You may recall that in my last blog, I wrote that some surveys conducted in recent years reported that the majority of Americans are not prepared for retirement^(1). And I suggested that the reasons for this apparent lack of interest in the subject may not, in fact, reflect  lack of interest at all.

Instead, I suggested that the indifference was likely related to other factors, including the possibility that we, as a society, are thinking about retirement in the wrong way. The traditional notion of retirement – simply stop work at age 65 (or thereabouts) – might not be relevant to an increasingly large number of Americans.

In my last missive, I promised to provide a new context for retirement planning that would integrate more recent retirement trends (longer life expectancies and the desire to pursue meaningful work before retirement) into a framework that makes more sense for preparing for the next chapter in your life – financially and otherwise. A new approach may just be the tool that will help people become more interested in thinking about their long-term financial future!

In considering this “new retirement”, I have observed that more people now actually work during some of the years they are “retired”, which means they really have multiple “retirements”. The first one may include transitioning from your “traditional work” (whatever you have done for most of your professional life) to a new professional pursuit or even an entrepreneurial venture.

This shift could include consulting in your current field, pursuing a professional passion, or even working in a new occupation. Of course, for some, this stage of “retirement” may also include some pleasurable pursuits like golf, travel, gardening and/or other hobbies. These “extracurriculars” might (or might not) take up a greater percentage of your time than previously, but in this first stage of retirement, you are still involved with work, either because of financial considerations, your personal preference, or both.

Many people, even those who can afford to retire, want to remain active in their work and continue making professional contributions! But you might now want to work in a way that is different from what you did in the past – for example, professionals are increasingly making career choices that reflect both their professional passions and their personal values – even if it is the same field in which you have traditionally worked.

It is this deeper connection to work that can provide important psychological benefits during this first phase of retirement. In my opinion, these psychological and other non-financial considerations are just as important as considering your finances in making pre-retirement career choices. Professionals and entrepreneurs, particularly those in midlife, need to actually like their work!

Of course, the income you are continuing to generate during these years certainly provides another benefit which is to preserve (and potentially enhance) the financial resources you will need when you stop working. This may help mitigate one of today’s key retirement challenges which is also referred to as “longevity” risk – the possibility that you could run out of money during the years you are retired. For some of you, this period may last for 20 or 30 years, or even more.

The next phase of retirement – I refer to it as a “second” retirement – then includes the retirement we often think about – the time when we really have no earned income and are pursuing interests/activities not at all related to work.

This second phase of retirement also may eventually lead to the time when some of our physical capabilities begin to diminish and when we might not be able to live independently. There are many planning considerations for this phase, including the need to prepare for potentially higher medical costs and the additional expense of someone helping us with certain aspects of day-to-day living or even living in a nursing home.

You might want to use a “multi-phased” approach such as the one I have outlined as you think about your own circumstances and your planning. With the recent challenges in the economy, it might be wise to soon review your financial status and the timing of when you want to stop working (or when you think you will not be able to do so).

An effective review would involve estimating the income you will need when you stop working and determining whether you are on track to fund those future needs. However, if you wait too long to review your situation and you then learn you need to make adjustments, you might not have adequate time to improve the chances of meeting your goals.

If you need any help conducting such a review, I offer a complimentary consultation about your situation. Feel free to call me at (925) 301-4086 or email me at bill.pollak@lpl.com. Many people who have taken the time to develop a retirement plan often feel more confident about their financial future!

⁽¹⁾       McKinsey Global Institute, November, 2008
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.

I wanted to post a quick reminder about our upcoming retirement planning workshop in San Francisco on June 1, 2012! The challenges in the housing market, fluctuating stock prices, and US companies seemingly reluctant to bring on new workers are making people’s financial lives complicated! With uncertainty about the future value of retirement accounts and home equity, many Americans may not be able to retire when they want.

In this seminar, I will provide objective information that will help you determine your retirement income needs, manage and structure an effective retirement income distribution strategy, and properly allocate your assets to improve the chances of attaining your goals. This session is tailored to the needs of people who want to retire in the next few years or for people whose retirement planning is further in the future, but who want to begin to think about how to position their finances for their long-term future when they will no longer earn employment income!

