. Now, figure out how much money you'll have coming in during a year in retirement. Some financial planners say the two numbers should almost match, but author Jonathan Pond says you should be able to live on far less than 100 percent of your pre-retirement income.
JONATHAN POND, AUTHOR, "YOU CAN DO IT!: I think where financial planners say you have to have 80, 90 percent or 100 percent-- I've even seen 110 percent-- are too high for most people. Because if you really look at the expenses that will be reduced after you retire -- and it requires putting pencil to paper -- but if you look at that, I think the number to maintain your lifestyle is more around 65 percent of your income.
HICKS: Wealth manager Patty Houlihan disagrees. She says living on two-thirds of your pre-retirement income is risky.
PATRICIA HOULIHAN, PRES., HOULIHAN FINANCIAL RESOURCE GROUP: I know the rule of thumb, a lot of people suggest that you only need 70 percent. The reason I say 100 percent is because I know how people are. I've worked with clients for over 25 years in what I do and it's just, I don't find them wanting to cut back. For example, they'll argue with me; they'll say, "oh, Patty, we're going to sell the big house. We don't need all this room." Yeah, but they're going to get a condo with a view by the ocean, so the house that they've sold is going to go straight into the condo that they're buying.
HICKS: Still, Terry Savage, who's written a book on this subject, says it's vital to figure out where you stand in terms of your retirement finances. Savage suggests using an online retirement calculator to help you do the math.
TERRY SAVAGE, AUTHOR/ FINANCE COLUMNIST: There's a wonderful web site put up by the Employee Benefit Research Institute. It's called choosetosave.org. And when you're there, you can click on something called the ballpark estimate and that will allow you to put in things like your income now and how much you've saved and what year you plan to retire and what percentage of your income you might want to replace in retirement, along with an estimate of what you think inflation will be. HICKS: Of course, seeing how your retirement finances stack up is just the starting point. You still have to plan carefully to make sure your money will last 20 or 30 years. GRANT: The biggest concern that most people have is whether or not they will outlive their money. HICKS: Gerald Grant says the Byars are in good shape because they've thought long and hard about their retirement financial needs. And he says others can learn from their example. WALTER BYERS, RETIREE: But see, if you do it right, your retirement should be the best years of your life. HICKS: Connie Hicks, NIGHTLY BUSINESS REPORT, Kendall, Florida.
The Experts Offer Their Opinions On The Best Road To Retirement
PAUL KANGAS: So figuring out if you're financially ready to retire may not be easy, but it's still important to try. And joining us are two experts with different views on how to do that: Cecil Hemingway, retirement practice leader for Aon Consulting, a division of Aon Corporation that advises companies on human capital matters and Laurence Kotlikoff, economics professor at Boston University and co-author of the new book, "Spend 'til the End." He also heads a company that sells retirement planning software. Cecil, let's begin with you. For many years, your firm has set retirement replacement ratios. Those take pre-retirement income levels and figure the percentage that average people need to maintain their living standards in retirement. Aon has just come out with the 2008 replacement ratios. What do they show?
CECIL HEMINGWAY, US RETIREMENT PRACTICE LEADER, AON CONSULTING: Hi, Paul, yes, the replacement ratios vary quite a bit by pay levels, so you do have to look at various pay levels and what we show is that for folks making about $60,000 a year, they would need about 78 percent of their pre- retirement income to maintain their living standards into retirement. That number doesn't go up as you go to about $90,000 of pre-retirement income and so for somebody with an income pre-retirement of about $150,000 a year, the replacement ratio target goes up from 78 to 84 percent. And you have to look below the surface a little bit. A lot of that comes from Social Security for the lower paid folks, about 46 percent. And then when you go to the higher-paid person making $150,000 a year, Social Security replaces only about 23 percent.
KANGAS: Now, Laurence, you are a critic of income-replacement formulas for retirement, including those that are incorporated in many retirement calculators. In your book, you describe this method as financial snake oil and you say that it's dead wrong for most people. Why do you see it as so flawed?
LAURENCE KOTLIKOFF, ECONOMICS PROF., BOSTON UNIVERSITY: Well, these calculations are very primitive. They're only taking in a couple of variables. They're not asking questions like how many kids you have, what college expenses you're going to have, whether you're going to downsize your home, move to Texas and not pay state income taxes. There are just a host of pretty important questions. So it's like going to the doctor and having a two-second checkup and then getting a prescription.
KANGAS: Cecil, you believe there is value in the income replacement- ratio method, but would you agree that people should not rely on it solely in determining how much to set aside for retirement?
