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Column: Temping at 90…Or Planning Now Sure, the financial pros all tell you to start saving early for retirement. But have you really thought much about retirement? And do you alternate between thinking you will never retire and wanting to do so tomorrow? Whether you are 25 or 52, retirement is changing significantly. Only one in five workers has a traditional pension plan - and those are mainly in government or large, traditional companies. About 60 percent have some form of retirement savings plan at work. Many younger people worry about whether social security will exist for them. And many current workers are not aware that the age at which you can receive full social security benefits is changing - even though the law changed two decades ago. Yet, few people have followed the political debate about privatizing social security. And organizations that work on women's issues will tell you that the worst impact of the proposed plans will be on women. Meanwhile, we have not really faced up to the implications of a society in which people work for less than half their lives and can expect to spend 20 or more years in retirement. When I spoke on retirement issues to a professional women's group recently, most were shocked when they realized that they could expect to spend about half their lives working and the other 40-plus years in childhood and retirement even though many had parents or grandparents in their late 80s or 90s. So, let's take a little look at retirement issues. Whether you are thinking about what you may want to do, wondering about your parents' future, caregiving to another generation or ready for a little social activism…doing temp work to survive at 90 is probably not your preferred future. Retirement is a very recent concept. "Social Security" was designed in the United States to move older workers out of the workforce during the depression so that there would be jobs for younger people. And since most people did not live to 65, retirement was still an exception. Now, most people expect to retire and still have many years to live. Baby boomers indicate they expect a very active retirement - full of travel and sports and other expensive ideas. During the past few years, the press was full of stories of younger retirees doing all sort of things and of 25-year-olds who planned to retire to a different life (social commitments or travel or family) at age 35 or 40. Lots of people seemed to think that was almost normal and until last year the retirement age continued to drop. Yet the reality is:
Those who retire as they planned to, with good health, and who were actively involved in non-work activities before retirement, are most satisfied. Those retirees who regularly engage in active, meaningful, productive activities in retirement are the happiest. Increasing evidence also shows they are the most likely to retain their physical and mental health the longest. This column is designed to give you some ideas about ways to prepare for retirement, no matter what your age or when you hope to retire. It also includes some resources for those who may be caregivers. Do you think of retirement in the traditional way: At 65 you get the gold watch and the next day you get to sleep late and then do what you want? Those images have never been the most common type of retirement - and in the last 15 years they have broken down almost completely! The reality is that retirement for most people is marked by these types of changes:
Some of what drives these changes is financial. Retirement does not mean you will spend less, necessarily, although you may spend money differently. Many people have much larger prescription drug bills as they age; and once you leave a job that had health benefits, these costs come out of your own money. Medicare does not cover them generally. Many people want to travel more. Others expand the time that they play games and sports or attend events. What you save on dry-cleaning your business clothes certainly doesn't cover all that! But for many people the other driver of these changes is psychological. Once one gives up the title and the work of a job, what is there to provide those rewards? To give you a feeling of achievement or recognition, or even identity? And so, many people continue to work or convert to volunteer work or other ways of making a difference. A. Financial Background While you need to learn about your own finances and develop your own plans, here is some background. One of the most shocking things I have learned in studying retirement issues is that even well-educated, professional women often do not plan for their future! Financial Aspects of Retirement - The Bad News Financial experts recommend that 70-100 percent of pre-retirement income is needed to retire comfortably. Studies show that even after learning of the differences between what one plans for retirement and what one can afford to do, only 42 percent adjust their savings or retirement date to meet their stated needs. The percentage of 40-plus year-old workers who have done any planning for retirement income needs has declined to less than one-third. Women are significantly less likely than men to have done any planning for retirement. Only 20 percent of workers know when they are eligible for full Social Security benefits. If you were born after 1937, you cannot retire at 65 with full benefits. And the early retirement penalty percentages are also increasing with this change. Until 2000, early retirement was available at 62, with 80 percent of Social Security. This is declining to 75 percent (as the full retirement age change is phased in) and then to 70 percent as full retirement hits 67. Baby Boomers spend money and go into debt at much higher rates than previous generations. The average worker's investments within 401k, 403b, and 457 plans have declined over the past five years. The average loss last year was 13 percent and is over 20 percent more this year. Most workers assume they will spend 20 years in retirement (actual average as of 2000 was 18 years for men and 23 for women). Yet only 25 percent of those between the ages of 40-59 have saved $100,000 or more total, excluding home equity. On average, this $100,000 allows about $6,000 per year to spend. Over 50 percent of workers who are age 50 and up expect to work longer and still face a much less comfortable retirement due to the impact of stock market declines on their retirement and other savings since mid-2000. All workers aged 49-64, except those at the very top ($1 million and up), have lost ground in terms of retirement savings as compared to past retirees. Financial Aspects of Retirement - The Good News Pensions cover 22 percent of all workers. Thus, these people have double the assets of those with other types of retirement savings and are much more likely to have a comfortable retirement. If you work until 70, Social Security increases your benefit by 6.5-8 percent (depending on year you retire) over the 'full' retirement benefit available. All penalties for earning income have been eliminated by Social Security for those over age 65. Starting in 2002, the caps on the maximum amount of money you can save in defined contribution types of retirement savings (401k, IRA, etc.) is increasing annually. And those over 50 are allowed additional 'catch-up' savings. New limits apply for employer-sponsored plans (401k, 403b, 457 plans).
