50 With No Retirement Savings? What to Do Now

Now that the presidential election is over, health-care costs and Social Security moved up to the top of transition boomers’ economic worries.

A new study released by Allianz Life Insurance Company shows that among boomers ages 55-65, rising health-care costs and the future of Social Security were their main worries heading into retirement. With retirement 10 years away for this age group, these two issues transcend political lines and have boomers worried about their future financial security.

I had a chance to speak with Katie Libbe, vice president of consumer insights for Allianz Life about the impact of the election and how it impacts baby boomers’ retirement paths. Here is what she had to say:

Boomer: How would you advise a 50-year-old baby boomer with no retirement plan or savings to do now to jump start a savings program?

Libbe: There are two key steps that baby boomers at that stage in life should take:

The first step is to develop a budget. You don't know how much you can save until you determine what you need to spend on a monthly basis. This involves not only analyzing monthly expenses, but also determining wants versus needs. Especially when close to retirement, boomers need to take an honest look at their spending and understand how it affects their future retirement plans.

For example, many people believe that their spending will go down in retirement. Popular financial planning wisdom says that without the costs associated with day-to-day work, retirees will save money – about 20% of their pre-retirement expenses - but this doesn’t always happen. A consumer survey of retirees ages 50 to 70 overturned some traditional ideas about retirees’ expenses. The survey divided the participants into four wealth quartiles, with total wealth ranging from $26,000 to more than $1 million. No group reduced spending by 20% in retirement. The most sizeable reduction was less than 14%, while the most affluent group actually increased spending by 7%.

The second step is to look for online resources that can help you understand retirement income planning concepts including Social Security. This resource should help you understand what gap you might experience between expenses and what Social Security will fund.

Finally, boomers should look at how aggressively they can ramp up their savings, including their 401(k), IRA, etc. By cutting down on expenses and exploring other options for adding income - such as finding a roommate or taking on a second job - boomers can help jump-start their savings and begin the process of following a true retirement plan.

Boomer: As shown in the survey, transition boomers believe that rising health-care costs will have the greatest effect on their retirement. Why?

Libbe:  Transition boomers believe that rising health-care costs will have the greatest impact on their retirement security because they are already seeing the effects in their pay stubs via rising health-care insurance premiums.

According to Kaiser Family Foundation and HRET Survey of Employer-Sponsored Health Benefits from 1999 to 2011 (Sept. 2011), while wages have increased 50%, health-care premiums have increased 160% over the same time period. This is a staggering increase and one that boomers recognize is only going to get worse. Without employer-provided health-care insurance, many people won’t be able to pay for health-care expenses in retirement, which tend to increase as we age.

Boomer: Did the survey show any difference with party affiliation on how boomers approach retirement savings?

Libbe: When it comes to overall retirement savings philosophy, 59% of Republican Transition Boomers identified themselves as being conservative or moderately conservative compared to 36% of Democrats. However, Democrat Transition Boomers were more likely to be balanced in their retirement savings approach, with 29% identifying themselves as balanced versus 18% for Republican Transition boomers.

Regarding the effect the election will have on their approach to retirement savings, 29% of Republican Transition Boomers said they were likely to become more aggressive if Romney had won while 30% of Democrats said they would have become more conservative. With President Obama re-elected, 81% of Democrat Transition boomers anticipate no changes to their retirement approach while 42% of Republicans said they will become more conservative.

Transition boomers who did not identify with either major political party also reported being more conservative or balanced in their retirement savings philosophy. Thirty-nine percent of Independents and 29% of those with no preference identified themselves as conservative or moderately conservative, while 30% of Independents and 34% with no preference identified themselves as balanced in their retirement savings approach.

The majority of this group of Transition boomers also said the outcome of the election would not trigger a change in their retirement savings strategy. Specifically, with President Obama's  re-election, 64% of Independents and 75% of no preference Transition boomers said they will keep the same retirement savings strategy. If had Romney won, 61% of Independents and 73% of no preference Transition boomers said they would have kept the same retirement savings strategy.

Boomer: How much of an impact on my Social Security benefits will working to age 70 give me?

Libbe: Although people are eligible to claim Social Security benefits starting at age 62, it doesn’t mean they should. People may receive 20-30% less in their benefits based on current Social Security Administration calculations if they start withdrawals before their full retirement age, which is age 66 for those born between 1945 and 1954.  If they delay taking Social Security benefits past full retirement age, they will receive an additional 8% more per year up until age 70 when they would receive the maximum. Make sure you have a strategy for taking your benefits that helps you meet your retirement income needs without sacrificing benefits unnecessarily.

Boomer: At age 55, what does separation of service exception for early withdrawals mean?

Libbe:  The separation of service exception for early withdrawals allows for early withdrawals from ERISA qualified employer sponsored plans without a 10% federal tax penalty for early withdrawals if you are age 55 or older when you  leave the employer. IRAs do not qualify for this separation from service exception so the money would have to stay in the employer plan.  Some exceptions also exist to the 10% federal tax penalty for early withdrawals with 72(t) distributions (substantially equal and periodic payments) if taken from an ERISA qualified plan or from an IRA .

Boomer: What do baby boomers - particularly Transition Boomers - need to know about retirement income?

Libbe:  There are 75 million baby boomers in the United States. Every day for the next 19 years, 10,000 of these boomers will reach age 65, the traditional age for retirement in America.  Many of these boomers are part of the first pension-less generation. Unlike previous generations, their retirement savings are not guaranteed in the form of a pension that pays out every month for the rest of their life. They are responsible for making that money last and need to determine a strategy to ensure it does just that. In order to add a level of security to their retirement plan and include some guarantees, boomers should consider allocating a portion of their assets to an annuity with some kind of guaranteed income stream that they can’t outlive. Allocating a portion of their retirement portfolio to an annuity can also protect that piece from market volatility.

Guaranteed income is also important in connection with inflation. For the last 20 years, inflation has been less than 3% per year – but that’s no guarantee that it can’t spike above that level. The average inflation rate since 1914 is 3.4% and the average rate during the 1970s was a staggering 8.1%. Given an assumed average of 3% annual inflation, $100,000 of purchasing power decreases by 14 percent in five years and by 45% in 20 years. Thus, even a modest average annual increase in inflation can be a significant hit to your retirement savings. In order to be truly protected, boomers should incorporate some form of guaranteed income that offers options for increasing income to keep up with inflation.

Working in retirement is another topic that baby boomers need to understand. When people are confronted with the reality that they won’t be able to retire on time, many assume they’ll just be able to work longer. However, according to a different EBRI study (March 2012), 50% will retire earlier than planned. Reasons include their own health issues (51%), caring for a spouse (19%), or job loss/downsizing (21%). Others said changes in skills required for their job (11%) or other work-related reasons (23%) played a role. Bottom line, the ability to work longer is not always in your control, so you should plan accordingly.