Can you forecast with accuracy the rate of inflation for 20 years or more?
How good are you at correctly guessing future stock market returns?
I ask these questions to emphasize how exasperating retirement planning can be, precisely because you have to make decisions based on a lot of assumptions.
During a recent online discussion, one reader voiced the same frustration I hear all the time from people trying to make the right health-care and financial choices for their retirement. As this 60-year-old reader expressed, retirement planning is a lot like rolling the dice. You can’t predict the results with certainty and much is out of your control.
“Something I find frustrating about choosing a health insurance plan, when to take Social Security and deciding about long-term care insurance is that all these things require you to place your bets on your health and longevity and often your spouse, as well,” the reader wrote. “My husband is eligible for his pension, and we recently received paperwork stating that we have to make an IRREVOCABLE decision on his pension benefits as to whether he wants to receive 100% of his monthly pension, in which case I would receive 50% of his monthly pension should I survive him. Or does he want to receive 75% of his monthly pension, in which case I would receive 75% of his monthly pension should I survive him, and so on and so forth. How in the world can we make an irrevocable decision on something so important without a crystal ball? It feels like all these things are just a throw of the dice, and as a non-gambling person, it makes me terribly anxious and uncomfortable. Surely I cannot be alone in feeling this way?”
From my experience, she’s not alone in feeling overwhelmed about what comes down to a guessing game on key questions about retirement. This is particularly the case when it comes to the decision of when to start receiving Social Security: Should you take it as early as possible at 62 or wait until you’re 70?
Look at this data from the Social Security Administration:
— A man reaching age 65 today can expect to live, on average, until 84.
— A woman turning 65 today can expect to live, on average, until 86.5.
But those are just averages. “About one out of every three 65-year-olds today will live past age 90, and about one out of seven will live past age 95,” according to the SSA.
If you claim Social Security early, rather than waiting until your full retirement age, there’s up to a 30 percent reduction in your monthly benefit. If you wait, every year you delay beyond your full retirement age up to 70, you get an 8 percent bump in your benefit.
If you can afford it, many financial experts recommend that you wait until you’re 70 to claim Social Security. But such advice may not be best if you end up having a shorter than average life span. With this in mind, some readers have argued that they don’t want to delay taking Social Security fearing they will die sooner than expected so why not use the money to travel or do whatever they want during their healthier years.
“The question of when to retire is one laden with emotions, predictions, and ambiguous financial considerations,” a research analyst wrote in a Social Security bulletin titled “Behavioral and Psychological Aspects of the Retirement Decision.”
If you want a rough estimate of your life expectancy and that of your spouse, try the agency’s Life Expectancy Calculator.
I’ve had some interesting debates on the issue of when to start taking Social Security. Read:
You may also find this post from Fidelity Investments helpful: 5 Social Security myths debunked
Experts advise people to figure out their future financial needs by using a retirement calculator. But the calculators require you to make a lot of assumptions in an effort to sufficiently fund your retirement.
One reader, who had followed my advice to try and figure out how much she needed for retirement, came back with a concern: “There are a lot of variables there that I have no idea what to enter. How can I gauge inflation, wage growth, return rates, etc.?”
Several certified financial planners, who volunteer to answer investor questions as part of an outreach of the Certified Financial Planner Board of Standards, offered some guidance in answering questions you may encounter in retirement calculators.
Read their advice here: Are you saving enough for retirement?
It’s understandable that you’re afraid you’ll make a wrong choice. But don’t let this fear stop you from doing some retirement planning. Gather as much information as you can and then make the best guess possible, taking into account your situation.
Let’s talk more about this. Are you frustrated about the retirement decisions you have to make based on predicting a future you can’t control? Are you currently retired? Is so, did any of your guessing pay off? Send your comments to email@example.com. Please include your name, city and state. In the subject line put “Retirement Crystal Ball.”
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. What do you like about retirement? What came as a surprise?
If you haven’t retired yet, what concerns you financially?
You can rant or rave. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
Last week, I wrote about selecting the executor of your estate.
I asked: Who will handle your estate and how did you make the decision?
Jane from Virginia wrote: “My husband and I have been married 15 years and each have kids from prior marriages. Two of his three kids don’t talk to him after the messy divorce with their mother, and he has never met any of his four grandchildren. I have only met the kids a few times. My two kids love my husband and treat him like a father. They don’t have any children yet. My son is the older child but is not financially responsible. My daughter is who we have named the executor. She is super responsible and even though she is overseas, I think she will do a great job.”
Gary Grinaker of Bismarck, N.D., wrote: “My youngest sister is my estate’s executor, with my other sister as backup. She helped our mother with our father’s estate, so has the experience as an executor. Most important, she is not one of my heirs. My will specifies what she will be paid because it is time-consuming work and deserves fair compensation. While lawyers and accountants have no problem billing for their time, leaving a family member to set their own compensation creates a minefield for your family to navigate.”
Pam A. from Houston wrote: “I picked my 28-year-old son. He has an engaging personality and gets along with most people. He is smart and will find out how to do something he doesn’t already know about. My daughter gets along well with others but finds money matters complex and boring.”
Joe Harr made an excellent point about considering location in choosing an executor. He wrote: “My mother chose my brother as her executor because he is the oldest child. She listed me as the alternate. My brother lives in Michigan. My mother died in Prince George’s County, Maryland. I live in Alexandria, Virginia. As we’ve discovered, the executor must visit the courthouse of the county where the death occurred, or pay an attorney to visit on their behalf. My mother had a small estate, under $25,000. We don’t want legal fees to eat that up. Because of our locations, my brother and I decided that he should recuse himself from being the executor in favor of me. It is just much more sensible for me to make the required visits to the courthouse. My mother chose the oldest child by default, and we had no objections when she wrote her will. We never thought that location would make a difference. It does. And it is something that anyone should consider when they write their will or when they move their residence.”
“I chose an [accredited estate planner] to settle my estate because settling an estate is a too big of a burden to dump on a family member or a friend,” wrote Jeff of Cherry Valley, Calif. “I know this because I’ve settled three estates in my life and it’s stressful, time-consuming and easily causes drama between the executor and the beneficiaries.”
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