HEMINGWAY: Yes, Paul. I think it's interesting to note that in doing the replacement income ratio that Aon Consulting has been doing for so many years with Georgia state, we actually do what Larry suggests, but in a general sense. We try to understand what the spending needs are after retirement; we reflect changes in tax status and the fact that you no longer have to save. We also use the Bureau of Labor Statistics' consumer expenditure data to reflect the fact that your spending patterns after retirement are different. So I think we need to be careful to not necessarily take something which can be quite useful and label it and then summarily dismiss it. The way I think about it is retirement is a journey and I would agree with Larry that if we could all have a GPS that journey would be very precise and wonderful, but certainly many of us don't have a GPS or don't have the money to buy the GPS, so a plain, old-fashioned compass that tells where north is can get us much further than just simply being lost in space.
KOTLIKOFF: The problem here is that the compass is pointing in large cases in the wrong direction. You're telling people with this replacement rate calculation in many cases to save five times more than they should. And then this thing is being then used to induce people to hold risky assets to raise the probability of making a target that's too high. So if you actually take households, actual households and run them through the right software, find out what they should be saving and then compare that with these income replacement targets, you find out they're off by a factor of five. So it's not small mistakes here; it's really pointing south when you should be going north.
KANGAS: Finally, gentlemen, let me ask you both, considering how complex it is to determine a person's financial readiness for retirement, is it better to leave this task to a financial professional? KOTLIKOFF: I would say no. The right software is completely easy to use. You enter standard -- you know, answer very simple questions like what your mortgage is, what your kids' ages are, things that aren't included in this replacement rate calculation and then in three seconds you get an answer. So it's actually not complex; it's actually very simple these days to get the right answer.
KANGAS: Briefly, Cecil, your rejoinder?
HEMINGWAY: There's a lot of assumptions here, and I do think just software has a very great purpose, but at the same time it is very important -- these are important decisions and I think having a professional to help you and maybe use the software as a tool to supplement the professional advice is probably not a bad idea. KANGAS: Gentlemen, I want to thank you very much for your different views on this important subject. My guests, Lawrence Kotlikoff of Boston University and co-author of "Spend 'til the End" and Cecil Hemingway, leader of the retirement practice at Aon Consulting.
When Will You Be Ready To Retire?
PAUL KANGAS: So figuring out if you're financially ready to retire may not be easy, but it's still important to try. And joining us are two experts with different views on how to do that: Cecil Hemingway, retirement practice leader for Aon Consulting, a division of Aon Corporation that advises companies on human capital matters and Laurence Kotlikoff, economics professor at Boston University and co-author of the new book, "Spend 'til the End." He also heads a company that sells retirement planning software. Cecil, let's begin with you. For many years, your firm has set retirement replacement ratios. Those take pre-retirement income levels and figure the percentage that average people need to maintain their living standards in retirement. Aon has just come out with the 2008 replacement ratios. What do they show?
CECIL HEMINGWAY, US RETIREMENT PRACTICE LEADER, AON CONSULTING: Hi, Paul, yes, the replacement ratios vary quite a bit by pay levels, so you do have to look at various pay levels and what we show is that for folks making about $60,000 a year, they would need about 78 percent of their pre- retirement income to maintain their living standards into retirement. That number doesn't go up as you go to about $90,000 of pre-retirement income and so for somebody with an income pre-retirement of about $150,000 a year, the replacement ratio target goes up from 78 to 84 percent. And you have to look below the surface a little bit. A lot of that comes from Social Security for the lower paid folks, about 46 percent. And then when you go to the higher-paid person making $150,000 a year, Social Security replaces only about 23 percent.
KANGAS: Now, Laurence, you are a critic of income-replacement formulas for retirement, including those that are incorporated in many retirement calculators. In your book, you describe this method as financial snake oil and you say that it's dead wrong for most people. Why do you see it as so flawed?
LAURENCE KOTLIKOFF, ECONOMICS PROF., BOSTON UNIVERSITY: Well, these calculations are very primitive. They're only taking in a couple of variables. They're not asking questions like how many kids you have, what college expenses you're going to have, whether you're going to downsize your home, move to Texas and not pay state income taxes. There are just a host of pretty important questions. So it's like going to the doctor and having a two-second checkup and then getting a prescription.
KANGAS: Cecil, you believe there is value in the income replacement- ratio method, but would you agree that people should not rely on it solely in determining how much to set aside for retirement?
