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8 Long-Term Retirement Planning Realities

Philip Moeller

As we get closer to an election that is "all about the economy," polls show that maybe that's not so true. Americans think the economy is getting better. Consumer confidence, the stock market, and home values are all up. Credit and debt problems are down. Unemployment remains unacceptably high but there are more jobs today than when President Obama took office.

Perhaps it's more accurate to say that this election is all about the government and how it deals with the economy. Neither political party has distinguished itself here, but at least voters will be provided with clear differences. Of course, these differences have produced mostly gridlock in recent years, and even the approaching fiscal cliff may not bring Congress to its senses.

[See Obama or Romney: Who's Better for Your Portfolio?]

With so much uncertainty in the short run, it's more important than ever for retirement plans to be based on longer-term trends. Many of these trends are cautionary, if not downright negative. But ignoring them or wishing things were different is a strategy only an ostrich could love. Here are eight key trends for people in or nearing retirement:

1. Real investment returns are staying low. The American consumer will not resume being the engine of growth for the domestic economy. There simply won't be enough people in their prime consumption years--their 30s to 50s--to buy enough material goods to provide us sustained annual growth rates of 4 to 5 percent. On the financial side, interest rates are not likely to rise for some time, and yield-sensitive investments will be hurt by low rates. So don't count on sizable investment gains to make your retirement dreams come true. Assume real returns of 1 or 2 percent and adjust your spending plans accordingly.

2. The public pension system is broken. If you work for state or local government, your pension will face growing pressures. Governments simply cannot deliver on the pension promises they have made to employees. Expect to see more multiple-tier plans as governments try to protect the pensions of existing employees by trimming plans for newly hired workers. This will not be enough to protect employees in many states, and their benefits will be under attack. So will retiree health benefits. If your employer retirement benefits were cut by 10 or 20 percent, how would you adjust?

[See 10 Essential Sources of Retirement Income.]

3. Governments have no money. In the short run, economic weakness and powerful anti-tax sentiments may extend the life of the Bush tax cuts, which are set to expire at the end of this year. If tax rates stay low (and they are very low today in historical terms), they will be credited for any improvement in the economy. But make no mistake, there are not enough eggs left in the golden goose to close the country's enormous budget gap. Some combination of spending cuts and tax increases is in the cards. Seniors may be spared the brunt of any cuts, but they are likely to face at least a flattening in future benefits.

4. You will live longer and longer. The biggest money story for many seniors will be just how long their nest eggs need to last. If you're healthy and 65, you should plan on living another 30 years. That's 10 to 12 years longer than the average life span. But if you take care of yourself, that shouldn't be a surprising outcome. This raises the possibility that you would need to live more frugally than you'd like for a long time. One tool worth considering is longevity insurance--an annuity that doesn't begin payments until you're 85. Because the odds favor you dying before then, you can get attractive terms from insurance companies selling these products. With such an annuity, you can spend down your nest egg by the time you reach 85, and then the annuity payments will begin. You can live better now and, if you're lucky, continue living better when you're 85.

5. You will work longer and longer. Because of poor retirement planning and longer life spans, millions of us will need to find encore careers. Each year we delay retirement can increase the size of our investment savings, raise our Social Security benefits, and shave a year off the funding workload of our nest eggs. For many baby boomers, continuing to work will also be a preferred lifestyle.

6. Social Security is the retirement star. With real investment returns and pensions under continuing pressure, Social Security will become even more important. Expect to see reform proposals to help repair the program's long-term funding shortfall. The most commonly advocated changes include raising or eliminating the earnings ceiling for paying Social Security taxes, raising the retirement age for future retirees, and perhaps reducing the annual cost of living adjustment. Many financial planners advise people to use their Social Security and other guaranteed pension payments to cover fixed and essential expenses--mortgage, taxes, utilities, home maintenance, healthcare, and food. Earnings from retirement investments thus can be used for non-essentials such a travel, restaurants, and entertainment. How close would your Social Security and pension come to covering your "must pay" items?

[See 12 Ways to Increase Your Social Security Payments.]

7. Homes are no longer piggy banks. Home prices are slowly recovering from their recessionary collapse. But there is nothing on the horizon to support any trend boost to home prices. Millions of homes continue to be worth less than their outstanding mortgages. And there will be more baby boomers looking to sell their homes than the supply of new home buyers. While the equity in your home may be safe, don't assume much growth when you do your retirement planning.

8. We are running out of doctors and caregivers. We already have too few primary-care physicians. Health reform will provide insurance to more than 30 million additional people beginning in 2014. This will eventually turn the caregiver shortage into a crisis in many markets. At the same time, an aging population will require more caregivers. Expect prices for in-home and institutional care to rise. There also will be a strong push to substitute technology for human caregivers by using telemedicine for remote monitoring and interactive healthcare in people's homes.

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