Setbacks often cut into final retirement savings
By HELEN HUNTLEY
Published April 30, 2006
Here's another reason to start saving for retirement as soon as you start working: If you wait until the last minute, life might torpedo your plans.
For many people, the 50s and early 60s are peak years for accumulating retirement savings. In an ideal world, end-of-career salaries are high and expenses decline as children leave home. But in the real world, things often go wrong.
That's what Boston College researchers found when they analyzed the lives of a group of adults who were 51 to 62 in 1992 and who were interviewed regularly over the next 10 years as part of a national study. The vast majority - 69 percent - experienced some type of major negative shock in that decade. When shocks to spouses were included, only 18 percent sailed through unscathed.
"Life's uncertainties can upend the best-laid retirement plans," Richard Johnson, Gordon Mermin and Cori Uccello wrote in "How Secure Are Retirement Nest Eggs" available at www.bc.edu/centers/crr) The most common shock was a new diagnosis of a major medical condition, with heart problems the most frequently mentioned. One-third said their health limited their ability to work.
Workers with less education were most likely to have health problems. But job loss was just as common for college graduates as it was for high school dropouts.
For married people, divorce was the most financially devastating event. For singles, it was becoming disabled and unable to work. Other serious financial shocks included widowhood and entering a nursing home.
"The safety net is meager for people who lose their jobs or are forced to retire early because of declining health," the researchers concluded. "Workers need to consider these risks as they develop their retirement plans. Those who wait until their 50s to begin saving seriously, as many do, may find it too late to protect themselves against unexpected setbacks."
That's a sobering thought.
I might be interested in investing in a unit investment trust, but I have never seen anything mentioned about them in the newspaper. What are the pros and cons and how does a person monitor the ups and downs of such an investment, since there doesn't seem to be anything in the newspapers?
A unit investment trust, or UIT, is a variation on a mutual fund. As with mutual funds, the main advantage is diversification. For a modest investment, you get a piece of a diversified portfolio of securities. One difference is that UITs have a fixed portfolio that is not actively managed, which means lower costs, at least theoretically.
A common example is a bond UIT with a final maturity date. The investor receives regular dividends plus principal as bonds are called for redemption, then at the maturity date receives the remaining principal. Typically, this investment can be bought and sold through your broker, but the only way to monitor your investment is through your brokerage statements or by looking up your brokerage account online. There may be sales charges and/or redemption fees.
Some exchange-traded funds are legally structured as UITs, but operate differently from the UIT mentioned above. These ETFs have shares that trade like stocks, with prices fluctuating throughout the trading day and brokerage commissions when you buy or sell. One example is the popular "Spider," also known as Standard & Poor's Depository Receipt Trust, which invests in the Standard & Poor's 500 Index. You'll find closing prices on ETFs listed in the stock tables.
Because UITs are not all the same, it is very important to read the prospectus closely before investing.
Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or log onto www.sptimes.com/blogs/money where you also can see other questions and answers.