HinHowt 06-7-102  


The 12 most important decisions you must make before you retire


Stan Hinden

McGraw-Hill, 2006, 228 pp.  ISBN 0-07-146466-2


Hinden was a Washington Post financial reporter.  After his retirement he continued to write the Post’s “Retirement Journal” until 2003.  This book came from his retirement experience.  Some of the parts you will need later and you can skim over these.  But you may discover things you need to think about now – or ten years ago!  The chapters get a bit depressing when you get into the social security, costs, and medical scenarios.


This is a secular approach.  It has lots of helpful advice, but I also want to ask how God can use me during retirement years and how that should inform my plans.


Begin investigating long before you turn in your retirement papers.  You can’t learn all you need to learn in a few days. (Preface)


1.  Am I ready to retire?  It has “little to do with your fantasies and a lot to do with your age, your health, your family, the nature of your job, your financial situation, and your outlook on life.” (2) 


Reasons to retire: The time is right.  You have more important things to do.  Your job is changing.  Reasons for not retiring: Your work is your identity.  You’ll miss the people.  You want to stay in the loop.  You may be able to retire and go back to work part time.  Many are doing it. 


“Take a few minutes to think about what life will be like for you after you leave your job—especially if you are married.”  Being around the house a lot may be a big adjustment for both of you.  (13)


2.  Can I afford to retire?  List all your income and all your expenses and compare.  If you don’t have enough you have to raise income or reduce expenses.  Your savings may help close the gap, but be careful: it disappears quickly.


“When you begin working on your retirement budget, don’t forget that you probably will have to buy a secondary insurance or medigap policy to cover some of the expenses Medicare does not.” (20)  Long term care insurance can be about $6,000 per year for a 65-year-old couple.  Your social security income may be taxable. Talk to a tax accountant in advance. (22) 


“The 80 percent rule hasn’t worked for us. If anything, our living costs in retirement are higher than they were when we were both working.” (23)  Savings can take a big hit if you begin traveling. (24) 


“What you do about your money when you are 30, 40, or 50 will determine whether you can retire comfortably at 60, 65, or 70.” (25)


“Time can turn a modest amount of regular savings into a hefty amount of money.  The number of dollars you invest is important but the amount of time it has to grow is also important.  Money makes money. (27) 


3. When should I apply for Social Security?  Early?  Normal?  Late?  You can continue to work past your full retirement and/or delay taking social security and increase your monthly benefits up until age 70. (41)  


If you were born in 1929 or later, you will need 40 credits to be eligible for retirement benefits.  You earn your credits during your working years.  Generally speaking, 40 credits represent 10 years of employment.” (45)  Lots of info in SSA Publication 05-10072.  www.socialsecurity.gov or 800-772-1213.


Your Social Security retirement benefits are based on the amount of money you earned during your lifetime – with an emphasis on the 35 years in which you earned the most.” (46)


Documents needed to apply: SS number, birth certificate, W-2 forms from previous year, military discharge papers, spouse’s birth certificate and SS number, proof of citizenship if born outside the country, your bank account number. (48)


The earnings limit is confusing.  (50)


4.  How should I take my pension payments?   There are two main types of pension plans: a defined benefit plan, which is paid for by the employer, and a defined contribution plan, such as a 401(k) savings plan, to which the employee, and often the employer, contribute.


Sometimes you have a choice of taking your pension in a lump sum or a monthly payment.  And you may choose to take a reduce monthly payment so that your spouse can continue to receive benefits after you die.


5.  What should I do with the money in my company savings plan?  “Don’t try to outguess the market.  Decide on your long-term investment strategy, and as long as it’s the right strategy for you, stick to it.” (79) [Great idea – but what is the best strategy for you? dlm]


Three typical mistakes for investing in retirement: investing too conservatively, inadequate diversification, and too little knowledge of investing. (80)


“Most workers should save at least 15 percent of their pretax salary each year…in order for their investments to replace about 50 percent of their preretirement income.” (81)


Often the best option for your company savings is to roll it over into an IRA rollover account. (81)  “All in all, the 401(k) plan is like a good friend.  It’ll be there when you need it.  But as with any friend, take time to get to know it well, and treat it with respect.” (86)


6. When do I have to take money out of my IRAs?  Consult a financial planner before you withdraw.  You have to begin withdrawing from your IRA and paying taxes on it when you reach 70 ˝.  Find out how many tax-deferred accounts you have and how much you must take out of each account.  See resources listed at the end of the chapter.


7.  How should I invest during retirement?   Several web sites have a handy retirement calculator that helps you estimate how long your retirement savings will last.  See for example Vanguard [or Valic].   (104)  Retirees tend to underestimate their expenses and over estimate their income!   Be realistic.  Try to take out not more than 3 or 4% of your savings each year when you first retire.  Later you may be able to take 4 or 5%.  The key is keeping control of expenses!  (105-6) You can invest for growth or income or both. 


