Longer Lives Lower the Value of Fixed Payments

Retirement planning  is complicated.  That’s because most people don’t want to sit on a porch staring into the sunlight on Golden Pond.

Today’s 65 year old has lots of life left and that may be the root of several of the problems that you’ll encounter if you want to plan retirement for yourself in the face of a lump sum option from your pension plan.

#1  Ignoring Inflation

Ignoring inflation: Sure, you’re aware of inflation. While it had been silent for a number of years before 2000, the rising price of gas in the last half of 2008 brought the point home for everyone who had a car or had to get somewhere. Even if gas prices moderate, the point is that inflation is generally unstoppable. It’s the price of progress and it’s certain to be a part of the US government’s plan to reduce its growing debt.

If you are considering a pension payout that doesn’t grow with inflation, you’re taking a huge risk. If you have other  savings that do grow, and if your needs are very simple, the fixed amount may make some sense to you. If the monthly figure sounds pretty good, take away a third of it. That’s going to be the purchasing power you’ll have 10 years from now if inflation continues at 3%. In 15 years, it’s close to half as much. Does 50% of that figure sound good to you?

#2  Ignoring the Cost of Health Care

Most experts like to use 3% as an average figure for inflation. But averages are awful for real planning purposes. Consider that healthcare costs have risen more than 5% per year. All but the very healthiest retirees take several different prescriptions. That expense will likely continue to rise as will the cost of any type of doctor visit or surgical intervention. The lure of the monthly payout figure is that you ignore the fact that you’ll need more in later years, and if you have an emergency, you’ll not have access to larger sums.

#4  Underestimating Life Expectancy

This mistake is hard wired into your brain, so it’s difficult to see beyond it. In fact, you likely have several conflicting opinions about it. On the one hand, you know you’ll die. On the other hand, just like a teenager in the 1960’s who didn’t trust anyone over 30, you’re probably thinking that you’re unlikely to see 90. But if you’re 65 now, you have a 50% chance of living past 84. IF you’re married, one of you has a 50% chance of living past 90.

Tie this to the inflation issues we talked about in the last section, and you can see that making mistakes about both of these issues together can have bas consequences that add up quickly.

#5  Ignoring Early Retirement Subsidies

If you’re considering early retirement, your employer may throw in an offer to cover your health care needs until Medicare kicks in. You need to add this into the number. When you shop around for health care coverage, you may be surprised to find that the offer of insurance to a 50 something year old is worth over $10,000 per year.

Health insurance cost is probably the major stumbling block for most people who want to retire early. Given that they will have a few years before Medicare kicks in and before Social Security income starts, the burden prevents most people from quitting their jobs much before their early 60’s.

#6 Misunderstanding Annuity Guarantee Benefits

The monthly pension check form your company is guaranteed by the Pension benefit Guaranty Corporation. That’s a government sponsored entity that guarantees pension checks in case your company goes bankrupt or you plan runs into serious difficulties. Health plan benefits are not covered.

For 2009, the maximum guarantee on a single life plan is %4,500 per month. In order to see what the PBGC does not cover, go here.

There are some issues coming down the road for the PBGC if things go south in the economy for an extended period of time. The government does not fund the corporation; workers who have pension plans fund it. And the number of subscribers is dwindling. For a discussion of what the PBGC might face in the future, go here.

#7 Using Retail Investing Options

Planning for a nest egg to last for several decades in the face of changes, emergencies tragedies and new priorities represents a challenge for which you have no training. If you decide to take a lump sum payout, you’ll need professional help investing it.

Trading stocks is not so easy that a baby in a high chair can do it. “The face of the independent investor” is often wrinkled and frowning.  Get professional help. No matter what you see on television, DON’T TRY THIS AT HOME.

Use a Certified Financial Planner. These men and women have spent years to get their marks and likely have many years of experience handling just the obstacles that are new to you.