Have I Managed My Finances Well for a Long Retirement?
PBS NewsHour business and economics correspondent Paul Solman says the answer depends on how your savings will translate into retirement income
PBS NewsHour business and economics correspondent Paul Solman is answering questions from Next Avenue visitors about personal finances, business and the economy. His advice appears on Next Avenue as well as Solman's PBS NewsHour blog, Making Sen$e With Paul Solman, and the Rundown, NewsHour's blog of news and insight. PBS NewsHour is an hourlong television program and accompanying website with the mission of providing intelligent, balanced and in-depth reporting and analysis of the day's most important domestic and international issues and news.
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I’ll be 65 next year, have been retired since 2010 and my state pension plus a pension from my deceased husband is $4,000 per month after taxes. I have almost $220,000 in a low-risk TIAA-CREF annuity, own my home outright with a value of well over $100,000 and have Series I Treasury bonds worth about $48,000. I also have a little over $27,000 in the bank and no outstanding debt. I am now considering selling my house and retiring to a warmer location due to arthritis. As a woman whose family members have lived long lives, I’m wondering if there is something I should be doing differently with my money to help ensure it will last my lifetime. I paid a certified financial planner for a financial plan in 2002 after my husband died; should I see a CFP again? — Elizabeth Hagan
I have questions, Elizabeth — many questions.
The first and foremost: How much do you live on? And if you move to warmer climes, will the tab change?
Second question, almost as important: Is the $4,000-per-month inflation protected, the way Social Security is?
Finding a Financial Planner
I'll leave the other questions for the CFP, though I worry about you finding a good one. By definition, fully half of financial planners are below average. You remember what they call the person who finished at the bottom of the class at the worst medical school in the country, right? "Doctor." (The Next Avenue article, “Beware of Financial Advisers With Bogus Credentials,” can help you determine if a pro’s bona fides are legit.)
The Safest Possible Investment
Tallying your numbers, it looks like you have just under $300,000 in savings, leaving your home equity out of the picture. One way to think about the value of such a nest egg is to see what it would yield if you were to put it into the safest possible investment: An inflation-protected annuity. (This assumes you are willing to leave nothing as an inheritance.)
With an inflation-protected annuity, you turn over a chunk of money to a financial services company and in exchange you’ll receive guaranteed, regular payments for the rest of your life with a rate of return that will be at or above the inflation rate.
An inflation-protected annuity for a woman your age returns something like 6 percent a year. That would mean $18,000 or more if you put down $300,000. Both Vanguard and, from what I read on the Internet, Principal, offer inflation-protected annuities.
The bottom line is that if both your pension and nest egg are inflation-protected, and you can live on $58,000 a year or less, you should be fine, no matter how long you survive.
Taking Health Into Account
But what if you become incapacitated? Or simply turn frail enough that you need to live in an assisted living facility or nursing home?
Do you have long-term care insurance? Under current law, Medicaid will pay nursing home costs once you've depleted all funds. But the Medicaid system, which is already under enormous budgetary pressure, will be increasingly strained as baby boomers such as yourself decline in health. So it might not be able to cover nursing home expenses in the future for everyone it does now.
Retirement Planning Software That Could Help
You might try out Larry Kotlikoff's free online ESPlanner Basic software to see how safe you are in avoiding the risk of running out of money. Kotlikoff, a Boston University economics professor and a friend of mine, is a noted retirement expert and frequently answers questions about Social Security for Making Sen$e With Paul Solman. His ESPlanner Basic software suggests how much you should spend, save and insure each year to achieve a stable living standard through retirement, without borrowing.
Larry and I will be simplifying ESPlanner Basic soon — and adding a little zest, we hope.