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Episode #2123
Financial Health After Retirement
Lewis: If you haven't heard yet just keep listening. An alarm that's sounding louder and more frequently today is a message about the insecurity many Americans will face after retirement age should you hit the snooze button on this one. We'll find out next on Black Issues Forum.
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Lewis: Hello, everyone and welcome to Black issues Forum; I'm Mitchell Lewis. America is getting older and so is the average American's life expectancy. In fact, according to a 2004 report by the Federal Interagency Forum on Aging Related Statistics, the life expectancy of a child born in 2000 is about 30 years longer than that of one born a century ago. And between the years 2002 and the year 2030 the older population will more than double. News of our growing aging population has many sending up flares about the uncertainty of financial security into the future. Today we are going to talk about some of the issues that are cause for concern and some of the good news that's not being talked about. We'll also find out what you can do to better ensure that you are prepared for financial health after retirement age. To help us in that discussion I would like to welcome Ed Fulbright, President of Fulbright and CPA, PA in Durham and a certified public accountant. He is also the host of the weekly money management show, Mastering Your Money which can be heard both online and on Saturday mornings at 10:00 on FM radio 90.7 WNCU. We also have Bob Jackson, the State Director for AARP, the nation's primary resource on issues addressing the economic and retirement security of individuals over 50. And to both of you gentlemen, welcome to Black Issues Forum.
Jackson: Happy to be here.
Lewis: My first question is actually directed to both of you but I'll start off with you, Bob. What do you see as some of the concerns over the issues of financial security during post-retirement?
Jackson: This is obviously a very complicated issue and a very huge challenge for an awful lot of folks. But you look at the old pyramid of retirement security and it used to be that you would look at the person's pension, their savings, their income and based on that people could then kind of project what their level of financial security would be over time. But what we are finding now in 2006 is that there is a fourth pillar, an essential pillar to that element of financial security and that is healthcare, health insurance and that with the rising healthcare costs, you have to make sure that in retirement you have some kind of good, strong coverage health wise, whether it's Medicare or some other kind of private insurance to assure that those rising healthcare costs are covered.
Lewis: Ed, as a certified public accountant what are some of the things that you're seeing in relationship to post-retirement?
Fulbright: Well, in addition to healthcare, it's also long-term care which I would say is a component of that. And what that means is that's nursing homes. And if you're going to buy insurance to cover you you need to buy that early on. If you can buy it in your 50s, that's great but I see most people wait until they start to turn 60 to start to buy that.
Lewis: Bob, the AARP has come out with a report, Re-imagining America: How Can America Grow Old and Prosper? Tell us a little bit about this report and also in the report it states that the challenges facing retired folks are overstated. What did the report mean by that?
Jackson: The AARP came out with this report. It's a wonderful piece that essentially reviews the state of the demographics in the US. You mention this rising number of people turning-retiring and turning 65. The boomers. I'm at the leading edge of the boomers at age 60 myself. We are going to turn this country around in terms of, one, expectations, but also obligations. And so Re-imagining American is a kind of a look at where we are in America today, what to expect over the next 20 or 30 years but what the challenge is what we as a society could and should do to meet those needs. We are the richest country in the world. We have the ability to provide the safety net, we have the ability to provide new jobs for people who want to continue to work after 65. The old stereotypes of retirement at 65 doesn't wash anymore to the new boomers. People want to stay working, people want to stay in their homes. So the idea of pushing people into facilities, that doesn't wash anymore. Families, families are very dispersed all over the country these days so the old notion that you would have families there to take care of you, that's changed. And we need to learn how to deal with that. So with this changing demographic in our society, how do we, not only at the federal government level, but the state, the local community, how do we as a society respond to the growing needs that we are all going to have? Ed mentioned the need for long-term care insurance, what that means is that as you are aging, the likelihood of someone needing some kind of long-term care at age 80, 85, 90, 95, does increase. So we as a society, what are we going to do to assure that the services will be there for us when we need them?
