7/8/2015 AZ Republic by Dr. Harold Wong
About 80 million Baby Boomers were born after World War 2, from 1946-64, and now 10,000 Boomers turn 65 every day. Many Boomers plan to work past 65 because they don’t believe their money will last in retirement. They face 3 major risks to a Happy Retirement:
- Low Wage Increases and Uncertain Employment: Ten years ago, the U.S. median family income was $50,000 and it’s at the same level today. The Great Recession caused a loss of 10 million jobs. While many of these jobs have returned, they are not with the same pay and full benefits.
- Low Interest Rates: When the stock market crashed in 2008, Federal Reserve Chairman Ben Bernanke said his goal was to drive short-term interest rates as close to zero as possible and he succeeded. If you deposit $100,000 at Wells Fargo in a 1-year CD, you get $50 interest at the end of the year. Today, the interest yield on a 10-year U.S. Treasury Note is 2.31% and 3.10% on a 30-year U.S. Treasury Bond. The U.S. Bloomberg Corporate Bond Index is at 3.37% and the Bloomberg Municipal Bond Index is at 2.66%.
- Uncertain Future Stock Market Returns: A recent June 9, 2015 article states that one must lower one’s expectations of stock market returns, “Exclusive: Vanguard Founder John Bogle Projects ‘Nominal to Zero” Real Returns Over the Next Decade” by Wayne Duggan, found in www.finance.yahoo.com. Because of the unpredictability of future stock market returns, the recent academic literature has lowered the “4% Rule” to the “2.8% Rule”. This means that if you have saved $1 million, you can withdraw $28,000 and then increase it by about 3% each year to account for inflation; and have a good chance of not depleting life savings to zero before your death.
There are 3 things that Baby Boomers can do to Financially Prepare for a Happy Retirement:
- Save substantially more: For decades, the field of financial planning says that one’s goal is to save 10% of one’s income. This is not enough! I had a recent discussion with one of the Vanguard employees who manage the $billions of Google 401k money. We both agree that one has to save 20-25% of one’s income to have the same income in retirement as when working.
- Maximize Social Security income: “Among elderly Social Security (SS) beneficiaries, 52% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security”, “How Social Security Strategies Affect Your Retirement” by Dr. Harold Wong, May 23, 2014 AZ Republic. If your SS income at 66 is $1,600 monthly, it would be $1,200 if you took SS early at age 62 versus $2,112 if you took it at 70. Yet, only 1.2 % of men and 2% of women waited until age 70. The average SS check was $1,294 in 2014.
- You Must Consider a Private Pension: In July, 2014, a nurse age 62 deposited $250,000 into this concept. When she retires at age 70, she will receive $25,000 per year, guaranteed as long as she lives. Her cash flow alternatives for the same $250,000 were: $125 interest from Wells Fargo; $5,000 from a 10-year Treasury Note; $7,500 from a 30-year Treasury Bond; or an average $5,000 dividend yield from the U.S. stock market. There is virtually nothing else that pays a higher rate of guaranteed cash flow than a private pension.
Free Seminars: “How to Maximize Your Social Security and Other Retirement Income” will be held Saturday, 7/18/2015, 10:30 am-12:30 pm. “How Baby Boomers Can Financially Plan for a Happy Retirement” will be held Saturday, 7/25/2015, 10:30 am-12:30 pm. Both seminars will be at the Desert Foothills Library, 38443 N. Schoolhouse Road, Cave Creek, AZ 85331. Please RSVP at (800) 955-1408.