Retirement becomes an ever-evolving challenge

Health costs, living longer, investments affect plans

September 05, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The economic ground is shifting for millions of Americans in their 50s and early 60s who find themselves forced to reconsider their dreams of a comfortable retirement.

Experts say that many have abandoned plans for early retirement and growing numbers are laying plans to continue working far beyond what has been considered a normal retirement age.

The reasons are varied. We are living longer than ever before. The quality of health care and its cost are growing at a head-spinning pace. There have been some unpleasant surprises for some who rely on investment income and continuing changes in the retirement promises made by large employers.

But for many who have already retired, life is proving to be surprisingly manageable. They have found satisfying answers to an array of economic challenges and offer lots of advice from the other side.

Here's some of what they have to say in answer to questions about the growing challenges of retirement:

Question No. 1

How much money do you need?

"The rule of thumb I heard is if you retire and have the same kind of income when you were working, you might be pretty well off," says Herbert Harris, 81, of Silver Spring, who retired at 65 as an industrial engineer for the federal government. He consulted for a few years after that.

When planning retirement, Harris figured that he and his wife, Fran, a retired teacher, could live comfortably on his annual salary of $75,000. The couple's traditional pensions and Social Security, both of which provide cost-of-living adjustments, make up 80 percent to 90 percent of that, he says.

"We can pretty well handle most of all expenses," he says, including winter trips to Florida.

Future retirees likely will look at Harris and others like him as the lucky ones. Pensions that promise a monthly check for life are being replaced with defined-contribution plans, such as a 401(k). With these plans, the size of one's nest egg will depend on investment performance and how much the worker, and often the employer, kicks in.

In 1975, about 67 percent of private retirement plans were defined contribution; by 1998, it was 92 percent, according to an Employee Benefit Research Institute (EBRI) study.

These plans require a whole new set of financial decisions upon retirement when workers receive their savings in a lump sum. They can use the cash to buy an annuity that will provide them with a monthly check, or they can try to invest and manage it so they don't outlive their money.

Ada and Bob Stankard of Arnold faced some of these financial decisions.

Bob Stankard, 66, worked as a manager for film and imaging companies and retired twice, in 1993 and early 2002. The first time, he took his pension in a lump sum, the second time he received a payout from a 401(k).

Ada Stankard, 64, taught off and on while raising three children, but worked 10 years at private school before retiring in 2000. She had a defined-contribution plan and small pension.

The lump sums they received from employers were rolled over into an individual retirement account. They collect Social Security.

The Stankards hired a financial planner to manage their IRAs in the mid-1990s. The money is being invested with the goal of earning an average of 7 percent annually and allowing the Stankards to withdraw slightly less than 6 percent a year. Not until they are in their mid-80s will they begin to dip into principal, unless they increase their spending earlier.

Currently, they say, they are comfortably living on just under 70 percent of their preretirement income.

"We are sort of living on what was our take home pay," says Ada Stankard.

Some expenses have disappeared in retirement. Bob Stankard had been living and working in New York and commuting to Maryland on the weekends, so those costs are gone. The couple also is no longer saving for retirement, which ate a big chunk of their earnings.

"Ordinary living expenses haven't changed that much," Ada Stankard says. "My clothing budget is a little bit less ... but we do travel more and also seem to eat out a little bit more."

Of course, the answer to how much one needs to retire is as different as the individuals.

"You need to be able to maintain your previous standard of living," says Alicia H. Munnell, director for the Center for Retirement Research at Boston College. "You don't need to be rich if you weren't rich before. You do need to plan."

For planning purposes, experts for years advised that retirees would need 70 percent of their preretirement income. Now, many financial planners suggest that retirees will need the same amount of income that they had while working.

These planners find new retirees often spend just as much as before. Sure, work-related costs go down, but healthy retirees have time to travel, dine out and pursue pricey hobbies.

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