These strategies can help recover lost income and/or assets following one or more of the life events described above. These strategies can also be used by late savers to make up for lost time and to prepare for a comfortable retirement.

Increase Contributions to Tax-Deferred Retirement Savings Plans. The 2001 tax law increased annual contribution limits for IRAs and employer 401(k), 403(b), and Section 457 plans, at least through 2010. Just a 1% increase in the amount of pay diverted to savings can result in thousands of additional dollars at retirement. Americans contributed an average of $3,514 to 401(k) plans in 2001 (Opdyke and Higgins 2002). The maximum plan contribution limits are $12,000 in 2003, $13,000 in 2004, $14,000 in 2005, $15,000 in 2006, and higher amounts adjusted for inflation thereafter. (more…)

The Medicare program still pays for acute health care for all older Americans, although it faces the same structural shifts as Social Security and, therefore, faces the same threats to programmatic stability. Attempts to incentivize health maintenance organizations (HMOs) to expand the traditional Medicare benefits package by providing dental, chronic prescription drug, and other therapies not otherwise included in original Medicare have not worked well and are declining. The expense of most acute care provided to retirees by their own physicians, in hospitals of their own choosing, is still covered by Medicare at rates for which providers are still willing to work. (more…)

Prolonged market slumps, such as from 2000 to the present, significantly erode gains made during previous bull markets. Many investment portfolios in early 2003 are a small fraction of their former value. The last time that investors experienced three consecutive years of stock market declines was 1939–1941 (Stewart 2002). (more…)

Retirement savings last longer when invested assets are withdrawn tax-efficiently. Generally, this means tapping taxable accounts or tax-exempt investments first, followed by retirement accounts made with after-tax dollars, and then accounts funded with before-tax dollars. Withdrawals from Roth IRAs contribution should be made last because they have no minimum withdrawal age and earnings grow tax-free. (more…)

During the process of divorce, two people are expected to make rational and far-reaching decisions at a time of emotional turmoil. This may also be their first experience with the court system and hiring an attorney. Expenses often increase when one spouse moves out and sets up a separate household. Couples must estimate the dollar value of their household property and divide their debts. (more…)

Few events can turn a person’s financial life upside down as the death of a spouse. In addition to shock, grief, and loss of a spouse’s companionship, there is often less household income than before. There are also many decisions to be made (e.g., investing life insurance proceeds), forms to be completed, and suggestions from “helpful” family members and/or financial salespeople. For some survivors, the pressure to do something—anything—becomes unbearable. Decisions are made quickly, much like a “hot potato” that must be tossed away. (more…)

In the late 1980s, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), the government agency that calculates the Consumer Price Index, was directed by Congress to calculate an experimental Consumer Price Index for the Elderly (CPI E). This experimental index for Americans 62 years old and older is based on existing data, re-weighted to reflect expenditure patterns in the older population. A comparison with published CPIs found that older adults experienced a higher rate of inflation from 1983 through 1999 than the rates reported for either the CPI W or the CPI U. However, it is important to remember that the Consumer Price Index for the Elderly is an experimental index and is not regularly published by the BLS. (more…)

Cash flow planning is the process by which the flow of income necessary to sustain a given standard of living in retirement is identified and financed. It is perhaps the most critical part of retirement planning. Cash flow planning for retirees depends crucially on two factors: (1) the resource constraints a retiree faces in terms of assets and other retirement income sources and (2) the desires and needs a retiree has for spending in retirement. Both of these, in turn, depend to a great degree on when the planning is done. (more…)

There are at least two schools of thought with regard to the basic principles involved in planning for retirement spending. The first, and most common, approach poses the problem as a seemingly simple determination of the retirement income needs of a retiree relative to pre retirement income. This is typically expressed as a “replacement rate,” in which a retiree targets a given fraction of his or her pre retirement income level as an amount adequate to sustain a desired lifestyle without working. Often, a particular level of income is given as a rule of thumb (e.g., 80% of pre retirement income). (more…)

As U.S. longevity increases and health care costs soar, many older Americans face the prospect of outliving their retirement resources. Personal health and maintenance expenses are escalating, and more of America’s older adults have little recourse but to use credit for purchasing necessary medicines and even groceries. Moreover, many seniors who had planned on living in a mortgage-free home are finding that rising tax assessments, escalating insurance premiums, and other home maintenance–related costs are claiming a growing portion of their fixed incomes. (more…)