Woulda, Coulda, Shoulda: What Retirees Wish They'd Done Differently

A survey of 1,000 Americans in October 2003 by Million Dollar Round Table, an international association of financial professionals, found that more than two-thirds of retirees wish they'd done something differently in their retirement planning. Obviously, it's not possible for the study participants to turn back the clock, but those of us who still are working have a golden opportunity to learn from their mistakes--if we choose to. As Aldous Huxley, the 20th century writer and philosopher, said, experience teaches only the teachable.

So, what lessons do retirees and retirement advisers have to offer those of us who still have time--and a willingness--to change our course?

1. Save more.

According to a 2004 Putnam Investments survey of almost 2,000 recently retired workers, 70% wish they'd saved more. About 20% of the respondents said they were struggling financially, while 41% said they were very concerned they'll outlive their money.

Between an increasingly long lifespan, consistently higher health-care costs, and potentially smaller Social Security benefits, the 10% of gross pay savings objective that was the standard years ago might leave you short down the road. According to Jeremy Hoover, a financial consultant for Charles Schwab, a financial services company and brokerage, these days a savings goal of 20% of gross income is a better target for those who begin investing while they're still relatively young. That percentage goes up the later you start.

To hit that target, max out your 401(k) and IRA (individual retirement account) contributions, and count your employer's matching funds toward the total goal. If you're nearing retirement age and feeling behind, special "catch-up" provisions will help you, well, catch up.

For the 2005 plan year, 401(k), 403(b), and 457(b) participants age 50 and older may contribute an additional $4,000 more than the regular $14,000 limit for younger workers. That amount increases to $5,000 more than the $15,000 limit in 2006. You can take advantage of the catch-up provisions only if your employer has chosen to offer them.

The catch-up provisions for traditional and Roth IRAs allow older workers an additional $500 more than the $4,000 limit for 2005, and an extra $1,000 beginning in 2006.

Investing additional dollars each year is not the only way to save more over the long haul. Starting your savings plan earlier or working and saving longer also can build a bigger nest egg.

2. Plan for more expenses in retirement, not fewer.

In March, the Oppenheimer Funds "Investing for Retirement Survey" of 1,000 retirees and pre-retirees revealed that almost 70% of retirees said they spend as much as, or more than, when they worked.

Trying to predict today what your expenses will be as many as five, 10, or 20 years from now can be like trying to guess how many jelly beans are in a barrel. How do you know today whether or not you'll have a mortgage to pay when you retire, how much your medical expenses will be, or how active a lifestyle you will lead (those cruises and greens fees aren't cheap)? Then there are the variables of rising insurance costs, unpredictable investment returns, decreasing Social Security benefits, and inflation to consider.

Despite the inherent challenges, anyone dreaming of a comfortable retirement needs to make an educated prediction of future income needs. Here are a few tips to help you get a more accurate estimate:

Calculate when your mortgage will be paid off, when your children will be out of college, and whether or not you will have a car payment--these are large expenses that you may be able to control with careful timing. If you're healthy and active today, plan for an active retirement and the costs associated with travel, golf, hobbies, entertaining, and so on. Estimate optimistically when figuring your life expectancy. People are living longer, and you don't want to outlive your money. Play the "Longevity Game," offered by Northwestern Mutual Financial Network, to predict how many candles will be on your final birthday cake. Include an estimate of your Social Security benefits. (If you're eligible for benefits, the Administration sends you a printed estimate each year about three months before your birthday.)

As a general guideline, Hoover recommends replacing at least 80% to 100% of preretirement income. But he also encourages people to use some of the excellent online planning tools available to put together an individualized projection of retirement expenses.

3. Be realistic about working in retirement.

In a 2004 survey titled "Rethinking Retirement" conducted for Zurich-based UBS, a financial services company, 74% of participants said they plan to do "consulting" or "occasional work" for pay in retirement, and 47% said they planned to "pursue a hobby" as a way to make money in later life.

What the study also found is that, among those surveyed who already are retired, only 35% actually were involved in consulting and occasional work and only 13% actually were earning money from a hobby.

A similar statistic appears in a Money magazine article about the topic: Only 26% of current retirees have worked for pay at any time during retirement, and almost half of those don't work anymore because they're not healthy enough or think they're too old.

