| Sargent & Lundy Savings Investment Plan |
| PLANNING YOUR RETIREMENT INCOME |
| The following excerpts are from and article in the Spring
1999 "Fidelity Focus" magazine. The opinions of the author, Maura
McEnaney, may or may not reflect those of the SIP Committee.
John Gardner calls himself "the poster boy for retirement planning." When his peers were out earning their stripes as consumers, the then-36-year-old Painesville, Ohio, librarian, started saving. And saving. "I was raised to expect that a lot of things in life would be a matter of deferred gratification," says Gardner, who checked out of his $60,000-a-year job and into the world of retirement four years ago, at age 50. Today, he's proud of his investment success story. In retirement, he lives comfortably off his savings, keeps his expenses down, and takes exotic vacations to places like Tristan da Cunha, a group of islands in the South Atlantic. While many Americans would love a retirement lifestyle like Gardner's fewer have the resolve to do the planning that he did. According to a 1998 survey by the Employment Benefits Research Institute, approximately 69% of American workers age 53 and older have saved for retirement, but only 45% have ever tried to determine how much it will take to fund it. Answering some tough questions - about your lifestyle and budget as well as your retirement goals and expectations - can seem too daunting a task. But not doing so can have some serious consequences, experts say. Retirees who failed to evaluate their economic needs before leaving the work force are often surprised when they find themselves worse off than imagined, observes Felice Larmer, senior vice president of FirstMerit Investment Services in Akron, Ohio. "They procrastinated," she says. "Life intervened. They've taken the time to build their business, they've taken the time to educate their kids. But somewhere in the course of that they may not have been maximizing their 401(k)s. They think that between Social Security and their pension or savings they are going to have enough." Financial experts know that preparing for retirement may seem over- whelming, but it can be a whole lot less intimidating - perhaps manageable even - if the process is broken down into the four steps that follow: Step 1: Self-analysis The popularity of employer-sponsored savings plans such as 401(k)s has helped many workers get a jump-start on saving money for retirement. However, somewhere around age 50 or 55 most people should begin to take stock of just what they have accumulated, what they owe, and how best to proceed, according to Harold Evensky, a principal in Evensky, Brown, Katz & Levitt, certified financial planners in Coral Gables, Fla. Not knowing what you're planning for is one of the biggest mistakes would-be retirees can make. "Too many people have this naive idea that they are going to quit and take it easy," he says. "But that just won't cut it." Evensky suggests his clients begin to do some serious, detailed retirement planning about five years before they expect to retire. Pre-retirees first need to ask themselves how they want to spend their retirement. Are you planning to stay busy through consulting work or volunteer work? Do you want to travel? Where will you live? Are you thinking about moving to a smaller house or a warmer climate? Goals should be both time- and dollar-specific, Evensky says. In other words, how many more years do you want to work, and what kind of a lifestyle do you expect to pursue? Evensky also suggests building a few "what-if" scenarios into your plan. For instance, what if you move to Florida only to discover you miss the seasons? (Answer: Try renting there first.) What if your spouse dies soon after retirement? What if you decide to forego the trip around the world to help pay for your grandchildren's college education? "The whole purpose of planning is to help develop an intelligent model and give you something to work with," he says. "It will tell you one of three things: that your expectations are totally unrealistic unless you win the lottery; that you've got so much money you're going to have to bury it in the back yard; or that you seem to be living in the real world - your assets are reasonably in line with your expectations. How much is enough? Bruce Brunson, assistant professor of the Family Financial Management Program at Virginia Polytechnical and State University, has seen the studies, the software programs, and the calculations aimed at determining how much money is needed in retirement. While some experts suggest a comfortable retirement requires an annual income equal to about 80% of your salary at retirement, Brunson believes that range can realistically fall between 60% and 100%. The reason? The newly retired tend to be in good health, are anxious to travel, and have the time and the energy to spend more money. But as they get older, retirees are more likely to stay put. In some instances, however, these expense reductions can be more than off-set if you have medical or long-term care costs that are not fully covered by insurance or medical coverage. Your debts. The confidence level that comes from growing retirement savings can easily be wiped out if you are not careful about your debts. Paying down high interest debt, especially expensive credit card debt, may be in your best interest, says David Strege, a financial planner in West Des Moines, Iowa. "That's assuming the interest is higher than any return you might get in another investment. Should you pay off your mortgage? Not if you've already refinanced it at a lower interest rate. Paying off a low-interest mortgage may not be the best use of the money, particularly when you consider the tax deductibility of mortgage interest. You can probably get a better return on another investment," he concludes. Step 2: Setting up a plan With a lot of the hard work already complete, the next step requires some serious thought about how you plan to receive your retirement income. Whether the source of funds is a pension plan, a stock ownership program, or a 401(k) savings program, experts agree that investors should begin to weigh their options about allocating that income generally about six months prior to retirement. When an employer controls all or part of these assets, workers usually have three choices: to leave the money invested in the employer's plan; to take the distribution in cash; or to move the eligible funds to an individual retirement account or income annuity, a product that converts assets into a regular stream of income payments, explains Mike Harger, senior vice president at Fidelity Investments. Of course, there are pluses and minuses - as well as distinct tax ramifications - to each choice, Harger adds. Here's how