Retirement. It sounds like such a long way off; why worry about planning for it now? After all, just paying the bills and putting food on the table is tough enough for most of us. Plus, there will be plenty of time to save for retirement after the kids are gone, right? Unfortunately, this is normally not the case. In fact, when preparing for your golden years, time is your biggest ally.
Surveys consistently show that only 4 to 7 percent of those who retire each year are financially independent. Other couples must depend on Social Security, relatives, welfare, or other charitable means to live. Poor planning is the primary culprit for this sad statistic. Conversely, good planning can make retirement years some of the best years of your lives.
Why do people fail to prepare adequately for retirement? Most do not understand its importance, and they lack the basic knowledge to plan properly.
Very simply, all retirement planning centers around two key elements: (1) Saving enough and (2) Investing your savings properly for a good return. Many factors are involved in each of these elements, but they represent the essence of retirement planning.
There were days when the average worker retired at age sixty-five and died at seventy-three. Planning for eight years of retirement was not an ordeal. Between Social Security and a generous pension from a company for which they had worked over thirty years, the need for personal savings was minimal.
Things are much different today. The employee who works for one company most of his life and earns great pension benefits is becoming a character in a history book. Due to leaps in the medical field, average lifespans are increasing at a dramatic rate. At the same time, many people now opt to retire at ages well below sixty-five, meaning that an increasing percentage of workers will find themselves retired for longer than they worked. The need for good planning is greater today than at any time in our history.
To determine how much you need to save in preparation for this phase of your life, you must first determine your retirement income needs. There is no right or wrong answer here, but, assuming your house is paid for, a good rule-of-thumb is that you will require about 70 percent of your pre-retirement annual income to maintain your lifestyle.
What sources of income will be available to meet this need? Social Security will most likely be around in some form; so you should be safe counting on some income from it. A company pension is also a possibility, but, if you are like many of today's mobile workers, it may not be much.
The final source of retirement income is the most important and the one over which you have the most control—personal savings! One of the most important disciplines you can develop is setting aside a percentage of every paycheck into an investment account designed to provide you with income at your retirement. Individual Retirement Accounts (IRAs) are designed to help individuals save money specifically for their retirement years on a tax-deferred basis. Individuals are allowed to contribute up to $2,000 per year into an IRA. Money that would normally have been taxed as investment income is not taxed until it is withdrawn from the IRA, which may not be for many, many years.
The Taxpayers Relief Act of 1997 made a new type of nondeductible IRA available: the Roth IRA. All contributions to a Roth IRA are made on a nondeductible basis. Investment gains accumulate tax-free within the account. That's right—unlike existing nondeductible IRAs, subject to certain conditions, individuals will have the ability to withdraw money from their accounts completely tax-free. Talk to your tax advisor to see which account would be best for your family.
Generally, I also recommend taking full advantage of the 401(k) plan (or 403(b) plan for nonprofit organizations, schools, and hospitals) your employer offers. In a 401(k) plan, employee contributions are tax-deductible. Many times employers will match employee contributions up to a certain amount. Assets within the plan grow tax-deferred until they are withdrawn.
A financial planner can calculate the amount you need to save each month to reach your retirement income goals. But here are the general guidelines: If you are in your late twenties or early thirties and are just starting to save for retirement, you should set aside about 10 percent of your monthly gross income. If you are in your late thirties or early forties, you need to bump that figure up to approximately 15 percent of your income. Ratchet it up to 20 percent if you are in your late forties or early fifties and just getting started. Finally, if you are one of the unfortunate ones who are older than that and are just now accumulating assets for retirement, it is unlikely you will be able to save enough to become financially independent by age sixty-five. Extending your career a few years may be necessary to secure an adequate retirement income.
Once you have completed step one and set up a savings plan, you must decide where to invest the nest egg you are building.
Buying a home. Without a doubt, the first investment you need to make is the purchase of your personal residence. The benefits of owning a residence as opposed to leasing are enormous.
Assume that you pay the same amount each month for a house you own as you would pay for leasing an apartment. First, the majority of your house payment is likely to be tax-deductible. If you are in the 28 percent federal tax bracket and a 5 percent state tax bracket, every dollar you deduct saves you about thirty-three cents in taxes, making your after-tax payment for the house about a third less than the lease payment.
Second, each payment you make slightly reduces your mortgage balance, building equity in your home. Third, you build even more equity in your house as its value appreciates. Finally, your house payment remains steady while your apartment rent increases each year.
How much of a difference can owning your residence make over a ten-year period? The answer is likely to surprise you.
Assume that you could lease an apartment for $800 per month. At 8 percent interest, you could borrow about $88,500 for a home and keep the same payment, including principle, interest, taxes, and insurance (assume $120 per month goes for property taxes and $30 pays the homeowners insurance). If you make a 5 percent down payment, the house you could afford would cost about $93,158. Further assume that the house appreciates 3 percent annually and your apartment rent increases 3 percent each year. The benefit is shown in Figure A.
Savings "buckets." Beyond purchasing your residence, you need to establish four savings "buckets:"
1. Emergency savings: This money should reside in a liquid interest-bearing account at a brokerage firm or bank, such as a money-market fund. Normally $2,000 to $5,000 is adequate. However, I once met with one older lady who told me she did not feel comfortable with less than $100,000 in her check ing account!
2. Big-ticket savings: You can use the same account for this money as for your emergency savings, but distinguish in your mind that any amount over your liquid savings goal is set aside for big-ticket items. These are relatively expensive items that you purchase on a regular, but infrequent, basis, such as furniture, appliances, and cars.
