<< Back to all Blogs
Login or Create your own free blog
Home > Retirement Planning Pitfalls

Retirement Planning Pitfalls

April 16th, 2009 at 12:15 pm

Yesterday I had lunch with a friend who is considering retiring in July. She is 62 and has worked as a teacher for over 30 years. My friend is widowed with a grown son and four grandchildren. (Thankfully, her son will not be a financial burden... he is a successful engineer). According to her retirement estimate, my friend's pension will be about 72% of her current working income. My DF wanted to "pick my brain" because I retired last August, and she's searching for other perspectives on anything and everything related to retiring, especially some of the financial aspects.

So we chatted about what she's done to prepare for retirement. My friend has a 403b account ("small" in her words... not sure what that means) and a savings CD with about "one year's gross salary." DF owns her home that is almost paid for and has no other debt. In talking to my friend, here are some things she DID NOT take into consideration:

1) Inflation: although the state teacher's retirement system guarantees an annual 2% COLA, inflation will likely be higher. DF said she would use her 403b funds as needed to keep pace with inflation.

2) Health insurance: she will not be eligible for Medicare until almost 3 years after her retirement, so she has to plan for health coverage once COBRA runs out. (She thought COBRA would go on until she is eligible for Medicare, but I think it is only 18 months.) She said she would substitute teach to help pay for her health insurance until age 65, or take money from her savings.

3) Paying for increased cost of travel: after retirement, DF will reduce some expenses, but she didn't take into account that travel, a priority for her, might incur more expenses. She said she would use her savings or take on part-time work to pay for travel. Fortunately travel is a "want" and not a "need."

All in all, it seems my friend is on track to retire. She shared that she currently lives on about 80% of her net income, so that is another big plus for her. DF will use her retirement benefit "lump sum" to pay off her small mortgage. And, since she will no longer have a mortgage payment, she will try to add to her savings each month.

I did advise my DF to meet with her HR department regarding COBRA, and a financial planner and/or accountant to get specific financial and tax advice. Taxes in retirement can be an unpleasant surprise if you're accustomed to sheltering income and then find you have few deductions. However, I was happy to share some of the steps I took in my own retirement planning. My DF is doing exactly what I did prior to making the decision to retire... talking to others who have been through the process and leaving no detail to chance.

2 Responses to “Retirement Planning Pitfalls”

  1. Grace Says:

    Without knowing exactly how much your friend has in her 403(b) or current savings (one year's salary?), it's hard to know. But if lots of travel is in her plans, and she's going to use up part of her retirement funds to take care of her mortgage, I have to wonder why she would choose to retire now instead of waiting until 65. Not only would that increase her social security, but she would be eligible for Medicare, her mortgage would be history and she would have at least three more years of savings. Not to mention, she could then see how the markets are going to play out. Why would anyone who didn't have to (say, for health reasons) choose to retire in this economy?

  2. lartiga Says:

    Grace - People are choosing to retire in this economy and not just because of health problems (I am one of them). The HR Director at my former workplace (a friend) told me that despite cutbacks, they did not lay off any teachers this year because enough people were retiring. I think it all depends on how prepared you are and other factors. Teachers do not get social security in California. In CA, teachers and most public employees retire with a guaranteed "defined benefit" pension that is not affected by stock market fluctuations.

    My former employer generously pays health benefits for life for retirees with at least 15 years of employment, so I was lucky. My friend works for a different school district (than the one I worked for), and it only provides COBRA for retirees. She knew about COBRA but not that it would run out after 18 months. Since her pension will be about $5,000-$5,500 a month, she can afford to pay for health insurance for a few years. My friend looks forward to traveling and spending more time with her grandchildren, so I am happy for her.

Leave a Reply

(Note: If you were logged in, we could automatically fill in these fields for you.)
Will not be published.

* Please spell out the number 4.  [ Why? ]

vB Code: You can use these tags: [b] [i] [u] [url] [email]