Harger sees the pros and cons of these options. * Leaving it as is. Keeping assets in your employer-sponsored plan is a simple way of dealing with retirement money. Staying put allows investors to maintain the tax-deferred status of their savings with after-tax contributions and avoid paying taxes or penalties. On the flip side, however, staying with your employer's plan generally means your investment options will be limited to only those which the plan allows. Also, Harger suggests that workers ask their companies' employee benefit specialists about the plan's withdrawal and investment policies. Will it be easy or difficult to access money when it's needed? * Taking cash distributions. Get ready for a tax bite with this option. Funds withdrawn from a qualified employer plan are subject to a 20% income tax withholding on the portion eligible for rollover. People in high tax brackets could lose an additional 36% to federal income taxes. Add state and local taxes, plus an added tax penalty for younger retirees, and the payout could sustain a big hit. The good news? You've got complete control - of whatever might be left. * Rollover IRAs. These may be an attractive solution for younger retirees who want to avoid onerous taxes and penalties while they maintain tax-deferred assets in a diversified portfolio. Assets from a number of retirement plans can be consolidated into an array of mutual funds, bonds, stocks, certificates of deposit, or other securities. The pre-tax contributions and any earnings on applicable IRA assets are then taxed at the time of withdrawal, which generally must begin by age 70-1/2. But withdrawals before age 59-1/2 may be subject to current taxes and an early withdrawal penalty, Harger cautions. Taking part or all of your retirement plan savings as an annuity, which provides monthly payments for life, can be a conservative option for retirees seeking a guaranteed income stream. Asset allocation. Making decisions about how to access your retirement money also requires some thought about asset allocation. It is here, planners say, where many investors can sell themselves short. Too often, investors fail to recognize how two key elements - longevity and inflation - should factor into decisions about how to allocate funds, says Susan Freed, a certified financial planner in Washington, D.C. Not doing so can mean underestimating long-term financial requirements. For example, a 55-year-old who has saved off and on for 30 years may need enough retirement money to last 30 years. "If you then add inflation, it's likely that this investor will need to grow this money more than he or she may have realized," explains Freed. The best approach? "Have an income that increases each year according to inflation" - about 3%, Freed says. That means perhaps taking on higher risk during the early years of retirement and gradually shifting to more secure vehicles later. "The number one problem is being too conservative with your investment style," says Brunson. As they age, retirees collecting fixed pensions with no cost of living allowance are likely to face higher health care costs. Income streams should account for that possibility. "If you're 75 years old, you should have some part of your portfolio in something that is going to combat inflation. That's tough for some people to do because the natural instinct is to be more conservative," he says. Step 3: Executing the plan Equipped with a realistic sense about inflation, their desired level of income, and the kind of investments this may require, people nearing retirement can be more comfortable about executing their plans. If large-scale changes in the type of stocks or mutual funds you own are required later, Harger advocates a gradual approach, shifting from one investment vehicle to another over a period of time, using dollar-cost averaging. Because these periodic lump sums can buy more shares when the price is lower and fewer shares when the price is higher, over time this may reduce the cost per share and your chances of buying all your shares at the highest point. Of course, in order for this strategy to be effective you must continue to purchase shares in both market ups and downs. For many retirees, preserving wealth for heirs is a final and important part of the third step. Avoiding this step or any kind of estate planning could leave the bulk of your wealth up for grabs by federal, state, and local tax authorities. "It's becoming the single biggest concern that people have," says Eva Ribarits, vice president of estate planning for Fidelity's Personal Investments and Brokerage Group. "Once you've reached the point where you're not concerned about accumulation anymore, that's when these considerations become critical," she says. Ultimately, it is the retiree's responsibility to make sure all ;options have been considered. Consulting tax and legal advisers, picking beneficiaries, and getting them involved in the estate planning process can play significant roles in the financial legacy you leave behind. Step 4: Monitoring the plan Many experts suggest at least an annual checkup to make sure your plan still reflects your changing circumstances, as well as any noticeable changes in your asset allocation due to the market. But sometimes life - and death - require more sudden shifts in investment strategies. Seven years ago, Pat Lawson was forced to take early retirement from her job in the packaging department of a pharmaceutical firm in Philadelphia. At the time, the 20-year veteran walked out the door with 65 weeks' pay, company stock certificates, and a company-sponsored pension plan. Married with children, Lawson's plan at the time was a simple one. She intended to live off her husband's income while drawing a fixed pension for seven years until she was eligible for Social Security. Then, Lawson planned to convert her company stock into an IRA with growth oriented investments that could sustain a fair amount of risk. Last April, at age 62, Lawson did just that. But three months later she was reassessing her finances after her husband's death left her with no other income. "I was in an aggressive plan, but I changed to a moderate one because I can't afford the higher risk of losing the income," she says. Given her circumstances, Lawson expects she will now need about $20,000 a year from IRA, which she will be able to access easily. If all goes according to plan, Lawson hopes to move with one or her children into a bigger house - a payoff from her own investments. Retirement planning doesn't have to be an overwhelming task, these experts say. By applying a little forward thinking to these basic steps, investors can finish out their careers feeling confident about their plans for the future. |
This page updated on 2/22/99