One Expert's Retirement Planning Advice

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One Expert's Retirement Planning Advice
June 2006
By: Stan Hinden
Source: AARP Bulletin Today

In my ideal life, I planned my retirement with great care. I saved regularly, invested wisely and lived within my income. A savvy stock picker, I bought low, sold high and made money.

But in my real life, I had no plan for retirement. In my 30s and 40s, with a wife, three kids and a reporter's modest salary, I saved hardly at all. Not until I was in my 50s, when my wife, Sara, went back to work and my salary improved, were we able to save. As for stocks, I frequently lost money. It's embarrassing to admit all this because—as a financial writer at The Washington Post—I should have been well prepared for retirement. But I was always too busy to focus on what I needed to know and do. So while I did a couple of things right, I made several key mistakes.

Here's what I did wrong:

1. I didn't think ahead.

My biggest error was never telling myself: "Wake up. One of these days you and Sara are going to retire. It's time to find out if you'll be able to afford to do so." That would have forced me to consider how much money we'd need. It also would have prompted me to figure out if our pensions and Social Security would cover our living expenses. But most important, it would have given us time to get on the right track.

2. I flew solo.

When you need glasses, you go to an eye doctor. So when your financial future is cloudy, shouldn't you consult a financial planner or retirement expert? I wish I had done so before I retired because I needed an investment strategy that provided us with growth and income. I also needed to learn about Social Security, Medicare, medigap insurance, pensions, long-term care insurance, mandatory IRA withdrawals and estate planning. Amazingly, all these subjects played a significant role in my retirement.

3. I tried to outguess the market.

I can think of no quicker way to lose money than letting your emotions determine how you invest. I did that in 1990 during the Persian Gulf crisis when stock prices fell sharply. Because I feared an even greater loss, I moved my 401(k) money from the Vanguard Windsor Fund to a money market fund and left it there for 5½ years. During that time, the money market fund gained 4.6 percent annually while the Windsor Fund gained 18 percent a year. My emotional decision cost me $70,000 in potential 401(k) savings.

4. I may have shortchanged my wife.

When I retired, I was given several pension choices. I could take my maximum monthly payment, which would last as long as I lived. Or I could take a lesser payment and leave part of my pension for my spouse after I died. I was unsure about our need for income. So with Sara's approval, I took the maximum payment. But after I retired, I decided I'd made the wrong choice. My calculations showed that if Sara were widowed, her monthly income from Social Security plus her own company pension would barely cover her monthly expenses. She would need income from our savings to make ends meet. And that could be dicey. I wish now I had taken a smaller monthly payment in order to leave Sara a portion of my pension. I'd be happier.

5. I didn't know about "givebacks."

When I retired, I ran into the Social Security "earnings penalty," and I had to "give back" a portion of my monthly benefits. I could have escaped the penalty if I had waited six more months to retire, but I didn't know that. Today, the penalty applies to people between 62 and "full retirement age," which is moving up from 65 to 67. That is, if you are below full retirement age, getting Social Security and still working in 2006, you will lose $1 for every $2 you earn over $12,480. (A different earnings limit applies for the year in which you reach full retirement age.) So before you take your Social Security, consider the impact that working may have on your benefits.

6. I spent too much.

Credit card debt may be as American as apple pie, but I found personally that it is a bad idea for retirees living on fixed incomes. Those interest-loaded monthly payments put you in a budgetary straitjacket that erodes your financial flexibility and uses up the cash you may need for unexpected health or other expenses. If you are nearing retirement, look for ways to ease the credit card crunch, such as switching to lower-interest-rate cards and trying to make larger monthly payments. You will have a happier retirement if you don't owe your life to the company store.
Here's what I did right:

1. I joined a 401(k) plan.

If your employer offers a 401(k) plan, join it. It's a mistake not to. Sara and I found that the 401(k) plan was a simple, tax-friendly way to save and make our money grow. Put in as much money as you can from each paycheck. At the least, put in enough to qualify for the company's matching contribution—if there is one. If you're confused about investment choices, ask for advice. When Sara and I retired, we were grateful for those 401(k) nest eggs. Without them, our retirement activities would be severely limited.

2. I created an exit plan.

Nobody likes to think about dying. But you can arrange your legal affairs in advance, or you can leave those decisions to strangers. Sara and I asked an estate lawyer to draw up the wills, medical directives, powers of attorney and trusts that we needed. We even paid for our funerals. I also organized our personal papers: birth certificates, marriage license, U.S. Army discharge and property deed so they would be available when needed. Our children will thank us.

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Stan Hinden is the author of How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire (McGraw-Hill, 2006).

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