Lewis: Ed, when you meet with some of your clients or just observing in general, what do you see as some of the perceptions especially among the African American community when it comes to retirement and post-retirement preparations?
Fulbright: Yeah, one of the things that I observe, a lot of people are not saving enough if they are not part of what I call a select community like a school teacher or they are a local employee or a state employee or a federal employee where you have a government pension to supplement. Most of the companies have done away with their company pensions especially if you are younger. Some of them are not saving enough and when I say that I think that everybody-if you're not going to have a government pension to support you, you need to be saving at least 10% of your income. In fact, one of the things that concerns me is that a lot of people are working on the 40/40/40 plan. That is working 40 hours a week for 40 years to retire for 40% less income. And I would try to encourage them to work on what I call the 10/10/30 plan and if you start to save and add to that, what that is is that you earn, you save 10%. You earn 10% on that money and you do it for 30 years you will have enough money to retire assuming that you keep increasing that amount you are saving as your salary goes up.
Lewis: Bob, any observations from AARP as it relates to African Americans and retirement?
Jackson: There have been some changes. AARP did a large survey in 2004 comparing some data from 1998 and 2004 looking at perceptions related to retirement security, healthcare, and there have been some changes in the African American community over that time, some positive shifts to a feeling of a broader security. But there are some changes that are interesting in the sense of the ability to deal with family issues and that there is a growing recognition and I certainly don't want to-I would be careful about any generalizations and stereotypes but African American families have been very close over the years and generations. And that is still true but there is still a shift that there is no longer that obligation. So issues like this are alarming and we need to be thinking about that. There is a shift in the perception of long-term security in terms of will retirement incomes be there and healthcare systems be there? These are issues that are challenging the 30 and 40-somethings as we are seeing in our employer situations. The employers are dropping healthcare plans or changing them dramatically. Certainly pension plans are being changed and/or eliminated. So the ability of individuals to plan for the long-term is critical and as Ed suggests you need to be planning now for that long term future.
Lewis: Ed, of course, one of the things that is really popular, the 401k plan. Now should people be putting perhaps all their eggs in one basket and doting on security in 401k?
Fulbright: Well, 401k plans is normally independent from your employer's ability. They usually have a trustee or somebody who maintains the funds so if your employer goes under, your fortune or the money that you save hasn't unless you put it all in company stock. Now I really encourage clients to keep away from company stock to the certain extent if they have stock options, really they shouldn't have more than maybe 10-20% of their wealth in stock, in company stock simply because what happens if your company goes under then you've lost 20% of your portfolio-that's what happened with Enron-and then you're also probably going to lose your job. So you are hit twice. And a lot of people can't recover from that especially if they have 100% of their money in company stock.
Lewis: What financial vehicle should folks be looking towards investing in or being a part of as it relates, when you get to that retirement age and that retirement period?
Fulbright: Some of the vehicles that I think is that-some of the people if they have gotten to retirement age and they have retired, I would probably encourage them to roll their money out of their 401k plan simply because there are some advantages that they can leave to their loved ones if they happen to pass away. Like of it's someone other than your spouse if you have it in an IRA you can leave that money to your children in that IRA and if you haven't reached the age of 70-1/2 you don't have to take all that money out. If you have it in the right type of vehicle and I would just encourage people to put them in regular IRAs that are at brokerage firms and not to use annuities inside of the IRAs because that can add another degree of complication and also have additional expenses that are unnecessary for them to get the type of returns that they need.
Lewis: When you talk about rolling over, what does that mean and are there any disadvantages associated with rolling your finances over?
Fulbright: Okay, let's be very clear and the best way for you to do it is to go to an investment provider and get an IRA set up first and do what is called a direct rollover or a direct transfer. What that means is that that money does not come directly to you. It may end up being-a check may be mailed to you but it's payable to you and the investment company for your benefit and then you cam mail it on to that investment company. Because if you don't, if you take it directly out of the 401k-you get 60 days-and some people like to gamble a little bit. They like to play this game where I am going to get it back in there within that 60 days. Well, one of the problems is that the government withholds, I believe it is somewhere between 20-28%. They have to and then you have to make up that difference. Well, I don't know too many people, if you've got $100,000 IRA or you got even a lot bigger than that, that could-I mean $100,000 in a 401k, if you get 30% taken out of that 401k, it is going to be difficult for you to make that money back up. So I like that direct rollover opportunity and that way it keeps mistakes from happening.
