Planning for Retirement


Have a strategy and you won’t worry about money.

Everyone has a different definition of wealth. Maybe it’s measured in terms of assets, but let’s also acknowledge that the wealth of having good health, a happy family and good friends is a bounty that can never be measured monetarily. That said, I propose this definition of wealth: Freedom from worry about money.

Think about it in the context of retirement planning. Everyone has a different definition of how much is ‘enough’ to keep from wondering if you’ll outlive your money and become a bag lady. A survey from a prestigious financial services firm said that 50 percent of women fear being a bag lady. I’m guessing that figure is much higher, maybe as high as 90 percent. It’s a fear most women share and I’m among them — the fear of being dependent, alone and impoverished in old age. So I’ll share three simple tips to put the concept of retirement ‘wealth’ in perspective.

The Savage Number
When I wrote my recent book, The Savage Number: How Much Money Do You Really Need to Retire?, I came across a simple formula to give an approximation of that number, which has become the focus of the baby boom generation. Read the book for specifics, or go to a certified financial planner, Vanguard, Fidelity or T. Rowe Price to do the Monte Carlo modeling necessary to find your number.
But think of it this way. There’s a general agreement that with appropriately diversified investments; you can withdraw about 4 percent of your assets annually and make them last through a 30-year retirement period.

Now these are very rough numbers, but let’s assume you need $100,000 a year, after tax, to maintain your current lifestyle. To withdraw that much annually, you’d need savings of about $2.5 million. But wait. If that ‘savings’ is in a retirement plan, you’ll pay taxes upon withdrawal. Thus you’ll need about $3.25 million in retirement plan savings to withdraw $100,000 every year and have a pretty good chance you won’t outlive your money.

Of course, Social Security will contribute additional money and so will any pension you’ve earned. Still, that’s a lot of money in today’s dollars. And that brings up the next issue: the value of your dollar in retirement.

Impact of Inflation
Today we enjoy very modest inflation. There’s some worry about future inflation because of all the money created recently by the Federal Reserve. But let’s just stick with historical averages. Over the past 70 years, the U.S. has had an average annual inflation rate of 3 percent.

Even at that low rate of inflation, the buying power of your money will be cut in half in just less than 25 years. So your investments will have to more than keep up with inflation. That’s the reason you can’t simply buy a lifetime annuity with your retirement savings, guaranteeing you a monthly check as long as you live. That check might be enough to cover your expenses now, but will that fixed amount be able to pay for your lifestyle when costs double, simply due to inflation?

Unforeseen Disaster – Long-term Care
While most people fear a stock market crash will devastate their retirement plans, the one thing that could quickly invalidate all your investment planning is the need for long-term custodial care.  Medicare or Medicare supplements don’t cover it. If you’ve become almost completely impoverished, state Medicaid programs will put you into one of their nursing homes – a possibility to be devoutly avoided.

Despite all the bad publicity about rising prices of long-term care (LTC) insurance, you owe it to yourself to purchase at least a policy that will cover a portion of your costs – perhaps one to three years of care, for about $200 a day, with some inflation protection. Or you can consider one of the new ‘combined’ policies that offer both long-term care benefits and a death benefit (or cash value withdrawal) if you don’t use the care benefit. You make a one-time cash deposit into the policy, leveraging your dollars to pay for care.

The need for long-term custodial care will become a huge issue in coming years, especially for women. Married? It’s likely your spouse will need care first – depleting both family financial resources and your energy as a caregiver. Women alone especially need the resources of finding caregivers that come with an LTC insurance policy.

So there you have it – an honest look at the three factors women need to deal with so they don’t wake up in the middle of the night worrying about money. Peace of mind about money.  That’s my definition of wealth. And that’s The Savage Truth.


About Terry Savage

Terry Savage is a nationally known expert on personal finance, the markets and the economy. She's a regular blogger at the Huffington Post and a frequent guest on television and radio shows. Ms. Savage's most recent book is a new edition of The Savage Truth on Money, which was named one of the ten best money books of the year by in its first edition. Her other current best-selling book: The Savage Number: How Much Money Do You Really Need to Retire? was published in Fall, 2009 and deals with issues in retirement planning and investing. You can read Ms. Savage's columns, as well as post questions and comments at her website, follow her on Twitter @TerryTalksMoney and on Facebook.