Getting old stinks. But getting old and going broke really stinks. So avoid it. Most Americans are living in a dream world when it comes to planning for their retirement. According to a survey conducted by the Forum for Investor Advice, only 11 percent of retirees were seriously concerned about outliving their financial resources. Eight percent were concerned about a bear market reducing the value of their investments, and 7 percent worried that inflation would lower the value of their assets.
That means 89 percent of retirees think their money will last. This lack of fear is attributed to the long-lasting bull market, according to Barbara Levin, executive director for the Forum in Bethesda, Md. But people are living longer — the average life expectancy has increased to where a person who reaches age 65 can expect to spend roughly 17 years in retirement. “Just the fact that people are living longer means that they should be worried about things like inflation and outliving their resources,” Levin says.
Some financial planners believe many people still have no idea how much money they’ll need to afford the retirement lifestyle they desire. The reason may be that the answer to that question is different for each person, says Samuel Case, a registered investment advisor in Fairfax, Calif., and author of “The First Book of Investing.” “How much income a person will need to retire varies a great deal based on what that person considers a comfortable retirement,” Case says. “If you make $50,000 per year, then you can plan on living on about two-thirds of that amount after you retire, between $30,000 to $40,000, because your expenses will also go down about 25 percent.”
Even if you plan to continue working part-time, you may be living on reduced income. So what issues should you focus on when you’re planning for retirement? Retirees must plan ahead for emergency expenses such as health care. Nursing home costs can add up quickly, so long term care insurance should be addressed before a person retires.
Women usually outlive their spouses, so women need to plan for the time when they will be alone, as well as preparing for married retirement. Divorcees should seek legal counsel whenever retirement plan savings are among the marital assets being divided. Both men and women who started saving and investing on their own can benefit from hiring an investment advisor to manage their retirement plans.
People who are approaching middle age with no savings need to begin preparing for retirement — now! A 45-year-old man may still have more than 20 working years ahead of him, so it’s not too late to finance a retirement. It’s especially important for low-income workers to start saving and investing as early as possible.
Your Retirement Plan Menu
The following are some of the most common retirement plans:
Individual Retirement Account
IRAs and Roth IRAs are widely recommended for workers with no company-sponsored retirement plan. Traditional IRAs are the most popular choice among investors because of their up-front tax deduction on contributions. There are no tax deductions on Roth IRA contributions, but withdrawals are tax free if the plan is held for five years and the account holder is over age 59-1/2. Roth IRAs are best for young savers whose money has a long time to grow.
Investors love these tax-sheltered savings plans in part because of the matching contributions offered by many employers. Participants can put in up to 15 percent of their annual salary. A 401k plan cannot require more than one year of employment service for employees to be eligible to make their own contributions. These plans are portable and can be rolled over into an IRA or another 401k when an employee changes jobs. Remember to ask questions about your 401k and you should try to avoid any 401k plan hidden fees that might be charged.
Cash-balance pension plans are quickly replacing the old defined-benefit pension plans. The old company-paid pension usually requires the worker to be with the employer for 20 years or longer. Today’s job-hopping workers have pushed employers to install the cash-balance pension because they can take a lump-sum payout with them when they leave the company. The payout can be rolled over into an IRA or taken as cash.
Employee Stock Ownership Plan
The National Center for Employee Ownership defines the ESOP as “a retirement-type plan in which a trust holds stock in the employee-participants’ names; after they leave (whether due to quitting, retirement, etc.), they cash in on the proceeds due them.” ESOPs usually cover all full-time adult employees. Also, the employer (not the employee) makes yearly contributions of company stock and/or cash to buy stock.
However, ESOPs may place too many eggs in one basket. If the stock does well, then you might get rich. If the stock falls, then your retirement fund may not be worth much.