Lewis: Bob, what lifestyles, or financial lifestyles folks should be considering as they approach retirement and even beyond retirement?
Jackson: Well, you can look at how we live now and how we choose to live. Whether it's look at your housing situation, look at your transportation, what kind of cars are you driving, where do you live? What community do you live in? What are the taxes in that community? And also where your family is and how close do you want to be to the rest of our family-your children or your parents, aging parents? One of the realities we boomers is that we are, many of us, are in the sandwich generation which we are, some of us are taking care of our aging parents or parent and also taking care of our children who are growing. Some of those children have returned to the empty nest and so it creates new challenges. So I think individuals need to be looking at not only their financial pot of money that they are expecting but how do they expect to live in that retirement? Do they want to be, stay where they are? Do they want to move to a downsize? To a smaller place and use the money and invest that difference? Put it aside in some way? Do they want to move to the coast or the mountains or back to New York or wherever? They need to be considering all of these pieces into their retirement planning.
Lewis: And of course another element of retirement, Social Security. How will that fit into the outlook for those perhaps in their late 40s, 50s and 60s?
Jackson: Well, AARP has been quite involved with the Social Security debate over the last number of years and we are strongly believe in our board and across the country of the majority of our members, strongly believe that setting up private accounts and Social Security is not the way to go. However, we recognize that Social Security, long-term solvency of Social Security does need to be addressed and the sooner the better. So we have a number of ideas about how that can be done without setting up private accounts and putting individuals at risk to in fact, build that pool of money in the trust fund to assure long term solvency. We think-we look at Social Security as a true base but people definitely, absolutely must be saving in addition to Social Security. Social Security is only one piece of long-term retirement security.
Lewis: Ed, your thoughts on Social Security?
Fulbright: Well, I think the government is going to do something but the sooner is the best thing that could happen. My concern and what we do with most of our clients is that we show them what their retirement will look like if they don't have Social Security and what it would look like if they have it. Well, of course it looks a lot rosier and they can save a lot less if they don't have Social Security. But we kind of put it forward to say, "Well, I'm not sure what is going to happen because something has to happen with Social Security. They either have to allow you to have either private accounts or they have to bring more people into the United States to make sure they have a bigger income base to take care of the saving base. Or they have to increase the limits or they have to do something. It's quite a few different options that they have. They could reduce your benefit and that is the scary part because the closer you get to 50 to 55 it really, that's sort of like, once you get to be 10 years out, and some people are really liking to try to retire before 65 or around 55. That is also another challenge because they've got roughly eight to ten years before they will be eligible for Social Security.
Jackson: I think, Mitch, I would like to just add that that's again part of the challenge in America today, is that if we look at the challenge to Social Security solvency that social contract that's been with us since 1935 and the changes, the solvency is looking good until 2042 or 2052 depending on the source. But the rising healthcare costs, the Medicare system itself is at greater risk than the Social Security trust fund. And so we need to address those issues, the changing pension plans that have been mentioned. This is a great threat to an awful lot of younger people and those who are close to retirement. There is case after case where a person at 60, 65 is rapidly approaching retirement and that pension on which they were counting has vanished. And this is not right. And so we are looking at pensions, we are looking at healthcare, we are looking at Social Security, housing costs are certainly climbing, these are tough issues that we as a society need to address.
Lewis: Now you were talking about housing issues. How important is that especially when you have these retirement communities. How does that play into retirement?
