Forecasting Retirement Income and Expenses

Transcription

1 Forecasting Retirement Income and Expenses Debra Pankow, Ph.D. Family Economics Specialist Participant objectives Participants will (depending on amount of time and activities included): Project retirement living expenses Project retirement income Complete ballpark estimate Begin to develop a personal financial plan for retirement Materials needed Computer lab if using interactive Ballpark Estimate or Copies of Ballpark Worksheet, pencils and calculators Optional Copies of Retirement Readiness Rating worksheet Retirement Expense Worksheet My Financial Plan for Retirement Resources: 10 Tips from the 2005 Retirement Confidence Survey (RCS) North Dakota State University Fargo, North Dakota JULY 2005 Note to program leaders This program involves forecasting and calculating retirement income and expense. It may very well be one of the most important lessons that certain audience members, particularly baby boomers and individuals 15 to 20 years from retirement, ever received. If your group does not have a lot of members in this age group, please consider inviting friends, relatives, etc., who might benefit from this information.

2 Introduction to Lesson Are you ready for retirement? Will you be able to afford to retire? Are you on schedule? Slide 1 Most experts agree that a significant number of Americans are not adequately prepared financially for retirement (Yuh, Hanna and Montralto, 1998; Hanna, Garman and Yao, 2003). While a majority of workers believe they are behind schedule when it comes to planning and saving for retirement, and less than half have tried to calculate needed savings, most Americans are confident about their financial security in retirement. The 15th wave of the Retirement Confidence Survey (RCS), which the Employee Benefit Research Institute and Mathew Greenwald & Associates Inc. conducted, found most workers (66 percent) believe they will reach their savings goal even if they guessed at the amount of money they will need. The 2005 RCS, as has been the case in previous years, suggests many Americans have a false confidence about their financial security in later life. Slide 2 You may start the program by having participants complete the Retirement Readiness Rating (optional activity). Note to leaders: If desired, have participants fill out the Retirement Readiness Rating. If using a computer lab, fill out online and interactively. If using a paper version, use the following scoring guide: Q 1-4, yes = 4 pts, no = 0 pts. Q 5, 6a & 6b Very confident = 2, somewhat confident = 1, not confident = 0. Q 7, Very well = 3, well = 2, not too well = 1, not at all = 0. Total up points = Very Good, = Good, = Adequate, 6-10 = Poor, 0-5 = Very Poor. Only two in five workers have attempted to calculate their retirement needs, yet working through a calculation clearly has shown to have positive results. In fact, the 2000 Retirement Confidence Survey (RCS) found that workers who have tried to calculate how much money they will need to save for a comfortable retirement appeared to be doing a better job of preparing for retirement than those who had not. The 2000 Retirement Confidence Survey showed that the median amount accumulated by Americans who have done a retirement calculation is about $66,500, compared with $14,000 for those who have not done the calculation. The mere act of calculating your numbers gives you a goal and makes you a more disciplined saver, said Don Blandin, ASEC president. Taking that first important step will help you become more aware of all the things that affect your retirement, such as changes in Social Security, so you can plan for your future financial independence.

3 Slide 3 Slide 4 The Retirement Confidence Survey is the country s most established and comprehensive study of the attitudes and behavior of American workers and retirees toward all aspects of saving, retirement planning and long-term financial security. Sponsored by the Employee Benefit Research Institute (EBRI), American Savings Education Council (ASEC) and Mathew Greenwald & Associates (Greenwald), the annual RCS is a random, nationally representative survey of 1,000 individuals age 25 and older. The survey contains a core set of questions that is asked annually, allowing key attitudes and selfreported behavior patterns to be tracked over time. Sample questions include: How confident are Americans about their retirement income prospects, including Social Security and Medicare? How much money have they saved for their future and where are they putting their money? Who do they turn to for retirement investment information and advice? Why are individuals not saving more, and what would motivate them to do so? The RCS also strives to be timely by covering issues that are of current interest to policymakers and retirement benefits specialists. Past examples include participant education in 401(k) plans and understanding of IRA eligibility. Here are the highlights of the 2005 survey: Most workers say they are behind schedule in saving for retirement. However, a large majority of these workers believe they will reach their retirement savings goal by the time they stop working, even if they are only guessing the amount of money they will need. This indicates that many people s confidence may be misplaced. Workers were asked for the first time about options that might make contributing to an employersponsored plan more likely. For the most part, workers (72 percent) are looking for an employer match of up to 5 percent of their salary. Nearly seven in 10 of the workers surveyed were skeptical that Social Security would continue to provide benefits at least equal to those that today s retirees receive. Workers continued to be unable to identify the age at which they would be eligible for full Social Security benefits.

