If you are about to retire, chances are you are not financially prepared.
Two-thirds or more of Americans close to retirement age aren’t ready, according to Mark Miller, retirement expert and author of the new book Rebooting Retirement: CommonSense Financial Strategies for Getting Back on Track.
“Retirement insurance boils down to your ability to maintain your standard of living in retirement,” he said. “And it’s very clear that a very large portion of families who are approaching retirement, let’s say 10 years later, do so without significant savings.”
In his new book, Miller offers ways for ordinary people to get back on track even if they’re too late, and lays out changes in Social Security policy that could help more people. Offer more insights and advice in a conversation with Yahoo Finance. Here are the highlights of that conversation:
Why this book now?
There is a lot of debate in the United States about whether we are facing a retirement crisis. Since people are not prepared, this means that they will mainly live on Social Security. Social Security typically replaces anywhere from 40% to 50% of your preretirement income.
Most retirement planners generally say you need to replace 70%, maybe more. As a starting point, it’s not a bad way to look at it. So it is clear that there is a gap for many families in terms of maintaining the standard of living.
The conventional wisdom for retirement planning is to start early, and there’s no disputing that starting early is hugely beneficial because you benefit from all that compound growth over your years of saving. However, there are things that can be done relatively late in the game.
You pride yourself on being competitive, how’s that?
I am ambivalent on two points. Let’s look at Medicare. Enrollment trends over the past decade have been firmly in the direction of commercial managed care’s alternative to traditional Medicare, which is the so-called Medicare advantage. But I like the traditional fee-for-service program for several reasons. In the book, I put forward an argument for using traditional Medicare for anyone who can afford somewhat higher premiums up front.
Simply put, traditional Medicare is the gold standard for health insurance in the United States. If you enroll in traditional Medicare and then add a Part D and F prescription drug plan Medigap Supplemental coverage, you will have access to the widest possible network of healthcare providers. And you’ll get the most predictability in your healthcare costs, because Medigap will cover most of the subscriptions and deductibles.
When you enroll in Medicare at age 65, you are likely to be in good health. I urge people at this point to think ahead of their future, when you’ll be older and likely to deal with more health issues and need more care. Having access to the widest possible network of providers, without the Medicare Advantage plan’s hassle between you and your doctors determining what care you can get and what you can’t get, is a huge plus.
What is your position on the future of Social Security?
Another point where I might call myself ambivalent is that I’m running in the exact opposite direction of where I think most of the mainstream media is definitely on Social Security. I demand an expansion of Social Security. Most talk about Social Security is that we don’t have enough money. We have to cut Social Security. We have to raise the retirement age and so on.
I contend that it is not really a matter of dollars. It’s a matter of values. We find money in this country when we want to do big things.
The important thing we can do with Social Security is make it bigger, not smaller. The 401(k) IRA experience is now four decades old. Obviously, it works really well for wealthier families who have been able to save and accumulate big bucks to use in retirement. This is probably about a third of households. And everyone else is approaching retirement either without saving anything or with small amounts, maybe enough for a few years in retirement.
Why scarce savings for low- and middle-income families?
There are obvious reasons for this. Dollars are not available. Middle-income families have faced financial stress over the past few decades, and they simply have to meet other, more pressing expenses.
Sheikh index Produced at the University of Massachusetts reports that about half of single people age 65 or older struggle to meet basic living expenses. We’re not talking about the fancy stuff here. We’re talking about paying for utilities, buying food, keeping the car running, that sort of thing. The numbers are much better for married people. But these are alarming statistics.
What financial moves can people take now to catch up?
make a plan. If you don’t have a plan, you don’t really know where you are. The goal is simple. You are trying to figure out whether or not you will get enough income from your working years to live comfortably. And taking the time to write a plan, whether on your own or with some help, is very valuable. It’s not a crystal ball, but it gives you context in which to think about the decisions you might make.
It’s time to retire. This is one of the biggest leverages available if you are able to control the timing of your retirement. There are different things that can affect it. But the idea of working somewhat longer can improve your outlook for retirement because you can delay your Social Security claim, still fund retirement savings, and maybe do some catch-up savings late in the game. It could mean more years of employer-subsidized health insurance, and fewer net years of living off your means in retirement.
How about home equity as a cushion in retirement?
For middle-class and lower-middle-income families, the most important financial asset on the balance sheet is home equity. The percentage of older Americans who own homes is very high. It is north of 75%. And to a varying degree, they already have equity in those homes.
Home ownership is a different story than financial assets. It is clearly not liquid. There are a lot of personal and lifestyle considerations that come into play here that differ from simply selling assets in an IRA. However, it would be foolish not to at least consider ways to profit from real estate equity since it is such an important asset. One strategy is to downsize and move to a less expensive home or location.
The other is the possibility of using a reverse mortgage. A reverse mortgage is not my preferred solution. It’s a product with a turbulent history. It has been subject to stricter regulation and some reforms over the past decade which I believe have made it entirely possible to use it in a safe way. The downside is that it is a very complex product. So it’s not my favorite tool in the toolbox. But for people who have already died who are intent on staying in their current homes and who need a way to cash in on the home equity, this is something to consider.
How can we make the savings if we are a little late in the game?
A very simple way to do this is to watch Fees paid into your retirement accounts. Keep it simple. You need to invest in a low cost index fund or ETF and save regularly. And that’s the end of the story. Fees can be very destructive over time. They can add up to a large withdrawal on your account.
One of the things that strikes me about the transition to retirement is that many of the people who get close to it have been working full time and have already occupied all of their mental space for years and haven’t started to branch out into the things they’re going to want to do in retirement. Getting to retirement can be somewhat of a brick wall. It’s like, “Oh my God, what do I do now?” People need to start early to develop additional interests outside of work that they can connect with in retirement.
Second, personal financial media, for the most part, tend to focus on and write for the people who need the least help. They are people looking for that extra edge. “How can I save a few bucks on my taxes this year” or “Increase my earnings.” That’s all great, but these are the people who are faring well in retirement with or without the edge. I hope this book finds its way to people who really need some basic help or are going to have a hard time.
Kerry is a senior reporter and columnist for Yahoo Finance. Follow her on Twitter @tweet