The Five Investment Rules: (109-111)

1.      You have to learn some basics of investing.

2.      The greater risk, the greater the reward – and vice versa.

3.      Don’t try to outguess the market; stay with your strategy.

4.      Go for the averages (dollar cost averaging).

5.      Spread your risk; put some in stocks, some in bonds, some in money market.


“Over the 79 years from 1926 through 2004, large-company stocks returned an average of 10.4 percent a year, while long-term government bonds returned 5.4 percent a year….” (113) [Is this a good predictor for the next 25 years? dlm]


Inflation is a concern, not a friend!  Inflation averaged 3.0 percent a year from 1985 through 2004.  $20,000 in 1985 would have been worth only $11,000 in 2004. (114)


Four main investment choices for maximizing long term income: immediate annuity, Treasury bonds, high-quality stock mutual fund, diversified bond mutual fund.  Decide whether to use part of the capital for income and keep some of it in growth for the future.  You want to keep pace with inflation and a high-quality stock fund will help. (116-17)


The primary goal of a bond fund is to produce income.  “A diversified bond fund…generally will be less volatile than a fund with only one type of bond.” (119)  When interest rates go up, bond values decline.  When the dollar declines, foreign bonds go up.  (120)


8.  What should I do about health insurance?  Medicare pays for most, but not all, of your hospital and doctors’ bills.  You will need supplemental ‘medigap’ insurance (also called Medicare supplemental insurance) to cover the gap.  This can be a complicated decision.


The Medicare program has four parts.  Part A pays hospital bills, home health care, hospice care, and skilled nursing facility care.  Most people do not pay a premium for part A but there is a substantial deductible.  Part B pays doctor bills, laboratory tests, outpatient hospital services, medical equipment and home health care (under strict limitations).  Most people pay a premium ($88.50/mo in 2006) deducted from your Social Security check.  Part C encourages people to use HMOs and other managed health care.  Part D is the new prescription insurance. 


If you retire at your full retirement age, sign up for Part A, Part B, and Part D at that time. If you continue to work and have company health insurance, take Part A at 65 and wait on Part B until you retire.  Notify the SSA 3 months in advance to ensure coverage won’t be delayed when your company insurance ends.  “If you wait 12 months or more to sign up for Medicare, your monthly premiums will go up.”  Call Social Security at 800-772-1213.  (135)


There are 12 standard policies for Medicare supplemental insurance.  Shop around.  Check out several companies, compare premiums, and be sure you understand what you are buying.  Start with the state insurance department in your state.  Such policies will only pay for items that Medicare covers.  If Medicare won’t pay, neither will your medigap policy. (137-38)


There is a one-time six-month open-enrollment period for buying medigap insurance.  During this time you cannot be denied coverage for health or other reasons.  Once you enroll in Part B, the 6-month open-enrollment period starts and cannot be changed.  There are special rules for those who work beyond age 65. (141)


9.  What should I do to prepare for serious illness?  [I learned from this section that you should not have a serious illness unless you are very wealthy or very poor.  Otherwise you can’t afford it. dlm] 


“The national average fee for a private room in a nursing home is $192 a day, or a whopping $70,000 a year.” (146)  The younger you are when you buy long-term care insurance, the lower the rates [but the longer you may live and pay before you use it. dlm]  (147)  The rates for long-term care policies are going up, reflecting the rapid rise of health care costs in the U.S.  A couple aged 65 may pay $6000 a year for long-term care insurance.  A couple aged 55 might pay about $4000.  (151)


Should you purchase long-term care insurance?  If you have a spouse or child who will be an active caregiver, you may be able to remain at home.  However, nearly half of today’s older people will spend some time in a nursing home (per AARP).  Leta Blank says buy if your annual retirement incomes are over $30,000 and you have assets of $100,000 to $500,000.  Buy only if you can afford it without making a lifestyle change and if you can sustain a 20 to 50% increase in premiums in future years. There are many options.  Don’t buy a policy you don’t completely understand. (152-54) 


The continuing-care retirement community has three levels: independent living, assisted living, and nursing home care.  (157)


10.  Where do I want to live after I retire?     

It’s highly desirable to be close to family, primarily for the relationships, but also because you may need some care.  Are you ready to put forth the physical and psychological effort to move?  What would it cost to live where you might like to go?  It requires considerable research.  How will you save and what will cost more?  Are you willing to adjust to a new climate, a new home, new geography, new cities and towns, new highways, new libraries, new businesses and customs?  How will you feel about leaving the old neighborhood where everyone knows you?  If you become seriously ill, will you be a long way from your children? 