If you intend to keep working after age 65--whether for financial reasons or simply to stay active, connected, and mentally challenged--don't be discouraged, be prepared. Now is the time to ask employment counselors or your company's human resources department for advice about continuing your career. You'll also find information and guidance online, at sites such as those belonging to AARP, Retired Brains, and 2Young2Retire. That last site was started by Howard Stone, who retired from a long career in advertising sales and publishing and began a second career as a life coach at age 64.

The real lesson here: Save enough while you're still working so that employment in retirement is an option, not a necessity.

4. Pay more attention to retirement planning.

A Fidelity study of recent retirees conducted at the end of 2004 revealed that more than half (57%) wish they had done more planning for the transition from employment to retirement.

To be really well prepared, you must have a strategy in all the following areas:

Investments--Is your nest egg invested appropriately for your age, risk tolerance, and goals? Remember, your investment plan needs to evolve as you get older. Develop an asset allocation strategy that will adjust with your changing circumstances and financial needs throughout the retirement years.
Starting your savings plan earlier or working and saving longer also can build a bigger nest egg.
Retirement income--Create a budget of anticipated retirement expenses and income. Understand the rules about withdrawing funds from retirement accounts--where, when, and how much you should withdraw to avoid penalties and reduce taxes. How much can you withdraw each year without risking depleting your nest egg too soon? What can you expect from your pension? Insurance--How will you pay for rising health-care and prescription costs? How will you cover the costs of long-term care? (Medicare usually does not cover nursing-home stays.) Underestimating health-care expenses is a common retirement planning mistake. Estate planning--"I'm a huge believer in estate planning," says Hoover, "because it makes life much less stressful." Despite expenses, many retirees still are able to pass on considerable wealth to their heirs. An expert can make sure that your assets go to the people and organizations you intend--and provide you peace of mind.

Need a little more motivation to get planning? A study from the Center for Retirement Research at Boston College found that households in which someone thought "a lot" about retirement had twice as much wealth heading into retirement as households in which there was little or no planning.

5. Invest more aggressively in your 20s, 30s, and 40s.

Hoover advises clients to be as aggressive in their investment strategy as they can without losing sleep. "You need to be investors, not savers," he says.

Generally speaking, higher returns come with higher risk. So, the first step toward becoming an investor is to understand your risk tolerance--how willing you are to endure volatility (ups and downs) in your portfolio. Online tools (for example, Kiplinger's risk tolerance quiz) can help you determine how much of your portfolio could be comfortably invested in various types of stocks.

Why is it so important to invest as aggressively as you are able? Consider the difference in the nest eggs accumulated by three investors. Each one invested the same amount ($250 per month) over the same period of time (25 years)--the only difference was their portfolio risk level.

Conservative Moderate Aggressive 15% large-cap stocks 5% international stocks 50% fixed income (bonds) 30% cash equivalents 35% large-cap stocks 10% small-cap stocks 15% international stocks 35% fixed income (bonds) 5% cash equivalents 50% large-cap stocks 20% small-cap stocks 25% international stocks 5% cash equivalents $271,120 (8.8% per year)* $374,055 (10.7% per year)* $422,546 (11.4% per year)* * Portfolio returns based on average returns of Schwab model portfolios from 1970-2004.

The aggressive investor ended up with approximately $150,000 more than the conservative investor. Even the moderate investor reaped substantial rewards for taking some additional risk (more than $100,000 in earnings over the conservative investor).

The time to invest for maximum growth is when there are decades between you and your retirement party. You can't afford to take big risks in your 50s and 60s: A significant loss in your portfolio at this stage could be impossible to recover from before you retire, and may even require you to postpone the last day of work.

Although you will need to shift your portfolio to safer investments as you get closer to making withdrawals, you still should keep some of your nest egg invested in stocks during your retirement years in order to outpace inflation and keep your portfolio growing.

As Brent Rutherford, a recently retired California state employee who ran the numbers and looked at numerous possible scenarios in preparation for retirement, points out, it's crucial to work on your retirement plan at an age when you still have some planning options.

If you don't, you just may find yourself contributing to a statistic about what retirees wish they had done differently while they still were working.

Published November 14, 2005