4 Slide 5 Slide 6 A study conducted of North and South Dakota farm/ ranch couples found that these families had set aside very little savings for their retirement, had participated in minimal retirement planning activities and planned to rely on their farm/ranch assets to fund later-life living expenses. Allow time here to discuss retirement of farm/ ranch couples, if this is an interest of your group. Good discussion will arise from questions such as: Do farmers retire? How has retirement changed from one generation of farmers and ranchers to the next? How do farm/ranch couples you know plan for retirement? Traditionally, retirement income funds came from what was called the three-legged stool Social Security, employer-sponsored pension plans, and personal savings and investments. Unfortunately, many stools have weak or missing legs. The more dependable sources of retirement income you have, generally the better you will be financially. Less than half of workers have tried to determine how much they ll need to save for a comfortable retirement, says the 15th annual Retirement Confidence Survey, which the American Savings Education Council sponsors.

5 Slide 7 Slide 8 To help plan retirement income, ASEC has developed a Ballpark Estimate Worksheet. The Ballpark Estimate is designed to provide a rough estimate of what you will need to save annually to fund a comfortable retirement. It provides an approximation of projected Social Security benefits and uses only one of many possible rates of return on your savings. Ballpark reflects today s dollars and does not account for inflation; therefore, you should recalculate your savings needs on a regular basis and as your salary and circumstances change. You will not want to stop with the Ballpark Estimate; it is only a first step in the retirement planning process. You will need to do further analysis, either by yourself using a more detailed worksheet or computer software, or with the assistance of a financial professional. Copyright, EBRI Education and Research Fund. All rights reserved. Some expenses will be lower in retirement, others basically the same (except for inflation, of course!), while others will increase. Ask participants to give examples of an expense that may become larger or smaller and why. If you wish, you can have participants fill out the retirement expense worksheet at this point. For example, the Center for Retirement Research (2004) suggests that rising health care costs will erode retirement security for baby boomers. The health care costs portion of household spending for older Americans (age 65 and older) is expected to rise from 16 percent in 2000 to more than 35 percent in 2030 for married couples, and from 17.3 percent to more than 30 percent for individuals. The worksheet simplifies the process of determining how much you need to save, assuming you want 70 percent of your current income, you live to age 87 and you realize a constant real rate of return of 3 percent after taxes. You also can complete the estimate online and let the computer do the math. This version lets you choose an amount of living expenses more or less than 70 percent of current expenses.

6 Slide 9 Slide 10 Here are some common retirement preparation tips. Ask your group s members if they disagree with any of the tips. Can audience members offer additional suggestions? (Note: Take a practice run refers to living on your projected income for a few months to see what the implications may be for household spending.) What if your forecasted retirement expenses are greater than your forecasted retirement income? What can you do now to prepare for a balanced budget when you retire? (Ask participants for suggestions, then use this list to enhance/reinforce their suggestions).

7 References AARP Data Digest (2002) Sources of Income for Older Persons in 2002 American Savings Education Council. (Ballpark Estimate, Retirement Readiness Rating, etc.). Retrieved 5/1/2005 from: Slide 11 During this lesson, you have been presented background information on the state of retirement preparation in America. You have been given the opportunity to forecast your retirement income and expenses. We have concluded with a discussion of retirement planning tips, including how to deal with an expected income shortfall. (Note to leader: Customize this statement if you did not cover all portions of the lesson). You now are more prepared for retirement than about half of the U.S. population! The act of simple forecasting of retirement income and expenses can be a great catalyst for individuals and couples to get their retirement preparations on track. It also has been shown to lead to greater savings. I encourage you all to go the next step and work on your own Retirement Financial Plan (optional handouts). Thank your for your attention and good luck in your financial future! Please complete the evaluation and return it to your county Extension office. The information will be collected in a national database to measure the impact of Financial Security in Later Life educational programs. (Instead of returning the evaluations to your county Exention office, individuals and program leaders can also submit their responses online at Thank you for your time and attention!! Johnson, Richard W. and Penner, Rudolph G. (2004) Will Health Care Costs Erode Retirement Security? An issue in brief. Center for Retirement Research, Boston College, October 2004, No. 23. Retirement Confidence Survey. Retrieved 5/1/2005 from: Butrica, Barbara and Uccello, Cori (2004). How Will Boomers Fare at Retirement? Prepared for AARP Public Policy Institute, AARP, Other Educational Resources Additional resources for those wishing more information to determine retirement income and expense: Planning for a Secure Retirement (Purdue) Retirement: Secure Your Dreams (Iowa State Extension) A Retirement Estimator for Farm Families (Purdue) Plan Well, Retire Well (University of Illinois Extension) Featured worksheets Estimating Retirement Income 25retireincome.pdf Retirement Expense Worksheet 23monthlycost.pdf

8 NDSU Extension Service, North Dakota State University of Agriculture and Applied Science, and U.S. Department of Agriculture cooperating. Duane Hauck, director, Fargo, N.D. Distributed in furtherance of the acts of Congress of May 8 and June 30, We offer our programs and facilities to all people regardless of race, color, national origin, religion, sex, disability, age, Vietnam era veterans status or sexual orientation; and are an equal opportunity employer. This publication will be made available in alternative format, upon request to people with disabilities, (701)