Bob Edwards: Hello, I'm Bob Edwards with an AARP Take On Today.
Okay, let's talk about money because surveys confirm that a top concern among older Americans is running out of cash in retirement, yet the piece of mind that comes from knowing that you're getting the most from the money you've saved is priceless.
So, how do you achieve that? Joining us today is Steve Vernon, a consulting research scholar at the Stanford Center on Longevity in the Financial Security division. Vernon is focused on addressing the most challenging issues facing retirees today, including finance, health and lifestyle.
Steve Vernon, welcome to the program.
Steve Vernon: Bob, thanks for having me today.
Bob Edwards: How early should people seriously start planning for retirement?
Steve Vernon: Well Bob, there are different phases people in their lives go through. When you're in your working years, your 20s, 30s, 40s, really all you need to do is save, put money in your 401K and your IRA and take care of your health. But it gets a lot more complex as you get into your 50s and 60s. And so, I suggest that people start seriously thinking about what they want to do in their retirement years in their 50s. And then by 60 you really ought to be taking a hard look at your finances and your health and your insurance, your living situation.
You know, it's kind of like those medical tests you're supposed to take when you reach 50. I suggest there are a number of reality checks you ought to take when you hit 60. And so, I'm just giving you a flavor for different types of things you ought to do as you approach your retirement years.
Bob Edwards: Gee, that's a lot later than I would had expected you to say.
Steve Vernon: The decisions that you make as you approach retirement you really need to focus on them then. But you need to build a foundation for it in your 20s, 30s and 40s and 50s by saving and taking care of your health. But eventually you have a complex series of decisions like when to take Social Security, and where do you live, and how long do you want to keep working? What kind of insurance might you need? You really don't need to be focused on those decisions until you are getting into your 60s.
Bob Edwards: Yeah, after you've paid all the college tuition.
Steve Vernon: Well, that one too.
Bob Edwards: And mortgages. A lot of people are concerned about running out of money in retirement. What are the top things people can do?
Steve Vernon: That's a concern, particularly with people living longer lives, and so I say yeah, you really ought to do your planning assuming you're going to be living into your 90s because many of you will. And many of our listeners will. The first thing everybody ought to do is maximize their Social Security benefit because that's actually the perfect retirement income. It increases for inflation, doesn't go down if the stock market goes down. It's not subject to fraud and being taken away from you. And so you can do that, maximize the benefit with a thoughtful delay strategy. Most people if they delayed starting their Social Security, will then have a lifetime increase in their Social Security benefit. And so that's the first step to not running out of money in retirement.
Bob Edwards: Everyone's retirement plans look different and there are lots of different retirement strategies. What are some of the most common?
Steve Vernon: We are in the tail end of a transition. A generation ago, a lot of workers had traditional pensions and a lot of companies have discontinued those. Those traditional pensions actually took care of this problem. They paid you a monthly check for the rest of your life no matter how long you live. And so that represents a problem that I was really interested in. Now people are retiring with lump sum of money and they have to be their own investment manager and their own actuary throughout their lives and that's a problem that I've focused on. That's one of the many complex decisions that people ought to focus on.
I actually suggest that people build a portfolio of retirement income. Just like you had a portfolio of investments while you were working and saving to, now you want to have a portfolio of retirement income. And that can mean Social Security, maybe a low cost annuity which like a personal pension and then finally invest your money with a systematic withdrawal scheme.
Bob Edwards: Tell me about the retirement strategy that generates consistent paychecks from your 401K and IRA savings?
Steve Vernon: That's a strategy to think of your savings as a retirement paycheck generator. The reason is that when you come upon retirement, you've got a lump sum of money. It might be the most money you've ever seen. Too many people wing it. They just look at their savings as a checking account and they start spending money from their savings. I've seen this happen, they just spend their savings down and it gets down to about $50,000 and they have this oh no moment where they realize that they're going to be alive for another 10 or 15 years but they only have 50,000 left.
Instead, I suggest think of your savings as a generator of a monthly paycheck and set up that paycheck to last the rest of your life no matter how long you live. Then you can just spend that paycheck and people are so used to managing their finances around a paycheck that I suggest setting up a retirement paycheck.
You can do that by buying an annuity is one way from an insurance company. Yes, annuities have a bad reputation but there are good annuities out there that are low cost and do the job. But you could also invest your savings and draw it down systematically with a plan to make that last the rest of your life. These are the elements of a retirement income portfolio that I suggest people set up. And this is an example of these more complex decisions as they reach their late 50s and 60s.
Bob Edwards: A new study from the Urban Institute says more than half of all workers age 50 and older lost their long held jobs because they were laid off or otherwise forced to leave. What advice would you give to someone during this critical retirement planning stage?