Date and Time: Friday June 1, 2012 at Noon

Location: San Francisco Chapter of the American Institute of Architects (“AIA”)
130 Sutter Street, Suite 600
San Francisco, CA

Many attendees at this workshop will be AIA members. However, people from all backgrounds are welcome to attend since the planning approaches to be described apply to individuals from virtually any profession. To attend, please register on this page: http://www.eventbrite.com/event/3465223577

I look forward to seeing you there!

Some of you might remember the famous phrase from a General Motors commercial many years ago – “this is not your father’s Oldsmobile.” Well, for those of you considering eventually retiring, I have news for you: “This is not your father’s retirement.” Unfortunately, surveys conducted during the past several years have shown that the majority of Americans are financially unprepared for retirement and are not even aware of their predicament⁽¹⁾.  

I think a likely explanation for this situation is that there are both emotional and practical obstacles that make planning for this eventuality difficult, especially for people in mid-life for whom the need for planning is wise. Of course, the challenging mix of the tough job market and financial market volatility in recent years has understandably impacted many people’s retirement plans – and sometimes their willingness to take a closer look at this area of their lives.

And my conversations with clients, friends, and colleagues – especially those experiencing a career transition — lead me to believe that some people have completely given up on the idea because they believe you have to be a very wealthy to retire and/or they will never have sufficient resources to do so. This perception may or may not be correct, although for those who have not taken a closer look at their finances, their belief may likely become a self-fulfilling prophecy.

But I think there are also other important reasons that retirement is a difficult subject to tackle. America is undergoing important changes when it concerns retirement, yet much of what we read and what is discussed in the media approaches the subject from a very traditional perspective. The “old” retirement (your father’s “Oldsmobile”) was based on an assumption that we were supposed to stop working in our early or mid-60s.

Not only does the challenging financial and economic landscape make this view somewhat anachronistic, but other important changes in society also make it less relevant. Unfortunately, the mass media and our popular culture often continue to portray retirement in outdated ways that have become out of touch with our evolving world.

These factors – the combination of recent economic challenges and the continued portrayal of a retirement in outdated ways — makes it difficult for people to really think about this important part of their financial life. If there are not any relevant models that can help individuals approach such planning, it is perfectly understandable why many people have basically opted out of preparing for their long-term future.  

However, anyone in mid-life and thinking about the next chapter in their lives does need to consider their long-term financial needs in both their financial and even career decision-making. The remainder of this blog and my next installment will further discuss the recent trends that have changed retirement and more importantly what you should consider in your own planning.

One profound shift that is well known (but very frequently not discussed) is that life expectancies are significantly longer than they were for previous generations. This trend, which is likely to continue, has effectively “raised the bar” in terms of the financial resources needed to retire – even for people who have done a great job saving. Many studies today indicate that average life spans will take the average person into their eighties, and a smaller but significant percentage of people will live into their 90s.   

Even for those who have attained financial independence (either because they do not live an expensive lifestyle or through a high level of savings, or both), the traditional retirement “model” often does not makes sense because they actually want to remain involved in their profession, a new business interest or passion, or some other pursuit during what are supposedly their retirement years.

The reality for many individuals, regardless of their finances, is that they want to apply their years of hard-earned experience to continue to make an impact in their chosen line of work, while others may choose to pursue a new professional path that more closely reflects their values and/or passions.

For such individuals, withdrawing from their work is simply not an option because they have the energy and passion to stay involved in the world around them. Connection to work can provide important psychological benefits that in some cases are far more important than any positive financial benefit that comes from remaining involved in work into their late 60s or even longer.

In lieu of the traditional concept of retirement, I think there is a more contemporary model that more closely reflects today’s society. I will be writing about that very soon, and more importantly what you can do to enhance the quality of your life and also prepare yourself financially! Stay tuned for this next blog!

⁽¹⁾       McKinsey Global Institute, November, 2008

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.

Recent surveys indicate that many Americans are unsure about how and when they will retire. Although the economy is beginning to recover, the upturn has been slower than past recoveries, creating challenges for people who are trying to build a long-term foundation for their needs when they eventually retire. If you are a mid-life professional and feel uncertain about how to move confidently toward your long-term goals, then you are invited to attend this workshop. The session will help you determine and plan for your retirement needs, consider the role of Social Security, and educate you about the principles of asset allocation and how to consider investment strategies based upon your needs. This seminar will not be focused on product sales, and will offer objective, educational about planning for the time when you choose to no longer work, or will not be able to do so.

Date and Time: Friday June 1, 2012 at Noon.

