Retirement Facts

If you were born between 1945 and 1964 you are labeled a “baby boomer” and there were 75.8 million babies born during that time period.  Those born in 1945 turned 65 in 2010 and entered the Medicare program and millions more will follow each year.  So if Medicare is running short of funds now, just think what will happen in the decades to come.   You must physically sign up for Medicare at the Social Security office three months before you turn 65.  If you fail to sign up, your premium is increased by 10% every year that you do not sign up.  You can decline Medicare if you have health care through your employer (and eliminate the 10% increase), but you have to remember to notify the Social Security Office after that fact.  If you have 40 quarters of work where you paid Medicare taxes, the Part A premium is free.  The Part B premium is deducted from your Social Security payment.  See the following table on Medicare premiums:

Type of Monthly Premium Amount of Monthly Premium

Part A monthly premium
(for people who pay a premium)

$451

Part A Late Enrollment Penalty

+10%

Part B monthly premium

$99.90 Higher-income consumers may pay more.

Part B Late Enrollment Penalty

+10% for each full 12-month period that you could have had Part B, but didn’t sign up for it

Part C monthly premium

Varies by plan

Part D monthly premium

Varies by plan
Higher-income consumers may pay more

Part D Late Enrollment Penalty

Depends on how long you went without creditable prescription drug coverage

 For those born before 1954, the full retirement age to collect Social Security is 66.  This is when you can collect 100% of your benefits.   If you collect at age 62, your benefit is reduced to 75%.   After age 66, for every year that you wait to collect (up until age 70) your benefit is increased by 8%.  I believe the government will be forced to increase the retirement age at some point because most of us are living much longer.

Interestingly enough, most people start collecting their social security earlier than their full retirement age.  Should you wait or start early?   You have to give back some of your Social Security if you have some earned income (up to a threshold) before your full retirement age.  Consequently, you should be aware of those facts before collecting.   If you expect to live a long life, you should wait until age 70.

The following statistics from CNNMoney.com are quite alarming.    They indicate the average net worth of various age groups:

                Under 25                             $1,475

                25-34                                   $8,525

                35-44                                   $51,575

                45-54                                   $98,350

                55-64                                   $180,125

                65 and Over                        $232,000

 Net worth includes equity in a home, so the liquid assets are probably far lower than those statistics.  Social Security was meant to supplement retirement and not to actually be the only source of retirement funds, as I fear it will be for so many people.   I have had people tell me that they are just going to work all of their lives; they will never be able to retire.  However, life doesn’t actually work that way as health problems or job reductions force you to retire.  In reality you should be preparing for retirement all of your working life.   The earlier that you start, the less you have to save over the years.  If you wait until you are 50, you have some catching up to do.

 The recommended spending rate from retirement savings was 5% for a long time until the most recent recession resulted in a more conservative rate of 4%.  In an ideal retirement situation, you would have no debt and be able to adjust your withdrawals during times of market negativity.  It doesn’t take a math wizard to realize that spending from a portfolio valued at $1,000,000 would be $40,000 – $50,000 per year.    If you are 25 now and your goal is to have $1,000,000 by age 66, don’t forget that an inflation  rate of 3% reduces the spending power of that figure to $297,628.

 It seems like an impossible task to save enough money to retire.  Our recommendation is to establish an emergency fund so that you don’t have to use credit cards when your car needs new tires.    If you have a retirement plan through work it should be fully funded.  If you are self-employed you should fully fund a retirement plan on your own.  You should always live within your means and as difficult as that sounds, it can be done.    If you have waited to save you will need to accept the fact that you will have to work longer.   I find that it is helpful to establish a net worth statement (list all assets, subtract all liabilities = net worth) and update it every year.  As you see your net worth grow it is an incentive to save more!

Barbara Gray, CFP®

Partner

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