Steve Vernon: Well Bob, working longer should be part of anybody's retirement plan and I say that and on the very next breath I acknowledge that can be easier said than done. And so I've done an analyses that show that if you can delay your retirement even for a few years, you really will give yourself a permanent lifetime boost in your retirement income. If you're laid off and you've got a position where you can't replace that position that's one of the toughest circumstances you can be in. And all I can say is, don't give up. It's worth it to keep plugging away. And even if you take a job that is quote unquote beneath you. Maybe not using all your skills and experience, still having that paycheck come in can do a tremendous benefit to your finances. But also it gives you social connections and purpose and maybe medical insurance.
What I try and urge people to do is set aside your ego and just realize, let me find some work that brings in a paycheck, hopefully brings in medical insurance, gets me out of the house. Tremendous benefits all the way around.
Bob Edwards: What would you tell a person who does not have significant or any 401K savings? How should someone in that situation prepare for retirement?
Steve Vernon: Well Bob, that's one of the most difficult circumstances that millions of Americans are facing right now. I don't have easy answers to this situation. It's a hard situation to be in. That person, their solutions, are kind of limited. They can either work longer or reduce their standard of living or some combination. That's really all that they have facing them and I don't want to represent that's an easy circumstance to be in. It's a tough situation to be in.
But, if you didn't have any savings then it's even more critical that you delay taking Social Security because Social Security will be the only pension that you have. And so that's probably the most beneficial strategy open to them. Not many people will do that.
Bob Edwards: And our listeners can visit aceyourretirement.org which has resources to help you get on track including a personalized action plan of steps you can take for a more secure financial future.
Steve, how much does Social Security replace income? And how should people adjust?
Steve Vernon: Well, Social Security would replace anywhere from say one third to two thirds of your income and it really depends on what your pay is because Social Security replaces a higher percent of your income for lower income people. They acknowledge that lower income people may not have the resources and the capability to save so they give them proportionally more.
There are two aspects to Social Security that I like to mention. First of all as I mentioned earlier it's almost the perfect retirement income source so it makes sense to optimize it. A lot of people say no. Social Security's not enough and yes, for most people it's not enough but that doesn't mean ignore it. You still want to get the most value from that.
I encourage people to get the most they can from Social Security. And I've got a book out there, Retirement Game Changers, the Tales About the Strategies That People Can Take to Optimize Their Social Security. Optimizing it is the first step but also realizing for most people it is not enough. At least not enough to replace your current standard of living. I encourage people to either consider working longer, start saving if you haven't saved already. You can start saving. But I think if you haven't saved enough money right now, you'll want to look at strategies for continuing to work as long as you can and find work that you like doing. It gives you social connections. These really are the levers that people have as they're approaching their retirement years.
Bob Edwards: Are there ways to navigate the almost inevitable healthcare costs that come later in life?
Steve Vernon: Well yes, that's another of the challenges and this is of some of game changing challenges that I address in my book, Retirement Game Changers. Healthcare costs are significantly higher for you as you enter retirement. When you were working and your employer paid for your health care, they on average were paying for 80 percent of the cost of that. And so if you're retiring before Medicare kicks in, that's the most tricky situation because you may not have your insurance from work and you've got to somehow make it to age 65 when Medicare kicks in.
And so, that should be part of your homework if you're considering retiring early. You've got to find medical insurance somewhere. But then once you're eligible for Medicare, some people breathe a sigh of relief and they think, okay, I've made it to 65 and they assume just because Medicare is called medical insurance that it's the same kind of insurance they had while they were working and that's a bad mistake. Because Medicare has significant gaps, significant deductibles and co-payments. And so everybody ought to pick some kind of a plan that supplements Medicare and there are two types.
There's a Medicare supplement plan, which pays for Medicare's deductibles and co-payments and then there's a Medicare advantage plan that operates like a PPO that you might of had, or managed care that you might have had, while you were working. Those are the options you want to explore and that again is part of that homework that you need to do in your 60s to see which kind of of plan might work best for you.
Bob Edwards: Are there other things that people should expect to spend more on?
Steve Vernon: Well yes. While you were working your medical plan might have paid for dental and vision whereas as Medicare does not pay for dental or vision benefits. That's one benefit that you want to make sure you've got covered. But also the big issue for most people is long term care expenses. That requires a separate strategy from Medicare because Medicare doesn't pay for long term care.
Long term care is care that you need when you get frail and it's not medical care. Medical care is paid for Medicare. It's drugs and doctors and nurses. Medicare and the Medicare supplements plans will pay for medical care but they won't pay for custodial care you might need when you get frail. Like preparing your food and moving around the house. This is wildcard for a lot of retirees that need some kind of long term care in their, say their 80s or 90s.
