First, I want to welcome new readers that I met at the recent mega-chamber mixer with Fair Oaks, Carmichael, and Orangevale, as well as those from a recent Folsom chamber event.
Second, you all know that I don't sell home and auto coverage. People always ask where I get MY insurance. My broker is Terry McNeil (and his daughter Jenny Baker) at McNeil Insurance Services in Folsom. They are simply the best at this kind of coverage.
Third, I'd like to ask you a favor. Would you send me a referral? Some of you are clients and others have been getting this newsletter for three years now! (Click link on the left to see them all since 2007.) You know I'm good at health, life, disability and annuity, so perhaps you will consider sending me the name of a friend or colleague who would benefit from talking with me? Is that fair to ask?
I have two stories, one is about a question so few people ask themselves until it is often too late. The second is about my misgivings about so-called health reform.
Both are important and I hope you learn something from each.
-Al
(FYI, some of this was in the WSJ a couple of months ago. I've added, deleted, and simplified.)
Just how much are you going to need in order to retire comfortably? Any idea? A guess maybe?
It may be the biggest financial question in your life. With 80 million baby boomers now heading into the flight path for retirement, it's a pressing one, too.
Yet a horrifying number of people have never even asked it -- and may not know how to find answers.
That is even scarier than the data showing that most people haven't saved enough. (And the two, of course, are closely related. One of the biggest reasons people haven't saved enough for retirement is that they don't realize how much they will need.)
So how do you go about working out the answer? There's a simple five-step approach.
1. Find the target.
Start by estimating your "target retirement income." That's simply the annual income you think you will need to live comfortably in retirement. Some experts advise drawing up budgets.
But if you are looking for a ballpark figure, there is a simpler approach. You can just assume that the discretionary income you are likely to need in retirement is about the same as the one you have now. It's not perfect, but it's a good place to start.
So take your current gross income, and deduct the costs you no longer expect to have once you are retired. That includes your payroll taxes. It includes the amount you're saving. It may include temporary expenses, such as college costs for your children. And if you are currently paying a mortgage, and expect to have it paid off by the time you retire, it includes the mortgage costs, too.
What is left after these costs is your discretionary income. If you want to know what you will need in retirement in order to live comfortably, that's as good a guess as any.
2. Estimate Social Security.
Work out how much you are likely to get each year in retirement from Social Security.
The Social Security Administration has online calculators to help. You can find them at www.socialsecurity.gov/planners/calculators.htm and www.socialsecurity.gov/estimator. Be aware that delaying your retirement date, up to the age of 70, will earn you higher Social Security payments. Remember to count your spouse's likely benefits, too.
3. Subtract pensions and other income.
Don't forget any income you are likely to get from other sources, such as a traditional company pension.
These used to be the bedrock of retirement planning, but fewer and fewer workers are covered by them now. Companies have shifted toward 401(k) plans, where the investment risk is borne by the employees rather than the employer.
Even those who are still covered by traditional pension plans typically rely on them less. These plans reserve their biggest benefits for those who stay with the same company for their entire career, and who does that anymore?
If you are still covered by a traditional pension plan, you should contact the administrators to find out how much you are likely to get when you retire.
4. Subtract income from your target.
With these three pieces of information in hand, you can now work out how much retirement income you will have to provide from your own savings. The answer, simply enough, is your target retirement income (step one) minus the income you can expect from Social Security (step two) and any traditional pension (step three).
5. Multiply the result by 20.
And from this you can estimate the savings you will need to accumulate in order to generate that income each year. It's about 20 times as much as the annual income.
In other words, if you are going to need to generate about $10,000 a year in retirement income out of your own resources, you will probably need to save about $200,000 by the time you retire. If you want to generate about $50,000 a year, you will probably need to save $1 million, or 20 times that.
Why 20 times? It's simple math. You don't want to run out of money, so to be safe you should really save enough to last for several decades. Many of those turning 65 in decent health these days should plan on lasting into their 90s. And when you are retired, you should probably plan on the basis that your investments may only earn 3% a year above inflation, maybe even less.
Investors may earn more, but those in retirement are probably going to want to play it reasonably safe. Based on those assumptions -- they are, I admit, conservative -- you will need to save about 20 times the annual income you need your savings to generate. Those who want to be even more secure could save 25 times.
For many people, this savings target will work out at around eight times current gross income. That's because the target retirement income is often about 80% of current income, Social Security aims to replace maybe 40%, and 20 times the difference is eight times. (If you've paid off a mortgage, you will need less).
Some people will tell you this figure is too high. They'll tell you a 65-year-old today can buy a lifetime annuity of $10,000 a year for about $130,000, or 13 times as much. But this is a dangerous illusion. It ignores inflation.
Over a decade or two, even mild inflation will seriously erode the real value of a fixed income. If inflation were to jump -- a significant possibility -- the risk is even bigger. The numbers here are based on real, post-inflation calculations.
You all know that I'm in favor of health insurance reform even if it puts me out of the business (I'd rather sell life, disability, and annuities any day!) But I have some problems with how this is bumping along.
President Barack Obama's new health coverage for uninsured Americans with health problems won't be cheap - premiums averaging $300 to $600 a month in the largest states, according to a government website that went live Thursday.
From cheaper to most expensive, premiums will range from a $140 a month to as much as $900, Richard Popper, deputy director of a new insurance office at the federal Health and Human Services department, said Wednesday.
The range is so wide because premiums will be keyed to standard individual health insurance rates in each state, which can differ dramatically because of medical costs and the scope of coverage. Also, older people will pay more.
"There are going to be meaningful premiums that are going to be required to stay in this plan ... in the hundreds of dollars," said Richard Popper, with the Office of Consumer Information and Insurance Oversight.
Estimates on HealthCare.gov show premiums for a 50-year-old in Florida will be $552 to $675 a month; in New York the cost will average from $400 to $600; in Texas it's $491 to $600, and in Pennsylvania $283 on average. In many states, consumers can start enrolling immediately.
Despite the cost, consumer advocates are urging uninsured people with health problems to sign up soon, because they cannot be turned away for medical reasons. Family members may be able to help with premiums, which are competitive with rates paid by people who buy their coverage directly from an insurance company.
The Pre-Existing Condition Insurance Plan will start taking applications in every state by the end of the month. Coverage will be available as early as August 1
The coverage is a stopgap for vulnerable people locked out of the private insurance market because of medical problems. It's intended to remain available until 2014, when core health care overhaul provisions take effect. At that time, insurers will be barred from turning away people in poor health, low- and middle-income households will get subsidized coverage, and most Americans will for the first time be required to carry health insurance.
To qualify for the pre-existing condition plan, people must be uninsured for at least six months and have been turned down for coverage by a private insurer because of a medical problem. U.S. citizens and legal residents are eligible.
The biggest question hanging over the program is whether the $5 billion allocated will be enough.
Millions of people meet the basic qualifications for coverage, and technical experts who advise Congress and the administration have warned the funds could be exhausted as early as the end of 2011.
HHS officials sidestepped questions about what would happen if the money runs out. One option is for the government to limit enrollment.
Popper estimated about 200,000 people would be enrolled in the program at any one time, but other HHS experts estimated that 375,000 would sign up this year, and the Congressional Budget Office says the total could reach 700,000 in 2013.
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