Eric Tyson - Personal Finance After 50 For Dummies

Don’t get hung up over expected cost-of-living increases. When we walk you through the retirement number crunching later in this chapter, these increases are incorporated into the analysis. The third point about future benefit law changes is worth considering, so we cover that in detail in Chapter 10.

If you want to delve into different scenarios for your Social Security benefits, use the SSA’s online Retirement Estimator at www.ssa.gov/benefits/retirement/estimator.html .

When putting together your retirement plan, you also want to consider any pensions you have available to you. You may have previously worked for an employer offering pension benefits, or you may currently work for a company with such a plan. Also known as a defined benefit plan, a company pension plan is one that your employer actually is contributing to and investing money in to fund your future pension payments.

In a typical plan, the employer may be putting away about 8 to 10 percent of your salary (this money is actually in addition to your salary, because the money isn’t taken from your income as it would be if you were contributing to a retirement plan such as a 401(k) plan). The money is then invested mostly in a mix of stocks and bonds (as it is in a balanced mutual fund).

Two terrific attributes of pension plans are

The savings happen automatically. Unlike a retirement savings plan like a 401(k), you don’t have to think about your pension plan. You don’t have to cut back on your spending or complete any forms. Your employer is putting away money on your behalf month in and month out.

You don’t experience any investment hassles or challenges. The pension fund manager does all the heavy lifting with regard to investing the money. So there’s no need for you to research or monitor financial markets or investments.

If your current or previous employers have a pension plan and you may have accumulated benefits, request a copy of each plan’s benefit description and a recent statement of your earned benefits. (When we get to crunching the numbers for your retirement plan, you need your pension benefit statements.)

Based on your years of service, your benefits statement will show you how much of a benefit you’ve earned. Your current employer’s statement or the person or department that works with benefits may also be able to show you how your pension benefits will increase based on working until a certain future age.

The many types of investments you may have are an important component of your retirement plan. These investments may come in various forms, such as bank accounts, brokerage accounts, mutual fund accounts, and so on. Your investments may or may not be in retirement accounts. Even if they aren’t, they still can be earmarked to help with your retirement.

Take an inventory of your savings and investments by gathering recent copies of your statements (or checking balances online if you’ve gone paperless) from the following types of accounts or investment options:

Bank accounts — checking (especially if it holds excess savings), savings, CDs, and so on

IRA accounts

Taxable accounts at brokers and mutual funds

Employer retirement accounts, includingProfit-sharing plansEmployee stock ownership plans (ESOPs)401(k)s, 403(b)s, and so forth

Investment real estate

We provide numerous bits of information elsewhere in this book about how to invest your retirement money as well as where to save it. At this point, you simply need to take an inventory of your current assets and use that information in the “ Crunching the Numbers” section to determine where you stand regarding retirement planning.

If you’ve owned a home over the years and it has a decent amount of equity in it (the difference between its market value and the mortgage debt owed on it), you can tap into that equity to provide for your retirement. In order to tap into your home’s equity, you have two primary options:

You can sell your home. After you sell your home, you can either buy a less costly one or rent.

You can take out a reverse mortgage. With a reverse mortgage, you continue to live in your home and draw income against your home, which is accumulated as a debt balance to be paid once the home is sold (check out Chapter 8for more info).

Many people don’t realize how safe their pension benefits actually are. Even if the company goes under, pension assets are held separately and are backed up by the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (also known as ERISA) to protect pension benefits in private-sector pension plans, also known as defined benefit plans. PBGC guarantees basic pension benefits earned, subject to limits, including

Pension benefits at normal retirement age

Most early retirement benefits

Disability benefits

Annuity benefits for survivors of plan participants

PBGC doesn’t guarantee health and welfare benefits, vacation pay, or severance pay. The maximum benefit amount that PBGC guarantees is quite substantial. According to the PBGC:

PBGC’s maximum benefit guarantee is set each year under provisions of ERISA … PBGC guarantees the “basic benefits” you earned before your pension plan’s termination date (or the date your employer’s bankruptcy proceeding began, if applicable) up to legal limits set by Congress.

The 2021 maximum monthly guarantee for a 65-year-old retiree is $6,034.09 for a straight-life annuity and $5,430.68 for a joint and 50% survivor annuity.

The maximum guarantee is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a survivor or other beneficiary. The maximum guarantee is higher if you are over age 65 when you begin receiving benefits from PBGC.

If you’re pretty certain you’d like to tap your home’s equity to help with retirement, consider how much equity you would use.

When beginning your retirement planning, make sure if you are married that you sit down with your spouse and coordinate your individual plans. Doing so may seem obvious, but it’s an important step. Discussions about retirement plans need to begin long before retirement. Even when one spouse is doing most of the financial planning for retirement, both spouses need to have a meeting of the minds over the nonfinancial aspects of their senior years. And the spouse who is not doing as much of the financial planning still needs to know the overall financial situation.

There are some topics couples should begin discussing at least five years before retirement:

Should each of you retire? If so, when would each prefer to begin retirement?

Would retirement be complete, or is part-time work a possibility for either spouse?