3. Debt liquidation: Generally, with the possible exception of a home mortgage, I recommend that you make every effort to live debt-free. Getting out of debt normally requires setting aside extra money each month, over and above all minimum required debt payments, for liquidating existing debt.
4. Long-term savings: This is the account for accumulating wealth and building a retirement nest egg. Even though most of the money in here may be relatively liquid, plan not to spend any of it until you are withdrawing income from this account to live.
In planning for retirement, the fourth bucket is the most important. So let's talk about how to invest these funds.
Stocks and bonds. Though others are available, the two primary classes of investments used for retirement savings are stocks and bonds. When you purchase a bond, you are lending money to an organization, such as a bank, a corporation, or the government. Bonds are called fixed-return investments because they pay a fixed interest rate until the bond matures. Assuming the issuer is creditworthy, bonds are considered to be safe investments.
When you invest in a stock, you become an owner of a corporation. Your return is not guaranteed, but depends on how well the company performs.
A key distinction between investing in a stock and a bond is that with a bond, your principal is not at risk. With a stock, your principal is at risk and moves up and down in value on a daily basis.
Why would someone risk their principal and invest in a stock when they could invest in a bond, where both their principal and return is guaranteed? Because, over long periods of time, stocks have significantly outperformed bonds, returning approximately 11 to 12 percent annually. This compares to an average bond return of 5 to 6 percent.
Stock prices tend to move in tandem with our country's economic cycles. Since a complete economic cycle lasts anywhere from three to seven years, I recommend that people only invest money in the stock market that can remain invested for a minimum of five years. Money that will be needed sooner than that, perhaps for a child's education or to purchase a car, should be placed in a fixed-income investment.
I believe that most, if not all, retirement savings should be set aside in stocks. Since accumulating retirement assets is a long-term proposition, and stocks yield the greatest long-term return, there is little need to commit a significant portion of one's long-term savings to bonds.
Since most people do not feel comfortable picking individual stocks, I recommend using no-load mutual funds for stock market investments. Mutual funds, because they are diversified, are safer than individual stocks. They also offer a professional manager who picks the individual securities for you and decides when to buy and sell each security. You may open mutual fund accounts with amounts as low as $500 and invest as little as $50 per month.
Because you can buy partial shares, they are ideal for making regular, periodic investments.
Retirement. It may still sound like a long way off, but once you get there, you'll be glad you prepared for it. mp
Scott Kays, CFP, is president and founder of Kays Financial Advisory Corp., which manages approximately $80 million in assets. He is the author of Achieving Your Financial Potential (Doubleday). Visit him at www.scottkays.com.
by David and Claudia Arp
When you retire, that old joke, "I married you for better or for worse, but not for lunch," may not be so funny. Here are five changes you may experience as you begin the retirement years, but each change offers you the opportunity to reinvent your marriage and make the rest the best.
- Your major identity changes. No longer is your identity with your job, and it's easy to just not know who you are. You can feel threatened. It's a great time to develop some new interests or choose a project to do together.
- You have more time together. Actually, you have the potential of spending twenty-four hours a day with this other person. At first it may be awkward transitioning into being a couple again.
- Your buffers are gone. Often one's job and children buffer conflict and in-depth conversations with your spouse.
- Communication patterns that worked before don't work now. Sound bites on voice mail and quick hellos and good-byes are replaced with having enough time to start an argument and actually finish it.
- Roles change. Before retirement one may have assumed the major role in caring for the household, cooking meals, and so on. In retirement, it's time to reinvent your roles.
Embrace retirement as an opportunity to deepen your understanding of one another. Scary as it might be, you can learn new skills that will deepen your communication. You have the opportunity to become intimate friends and lovers. Romance isn't reserved for the young, and you can reignite the spark of love in the second half of your marriage. It's time to jump-start the dating habit and enter your second childhood. Celebrate. Have some fun. Remember that marriage is a journey, not a destination, and you can decide where you want your marriage to go in the future.
David and Claudia Arp are marriage educators and authors of the Gold Medallion Award-winning book, The Second Half of Marriage, and video curriculum (Zondervan). Visit them at www.marriagealive.com.
by David and Claudia Arp
When it comes to the concept of retirement, the Scriptures are silent. We know in the past people didn't live long enough to retire, but what about Abraham and Sarah or Methuselah? They lived well past age sixty-five. Instead the Bible indicates that with age comes wisdom and understanding (Job 12:12)—two precious qualities our world desperately needs today. So as Christian couples, what should be our attitude toward retirement—the years when we typically have more time to call our own?
First, we would acknowledge that retirement is different for many couples. Some have resources to retire early and lots of life left to invest. Others have few resources and continue to support themselves way beyond the typical retirement age. However, every Christian couple has the privilege and responsibility of investing their lives in glorifying God. A Christian marriage is one that is Christ-centered and reflects God's image by the way spouses love and serve each other.
So it seems only natural to us that a retired Christian couple will find new and creative ways to express God's love and service to those around them. It may be helping an adult child who is in crisis or getting involved in the lives of their grandchildren. Consider these Christian couples: Bob and Beverly moved to Vienna, Austria, to help organize the administrative office for a Christian ministry. Roger and Carol, after early retirement, joined the staff of their church and are helping to develop a church model for ministering to marriages and families. Our neighbors, Bill and Fran, invest their time in mentoring others, leading Bible studies and a significant prayer ministry. As we think of these couples, we see unique opportunities where together they are sharing their wisdom and understanding with others. Not one would describe themselves as retired. Think about it. Do you ever really plan to retire? We don't.
David and Claudia Arp are co-authors of Fighting for Your Empty Nest Marriage (Jossey-Bass). Visit them at www.marriagealive.com.
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