With folks living longer and health-care costs going up and up, it’s important to do your best to save for retirement. Every month, I focus my online discussion on retirement issues.
Jeanne Thompson, senior vice president at Fidelity Investments, joined me last week to answer reader questions. Here are some she couldn’t get to during the hour-long chat.
Q: My husband is approaching retirement, and his pension (Yep!) offers many options. He has excluded the ones that are single life only, but how do we know if he should take the one that allows me to continue at same amount as survivor, higher amount initially but leaves survivor with only 50 percent monthly or the one that pays the least initially but ‘pops up’ to the full amount (single life) if I pre-decease him? Seems very confusing!
Thompson: It can be! There are many options in a pension and making a decision that you can’t undo can be stressful, but it really comes down to a single question: If you outlive your spouse, how much money will you need to cover basic living expenses, such as your food, housing and health insurance? You will want to make sure the annuity payment and Social Security benefits can at a minimum cover your essential living costs. Having a better understanding of what those costs will be will help you make the choice that’s best for you.
If you’re fortunate enough to have a pension here’s some reading for you if you’re married and wondering which pension option to choose once you retire.
Fidelity has put together a guideline to help people figure out how much to save for retirement. Here’s the company’s rule of thumb: Aim to save at least one times your income at 30, three times at 40, seven times at 55, and 10 times at 67.
Q: Can you talk about the other assumptions that go into the guidelines? I’m presuming that the 10 times your salary by retirement age has some assumptions in it, like having a house paid off, or that you can pull out 4 percent per year. I’ll be 52 this summer, and I’m saving over 37 percent of my salary (no dependents, no spouse, parents probably won’t need me to support them, but I don’t have any expectations of an inheritance). I had some savings roadblocks early on like student debt and some time out of work. I just don’t see how this ends up working out. I rent, so housing costs aren’t going away. I could move someplace further out, but I like a walkable neighborhood and they are expensive. I guess, I don’t spend much time thinking about getting to the goal since I feel like I am doing about as much as I can anyway. It is nearly $50,000 per year. I suppose the small pension will help. Assuming that doesn’t get taken away by Congress.
Thompson: It’s important to keep in mind that the age-based guidelines are just a “rule of thumb” and everyone’s situation will be different. Some people may have less and be just fine, so if you don’t reach the 10 times threshold it doesn’t necessarily mean you’re in bad shape. You’re on the right track when thinking about some steps you may want to take in retirement – we’ve found many individuals choose a semi-retirement, working part time to help address some of their expenses. Your saving rate is fantastic, so I’m sure that is going to help, and don’t forget you’ll have Social Security to help. In terms of our assumptions, they are based on targeting replacing 45 percent of your pre-retirement annual income with the rest coming from Social Security. We did not assume any pension income. So, if you have a small pension that is icing on the cake. The investment strategy is that of a typical target date retirement fund, assumes a 15 percent savings rate, a 1.5 percent constant real wage growth, a retirement age of 67 and a planning age through 92.
Q: I’m very interested in the idea of buying a pension-like product, but it seems that the insurance companies are more interested in selling a product than selling the “right” product. Could you please explain the basics of what folks should look out for if they’re interested in purchasing annuities for guaranteed income in their retirement years?
Thompson: Annuities can be a great way to supplement your 401(k) savings in retirement. They can help protect against market downturns in retirement, as well as help ensure you don’t outlive your savings, which can provide a lot of peace of mind. But you are correct, they can also seem complex, and it’s important to keep a few things in mind to ensure you are selecting the right annuity for your needs. First, make sure you are investing with a highly rated company that has a strong rating from an independent rating company like Standard & Poor’s or Moody’s – these companies regularly review an insurers financial strength and its ability to pay its contractual obligations. Then, figure out what you need to do with your annuity: Do you want to build savings leading up to retirement (in which case you might want to consider a deferred annuity), or create a retirement income stream (in which case you may want to consider an income annuity)? Annuities are also “variable” (which means they invest in mutual funds) or “fixed” (which is more like a certificate of deposit, not as much growth potential but conservative). And be sure to compare the cost against the value of each additional guarantee, feature, and benefit—and only pay for what you need.
There can be a lot of fees associated with an annuity, so know what you are buying. Read the following:
— Annuities: More cons than pros?
This is a must read!
Retirement rants and raves
This is your space. It’s an opportunity for you to share your experiences or concerns about retirement. You can rant or rave. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
Alan Hansen of Redwood City, Calif., wrote,” My wife and I live in uber expensive Silicon Valley where barely getting by requires both spouses to earn $150,000. Both my wife and I decided independently to save for retirement beginning in our mid 20s. Thankfully, we have been able to save minimally 10 percent of our salary for over the past few decades and have enough to retire comfortably outside of Silicon Valley in our early 60s (we are both in our early 50s). My rant is that we can’t afford to retire in the place that we have been living for the past few decades primarily due to the amount of taxes that we will have to pay on our 401(k) balances in order to support the retirement (and medical expenses) of others than either could not afford to save for their retirement or choose to waste their money on fancy cars and/or vacations. There are many things that we choose to either forget it about (too expensive) or defer (home improvements) since we didn’t want to burden our children with our expenses in our golden years.”
Ryk McDorman of Denver wrote, “I grew up on welfare, barely having enough money to subsist, much less have the things that I wanted. This greatly informed my financial behavior as an adult. I promised myself I’d never live so precariously again. My wife and I are on target to retire early at 60, seven years from now.”
Newsletter comments policy
Please note it is my personal policy to identify readers who respond to questions I ask in my newsletters. I find it encourages thoughtful and civil conversation. I want my newsletters to be a safe place to express your opinion. On sensitive matters or upon request, I’m happy to include just your first name and/or last initial. But I prefer not to post anonymous comments (I do make exceptions when I’m asking questions that might reveal sensitive information or cause conflict.)
Have a question about your finances? Michelle Singletary has a weekly live chat every Thursday at noon where she discusses financial dilemmas with readers. You can also write to Michelle directly by sending an email to email@example.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read more Color of Money columns, go here.