Retirees’ Unkind Surprises

The massive baby boomer generation, headed for the retirement rolls, faces some real financial jolts. Fortunately, the picture isn’t all bad.

For the next 18 years, 10,000 baby boomers will retire per day. But 60% of prospective boomer retirees expect to work, and when they do, some eight-tenths of that 60% expect to make as much per hour as they did when they were in full time employment according to a recent survey conducted by Banker’s Life Center for a Secure Retirement. 

A companion survey found that reality is much different: 53% work for less money. Our experience is that retirees want to maintain the same cash flow in retirement that they enjoyed during their working years, and this frequently necessitates some form of additional work. 

Often, however, maintaining the lifestyle does not require replacing 100% of pre-retirement income.

As an example, let’s take the baby boomer employee who makes $100,000 per year. About $7,500 of this income is lost to Social Security and Medicare taxes. Additionally, this boomer saves an average of $6,000 in a 401(k) plan. Thus, the cash flow needed to maintain the lifestyle isn’t $100,000 per year, but something closer to $86,500. Further, income taxes are likely to be lower, and commuting and business wardrobe costs are reduced or eliminated.

Of those who are already retired, 73% think they have enough money to maintain their lifestyle in retirement, according to a recent report from the investment service Merrill Edge. But only 57% of the non-retiree group feels the same way. Looking at it from a different angle, the retired group doesn’t feel as much stress as the non-retired group.

What are most people concerned about? At the top of the list is a concern that Social Security will be different in the future than it has been in the past. We would agree, but it is unlikely that those who are already retired or within a few years of retirement will see much of a change. 

Also, those who have a pension are worried that it will change or suffer from inadequate funding. Indeed, this has happened in the past to both corporate and government plans. Many corporations have abandoned the traditional pension plan in favor of a 401(k) approach, but most governmental organizations have not and it is putting a huge stress on them. In addition, the Pension Benefit Guaranty Corp., which is set up as a back stop for pension plans that go bankrupt, is running out of money in coming years. 

Finally, there is concern about the rising costs of medical care and the solvency of Medicare. Health-care cost growth, while slowing, keeps moving up.

Meanwhile, seniors, especially wealthy ones, can’t catch a break when it comes to Social Security and Medicare. Although it won't be official until sometime this fall, there is likely to be little or no increase in Social Security benefits in 2016, as inflation has been relatively tame, primarily due to lower oil prices.

On top of this, the Medicare trustees have projected some significant increases to Medicare premiums for 2016. For some it could be as much as 50% for Part B (doctors) and D (drug). This double hit could become a triple hit if deductibles and co-pays also change.

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V. Raymond Ferrara, CFP, CSA, is chairman and chief executive officer of ProVise Management Group LLC in Clearwater, Fla. 

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