Baby Boomer Retirement
"Have you thought about retirement?" We've asked this question before, and we'll no doubt ask it again. Retirement is an important matter in general and in particular because it makes us look beyond today. Debbie from Hodgepodge writes to ask us for ideas about what to do if our own time "beyond today" is approaching rapidly. What if we're in that great Baby Boom generation now nearing retirement and we haven't really begun to save for it? What can we do?
Since a good number of folk are in that circumstance, we don't have to go far to find advice. Two quick, current sources: Kiplinger's Personal Finance Retirement Planning 2007, a brand new magazine, dated Fall 2007, for $5.95 at good-sized newsstands and supermarket magazine racks. And the March 2007 issue of Money Magazine, which by now is probably available at your local public library. The Kiplinger's has an article titled "Late Bloomer" that addresses these questions, while the cover story of Money promises "Everything You've Always Needed To Know About Money…But Now You're Too Old To Ask". Some of their notions are a little too cheery and facile, as if you could change your attitude and behavior, if not overnight, then in just a couple of days. That's easier said than done, of course, but at least our thinking will get started in the right direction.
Spending and Debting – Again!
Two places that both of these popular magazines urge us retirement planners to start have, interestingly, no direct link to saving and investment. Those will come, to be sure, in just a couple of paragraphs, but the initial steps consider the other side of our financial statements, spending and debt. Ah, we've heard this before too! Make a budget, say Kiplinger's and Money, and Kiplinger's contains a nice worksheet to help you do this. You need to know how much money you need to live on. You will be more conscious, then, of how much you spend and what you're buying. You can see more easily where you might cut back. Money lists several websites that help you do this on-line, if you prefer.*
Pay down your debt. How many times in its young life has Ways of the World said this to you? When you're looking at retirement, paying off debt now will help then in two major ways: It reduces the cash drain of big payments. And it lowers your own personal risk at a time when other life factors may make you more vulnerable: your own health, your family's health and your income. One tactic you can use if you carry significant credit card debt is to pay it off using a home equity loan. Paying that off, in turn, costs you far less interest and may have some tax benefit.
401(k) Plans and IRAs
Now to saving and investment. One thing Ways of the World does not do is give investment advice. But we can make some broad statements about ways of saving and investing. We mentioned, for instance, in our November article on retirement that a surprisingly large number of people don't know anything about their employer's 401(k) or other pension plan. Now's the time to find out.
New federal legislation passed last year gives more employers the opportunity to enroll employees automatically in 401(k) programs unless the employee chooses to opt out. This is the reverse of the prior arrangement that called for the employee to make the enrollment decision. With the new law, employers will set initial investment amounts and asset allocations, and employees can choose to alter these. A kind of forced saving. Further, the new law also forces the employer to let employees diversify; many of these plans' investments have been restricted to the employer's own stock, but this can be phased down, if the employee chooses.
Note that you can contribute to both an IRA and a 401(k) in the same year. Within certain income limits (in 2007, $99,000 for singles, $156,000 for married couples) you can choose a Roth IRA. You make deposits into this account from after-tax income, but its income and capital gains will always be tax-free. Regular IRAs, which come from pre-tax income, are tax-deferred; they impose the tax on your withdrawals of the initial amount and its growth, and you must begin withdrawals by age 70-1/2. Roth IRAs have no such withdrawal requirement, and your money can continue to grow tax-free. This year, people under 50 can contribute $4,000 to a Roth IRA and those 50 and over can contribute $5,000. Last year's law also established a "Roth 401(k)". Whatever instrument you choose, take as much advantage as you can of tax-advantaged savings vehicles to enhance your return.
Asset Recipe: Mix Thoroughly
Both the Kiplinger and Money publications drew my attention to a new kind of mutual fund, called the "target date fund". As life circumstances change, so should our investment profile: when we are young, we want our investments to emphasize growth, but as we get older, it's more current income we need. The growth portfolio has a large proportion of stocks, while the income portfolio needs bonds and stocks that pay large dividends. These "target date" funds shift your money more-or-less automatically at preset "target dates" to achieve this remix. To learn more, including mutual fund companies that offer these, check out our source publications or their respective websites.
