Speak with a Registered Agent: 1-866-223-2121

Speak with a Registered Agent: 1-866-223-2121

Case Study: Retirees Often Have Enough Money But No Plan

By , with Annuity FYI

…she deposits her entire Social Security check in the bank. She doesn’t spend more because she doesn’t want to risk exhausting her savings. And she doesn’t have a financial plan because she always finds a reason to put it off. Currently, she is uninterested in investing because she thinks the stock market is too high and that bond prices will continue to decline as interest rates continue to climb.

Mary Lovero, a 70-year-old widowed Ohioan, has a particular type of retirement problem that always escapes her, and, sadly, millions of baby boomers happen to share it. She has sizable liquid assets but no financial plan whatsoever, and so she lives below her means. She is not a skinflint but spends considerably less than she could — an unfortunate proposition given that a healthy retiree her age — and with her means –should be living it up.

Lovero used to travel regularly, sometimes to Europe, and no longer does. Even simple weekend getaways, a staple of much of her adulthood, are few and far between. Why? Lovero doesn’t want to risk running out of money, the biggest fear among most retirees.

In her case, however, the concern is highly exaggerated. Lovero, whose name has been changed to protect her privacy, has $1 million in savings, and receives a healthy Social Security payment of $2,500 every month. She also has reasonably priced long-term care insurance, which she bought two decades ago, and a Medicare supplement plan, which means she doesn’t have to worry about outsized medical expenses.

But Lovero withdraws a grand total of only $48,000 a year in savings. And much of that is replenished annually because she deposits her entire Social Security check in the bank. She doesn’t spend more because she doesn’t want to risk exhausting her savings. And she doesn’t have a financial plan because she always finds a reason to put it off. Currently, she is uninterested in investing because she thinks the stock market is too high and that bond prices will continue to decline as interest rates continue to climb.

The Mary Loveros of the world are all over the place, says Scott Sadar, executive vice president of Somerset Wealth Strategies in Portland, Ore. He says half of the clients who have come to him fit the same pattern as Lovero before finally breaking down and seeking financial planning help. “In many ways, the U.S. is a very educated country,” Sadar says, “but in other ways it is not.

“Knowledge in many ways is power,” he adds.”If you don’t have it, you’re at a major disadvantage, particularly when it comes to finances.”

To be sure, people like Lovero could be in much worse shape — they could, for example,lack the money necessary to buy basic necessities. The fact that they don’t have this problem, however, doesn’t mean they are unscathed. They have anxiety about money, Sadar says, and it’s adversely impacting their lives. And they live below their means — sometimes far below — a mistake in the early years of retirement because many will not be well enough to enjoy life as they approach their mid-70s and beyond.

The dearth of financial planning in America isn’t limited to the retirement set. A majority of Americans just don’t want to be bothered thinking about their financial future. According to a story this month in Bloomberg News, two-thirds of Americans who work at a company with a 401(k) plan don’t participate, even though employers commonly match contributions 50 cents on the dollar up to a certain level. This is the case even though a growing number of employers require employees to opt out of participation in a 401(k) plan — seemingly less of a burden than requiring them to opt in.

In their golden years, many Americans continue to find excuses not to intelligently plan their finances. Sadar says many clients today decline to invest in an income annuity or in other annuities with lifetime income riders because they don’t want to lock in interest rates at current levels. That would be foolish, they think, because rates will be higher down the road.

This may well be the case, Sadar says, but say, for example, they delay buying an income annuity for three more years. What happens to that uninvested money in the interim?

Typically, it sits in a bank savings account or money market account and earns virtually nothing, he says. A 65-year-old single man who invests $100,000 today in a fixed indexed annuity with a lifetime income rider and takes withdrawals immediately would receive $5,500 a year. If he waited two more years, assuming the same interest rates, he would earn $1,000 more annually because he is two years older. In the meantime, however, two years have passed and he forfeited $11,000 in income, most of which would not be recouped in traditional savings vehicles.

Behind the retiree mindset to sidestep sophisticated financial planning is the fact that most people mistakenly look at retirement as the finish line — the point after which financial planning and investing become moot. That is flat-out wrong, even for footloose singles without children, because they have only one income to save and proportionately higher expenses than couples.

Fewer baby boomer retirees have pensions than did their parents. Meanwhile, according to the Society of Actuaries, expected longevity for men and women at age 65 has increased more than 10% since 2000. The average 65-year-old man today will live to 87 and the average 65-year-old woman to 89.

For those who can be persuaded to work with a financial planner to establish an intelligent retirement financial plan, here is a quick synopsis of the kinds of tips they are likely to hear:

  • Determine your income streams. The Social Security Administration, for example, offers a solid projection of the amount of your Social Security benefits, depending on your particular circumstances, and what happens if you delay taking benefits. You’re entitled to Social Security at age 62, but payments are 25% less than at age 66. If you’re willing to wait until age 70, payouts rise an additional 8% annually.
  • Budget your expenses. Expects say retirees need 70 to 75% of their income when they worked, but it can easily be less or more. For starters, start with a careful projection of basic expenses, such as food, utilities, transportation and medical costs.
  • Review insurance needs. Roughly around age 60, most term life policies become much more expensive. A long-term care policy often makes sense, but it is even more costly.
  • Assess your Social Security strategy. Consider maximizing Social Security by delaying the receipt of benefits. If you already took benefits at, say, age 63 or even age 66, it’s not too late to turn them off if you can and eventually reap higher benefits if you continue to turn off income until age 70.
  • Invest and stay invested. Since you’re likely to live roughly another 20 years, sage investments are not really optional if you want to make sure that inflation doesn’t eat up your nest egg. A relatively conservative investment portfolio can simultaneously generate income and protect your wealth from the ravages of inflation.
  • Consider buying an annuity.Wisely planned, a competitive annuity will almost always cover essential living expenses, no matter how long you live or how poorly your mainstream investments perform.

At minimum, people should take some time to weigh these suggestions on their own. They may need to approach a financial planner only if they feel need help. A second opinion and professional input is always best. But most important of all is simply laying out some sort of strategy to enhance your financial future.

Information Request Form

If you have questions or would like more information, please complete this form and a licensed professional will be happy to help. For the fastest response, please select 'Phone' as your Contact Preference.

By providing your information and clicking 'Submit' above, you acknowledge that you have read and agree to this site's privacy policy. You also provide your consent to be contacted at the email address or phone number provided above (including any wireless number) by licensed agents or representatives from or on behalf of Somerset Wealth Strategies, LLC and other companies to provide the information requested and/or offer annuities or financial products. You understand that these calls or SMS messages may be generated using an automated telephone dialing system, a pre-recorded message, or artificial voice. Consent to receive such messages is not a condition to purchase any goods or services. You may opt out at any time by following the instructions in the messages you receive.  Receiving quotes and information through our website is free, and you are under no obligation to purchase any goods or services as a result of this request. You affirm that you are the subscriber of the provided telephone number or that the subscriber authorized you to provide the number. Message and data rates may apply. Somerset Wealth Strategies, LLC is committed to respecting your privacy and adhering to all applicable laws and regulations, including the Telephone Consumer Protection Act (TCPA).