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Some diligence now means dollars later

The concept of employer/government-assisted retirement in America is considered to be 70 years old this month, dating to the creation of the Social Security Act. It is estimated that fewer than two of every five workers have calculated what they will need to live on once retired and what their income will be.

By ROBERT N. JENKINS
Published August 29, 2006

You should know

The concept of employer/government-assisted retirement in America is considered to be 70 years old this month, dating to the creation of the Social Security Act. It is estimated that fewer than two of every five workers have calculated what they will need to live on once retired and what their income will be. Here are some facts to know:

* Financial planners say workers should figure on their retirement funds - IRAs, pensions, profit-sharing plans, investments - replacing 50 percent of their salary. Social Security should be counted on to replace at least 20 percent of a salary, though that percentage would be less for those earning the largest salaries.

* Planners say a retiree should withdraw no more than 4 to 5 percent a year from a savings account, so that he or she does not outlive the money in the fund.

* For companies contributing to an employee's 401k plan, the most common formula is 50 cents contributed for every dollar the worker saves, up to 6 percent of the salary.

* This year, you can put up to $4,000 in an IRA and $15,000 in a 401(k). If you are at least 50, you can save an extra $1,000 in the IRA and $5,000 in the 401(k).

* Only one in six nongovernment workers has pension coverage. Of those, only one in 10 contributes the maximum allowed to tax-deferred plans.

* The new trend in company retirement accounts is the "life-cycle fund." A series of various mutual funds represents progressively less risk, and each employee's funds are automatically shifted to more conservative portfolios as the likely retirement date approaches.

* Online tools for calculating your retirement savings include:

www.kiplinger.com/personalfinance/tools

www.choosetosave.org/ballpark

www.bloomberg.com/invest/calculators/retire.html

www.aarp.org (type "retirement calculator" in the Search window)

Source: Kiplinger's Retirement Planning

Soaring prices for gasoline, prescription medicines and housing are a reminder to take a hard look at our financial plans for retirement.

Consultants estimate that for workers to continue living comfortably once they retire, they will need 75 to 85 percent of their preretirement income, usually drawing on pensions, savings and Social Security.

But fewer than 40 percent of people now working have calculated either how much they'll need or how much they'll have.

If you - like me - are in that majority of nonplanners, or if you haven't reviewed your postretirement picture recently, you should do so. My own wake-up call was reading the Retirement Planning guide published by Kiplinger's Personal Finance magazine.

The 128-page magazine is filled with success stories. Wait until you read about the retired telecommunications worker who is now an "extra" on various TV shows, or the 32-year-old physical therapist on track to have $2-million in savings when she retires. It lists the Top 25 mutual funds and offers a "procrastinator's catchup guide."

It was after I took a pencil and calculator to the magazine's retirement worksheet that I called editor Mary Beth Franklin to discuss the issues facing what will soon be the largest number of retirees America has ever had: As of this year, more than 7,900 baby boomers are turning 60 each day.

Here's part of our conversation:

What is the prime issue that workers should know about saving for retirement?

The earlier you start, the better off you are, but it's never too late. . . . Many of you are going to be responsible largely for your own retirement, and it's going to be as good as you make it.

The people who have some kind of guaranteed income, whether it's a pension, annuity or whatever, they're just happier. They're not necessarily richer, but they're more content.

There's all sorts of great tools out there to help them save. The main one, if you are fortunate enough to have a workplace plan like a 401(k), is to contribute at least as much as needed to get your employer's matching contribution.

But contribute to the max allowed ($15,000, this year) if you can.

If you are 50 or older and can take advantage of (one-time) catchup contributions of up to $5,000 (in tax-deferred income), it's a great idea.

But if I start thinking about retirement savings at age 62, is it too late to do something meaningful?

You would probably need to be working a lot longer than the traditional retirement age. . . . But there are other choices you can make (to reduce your financial needs once retired):

* Do you own a home? Can you downsize?

* If you pay off a mortgage when you retire, your cash flow needs may be going down by $1,000 or $2,000 a month.

* Can you move to a less expensive area?

* Can you work part time?

How about the recent changes to typical sources of retirement income for the average worker - fewer pensions are being made available, fewer employer-supported health plans, the longer life expectancy?