These comments about shifting around asset types highlight another general feature of our retirement plans: they should be diversified. No single asset type, much less a single asset, can be counted on to provide the cash we need at the time we need it. So combinations are best – some of this and some of that – some home equity, some stocks, some bonds, some simple bank account. And increasingly, as markets become more global, some of the stocks and bonds should represent companies and governments outside the United States.
Watch Those Fees
A couple of investment "don'ts". Don't invest in an asset you don't understand. "Variable universal life annuity". Excuse me? BDCs? REITs? Gas royalty pass-throughs? These may all be fine. But make sure you know how they work. And how their fees are structured.
Then the other "don't": stay away from high-fee instruments. There are hundreds of no-load mutual funds and funds with low expense ratios. Look at prospectuses and other information to find out about these costs. If someone is trying to sell you a high-fee product, make sure there's such a good reason for the fee that the investment still pays for you. [Someone we know really well has a particular asset for which something called "insurance charges" eats up almost all of the capital gain every quarter. Hmmm. Wouldn't her money be better off somewhere else?]
Think Twice About Early Retirement
One more pre-retirement concern, especially for us older Boomers. In reading up for this article, we were shocked – shocked!! – to learn that half of workers start to draw Social Security at age 62. This permanently reduces your benefit by about 25%, and until your "normal" retirement age there are earnings caps that are really restrictive. If you work and your income this year is more than just $12,960, earnings above that amount reduce your benefit check further until your regular retirement age (presently 65 years and 10 months). So unless there's a health or a family reason to stop working early, keep going, distasteful as this may seem in the moment. Depending on your profession, you might be able to work out a less-demanding job situation, so you can at least slow down. But please reconsider plans for "early retirement".
We still need to talk in more detail about Social Security and Medicare, and we will do that. The demographics are already in place: 3.3 workers per beneficiary in 2006 will become 2.3 in 2025 and headed still lower. The programs are likely to experience further benefit cuts and tax increases. Further, despite many politicians' disdain for private accounts, we're probably going to need them too – and don't look now but that automatic 401(k) enrollment scheme is a step in that direction. More to come.
-----------------------------
*Here are some helpful websites. Google can bring you many more.
Social Security Administration: www.ssa.gov
Kiplinger's: www.kiplinger.com
Money Magazine: www.cnnmoney.com
Retirement planning worksheets: www.ifigure.com (select the "Money" item in the left margin menu. Further links to numerous resources) and www.360financialliteracy.org
Since a good number of folk are in that circumstance, we don't have to go far to find advice. Two quick, current sources: Kiplinger's Personal Finance Retirement Planning 2007, a brand new magazine, dated Fall 2007, for $5.95 at good-sized newsstands and supermarket magazine racks. And the March 2007 issue of Money Magazine, which by now is probably available at your local public library. The Kiplinger's has an article titled "Late Bloomer" that addresses these questions, while the cover story of Money promises "Everything You've Always Needed To Know About Money…But Now You're Too Old To Ask". Some of their notions are a little too cheery and facile, as if you could change your attitude and behavior, if not overnight, then in just a couple of days. That's easier said than done, of course, but at least our thinking will get started in the right direction.
Spending and Debting – Again!
Two places that both of these popular magazines urge us retirement planners to start have, interestingly, no direct link to saving and investment. Those will come, to be sure, in just a couple of paragraphs, but the initial steps consider the other side of our financial statements, spending and debt. Ah, we've heard this before too! Make a budget, say Kiplinger's and Money, and Kiplinger's contains a nice worksheet to help you do this. You need to know how much money you need to live on. You will be more conscious, then, of how much you spend and what you're buying. You can see more easily where you might cut back. Money lists several websites that help you do this on-line, if you prefer.*
Pay down your debt. How many times in its young life has Ways of the World said this to you? When you're looking at retirement, paying off debt now will help then in two major ways: It reduces the cash drain of big payments. And it lowers your own personal risk at a time when other life factors may make you more vulnerable: your own health, your family's health and your income. One tactic you can use if you carry significant credit card debt is to pay it off using a home equity loan. Paying that off, in turn, costs you far less interest and may have some tax benefit.
401(k) Plans and IRAs
Now to saving and investment. One thing Ways of the World does not do is give investment advice. But we can make some broad statements about ways of saving and investing. We mentioned, for instance, in our November article on retirement that a surprisingly large number of people don't know anything about their employer's 401(k) or other pension plan. Now's the time to find out.
