- - Thursday, April 26, 2018

If you don’t want to be broke, bored or just not able to retire, it’s best to start planning right now. For most folks that begins with establishing an IRA or similar account where they work, because benefits defined pensions are disappearing and social security won’t be enough.

Most folks don’t have access to private equity deals or exotic real estate plays, and a diversified portfolio of stocks has proven best for the long haul. Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries 2 to 1.

Recent market turbulence has created a lot of anxiety, but the steady gains from the election of Donald Trump through late January were exceptional — big swings are the norm even in a growing economy and long bull market.

Those within 10 years of retirement should gradually adjust their portfolio from mostly stocks to half fixed income — the exact mix at retirement depends on factors, for example like money that may be needed for a child’s wedding.

Most folks often underestimate what they will need in retirement. Mortgages may be paid and children grown, but we tend to spend more on ourselves. For one thing, annual health care expenses can range up to $24,000 per couple, or even more, because Medicare premiums are graded to income and many older folks elect some kind of concierge service like MDVIP. Those provide quick access to a general practitioner and other personalized services, and other doctors who accept Medicare have crowded calendars and waiting rooms.

Most folks underestimate non-medical expenses because regular avocations cultivated during working lives — assuming their kids gave them some time away from soccer, dance lessons, college admissions and the crises adolescent children create — don’t take up nearly all the leisure time available in retirement.

Folks don’t garden or golf much in the winter and even the most avid reader or knitter wants to get out the house more. Hence, retired folks spend more on travel and entertainment and many take up an additional hobby — I started biking at 65 and was shocked at how much it cost to keep my carbon fiber speedster on the road logging 7,000 miles a year.

Even well-established millennials sometimes need help from parents to get through rough patches or purchase a home — don’t judge them harshly, many baby boomers borrowed down payments from their parents. Provisions are needed for the final decade of life when long-term care is often required, and one-time needs like a new furnace, roof or car still can cost more and come up sooner than anticipated.

After auditing all that, estimating annual needs and subtracting Social Security benefits from the total, it is important to recognize we are living a lot longer these days. Couples who reach 65 in reasonably good health, embrace activities that keep minds active and exercise regularly should count on one partner living to 100.

The minimum annual distribution requirements for tax-sheltered retirement accounts imposed by the IRS at age 70 essentially assume longevity in that range. Simple prudence requires planning for retirement assets to last at least 35 years.

At retirement, if funds are allocated one-half in an S&P 500 index fund and one-half in fixed income — for example a ladder of CDs ranging from one to five or seven years, retirees can conservatively assume a 4 percent annual rate of return. Assuming overall inflation at 2.7 percent — 2.25 for general living expenses and 4.25 for health care — and running down savings at a rate of 3.5 percent, the money should last 35 years.

As a 4 percent rate of return is conservative, the money should last longer and some likely will be left for heirs.

If your savings won’t support your anticipated spending at a 3.5 percent draw down rate, then you should plan to work longer or continue earning some money after leaving full-time employment.

Most folks find complete retirement boring and even stressful. Although it may not be possible to work part-time in your old line, cultivating some independent consulting work, turning a hobby into as sideline that pays or just a part-time gig in a flower shop or as a limo driver — depending on your education, skills and desire for continued responsibilities to others — can be as important as stashing enough cash in an IRA.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

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