By Sandra Miller
Daily Evening Item
More than half of Americans between the ages of 18 and 34 and a quarter of those aged 35-54 have not begun to save for retirement, according to reports. Perhaps those people behind the statistics reasoned that when they first entered the workforce, it was more important to buy furniture for the new apartment. Then it was time to get married, buy a house, have kids, start an education fund, get a bigger car, take the kids to Disney World … and when things settled down, that’s when they would start putting money into their retirement. But that’s a bad spot to be in if you’re 20 years or less from retirement.
If you want to retire comfortably, and have accepted that you most likely are not going to win the lottery, then it’s time to take control of your destiny, preferably yesterday. Social Security will most likely provide for the basics: groceries, shelter and a little clothing, but not much else.
The problem with Social Security is that it is about to be crushed by the number of baby boomers nearing retirement. When Social Security was established in 1935, the system worked because the average life expectancy was 62. Today’s medical miracles are keeping us alive 30 years after retirement age. You do the math. Oh, you haven’t, and that’s why you’re reading this article.
This article won’t do the math for you; instead, it’s to get you thinking about your retirement plan, or lack thereof. So how much does the average person need to retire? It’s hard to predict how much a person who is 40 today will need at 70, but if you use current inflation figures, many reports are saying you should have at least a million dollars in the bank before retiring. A million dollars?
“I have clients with portfolios that large,” says David Whelan Jr., CPA, who is president of Eaglerock Investment Strategies Inc. in Swampscott. “However, the vast majority of people are not heading in that direction.”
Set your goals
Your goal is to avoid living out your retirement years with a cat food diet and a social calendar consisting of watching TV on a tattered recliner. However, you should also expect to live more frugally.
One rule of thumb is that you’ll at least 75 percent of your current income. “It depends on lifestyle, if a client wants to travel around the world once a year, if golf is in somebody’s plans,” says Whelan. “But people who retire at 65 can conceivably live another 20 years, so whatever people set aside needs to last that long.” Also factor in medical expenses not covered by Medicare; retirement community or assisted living costs; and helping out any family members in need.
Expect to contribute a minimum of 5 percent if you’re in your 20s, at least 7 to 10 percent in your 30s, and 15 to 20 percent if you’re just starting to save for retirement in your 40s and 50s.
“I’d tell my 35-year-old best friend to pick a portfolio of well diversified mutual funds, put as much as he could into it, and not do anything with it,” says Whelan. “He will be very happy in 20 years.” As you near retirement, shift more of your retirement nest egg into more stable bonds to ride out another economic downturn.
However, there will be some hard choices to make.
“The 40-something crowd is dealing with planning for retirement and their children’s education, which is often competing for the same dollars,” says Whelan. He and many other financial planners urge that your retirement takes priority. Worst case, junior can get loans or go to a fine state school. You aren’t being selfish – you are trying to protect your kids from having to care for you when you’re older and penniless.
On the other hand, you can use those Section 529 education savings accounts for yourself – name yourself the beneficiary and use those funds in your retirement for tuition, fees, supplies, books, room and board to study literature in London, or learn Italian in Rome.
Also, some plans will let you borrow from the account balance for a downpayment, education expenses, emergency medical expenses and disability.
Diversify your savings
Workplaces will offer a 401 (k), Individual Retirement Accounts (IRAs), pensions, annuities, or Keogh, and if you’re lucky your employer will contribute to it. You’ll then have Social Security and savings.
Many Polaroid employees are looking at empty retirement accounts; meanwhile, many who thought they could retire soon are looking at mutual funds sagging from the economic downturn. The key to safer investing is diversification – don’t put all your eggs into one basket.
“In a 401K the biggest mistake people can make with Polaroid and Enron is having 100 percent of your portfolio in one stock,” says Whelan, who recommends no more than 10 percent in any single company.
However, this is also a time to be brave. “I think the biggest concern I have these days is hearing people say that investing in the market these days isn’t safe; but historically it is still the best way to save for retirement,” says Whelan. “People have to keep the discipline and focus.”
General Electric worker Joe Cahill of Lynn has been setting aside 7 to 10 percent of his salary since he started 26 years ago, and he is fully invested in his GE pension. His 401(k) consists of all GE stock, and GE matches up to 7 percent. Considering what happened at Polaroid, he adds nervously, “I have to do something about that. But GE is somewhat like a mutual fund, because they are so diversified. And they’ve done really well in the past 5 or 10 years.”
“When I was younger I never thought I’d get to the point where I’d be in retirement,” says Cahill, who now finds himself listening to financial programs on talk radio for advice. “I feel most people retire into poverty.”
Good financial planning also includes investing in non-tax-sheltered mutual funds, preferably with no custodial fees and no commissions, called loads. “There are some real good no-load mutual funds out there – Janus and Vanguard offer a couple of investment families that have no-load products,” says Whelan.
You may also want to tune up your retirement planning with a well-recommended certified financial planner. A planner charges about one to two percent of the portfolio, up front or based on commission.
“We’re an independent firm,” says Whelan about his Eaglerock services. “We have in excess of a thousand funds available. If you go to Smith Barney you’re apt to end up with Smith Barney funds. Some people work on a fee basis, a lot of it is commission-driven. Nothing is for nothing.”
Sandra Miller is a freelance writer. She is hoping that her Partridge Family lunch box and original Star Wars figurines will fund a comfy retirement.
Sidebar: Last-minute retirement fixes
If you’re nearing retirement age and didn’t save enough:
• Extend your planned retirement age. Plan for a second career that you can foresee yourself doing past 70, even if only part-time. Take advantage of 401(k) plans or health benefits.
• Turn a hobby into income. Golfers can skip the fees in exchange for a part-time job on the greens. Sell your baked goods to the local grocery store.
• Consider a reverse mortgage, where you get a monthly income while building a loan balance against your home equity.
• Maintain your health. Stop smoking (you’ll save loads of cash), exercise (walking is free!), keep your weight down (save on groceries). Eat less meat (veggies are cheaper, and cholesterol takes its toll). Brush and floss daily (or are dentures cheaper in the long run?)
• Look for cheaper cable and Internet plans. Better yet, cancel those services and volunteer your time. (Bonus: A social life.)
• Buy a multi-family home that generates rental income, or take in a boarder.
• Barter your babysitting and cooking skills for a bedroom and kitchen space in your kid’s home.
Resources:
Some good books for beginners:
• “Personal Finance For Dummies,” By Eric Tyson
• ”The 9 Steps to Financial Freedom” by Suze Orman
• “On Your Own: A Widow's Passage to Emotional and Financial Well-Being,”
Alexandra Armstrong
• 25 Myths You've Got to Avoid If You Want to Manage Your Money Right: The New Rules for Financial Success, Jonathan Clements
Websites:
• www.Motleyfool.com
• www.bankrate.com
www.quicken.com
• Social Security benefits calculator: www.ssa.gov/retire/calculators