HEMINGWAY: Yes, Paul. I think it's interesting to note that in doing the replacement income ratio that Aon Consulting has been doing for so many years with Georgia state, we actually do what Larry suggests, but in a general sense. We try to understand what the spending needs are after retirement; we reflect changes in tax status and the fact that you no longer have to save. We also use the Bureau of Labor Statistics' consumer expenditure data to reflect the fact that your spending patterns after retirement are different. So I think we need to be careful to not necessarily take something which can be quite useful and label it and then summarily dismiss it. The way I think about it is retirement is a journey and I would agree with Larry that if we could all have a GPS that journey would be very precise and wonderful, but certainly many of us don't have a GPS or don't have the money to buy the GPS, so a plain, old-fashioned compass that tells where north is can get us much further than just simply being lost in space. KOTLIKOFF: The problem here is that the compass is pointing in large cases in the wrong direction. You're telling people with this replacement rate calculation in many cases to save five times more than they should. And then this thing is being then used to induce people to hold risky assets to raise the probability of making a target that's too high. So if you actually take households, actual households and run them through the right software, find out what they should be saving and then compare that with these income replacement targets, you find out they're off by a factor of five. So it's not small mistakes here; it's really pointing south when you should be going north.
KANGAS: Finally, gentlemen, let me ask you both, considering how complex it is to determine a person's financial readiness for retirement, is it better to leave this task to a financial professional?
KOTLIKOFF: I would say no. The right software is completely easy to use. You enter standard -- you know, answer very simple questions like what your mortgage is, what your kids' ages are, things that aren't included in this replacement rate calculation and then in three seconds you get an answer. So it's actually not complex; it's actually very simple these days to get the right answer.
KANGAS: Briefly, Cecil, your rejoinder?
HEMINGWAY: There's a lot of assumptions here, and I do think just software has a very great purpose, but at the same time it is very important -- these are important decisions and I think having a professional to help you and maybe use the software as a tool to supplement the professional advice is probably not a bad idea. KANGAS: Gentlemen, I want to thank you very much for your different views on this important subject. My guests, Lawrence Kotlikoff of Boston University and co-author of "Spend 'til the End" and Cecil Hemingway, leader of the retirement practice at Aon Consulting. Another big step in the process leading up to retirement is deciding when to retire. That often goes hand-in-hand with when you plan to begin taking Social Security payments. Because Social Security is a key part of any retirement income mix, boosting its benefits could help your financial picture. Reporter Joe Collum looks at a way retirees can get bigger Social Security checks for the rest of their lives. COLLUM: When is the right time to retire? It's a question Stan Hinden and his wife, Sara, didn't think much about. Despite Stan's long career as a business columnist for the "Washington Post," he admits that he was clueless about retirement. STAN HINDEN, RETIREE: The truth of the matter, Joe, is that I was not prepared.
COLLUM: Hinden ended up retiring at age 69, but most workers move into retirement at the other end of that decade, in their early 60s. One of the main reasons is that it's possible to collect Social Security payments beginning at age 62. And for those who can't wait to stop working, that's a big incentive to retire then. One who fit that bill was the original baby boomer, Kathleen Casey-Kirschling. Born at one minute past midnight January 1, 1946, she chose to begin collecting Social Security as soon as she turned 62. Like Casey-Kirschling, it's estimated that at least half of the 80 million baby boomers born between 1946 and 1964 plan to begin collecting Social Security as soon as they're eligible. Some just feel like they've earned it; others fear for the future of Social Security; and some simply need the money. But for tens of millions of Americans, that could become a costly decision. That's because if you take Social Security before the normal retirement age, which is 66 for most boomers, you get reduced payments for the rest of your life. Take, for example, a man who begins receive Social Security at age 62 with an annual payment of about $17,600. But by waiting until age 66 to collect, his annual payments jump to over $23,000. The delay means he loses money if he lives only until age 77, the average lifespan at birth for an American man. But if he lives to 85, the higher payments will bring him almost $45,000 extra dollars. And by 90, he'll pocket more than $73,000 additional dollars. Barbara Bovbjerg of the Government Accountability Office says as life expectancies rise, that's a big difference.
BARBARA BOVBJERG, U.S. GOVERNMENT ACCOUNTABILITY OFFICE: If I were to die before the actuarial average, I probably wouldn't be too worried about what was happening with monthly benefits in the future. But if I were to die substantially after the actuarial average, I would want to make sure that I was not living in poverty.
COLLUM: Christine Fahlund of T. Rowe Price advises her clients to plan to be around until at least age 95. And she says the longer you can put off Social Security benefits the better, because you cannot get a better guaranteed return.
CHRISTINE FAHLUND, SR. FINANCIAL PLANNER, T. ROWE PRICE: Because it might be an 8 percent increase by waiting a year, plus inflation increase of maybe, say, 2 percent. So it might be a total of 10 percent more money being paid out to you by waiting each year.
