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How To Plan For A Comfortable Retirement
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Business New Haven
11/22/1999
By: Susan Banfield
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Retirement is a touchy subject. The word can spark guilt in Generation Xers, who may associate it with unheeded chiding from parents. It's a frequent cause of apprehension among Baby Boomers, who are not sure if they even still can prepare properly for a time that is fast approaching.
Cheer up. No matter what your age, a comfortable retirement is a lot more attainable - even painless - than many realize.
The biggest problem younger workers face is their own resistance to saving. Most younger people either don't grasp the importance of saving for retirement, or else they feel, what with houses to buy and children's educations to save for, that they simply can't afford it.
Yet if everybody saved ten percent of their income from the time they started working, they would have nothing to worry about. If workers simply took advantage of their company's plan, starting at age 30, and did nothing else, they would have a nest egg of $2 million or $3 million by retirement age.
In fact, it is crazy not to take advantage of a company 401(k) (or, in the case of non-profits, a 403[b]). Yet the reality is that almost 70 percent of people under age 30 put nothing into their company retirement plans.
One way to overcome reluctance to save is to look squarely at how much you stand to benefit. To begin with, every dollar you place in a 401(k) is a dollar you will not pay taxes on. Since a 30-percent tax bracket is typical for younger workers, this means you can make 30 cents on every dollar you salt away. In addition, many companies will augment what you put in (up to a certain limit) by 50 percent. This means you earn an additional 50 cents on each dollar saved, for a total earnings of 80 cents on the dollar. Not bad!
Getting started is the key. Even if you can save only one percent of your income for a time, eventually you will be able to up that percentage to two, then three, and the money will grow. Say, for example, that you are 25 and feel you cannot possibly pare anything from your budget for a retirement account. But every morning on your way to work you buy a café latte at Starbucks. Start bringing coffee from home instead, and put what you were spending at Starbucks into a 401(k). By retirement age you will have accumulated $966,000.
The moral for younger workers: If you do nothing else, take advantage to at least a degree of your company's retirement plan.
Painless retirement saving is also possible for self-employed workers. There are several plans to choose from, including Keoughs, SEPPs (Simple Employee Pension Plans), Simple IRAs and profit-sharing plans. Select and tailor a plan that it is most advantageous to you and your company.
For older workers - say, early 50s - the primary concern is likely to be that it's too late to make provision for retiring comfortably. The good news is that it's not. These worries have been exacerbated by doomsayers' reports about the demise of the Social Security system. Actually, Social Security is in better shape than most people realize.
Right now, if current economic conditions persist, Social Security will be sound for at least 35 years. Congress recently mandated that every worker be mailed an annual statement detailing what their Social Security benefits will be if they retire at 62, 65 and 67. So it's easy to verify what you can expect from the government. For most people, the figures are a pleasant surprise.
Still, Social Security provides far from a comfortable retirement for most people. If you have been negligent about savings, there is still time to play catch-up. Perhaps your earnings have been drained by raising a family, sending children to college, paying for weddings. Now, however, as your children move out on their own, saving should be much easier. If both a husband and wife take full advantage of retirement plans at work, and perhaps set up a separate investment account, they can provide well for themselves in the space of just 15 years.
A Roth IRA is an excellent option for a secondary retirement account. Since many employers will match only the first six percent of money you place in a 401(k), it often makes sense to take the next four percent you save and put it into a Roth. While the Roth money is not tax-deductible up front, it grows tax-free and comes out tax-free.
This can be a tremendous advantage when you retire. If 30 or 40 percent of the savings you withdraw to live on are not taxable, you wind up in a lower tax bracket, and pay less taxes on the taxable part of your income.
In order to make specific plans for how much you need to save as retirement age draws closer, you need to set a goal for your annual retirement income. Usually this is 75 or 80 percent of your present income - although once your children are through school and your house is paid off, you may be able to live well on 50 percent.
Ideally, you will want to build a sufficient nest egg that an eight-percent annual return would yield this 75- or 80-percent figure. Most investments actually have an annual yield of somewhere around 12 percent, but it is wise to plan to be able to live on 8 percent, so that the extra four percent can help you stay ahead of inflation.
When making late-stage retirement plans, consider purchasing long-term care insurance. This will protect your nest egg from being drained by you or your spouse being confined to a nursing home. Long-term care insurance is much cheaper if purchased while you are still relatively young and healthy.
If all of this number crunching seems too daunting, or you feel bewildered by the array of secondary investments available, it's wise to consult a qualified financial planner. The key word is “qualified.” Financial planners are not required to be licensed. Be sure to select someone who has been in the business for at least five to ten years.
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