Double Dip Recession? How to Protect Your Retirement
With all the attention given to the debt downgrade and a possible second recession, it's a good time to review my mother's retirement experience to see what we can learn. She just turned 90, has been retired for over 30 years, and during this time, has survived four major meltdowns -- and counting. Let's take a look at why she's doing so well in her retirement years.
When my father retired 30 years ago, he made smart decisions that are still protecting my mother nearly six years after he passed away. She has a lifetime pension from my father, who worked as a professor at USC until age 65 -- normal retirement age in those days. He elected a 100-percent joint and survivor annuity, so my mother continues receiving a lifetime income despite his passing. He also waited until age 65 to start his Social Security benefits, so she's now receiving his Social Security income as a widow's benefit. Because of the way her pension and Social Security benefits are designed, income from them just keeps chugging along in spite of the economic turbulence.
She supplements her pension and Social Security benefits with interest and dividend income from her retirement investments. While the value of her investments has fluctuated significantly over the years, the dollar amount of her interest and dividend income has fluctuated by a smaller, more tolerable amount.
During the various ups and downs of capital markets during the last 30 years, she hasn't panicked and sold her investments. She's kept her asset allocation fairly steady over the years, and while she's experienced some significant downturns, she remained invested for the recoveries that followed.
She and my father also paid off the mortgage on their house. They never borrowed against the home equity, either, even though it's grown substantially since they bought the house in 1954. And while the house is small by today's standards, it meets her needs just fine. She also keeps her living expenditures low and has no credit card debt. She's doing a good job of managing the magic formula for retirement security: income > expenses.
She's also in good health for being 90. While she's slowing down and has various ailments, she's still going strong and it's highly possible she'll survive my father by 10 years or more. She still has her wits, and she gets around when she needs to. She eats sparingly but consumes lots of fruits and vegetables -- she even grows some of her own food -- and she gets good exercise by walking and gardening. She keeps in touch with friends and relatives, and she sees family members at least once a week (all of her kids live nearby).
The financial meltdown of 2008-09 didn't change her life very much, and the latest turbulence won't either. She still has about the same income and expenses, and she continues to do what gives her joy in life.
My mother's story inspired me to develop a systematic plan for living a long, prosperous life -- and for surviving future downturns, which are inevitable if you'll be retired for 20 years or more.
Next: 10 Steps to Recession-Proof Your Retirement Years
10 Steps to Recession-Proof Your Retirement Years
Based on my 35-plus years of actuarial experience helping large employers run their retirement programs, and inspired by my mother's story, here are my 10 steps to retirement security:
Step 1: Take care of your health. This will help reduce your medical and long-term care expenses, enhance your enjoyment of life, and enable you to continue making sound decisions late in your life.
Step 2: Protect against the risk of catastrophic conditions. In most cases, that's the threat of high bills for medical and long-term care expenses. You'll want to plan for some combination of insurance, dedicated savings, or other financial resources should you need to pay for these expenses.
Step 3: Consider working as long as you can at a job you enjoy. Not only will this bring in needed income, but you might improve your health and longevity, and might even obtain medical insurance through your employer.
Step 4: Maximize Social Security income by delaying benefits. Social Security pays you a lifetime income, no matter how long you live and no matter what happens in the economy. By maximizing your income, you're taking steps to insure you won't run out of money before you die.
Step 5: Be prudent when withdrawing retirement savings. Use your savings to generate a lifetime retirement income rather than spending "willy nilly" on your wants and needs.
Step 6: Maximize income from traditional pension plans. If you participate in a traditional pension plan, you can maximize your lifetime income by delaying the start of your pension until your plan's normal retirement age. If you're offered a lump sum instead of a monthly pension, only consider that option if you're in poor health. If you're one of the many people who don't have a traditional pension plan from your employer, you might consider taking part of your retirement savings and buying an immediate annuity -- a "do-it-yourself" pension.
Step 7: Manage your investment risk through asset allocation and invest for income. Low-cost, index mutual funds that are balanced between stocks and bonds have performed well over the years, through thick and thin. These funds systematically rebalance your investments, forcing you to buy stocks at a low and sell at a high.
Step 8: Adjust your living expenses to match your retirement income. Downsize your house, your car, and other financial spending, and buy only what meets your needs and makes you happy.
Step 9: Develop a robust social portfolio. This helps you enjoy life, improves your health and longevity, and provides social resources that will help you when you're ill or otherwise need help.
Step 10: Become a student of retirement, and build a professional team. Learn how to make sound financial decisions, and if you need professional help, be sure to hire competent advisors who have your best interests at heart.
There are lots of details that go along with each one of these steps, and some are easier said than done. You'll need to spend many hours learning about the issues and doing your homework in order to follow the steps properly. But there's nothing wrong with that -- after all, you're planning for your retirement security for the rest of your life, and you'll want to have the peace of mind that you can survive the inevitable downturns when they occur. And if your experience is anything like my mother's, your retirement could last 30 years or more.
P.S. You can learn about the details of these ten steps in my book, Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work Through Thick or Thin.
More on MoneyWatch:
- The Magic Formula for Retirement Security
- Boost Your Social Security Payout by $100,000
- What You Need to Know About Social Security
- IRAs and 401k: 3 Ways to Generate Lifetime Retirement Income
- Recession-Proof Your Retirement Savings
- Pension Plan Lump Sum Payments: Why You Should Avoid Them
- Should You Buy Long-Term Care Insurance?
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
