A Few Final Thoughts On Planning For Retirement

By Martha M. Hamilton
Sunday, June 15, 2008

I have spent the past two years focused on a subject that was almost an afterthought for most of my working life -- financial planning for retirement. I knew when I started writing this column that the subject was vast and complex, but I had no idea just how complicated it was.

The new retirement landscape requires us to take on a job once handled by professionals. We now play a larger role ourselves ensuring that we will have adequate resources. That means saving and investing, often on our own, and trying to protect against such unknowables as how long we may live and what financial markets will be like in the future.

I've learned a lot in the past two years, and since today's column will be my last for The Washington Post, I would like to emphasize the most important lessons.

· First and foremost, we need to pay more attention to our children's financial education. It didn't occur to me to talk to my daughter about money management when she was younger. It may have been because I thought she would pick it up automatically or because her teen years were so complicated that we never had the time. But she did stumble upon at least one principle. In her late 20s she called me, excited to have just learned about the magic of compounding from a friend in New Orleans.

I could have sworn I'd mentioned how compound interest multiplies, though she swears I hadn't. It may just have been that talking to your kids about money is the same as talking to them about sex and drugs: They assume you have no personal experience, so they pay no attention.

I never did talk to her about the importance of beginning early to save for retirement. This year, though, she opened a Roth IRA with my encouragement. If you can, persuade your kids to start saving in a Roth when they take their first part-time jobs. With a Roth IRA, you pay taxes at the time you put the money into savings and take accumulated earnings out many years later tax-free. Most young people probably will be in a higher tax bracket as years go by, so a Roth is a better choice for them than a savings plan in which you pay taxes down the road.

On the positive side, Alec (also known as Sarah) inherited Scottish frugality from both sides of her family. Both her dad and I grew up in families that watched spending carefully. My dad was recycling in the 1960s, picking up neighbors' yard trimmings to put on his compost pile. And my ex-husband's family would stop the car and pick up produce that bounced off trucks in Texas -- something we once did on the Eastern Shore, as well.

Since she is not a big spender, she has avoided a huge trap -- the accumulation of crippling credit card debt.

· Second, although workers are increasingly reliant on their own savings, we are not saving enough or investing as wisely as we should. Health-care costs in retirement could be $200,000 to $300,000, or even more. Most of those who are lucky enough to have a retirement savings plan such as a 401(k) have less than half that amount. That doesn't leave much to live on.

And many workers have no access to an employer-provided retirement savings plan.

Lower-income workers have a higher percentage of their earnings replaced by Social Security, which accounts for 90 percent or more of the earnings of 40 percent of all retirees. The lack of savings is going to hit middle- to upper-middle earners hardest, potentially resulting in a sharply reduced standard of living in retirement.

· Third, in addition to health-care costs, I have learned to fear inflation -- and longevity. Inflation is way scarier to me than recessions are, because it virtually never lets up. And it can erode your savings the same way a trickle of water can carve a canyon, given enough years.

Even mild inflation is dangerous. Say you have $100,000. At an inflation rate of only 3 percent a year, it will be worth just a little over $50,000 in 20 years.

I remember the 1970s, when inflation rates rose to more than 14 percent a year. That was pretty scary.

As for longevity, a long life is less of a blessing when you outlive your savings. We all have a tendency to underestimate our longevity, myself included. For most of my life, I expected to live to about 90, based on family history. But now, with my mother going on 95 and with some experts saying you should add about five years to your life expectancy based on family history, I'm guessing I might live to 100.

I am fortunate to have a pension that will provide monthly payments for life, but it is not adjusted for inflation. As a result, I want to delay taking Social Security as long as possible. A large number of workers claim Social Security at age 62, or as early as they possibly can. That results in lower payments for life. I would rather wait and have the cost-of-living adjustment on the biggest base possible.

A growing concern that I have developed in writing this column is for the large number of workers whose savings will be inadequate in retirement. This could occur for any number of reasons: because they did not save enough or did not invest as wisely as professional pension experts, or because they used their savings to survive a break in employment or, unwisely, took the money out in a lump sum when they changed jobs and spent it. Fortunately, lots of smart minds are focused on this problem, coming up with suggestions to either improve retirement savings plans or to replace them.

I thank The Washington Post for giving me this opportunity to write about an extraordinarily important issue, and I thank the readers for their helpful feedback and column suggestions and for contributing to my continuing education. I am not leaving the subject: I will continue writing on retirement issues for the online AARP Bulletin.

Join Martha M. Hamilton and Teresa Ghilarducci, an economist at the New School for Social Research and author of "When I'm Sixty-Four: The Plot against Pensions and the Plan to Save Them," at noon Tuesday for an online chat at washingtonpost.com.

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