If you relocate, it may help to do it over a period of years, visiting for shorter and extended periods of time, developing a sense of place.  The decision to relocate should take five years of advance planning. 


Less than 5 percent of people move between states.  Most move to the Sunbelt, mainly for the climate, but more people are going to the Pacific Northwest, Rocky Mountains, and New England.


11.  How should I arrange my estate to save on taxes and avoid probate?

Issues to consider: prearranging the funerals, an advance medical directive (power to make medical treatment decisions when you are incapacitated), durable power of attorney (power to make legal and financial decisions if you are incapacitated), estate planning – trusts, wills, and estate taxes.


Probate is a legal process that is used to wind up a deceased person’s financial affairs.  A “revocable living trust” for each spouse is a way to avoid or minimize estate taxes and probate.  The will describes how your personal property is to be distributed and provides instructions on winding up your affairs.  Detailed instructions about who inherits what and when and how may be in the trust. (189-90)


A “by-pass” trust shelters your estate from taxes and probate.  A trust may typically cost $3000 - $4000 to set up.  In 2006 assets up to $2 million are exempted from Federal estate taxes. (191-92) 


Get organized.  Make a personal financial inventory.  Then find all your important documents and put them in a safe place.  Make sure your wife and family know where to find them.  Include your will and trust, prearranged funeral agreements and payments, deeds to home and property, car title, military discharge papers, veterans’ benefit papers, marriage license, divorce papers, birth certificates, citizenship papers, passports, immigration papers, bank accounts, brokerage and mutual fund accounts, credit card numbers, Social Security card, all monthly income sources and amounts, insurance policies (including auto, home, life, health), and your doctors information.  Include names and phone numbers of all these things. (193-94)  


When Dad dies and Mom remarries, horror stories abound.  If both have children, consider avoiding conflict by keeping your assets in your own names. (196)  One way to protect your grandchildren is a generation-skipping trust. (197)


Explain your actions and discuss them with your children and other relatives.  “Children should know exactly what their parents intend to do with their money and other assets.  If they have problems with the parents’ plans, it’s a good idea to find that out before it’s too late.” (200)


12.  How can I age successfully?  A primary challenge is to stay healthy.  See Successful Aging by John W. Rowe and Robert L. Kahn.  The author still exercises about an hour a day.  “Exercise is one of the few investments I’ve ever made that seems to have all upside and no downside.”  Exercise can become habit-forming.  It produces endorphins that make us feel good. (207)


“When you’re reminded of the name you forgot or the location of your car, and you can say, ‘Yes, of course.  That’s it,’ then you are probably fine.  The real time to worry…is when you find the name you forgot and you don’t get the feeling that you knew it all along.” (211, per Marilyn Albert)


“Older people can overcome [memory] difficulties by working at remembering—for example, by deliberately fixing the location of their car in their mind before they leave the parking lot.” (212)  Use some helps – a calendar, a place for everything, a to-do list, etc.  (213) 


In the late 50s to early 70s, many enter a “liberation phase,” with a new sense of freedom and courage.  (215)  Creative expression is shaped by the desire to find larger meaning in our lives and apply the wisdom we have learned. (216) 


Don’t: (218-19)

·      Bore people with your health problems

·      Tell the same story to the same person

·      Neglect old friends

·      Let anger rule your life

·      Assume people want your advice

·      Live in the past

·      Miss your opportunities

·      Be grumpy

·      Annoy your friends with your problems

·      Grip about your birthdays


Do: (219-20)

·      Choose activities you enjoy

·      Exercise regularly

·      Eat healthfully

·      Stay tuned into the world

·      Meet new people and develop friendships

·      Pace yourself

·      Laugh

·      Be friends with your children and grandchildren


Selected references from chapters:

·      Fee-only financial planners are represented by the National Association of Personal Financial Advisors.  www.napfa.org

·      Medicare.  Call 800-MEDICARE for information and publications.  www.medicare.gov

·      Medicare & You 2006 (CMS Pub. 10050)  Also Choosing a Medigap Policy (CMS Pub. 02110), Enrolling in Medicare (CMS Pub. 11036), and Medicare Coverage of Skilled Nursing Facility Care (CMS Pub. 10153)

·      Planning for Long-Term Care, United Senior Health Council, National Council on Aging, Washington, D.C. 

·      Jeff Blyskal, Consumer Reports Money Book (chapter on wills and trusts)

·      Stephen Maple, The Complete Idiot’s Guide to Wills and Estates, Alpha Books, 2003

·      Dan Rottenberg, The Inheritor’s Handbook: A Definitive Guide fo Beneficiaries, 2003

·      National Association of Financial and Estate Planning, www.nafep.com  (Click on Estate Planning)


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