Maryland Bar Bulletin
Publications : Bar Bulletin

June, 2004

LOOKING FORWARD TO RETIREMENT?
~For Many Americans, Optimism Could be Misplaced~

By Jason L. Ditto and Todd E. Binder

Sixty-eight percent of Americans are very or somewhat confident of being financially comfortable in retirement, according to a 2004 Retirement Confidence Survey released by the American Savings Council. Contrast that with another fact from the Savings Council – that 45 percent of workers have less than $25,000 in total savings and investments, excluding the value of their home, and 42 percent aren’t saving for retirement at all.

Taken together, these facts could indicate that most Americans are far from being on target for being financially comfortable in retirement, and if they are optimistic about their retirement, perhaps they shouldn’t be. (The Baltimore Sun, “Americans are Too Optimistic About Retirement, Study Finds”, Ambrose, Eileen, April 6, 2004)

Will You Have Enough to Retire?

Many Americans may be unprepared for their retirement, perhaps due to some of these trends:

  • Savings rates among Americans continue to decline.
  • There has been a shift in responsibility for retirement funding from employers to employees. The marketplace is forcing retirement planning onto individuals and moving away from company-structured benefits.
  • Post-retirement living expenses may not decrease as many expect due to more active and expensive retirement lifestyles that include more travel and dining out.
  • Medical and prescription costs continue to rise – especially for older Americans.
  • Long-term care costs are rising at a higher rate than inflation and other health care costs. (The American Council of Life Insurance, “Can Aging Boomers Avoid the Nursing Home?” 2000)
  • The average life expectancy has risen from 47.3 years to 77.2 years between 1900 and 2001. Those currently age 75 have a life expectancy of 11.5 years. Longer life expectancies mean that more money is needed over a longer period of time.

So, will you have enough to retire? Each person or family’s situation is special. Some individuals earning $500,000 or more annually are unable to retire at age 65 due to large fixed or on-going expenses, while some individuals who earn $50,000 are able to retire based on a high level of savings and controlled expenses. Most people fall somewhere in between. Each individual needs to plan, to determine where they are and what their retirement needs are.

The Planning Process
Retirement planning is just a subset of the broader area of Financial Planning. To properly prepare for retirement, you should review your total financial picture. Ask – and answer – these five questions to begin your financial planning:

  • Is there enough money for your family if you should become disabled, die or have an extended need for health care?
  • Will you have enough money to be financially independent when you want to stop working?
  • Are your assets allocated in a manner consistent with your goals?
  • Do you have appropriate efficiencies in place to minimize the costs of income and estate taxes?
  • Are your legal documents updated regularly and reviewed for consistency with your personal and financial goals?

Retirement Cash Flow
Retirement is no different than everyday living prior to retirement – cash flow is important – and balancing income and expenses is critical to a positive cash flow. On the expense side, think about what type of retirement you are looking for and whether or not you want to leave a financial legacy to heirs or a charity. On the investment side, consider your investment strategy and asset allocation and determine if they are aligned with your time frame and risk tolerance. Understand how your health coverage will change under Medicare and who will cover your healthcare if you retire early. Make sure you plan for expected and unexpected long-term health care needs and expenses.

Justified Optimism
The Savings Council Survey noted that workers who are not saving for retirement at all gave a variety of reasons: “About one-third said they are counting on getting money from an employer. Others are relying on God, an inheritance, saving later and Social Security to take care of their retirement.” (Department of Health and Human Services, Table 27, 2003)

Most of us should rely on ourselves and on realistic financial and retirement planning to justify our optimism about retirement. This summary should provide a general framework for your retirement planning:

  • Identify your goals
  • Summarize and discuss them with your family and, if applicable, with your business colleagues
  • Do a realistic analysis of your post-retirement expenses and available funds
  • Quantify your current assets and liabilities
  • Evaluate your risk tolerance
  • See a financial planning professional, attorney, CPA or a team of professionals for help matching your investment options and asset allocations to your risk tolerance profile and goals
  • Make sure that income and estate tax considerations are part of your plan
  • Establish an annual review program to update and re-evaluate your goals and progress.

Jason L. Ditto, MBA, is Director of Investments and Financial Planning at FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. Jason L. Ditto and Todd E. Binder are registered representatives of and offer securities, investment advisory and financial planning services through MML Investors Services, Inc., 11350 McCormick Road, Suite 200, Hunt Valley, MD 21031; (410) 785-7654. FranklinMorris is not a subsidiary or affiliate of MML Investor Services, Inc.

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Publications : Bar Bulletin: June, 2004

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