New federal legislation passed last year gives more employers the opportunity to enroll employees automatically in 401(k) programs unless the employee chooses to opt out. This is the reverse of the prior arrangement that called for the employee to make the enrollment decision. With the new law, employers will set initial investment amounts and asset allocations, and employees can choose to alter these. A kind of forced saving. Further, the new law also forces the employer to let employees diversify; many of these plans' investments have been restricted to the employer's own stock, but this can be phased down, if the employee chooses.
Note that you can contribute to both an IRA and a 401(k) in the same year. Within certain income limits (in 2007, $99,000 for singles, $156,000 for married couples) you can choose a Roth IRA. You make deposits into this account from after-tax income, but its income and capital gains will always be tax-free. Regular IRAs, which come from pre-tax income, are tax-deferred; they impose the tax on your withdrawals of the initial amount and its growth, and you must begin withdrawals by age 70-1/2. Roth IRAs have no such withdrawal requirement, and your money can continue to grow tax-free. This year, people under 50 can contribute $4,000 to a Roth IRA and those 50 and over can contribute $5,000. Last year's law also established a "Roth 401(k)". Whatever instrument you choose, take as much advantage as you can of tax-advantaged savings vehicles to enhance your return.
Asset Recipe: Mix Thoroughly
Both the Kiplinger and Money publications drew my attention to a new kind of mutual fund, called the "target date fund". As life circumstances change, so should our investment profile: when we are young, we want our investments to emphasize growth, but as we get older, it's more current income we need. The growth portfolio has a large proportion of stocks, while the income portfolio needs bonds and stocks that pay large dividends. These "target date" funds shift your money more-or-less automatically at preset "target dates" to achieve this remix. To learn more, including mutual fund companies that offer these, check out our source publications or their respective websites.
These comments about shifting around asset types highlight another general feature of our retirement plans: they should be diversified. No single asset type, much less a single asset, can be counted on to provide the cash we need at the time we need it. So combinations are best – some of this and some of that – some home equity, some stocks, some bonds, some simple bank account. And increasingly, as markets become more global, some of the stocks and bonds should represent companies and governments outside the United States.
Watch Those Fees
A couple of investment "don'ts". Don't invest in an asset you don't understand. "Variable universal life annuity". Excuse me? BDCs? REITs? Gas royalty pass-throughs? These may all be fine. But make sure you know how they work. And how their fees are structured.
Then the other "don't": stay away from high-fee instruments. There are hundreds of no-load mutual funds and funds with low expense ratios. Look at prospectuses and other information to find out about these costs. If someone is trying to sell you a high-fee product, make sure there's such a good reason for the fee that the investment still pays for you. [Someone we know really well has a particular asset for which something called "insurance charges" eats up almost all of the capital gain every quarter. Hmmm. Wouldn't her money be better off somewhere else?]
Think Twice About Early Retirement
One more pre-retirement concern, especially for us older Boomers. In reading up for this article, we were shocked – shocked!! – to learn that half of workers start to draw Social Security at age 62. This permanently reduces your benefit by about 25%, and until your "normal" retirement age there are earnings caps that are really restrictive. If you work and your income this year is more than just $12,960, earnings above that amount reduce your benefit check further until your regular retirement age (presently 65 years and 10 months). So unless there's a health or a family reason to stop working early, keep going, distasteful as this may seem in the moment. Depending on your profession, you might be able to work out a less-demanding job situation, so you can at least slow down. But please reconsider plans for "early retirement".
We still need to talk in more detail about Social Security and Medicare, and we will do that. The demographics are already in place: 3.3 workers per beneficiary in 2006 will become 2.3 in 2025 and headed still lower. The programs are likely to experience further benefit cuts and tax increases. Further, despite many politicians' disdain for private accounts, we're probably going to need them too – and don't look now but that automatic 401(k) enrollment scheme is a step in that direction. More to come.
-----------------------------
*Here are some helpful websites. Google can bring you many more.
Social Security Administration: www.ssa.gov
Kiplinger's: www.kiplinger.com
Money Magazine: www.cnnmoney.com
Retirement planning worksheets: www.ifigure.com (select the "Money" item in the left margin menu. Further links to numerous resources) and www.360financialliteracy.org
And Ms. Debbie's own personal choice: http://finance.yahoo.com/expert/article/yourlife/27943 and associated pages
posted by Carol S. | 6/05/2007 10:00:00 AM
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