| Sargent & Lundy Savings Investment Plan |
| READY TO RETIRE? |
| The following excerpts are from an article in the Spring
2000 "Stages" magazine. The opinions of the author, Clint Willis,
may or may not reflect those of the SIP Committee.
Chances are, you've been planning for retirement for quite a while. But for workers who are near retirement - or already there - there's still plenty to do. "Some of the most important financial decisions you'll ever make happen right before and during retirement," says Robert Steffen, a financial planner in Bloomington, Minn. Why? Because some important pre-retirement tasks must wait until you are within striking distance of retirement, when you're close enough to make realistic decisions about what you want to do and what it will take to achieve those goals. Still other tasks must wait until you're already embarked on your post-career life. The good news is that even if you're on the eve of retirement - or well into it - you can still do a great deal to improve your financial position and prospects. You can create a realistic and rewarding lifestyle and budget; choose investments that can generate current income and keep you ahead of inflation; take full advantage of retirement savings plans to keep your money growing; and take steps to protect yourself and your heirs as you grow older. "It's never too late to make smart decisions that can make your retirement better," says Mary Malgoire, a financial planner in Bethesda, MD. Planning and managing a successful retirement involve four distinct stages. Each stage presents challenges and opportunities that will require you to make decisions about lifestyle, investments, taxes, and other issues. The sooner you prepare to face those issues, the sounder your decisions will be - and the more you may be able to enjoy your retirement as it unfolds. "Your needs will change during those years," says Steffen. "But one thing that never changes is the need for alert, intelligent planning." Sizing Up Your Needs: Two or more years before retirement At this stage, retirement is starting to feel more real, and you can start to make realistic projections about what to expect. "This is the most important stage, because it's when most people first confront the issues that will affect every aspect of their retirement," says Malgoire. Start by estimating your expenses in retirement, which most financial planners say will range from 70 to 100 percent of your expenses at the time you retire. For a more precise estimate, start with your current expenses and then make adjustments for likely changes. For example, you might be spending less on education costs for kids and more on travel or medical expenses. Once you've estimated your retirement expenses, you'll want to review your retirement resources. Start by asking for pension statements from current or former employers who will owe you regular pension benefits. Then ask the Social Security Administration (www.ssa.gov or (800) 772-1213) for an estimate of your retirement benefits if you haven't already received one. Finally, estimate how much income you'll receive from your investments during retirement. That figure depends upon a number of factors, including your investment returns and your retirement age. One of the best ways to do this is to consult a financial advisor. Bear in mind that good savings habits at this stage of your career can greatly enhance your retirement prospects. If you've finished educating your children, for example, you might be able to increase the amount you stash in your 401(k) or other retirement savings accounts during the next five or 10 years. Some of that money may continue to grow tax-deferred in your account for years after you retire. "It really pays to fully fund your 401(k). Any investment that lets you pay taxes later rather than sooner is generally a good thing," says Carol Cantrell, a financial planner in Houston. Once you've done that work, you'll have an idea of about how much you plan to spend in retirement and about how much income you're likely to receive from pensions, Social Security, and your investments. That puts you in a good position to make some very important decisions. Example: You may decide that you want to work part-time to maintain a sense of purpose and/or earn extra income. This is also a good time to think hard about where you want to live in retirement. You might eventually decide to trade down to a smaller house to generate some extra cash, or you might choose to move to another part of the country to be closer to family or to enjoy a better climate and recreational opportunities. Income Planning: Less than two years before retirement This is a great time to hone your spending plans for retirement. Let's say you plan to make modest reductions in your clothing expenses (you won't need to dress up for the office anymore). Why not make some cuts now? If you're successful, you'll gain confidence in your ability to make the transition, and you'll also free up some cash for future costs. At the same time, update estimates for pension, Social Security, and investment income. Investors approaching retirement today may find that their savings have grown more than expected during the bull market of the past decade. That kind of good news may make the transition to retirement much easier. And if there's any bad news, you still have some time to adjust your expectations and behavior accordingly. Start looking around for