The rules of the game are being changed midway for many workers, and that's really tough. One of the magazine articles points out that while people talk about, "I'll just work longer," unfortunately sometimes it's not your choice:

You might be 55 and suddenly you're laid off, or your company goes out of business, or you're five years away from retirement and that pension you were expecting is frozen (and) you don't get that big bump-up in salary you were expecting.

We say to people that rules of thumb like saving 15 percent of your salary or whatever, these are great rules far out from retirement. The closer you get to retirement - I'd say no later than five years before - that's when you really need to crunch the individual numbers. . . .

So we tell people to look at your guaranteed sources of income:

* You can get a pretty good idea from the Social Security Administration how much to expect. (The Web site www.socialsecurity.gov has calculators providing a choice of increasingly detailed estimates of your monthly benefit.)

* If you're lucky enough to have a pension, how much is that going to be?

If there is a gap between what you know you're going to be spending and what you know you're going to have coming in, that's what you need to fill with your savings.

And if your savings are looking a little light, now is the time - within those five years before retirement - to say, "Let me tighten my belt a little bit and try to live on a 'retired' budget a year or two before I actually retire."

It's easier, the further you're away from that actual retirement date, to make tweaks in your plans.

You mentioned the 15 percent (salary) set-aside, but is that realistic if you've got a couple of kids? Who could really set aside that kind of cash?

I think the biggest impediment (to saving 15 percent) is granite countertops - because as soon as you send the kids to college, the first thing you want is to redo the kitchen.

And hey, you should reward yourself, but after you do the kitchen, then kick the extra five grand the next year into your retirement plan. What you put away now you're going to be able to enjoy tomorrow.

Folks nowadays are carrying much more personal debt . . .

Oh, huge debt.

Has that affected our usual retirement?

I think it changes dramatically the type of retirement people will have.

The World War II generation, particularly, hated debt and always wanted to hang on to their houses when they retired.

But in the future, some experts say, the majority of people . . . will have to tap into the equity of their home, either through a reverse mortgage or downsizing, because they've been carrying so much more debt through their working years than prior generations have.

One thing I would recommend that people do while they're still working, if they have a home and if it's possible, is to get a home equity line of credit. You don't necessarily have to use it, but it's easier to get while you're still working. And it's there as an emergency way to tap into your home's value.

The rates for paying back the home equity loan are going to be cheaper than your credit card debt?

Exactly. You're tapping into your equity and something you actually own in the long run, as opposed to just straight-out buying on a credit card.

The other thing we address in (the magazine) is health care costs in retirement, the disappearing retiree health benefits. This is huge, and you're probably going to be spending more money than you thought because your copayments are higher (than while you were working).

We also talk about long-term care insurance for those who can't afford it, and where it's appropriate, this may be a good use for some of your money. . . .

Is there any downside to working past the "normal' retirement age?

Not really. Just working an extra two or three years . . . reduces your need to save because you are getting income those extra years, you're most likely contributing to your retirement savings that much longer, you're delaying your receipt of monthly Social Security benefits, which will be larger. And you will be relying on your savings two or three years less.

But, at the same time, some people are physically not able to do that, or they'd like to keep working but their job has disappeared. And no matter how much we hear about the forthcoming shortage of workers, the brain drain, some companies simply aren't going to hire you if you're over 50.

I think that will change in the future as employers realize that valuable employees are the ones that are 50-plus, but it's going to be a culture change. . . .

I think the scary part (about retirement) is that some people can be financially secure and they work one day, retire the next, and they literally don't know what to do with themselves.

This can be difficult for married people who have been used to being apart eight or 10 hours a day.

People (contemplating retirement) should develop an interest . . . you know, not everybody has to play golf seven days a week.

* * n

Kiplinger's Retirement Planning is $5.95 and is on newsstands through Oct. 3 or can be ordered by calling toll-free 1-888-547-5464. Franklin said some articles occasionally will be posted to the Kiplinger Web site, but they are not archived.

Robert N. Jenkins can be reached at (727) 893-8496 or jenkins@sptimes.com.

[Last modified August 28, 2006, 19:30:10]