Planning For Retirement Has Never Been Easier (Or More Necessary)
By Larry A Ferstenou
Copyright © 2004. All Rights Reserved.
Reprinted here by permission.
If you're a baby boomer, or especially if you're younger, planning for retirement has never been more necessary. Though I've been convinced of that for a long time, a volunteer job my wife and I have been working the past couple of months has certainly validated that concern.
As tax aides in the AARP Tax Counseling for the Elderly program, Kris and I have been going to the local senior center two days a week to help people in their 60s, 70s, 80s, and even 90s file their tax returns. What we've observed is a little startling. Most of the seniors we've worked with are living on incomes derived from only one or two sources: defined-benefit pensions (otherwise known as employer-funded or "traditional" pensions) and/or Social Security.
At first we wondered if that is unique to this area or if it is typical nationwide -- a little research revealed that it is the latter. According to the Social Security Administration (www.ssa.gov):
- Social Security is the major source of income for two-thirds of our elderly.
- For a third of our elderly, Social Security represents 90% or more of their income.
- Without Social Security, nearly 48% of our elderly would be living in poverty.
As long as those two sources of income continue as is, most seniors should enjoy reasonably comfortable retirements. But what if the number of seniors with defined-benefit pensions was significantly lower AND what if Social Security benefits were decreased from current levels? How would that change retirement for our seniors?
The answer to that question should concern most baby boomers and those younger because it portends their future. Simply put, retirement as we know it today is changing and it's going to impact the lives of millions. Whether you end up living well in retirement or living in poverty (or working forever just to survive), will depend on how you respond to these two major changes currently taking place.
- Defined-benefit Pensions: Traditional pensions, which help support many seniors today, have plummeted over the past 20 years and continue to decline on an annual basis. Whereas most employees working in government and education are covered by traditional pensions, the Pension Benefit Guaranty Corporation (www.pbgc.gov) reports that 80 percent of Americans working in the private sector today do not have employer-funded pensions. Of the roughly 20 percent who do, there is an increasing concern about the growing number of plans that are being under-funded by employers -- in other words, the money may not be there when it's time for retirees to begin collecting their pensions.
- Social Security: According to a January 2004 report by the SSA, "In 2018 benefits owed will be more than taxes collected, and Social Security will need to begin tapping the trust funds to pay benefits." The fact that Social Security will be insolvent in an estimated 14 years should concern most Americans. As for tapping the trust funds, if you haven't read my article "Social Security or Insecurity," now would be a good time to do so. You can find it in the Simple Living Network Newsletter Archives.
Social Security was never meant to fully fund anyone's retirement. While it replaces about 40 percent of pre-retirement income today, it will very likely be less in the future. I believe Social Security will continue paying some level of benefits for a long time, but the bulk of your retirement income will need to come from other sources.
If you are hoping to one day retire, now is a good time for a reality check.
- Are you counting on Social Security to provide your retirement income? If so, where do you think the SSA is going to get the money?
- Do you have a defined-benefit pension to look forward to? If so, is it being adequately funded?
- If you are among the 80 percent of private-sector workers who don't have an employer-funded pension, are you investing enough in your 401(k) or other retirement program to fund your own future retirement?
- If you're self-employed, are you funding a Keogh, SEP, or SIMPLE?
- Have you established an IRA and are you investing as much as possible into it?
- If you don't have any of that, or if you have a minimal amount invested for retirement at this point, then it's clearly time to sit down and formulate a retirement plan that will keep you out of poverty.
You may be thinking that you don't have the expertise to plan your own retirement. Fortunately, it's never been easier. Many financial firms and mutual fund companies offer free retirement calculators and/or planning programs on their Web sites -- but they aren't all created equal.
Some calculators merely compute how much money you will have if you invest a given amount over a period of time, while others are full-featured planners that allow you to input multiple factors like salary, savings, current investments, rate of return expected, anticipated Social Security benefits, and the amount of income you want in retirement. The programs then calculate how much money you will have (or what your shortfall will be) and how long it will last, and adjust the figures for the inflation scenarios you enter. Once you've spent a little time learning how the programs work, it's easy to spend hours manipulating figures and entering different scenarios if planning for your future is something you are genuinely interested in doing.
Over 100 calculators related to budgeting, saving, credit cards, college, retirement, and much more can be found at the Web site of the American Savings Education Council (www.asec.org); click on Savings Tools and then Financial Planning Calculators. For a comprehensive retirement planning program that allows you to input multiple factors and then vary inputs to run different scenarios, click on www.quicken.com/retirement/planner. I've found this planner to be easy and fun to use. It won't answer all your questions, but it's a good place to start, it can help you keep focused, and it can help you gauge the progress you are making.
An essential first step in preparing for retirement is to simplify your life. That will result in less money spent and more saved so it can be invested for the future. Given that you are reading this newsletter, perhaps you've already taken that important step. But there are other effective long term planning strategies you should also implement. If you need help, there are numerous books and other resources available at your local library, on this Web site, and on others.
It's never too early to start planning for retirement; in fact, the earlier you start the better. But neither is it ever too late. If you can't count on your employer or the federal government to take care of you in retirement (which is going to be true for most baby boomers and those younger), then now is the time to sit down and seriously start figuring out how you are going to support yourself. With the calculators above, planning for the future has never been easier; it's also never been more necessary.
About The Author
Larry Ferstenou retired eleven years ago at age 42 and is the author of You CAN Retire Young: How To Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). For more information visit the You Can Retire Young web site.
Web Site: www.youcanretireyoung.com