Jackson: Well, retirement communities, like for example, continuing care retirement communities, there are a number of them around the country that have evolved over the last 30 years. These are high-priced, for the most part, high-priced housing and you pay a significant, oftentimes a significant sum of money to get in and then there is a relatively high monthly maintenance fee to pay for the services. So that is going to serve a lot of people, those with some money and resources and those who want that additional piece of security to know that you are in a place, if you transition from an apartment, independent living all the way to requiring skilled nursing care all there on one premise. Other folks are in subsidized housing, those people who are in independent living across their community in their own homes or apartments, wherever they live. But it really comes down to can you afford to stay in that home? And then the issue is that as you age you might have an infirmity that requires some adjustment to your home. We call that home modification and if you can adjust that home through either a ramp or with grab bars or with alarms systems or with changing your door locks or the handles on doors so that if you can't grab the door handle and twist it you might be able to grab it and push it down on a lever. And so just some small things like that will assure individuals the opportunity to stay in their homes longer than they might have been otherwise.
Lewis: And you've been giving us a lot of good tips here. Where can folks look to find out more information about these tips?
Jackson: AARP is just full of information. We really have a tremendous number of publications. But one thing-certainly they can call our state office here in Raleigh at 1-866-389-5650 and ask for one of our staff and we will be glad to help. Or they can look on our website and I think those are the best places to look and that would be at www.aarp.org/money and there is a great list of references on that page. Or www.aarp.org/bulletin/yourmoney. So there is a lot of good resources for you.
Lewis: And we'll make sure to try to have that on our website as well. But you were talking about healthcare and, Ed, I'll ask you this, how important is having like a healthcare policy for retirement?
Fulbright: Well, I think that's critical because Medicare will not take care of everything and if you are eligible for Medicaid then you probably will be fine for the most part but that means that you don't have a lot of money. But if you are with Medicare that means that you may have a little bit of money but you're taken care of, so you may need some additional items or a rider policy to go along with that or if your employer doesn't provide you with a policy because what happens in retirement is Medicare becomes the primary policy. Then your healthcare policy becomes the secondary policy. So you want that policy to be a good one and be a reliable company that is going to last for a while.
Lewis: As you look at people preparing for retirement, and of course there are some people who are struggling with retirement, what advice would you give to those folks who are in the workforce now, what should they be doing now to prepare for retirement? Bottom-line.
Fulbright: Well, bottom-line I think they need to look at what their lifestyle is and start to freeze it. And when I say freeze it that means that if you are five to ten years out, I'm not sure you should be buying a new home. You know, that can mean that starting a 30 year mortgage can create some difficulties. It's a lot easier for you to be able to retire if you are able to take out your mortgage ahead of time. Does that mean you need to make it a 15 year mortgage? I'm not saying that. It depends on the person's situation. It also can create a situation where if you handle your house correctly and your mortgage and with your other debts you may be able to combine those quickly and see where you can pay your debts off a lot quicker and a lot more efficiently. And if you don't have a mortgage you are usually able to retire a lot more comfortable than other people can.
Lewis: And we are coming down to almost a minute so I am going to ask you this question here, Bob. Now AARP has established a social impact agenda. What do you feel needs to be addressed in order to ensure that retired Americans will be able to prosper?
Jackson: The social impact agenda from AARP incorporates ideas, and strategies for solving a lot of issues including economic security issues like long-term solvency and Social Security. Providing work opportunities for older people as they age who may be-or move from one job to another job. A lot of folks that we are finding as part of retirement, one, they want to work and, two, they are looking for creating new opportunities so we strongly support encouraging work. We look at healthcare system more broadly. We look at housing, mobility, what we call livable communities as ways that communities, counties, states, can work to provide alternatives to assist individuals in creating their own alternatives.
Lewis: And I'll have to stop you here, gentlemen. Thank you so much for sharing information with us. I'd like to thank both Bob Jackson and Ed Fulbright for coming out today.
If you'd like more information about today's topic and guests, or obtain a copy or transcript of this show, please visit us online at unctv.org/bif. When you visit be sure to give us your comments and program suggestions. You can also call us on the BIFline at 919-549-7167. For Black Issues Forum, I'm Mitchell Lewis. Thanks for watching.
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