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Retirement: It's Not All a Crapshoot

by Glenn Ruffenach
Thursday, July 14, 2011

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Want to hear some good news about retirement? You have more control over your future than you think.

So much about retirement planning today is marked by doubt: We don't know whether our savings will see us through old age. We don't know what might happen to Social Security and Medicare. We don't know whether we'll be able to continue to work for as long as we wish to (or need to). And so we fret — a lot. In its most recent "retirement confidence" survey, the Washington, D.C.-based Employee Benefit Research Institute found that 27 percent of workers are "not at all confident" about having sufficient funds to live comfortably in later life — the highest level of gloom in the study's 21-year history.

At their worst, such anxieties can leave people paralyzed. Clark Randall, who heads Financial Enlightenment, a planning firm in Dallas, says he often sees this with his clients: "It's easy to focus on threats they can't control." And that's the point. If you're caught up in issues that are out of your hands — interest rates, changes in government programs, the markets — you're more likely to overlook those parts of retirement planning where you do have control.

So, "pop quiz": How many of the following steps — for which you're the boss — have you taken?

Setting a budget. It's among the most important steps in planning for later life, but less than half of workers have put pencil to paper, according to the Employee Benefit Research Institute. Why are budgets so critical? Projecting expenses and income can help you pin down your "number," the amount of money you need to save for retirement. You could be pleasantly surprised. "Many people who have been diligent about building a nest egg find they spend less on themselves than they realize," says Brent R. Brodeski, a managing director at Savant Capital Management in Rockford, Ill. Any number of work sheets can simplify the process. (See the Department of Labor's "Taking the Mystery out of Retirement Planning" or T. Rowe Price's "Retirement Readiness Guide.")

Timing Social Security. If you're married, the timing of exactly when each spouse first files for benefits can translate into thousands of dollars gained — or lost — in retirement. Rather than simply jumping in the pool at age 62 (the earliest point at which you can grab a check) or trying to sort through a dozen different scenarios, take advantage of a service that can run the numbers for you. One good bet: SocialSecuritySolutions.com.

Reducing debt. Between 2000 and 2008, the average debt for households headed by a person age 55-plus almost doubled to $66,000, according to Strategic Business Insights, a research firm in Menlo Park, Calif. Again, here's where would-be retirees can take the reins. Marsha and Chris Blair, 63 and 65, both educators, were saddled with a monthly mortgage of $5,300 on their house just south of San Francisco. Knowing they wanted to travel in retirement, they recently sold it (admittedly, not an easy feat in some markets these days) and moved to a $142,500 home in Yountville, Calif. Their new monthly payment for the land lease, insurance, taxes and cable: under $800. "You have no idea how freeing that is," Marsha says. "The first thing my husband says every time we enter the house is, 'Home, sweet unmortgaged home.'"

Creating a pension. If nothing else, the recent financial meltdown underscores the need for investments that throw off income, regardless of what's happening in the markets. If you're fortunate enough to have an employer pension, great. If not, there's no excuse for failing to buy and hold products — annuities, dividend-paying stocks, bond funds — that generate cash.

Managing taxes. No, you can't control tax rates, but you can practice "tax diversification," says Randall, of Financial Enlightenment. Ask yourself: Will virtually all your money in retirement come from your 401(k) or IRA? If so, those withdrawals will be taxed as ordinary income, and you could be paying as much as 35 percent to Uncle Sam. But if you divide your dollars among more buckets — Roth IRAs, municipal bonds, even real estate — you have the flexibility to pull funds from different sources at different times. "You don't know what your effective tax rate will be in retirement," Randall says. "That's why you should diversify."

Planning for long-term care. Yes, this is a tough one. But it's also an area where failing to act could prove devastating. Among your options: self-insuring, if you can set aside sufficient funds. Long-term-care insurance, which is complicated and expensive, is another possibility, as are so-called hybrid policies that provide some long-term-care benefits and some life insurance (but perhaps not enough of either). Finally, there's the Community Living Assistance Services and Support Act, the federal government's new insurance program for long-term care (the details are still being ironed out). While it could be a case of picking your poison, just choosing means you've taken control.

I know: The invariable response is, "But I don't have time." Please. It never fails to amaze me how people will spend weeks planning a visit to Disneyland with the grandchildren but won't take a few hours to assemble a retirement budget that could easily last 30 years. Believe me: You can find time. Take control of what you can control — and take the anxiety out of your retirement planning.