Lot of people that are in their 50s or 60s might have had this circumstance with their parents and it's a wake up call. That's another area that you might want to explore is how you might want to pay for these long term care expenses as you age into your 80s and 90s.
Bob Edwards: What advice would you give to people who are nearing retirement and carrying debt?
Steve Vernon: That's another tricky circumstance. It used to be a few generations ago people entered retirement debt free and now more and more people are entering into retirement with mortgage debt, student debt. So, my advice is to try and spend down that debt. Pay it down. Now that's again easier said than done. But if you're going into retirement with mortgage debt, one opportunity you might have is to sell that house and buy a less expensive house that maybe better meets your needs and then you can retire that mortgage. Because where you live is going to have a critical influence on your quality of life in your retirement years.
You might be able to do a win-win solution by finding a, say a town home that's closer to public transportation or where you can walk for exercise. It's a lower cost. You've retired the mortgage. You might be able to do a win-win solution there. For most people, mortgage debt is still the largest kind of debt that they carry into retirement. By moving, they may have an opportunity to retire that mortgage debt.
Bob Edwards: Downsizing. What's the biggest threat to our retirement system today?
Steve Vernon: Bob, I think the biggest threat is complacency and ignoring the problem. There's complacency on a number of levels. Let's start with our government policy makers. We all heard that Social Security has some funding challenges and our leaders aren't taking care of that and that's creating insecurity when people read these scary headlines that Social Security might not be there. Complacency and ignoring the problem on our legislature's level, that's one of the risks.
But then let's go down to employers. Employers really aren't helping their employees prepare for retirement. Yes, there are enlightened employers out there who put together retirement readiness programs for their employees, but by in large, most employers are just not paying attention. And then finally it's individuals themselves. I like to say, if you're going to live another 20 or 30 years in retirement, nobody said it would be easy. It's going to take some time and preparation. And I like to say that it's your new job. It's your new retirement job to spend time figuring out how you're going to have money for the rest of your life and how you're going to have medical insurance.
If you could pay yourself an hourly rate, you're actually paying yourself hundreds of dollars per hour by paying attention to these kinds of decisions.
Bob Edwards: Are there financial risks that some people don't consider in retirement?
Steve Vernon: Well, we mentioned long-term care. That's one risk that people don't really take care of. If they had to take of their parents, that was a wake up call that lot of people vowed that they're not going to have that happen to them. Most people though are aware of the concern about outliving your money. They're aware of inflation. They're aware of stock market risk. They may be aware of it, but they're paralyzed by it and they don't know what to do about it.
I like to say that I'm refining your question is that a lot people are aware of the risks but they just don't know what to do about it. There are strategies you can adopt to protect your income against inflation. Social Security does that. You can buy an inflation adjusted annuity. You can invest in the stock market but then that carries its risks as well.
This is part of the time that it takes for people to learn how to protect themselves against these risks. There are tools out there. There are game changing tools to protect yourself against risk, you just have to pay attention and take advantage of them.
Bob Edwards: Are there any retirement myths that you can debunk such as taking no more than 4% out of your retirement funds per year?
Steve Vernon: Well Bob I'd like to start with the myth that as my, I want to say it's my favorite myth which means I hate the most. Is that Social Security won't be there when you retire. People read the scary headlines that the Social Security trust fund might run out in 2034. They don't realize that Social Security trust fund is just a supplemental source of funding the Social Security benefit. The largest part of the Social Security benefit is funded by the taxes that current workers are paying.
I like to say as long as we have current workers paying taxes, we'll have Social Security. That's actually a myth that I'd really like to take the chance to debunk because it's going to be there. As long as we have democracy and as long as we have workers, we're going to be having Social Security.
Bob Edwards: Steve, thank you for joining us.
Steve Vernon: It's been a pleasure and I appreciate your work to help educate people on how to live long, healthy, financially secure lives because it's going to take a lot of effort so thank you for your efforts.
Bob Edwards: Steve Vernon is a consulting research scholar at the Stanford Center on Longevity in the Financial Security division.
Preparing for our financial future is all about achieving milestones that make sense for us individually. Whether your milestones are big or small, achieving them can help you turn financial insecurity into financial security. Visit aceyourretirement.org for tips on how to get your retirement savings on track. It's a free resource from AARP and the Ad Counsel for everyone to use and takes just three minutes. And AARP's Social Security resource center at aarp.org/socialsecurity where you can get answers to your questions about benefits.
For more, visit aarp.org/podcast. Become a subscriber. Be sure to rate our podcast on iTunes, Stitcher and other podcast apps. Thanks for listening. I'm Bob Edwards.
Bob Edwards chats with Steve Vernon about planning for retirement and getting the most out of the money you have saved.
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