the kind of work you might want to do in retirement. The network of colleagues and friends you have created should turn up opportunities to do enjoyable, fulfilling work - whether for fun, profit, or both. Moreover, even a relatively small amount of income can make a big difference in your long-term financial prospects. If you're retiring before you qualify for Medicare, find out whether your current health insurance plan will continue to cover you until age 65. If not, ask an insurance broker to start shopping for alternative coverage. Finally, give special thought to your options for long-term care as you grow older. One solution is to purchase long-term care insurance, which should provide for institutional care as well as home health care. Some communities offer senior resource centers that can provide information about long-term care. In addition, some brokers specialize in long-term care insurance. Bear in mind that such insurance is must less expensive to buy now than it will be as you grow older. Says Steffen, "The time to look into long-term care insurance is before you need it." Transition: Retired for less than a year If you're like most people, pensions and Social Security won't cover all of your retirement expenses, which means you'll need to convert some of your investments into current income as you move into retirement. The good news is that your retirement plan can continue to work even after you stop doing so. But you must decide what kind of work your investments in the plan will do. "Your money shouldn't stop working when you do," says Steffen. You may be tempted to shift a large portion of your retirement savings to income-oriented investments such as bonds or bond mutual funds, since they often pay more current income than stocks. But if you do that, you could sacrifice the potential for further growth in your savings, which could expose you to the risk that inflation will reduce your purchasing power during retirement. "At this stage, you may have 30 years of retirement ahead of you," says Warren J. Mackensen, a financial planner in Hampton, N.H. Although they contain more risk than bonds, "Stocks can offer the growth that you'll need to live well during the next three decades." You may want to consult a financial advisor for advice about how to allocate your savings once you've entered retirement, to help you achieve a balance between current income and long-term growth. Meanwhile, consider your options with regard to the money in your savings plan. You can simply leave it in your employer's savings plan or roll the money over into an individual retirement account. Either way, you'll maintain the tax-deferred status of the money in the plan. And if you stay with your company plan, you can continue to draw upon educational or other resources available to plan participants. Most importantly, if you separate from service with your company after age 55, you can begin making withdrawals from your employer's plan without paying the usual 10 percent early withdrawal penalty. IRAs don't have this same provision. If you absolutely need to, you can take a cash distribution of your assets in the plan. While this option gives you immediate access to the money, you'll be subject to taxes and penalties that can be significant. Moreover, you will no longer be able to defer taxes on investment earnings as you can in your 401(k). If you continue to hold some money in a 401(k) or other tax-deferred retirement savings plan, you'll face another important choice: Should you tap retirement savings accounts such as IRAs and 401(k)s to meet expenses, or instead spend money that's in taxable accounts? Bear in mind that money in some retirement accounts can continue to grow tax-deferred well after you retire. That's one reason to consider drawing down taxable accounts first. Managing Retirement: Retired for one or more years Once you've had a chance to settle into retirement, take some time to evaluate the success of your strategy, and decide whether you need to make adjustments in some areas. Start by revising your budget. By now, you'll have a sense of where your money is really going and what changes are realistic or desirable. You'll also find that some expenses - perhaps things such as your automobile and clothing - will decline, while others, such as medical care or travel, may increase. At the same time, examine your investment strategy: Is delivering an adequate mix of growth and income? Can you find smart ways to reduce risk or boost your potential returns? Again, you can ask a financial advisor to help you make such adjustments. You may want to leave your savings in tax-deferred retirement plans such as 401(k)s or IRAs for as long as possible, but you can't leave the money there forever. You must start withdrawing money from traditional IRAs and 401(k)s during the year when you turn age 70-1/2 and then continue making regular withdrawals based on your life expectancy. Whatever the timetable, your withdrawal strategy should reflect your needs for both current income and long-term growth. Finally, you'll probably want to consult an attorney who can help you draw up or revise an estate plan to protect your heirs. For example, you might be able to use trusts to shelter some of your estate from taxes, so that your spouse or other heirs benefit more fully form the fruits of your work and planning. Meanwhile, you can benefit from all that work yourself. |
This page updated on 5/26/2000