Location: San Francisco Chapter of the American Institute of Architects (“AIA”)
130 Sutter Street, Suite 600
San Francisco, CA

Many attendees at this workshop will be AIA members. However, people from all backgrounds are welcome to attend since the planning approaches to be described apply to individuals from virtually any profession. To attend, please register on this page: http://www.eventbrite.com/event/3465223577

 

Last week, I visited with the former employees of New United Motors Manufacturing (NUMMI), the Fremont car company which ceased operations in 2010. NUMMI recently notified its former workers that they would be receiving assets from the company’s now terminated Pension plan, and I was among a select group of financial professionals invited to help.

Imagine walking in the shoes of these employees! Many of them have vested pension account balances in the tens of thousands of dollars, and they have a relatively short period of time – 30 days – to select from among the many elections being presented. The choices are not easy and I met people afraid and uncertain about what they should do.

People faced with important financial decisions – especially when the choices involve a lot of money – often experience a range of emotions. And too frequently, fear and anxiety can make an already complicated set of options even more difficult to evaluate, leading people to make irrational decisions which may imperil their long-term financial situation.

So in this month’s blog, I thought I would share common errors to avoid and offer some tips to anyone faced with choices about retirement plan distributions. Here is what you can do to avoid unnecessary financial pitfalls and help optimize your financial situation at such an important time in your life:

1) Don’t take a cash, lump sum distribution and pay good old Uncle Sam a pile of money. You will be taxed by the Federal and State government and you will have to pay an additional 10% penalty if you have not yet attained age 59½. This advice may sound obvious to a good number of you, but if you are seriously considering it, don’t do it!

Even if you may need the money for near-term living expenses, you should still roll it over to an IRA – you can always keep the money in cash or cash-equivalents so that you can easily access it to pay bills. But if you immediately take the money now and then you later find other (non-retirement) money to sustain your short-term finances, you would have needlessly paid unnecessary taxes and penalties. That is because the decision to cash out is usually irrevocable.

So, put the money in an IRA and use the time to identify other sources of money that will help you avoid the need (or at least delay it) to take money from your retirement accounts.

2) For retirement assets that you will need to attain financial goals that are a few years or many years in the future, do NOT leave the majority of this money invested in cash or cash-equivalents. This might sound contradictory to the advice I gave above about keeping some of your retirement money in cash, but it really is not.

It is true that money you may or will need for living expenses over the next year should NOT be invested in the financial markets. However, any money not needed for such near-term living expenses should likely be invested in something, depending on when you will need the money and the risk level (low, moderate or high) that is appropriate for the goal.

I know there are some of you out there who are absolutely terrified of the markets, but the decision to stay in cash (again, for money that is ear-marked for medium and long-term goals) is one that will almost guarantee the erosion of your money’s purchasing power over the years. That’s one of the few guarantees available these days, but it is unfortunately not a good one!

That is because the money in a savings account earns about zilch in interest, and the “purchasing power” (or the amount of goods and services that your money can buy) is actually declining every day! Inflation is increasing the prices of everything that you will need when you begin to draw down your assets at some point in the future.

So, what should you do if you are concerned about your money losing ground to inflation, but you are also unsure about the volatility in the financial markets? One option is to allocate your money into investments that are NOT tied to the stock market.

Email me at bill.pollak@lpl.com if you are interested in learning more about these ideas! But, remember, doing nothing and leaving your money in cash is a choice, and the decision may expose your money to a risk that you may not have considered. You might feel that decision is a safe one, but you will be accepting the hidden but very real risk that your money might have less purchasing power in the long-term.

3)    Don’t make a hasty decision without getting advice and becoming informed. The rules about taking distributions from retirement plans are extremely complex. This is especially true for any of you in your 50s – there are some provisions in the tax code that can actually be very helpful (I’ll write about these in a future blog), but you can only benefit from them if you are informed about them before you take action!

Do not assume that the choices you have previously made a rollover is the correct strategy for today. A financial professional can assist you in clarifying the options specific to your situation.

The money in employer-sponsored retirement plans now represents a substantial percentage of most Americans’ long-term savings. My discussions with former NUMMI workers last week reminded me of the importance of developing a strategic plan for your retirement assets and of becoming properly informed about your options. Don’t let fear, anxiety or inertia lead you to a hasty and ill-conceived decision – instead take a deep breath and calmly take a close look at all of your options!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.

Investing involves risk including loss or principal.