COLLUM: Stan Hinden learned the hard way. He began taking Social Security at age 69 and a half, but had he waited six months, his payments would have been much higher. To undo his mistake, he had to repay everything he'd collected before age 70. Hinden is sill an active writer, who now specializes in retirement issues. He says one way many retirees could put off taking Social Security is by continuing to work.
HINDEN: If your income is enough to meet your expenses, I think you're fortunate. If it's not, your choice is to do one of two things: it's to either cut back on your expenses or to maybe work part-time or even full- time.
COLLUM: So when is the right age to retire? Experts say it's when you're ready financially and psychologically. But be aware that the age when you start to collect Social Security could make a big difference in terms of your retirement income. Joe Collum, NIGHTLY BUSINESS REPORT, Silver Spring, Maryland.
Social Security Strategies
SUSIE GHARIB: So the longer you live, the more it pays to put off collecting your first Social Security check. But even though women tend to live longer than men, a study by Boston College found that most women still begin taking Social Security at age 62. I talked about that and other Social Security issues with Kerry Hannon of "U.S. News & World Report" and Alicia Munnell, director of Boston College's center for retirement research. I began by asking Alicia Munnell if it makes any sense for women to collect Social Security as early as possible.
ALICIA MUNNELL, DIR., CENTER FOR RETIREMENT RESEARCH, BOSTON COLLEGE: No, it was a really surprising finding and actually we looked a little closer at that. And we found that single women actually claimed their benefits later than men, but married women claimed their benefits earlier than men. And married women can get a lot of benefits out of the system by claiming their own benefit initially and then a benefit based on their husband's earnings and ultimately a widow's benefit.
GHARIB: So, Alicia, are you saying that for a married couple, that it pays off for the woman to file for benefits at age 62 for example, if it allows her husband to delay collecting his?
MUNNELL: Well, I mean the husband's decision should be almost independent of the wife's. If he wants to continue working and can postpone claiming, he should go ahead and do that. If the wife wants to retire early and she then can claim some benefits based on her own earnings, then, point of fact, the couple will get the most out of the Social Security system if she claims on her own earnings and then later as a spouse and then latest as a widow.
GHARIB: Kerry, I understand that if someone decided to work into their 60s, and -- it doesn't pay to get the Social Security benefits at the same time. Why is that?
HANNON: Because the IRS, Susie, has an earnings limit. If you start taking your Social Security benefits before your official retirement age -- which for boomers is now 66; this year I believe it's $13,560 in earned income -- then your Social Security benefits up to 85 percent of your benefits can be taxed.
GHARIB: Alicia, as you know a lot of people are concerned that Social Security system is headed towards insolvency and that could be the reason why some retirees are trying to collect their benefits right away. But if there is going to be a cut at some point, doesn't it make sense to try to collect your benefits sooner rather than later?
MUNNELL: Susie, I've heard that argument, too, and I don't buy it at all. There's plenty of money to pay full benefits through 2040 and if anybody gets it together to get this solvency problem fixed, they're going to not cut benefits on anybody who's in their late 50s or early 60s as of today. So that is not a reasonable reason to claim your benefits early.
GHARIB: Kerry, do you agree with that? According to a lot of polls, many middle-aged Americans don't think that Social Security's going to be around when they retire. We hear politicians say just the opposite. What is the reality?
HANNON: I think the reality is more what we just heard. I think there's this fear factor out there that there is this dwindling account. But as noted, there was a surplus just last year of $200 billion in the Social Security fund and we're good through 2040, 2041 before anything is going to start being reduced and by then certainly there will be tweaks in the system. There are many proposals out there now, and it may end up being, perhaps, higher FICA taxes down the road. But for now I think that this baby boomer generation can rest assured that their benefit is not going to be reduced, from what experts have told me.
GHARIB: Alicia, as you know, most people cannot rely on pension funds anymore to pay for their retirement. And so how can -- what advice can you give on how people can maximize their Social Security benefits?
MUNNELL: Susie, you're absolutely right. Most people are going to have 401(k) plans and the balances in those 401(k) plans are really quite modest and so most people need to get as much Social Security as possible. And you get so much more if you wait. You get 33 percent more if you claim at 66 than if you claim at 62 and if you can wait until 70, you get 75 percent more. So if you have a normal life expectancy or somewhat longer, you should be trying your best to work as long as you can and postpone claiming as long as you can.
GHARIB: Munnell added that Social Security should be seen as the most reliable part of a person's retirement income. Because investment returns vary, she says it's much harder to guess how much money will be coming in for 401(k) or other accounts.