New limits exist for pre-tax individual accounts, too.
Roth IRAs (an after-tax option for individuals earning less than $95,000 or couples earning less than $150,000) also go to $3000 and $3500 if 50 or older. Self-employed? Have some self-employment income?
All these employer-sponsored and self-employment plans also have limits related to income percentages. The numbers shown above are legal plan maximums, although your own may be less. Note also that employers are not required to amend their plans to allow these higher limits, so you should check your employer's plan. Lower income? A temporary tax credit, available from 2002-2006, is available. Wonder if you may have some pension rights from earlier employment? The Pension Benefit Guaranty Corp has a booklet, Finding a Lost Pension, available at www.pbgc.gov. B. Some Financial Considerations in Retirement Planning Increase your savings rate now. Even small amounts help - omit two fancy coffees a week and put the money into your savings instead of Starbucks' coffers. Put the maximum you can into retirement plans unless you need to pay off high-interest debt first. Save for your own retirement first. Many parents save for tuition first, retirement second. There are more options for tuition assistance! Cut your debt now. The two fastest-growing segments carrying high debt levels or facing bankruptcy are people aged 55-64 and those over 65. The average short-term debt for 55-64-year-olds is 13 percent of total income. The average for 30-39-year-olds is still a high 11 percent. And this is only short-term debt, so mortgages or student loans are on top of it! Consider buying long-term care insurance. Research carefully - most is very expensive and often does not cover the most common needs. If your assets are below $300,000 or over $1 million, you can ignore this. If not, you have to assess whether you can afford to keep up payments after you retire. Note that you want a policy that includes home health care, since 80 percent of all elderly receive needed care at home. Your risk of needed nursing home care is relatively low until age 85 - after that. it rises to 18 percent. AARP has lots of good information on its website. One frequently recommended book is a J K Lasser guide, Choosing the Right Long-Term Care Insurance. Plan your retirement needs on your actual expenditures and interests. While financial experts say 70-100 percent of pre-retirement income is needed, many people live on 40-50 percent of their income during their late 40s-60s so as to meet other needs. If you can do that then, you can do the same in retirement. Do, however, be realistic - studies show many people significantly understate their expenditures because they do not know what they are actually spending now or because they are unrealistic about costs of what they will want to do in retirement. Research and evaluate your options for taking your employer-sponsored retirement savings plan monies whenever you change jobs. Transfering your 401(k), 403(b), or 457 plan savings into an IRA gives you full control over their use, including changing investments and changing amounts. Remember to roll over such moneies directly; if you take any out you owe taxes and penalties! When you retire, evaluate in advance your options under your organization's plans. You may want to transfer a lump-sum payment into an IRA. If you are really interested in security, you may want to look at annuity options. When possible, plan to take money from taxable sources first and let those in IRA/Keogh/SEP grow tax-free until you must take money out. Social Security: you control when you decide to take this money. Some studies show that if you are not working and take it at age 62, you will earn more than waiting until 65, as long as you die by 77. Or, if you can wait until 70 to start benefits, you will be significantly better off if you live past 80. Unless you will have a high income in retirement, consider paying off any mortgages before retiring. Consider selling your house once retired. Use your home sale tax exemption. Move into a smaller place, which also requires less maintenance, and pay cash for it. All of these ideas need to be thought of in terms of your own financial needs and plans. What may work well for one person is disastrous for another. The Web is full of basic planning information - and most firms that offer retirement savings through employers have excellent Websites available to all participants. Ready for a financial advisor? Ask folks you know well and your attorney or tax advisor, if you have them. C. Preparing for Retirement - Current Realities
D. Resources
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