Retirement Plans:
It's Never Too Soon
Financial and psychological preparedness in case of any pitfalls are the keys to success.
By Albert B. Crenshaw
(c) The Washington Post
Tuesday, April 25, 1995; Page Z11
Are you getting ready to retire? The best time to start planning for it, experts say, is the day you go
to work. However, these same experts will concede, almost no one does that.
Instead, most Americans wait until middle age or beyond to start taking a serious look at what
their lives are going to be like in retirement and all the decisions they need to make before they
take their gold watch and head for the door.
For people nearing the end of their careers, "the two big questions that people need to develop
answers to are: Can I afford to retire and am I ready to retire psychologically?" said Wayne
Bogosian, national director of consumer financial education at Watson Wyatt Worldwide, a
benefits consulting firm often hired by corporations to conduct classes for workers nearing
retirement.
"For most people, the first question is actually easier to answer, because it can be quantified,"
Bogosian said. "The second takes a lot of soul-searching. Retirement means different things to
different people. Most employers do have some information they can give to employees to arrive
at {answers to} some of these questions but not all of them."
But the decisions ultimately are yours, and with many of them there is no going back. So if you are
near retirement (and even if you're not), financial planners and others advise doing as much reading
and studying as you can.
Among the things they advise:
* Start planning now.
No matter what your age, today is not too early or too late to start gathering information and
thinking about decisions you'll have to make. The earlier the better, of course, but the increasing
dependence on defined contribution pension plans, those in which the employee makes the
investment decisions and bears the consequences, make early planning even more important than
in the past. You don't want to end up making a lot of key choices in the last 30 or 60 days.
* Get
all the details of your company's pension plan.
Traditional company-managed pension plans are not as common as they once were, but millions of
workers are still covered by them. Government workers, both under the Civil Service Retirement
System and the Federal Employees' Retirement System, still have this kind of pension, though the
FERS plan relies more heavily on tax-deferred savings.
These plans are designed to provide a steady income for your life in retirement, but many have
various options you need to consider. These choices are not as simple as they seem, and "are one
area where it's worth getting expert help," Bogosian said.
Typically, you will be asked to choose an annuity (a stream of payments) that lasts for your
lifetime, or for your lifetime plus that of your spouse. The "self-only" annuity is usually higher than
the "survivor" annuity. Think about how you will use the money and evaluate the choices in light of
your own health, your spouse's and your other income sources.
Some plans also offer a lump-sum option, meaning you get your benefit all at once and can invest it
yourself. This is "a particular challenge," Bogosian said. People who take a lump sum "are betting
they can manage their money better than the . . . company that's going to give them an annuity," he
said.
* Analyze your insurance needs.
As an active worker, you likely have group medical insurance and life insurance. If you are retiring
at normal age, you are eligible for Medicare, but if you are taking an early out, medical insurance is
a key consideration. Buyouts often include continuation of your company insurance, but make sure
you find out who pays the premium, and if it's you, how much it is. As an alternative, see if your
spouse can add you to his or her policy as a dependent.
If you have had life insurance through your employer, it will probably end when you leave work.
But check to see whether you still need it. If your children are grown and self-supporting and there
is enough other income to support your spouse, you may not need life insurance at all.
* Examine
your investment portfolio.
Conventional wisdom has it that older people should have their money in investments whose value
is stable because they are likely to need cash and have less time to ride out the downturns.
There is something to this, but the most common error people make in retirement investments is
being too conservative. Millions of Americans turning 65 today will live into their eighties and
beyond, so that portfolio has to last a long time. Also, inflation hasn't gone away and might get
much worse at some point during those years.
Experts advise keeping at least a portion of your savings in stocks. Many recommend a mix of
stocks and long- and intermediate-term bonds, with the things you'll need last, the stocks, in a a
tax-deferred account, if available, so they can grow without current tax.
"What's happened to inflation has lulled many people into a false sense of security," said Rich
Koski, national director of pre-retirement and financial planning at Buck Consultants, a benefits
consulting firm in Secaucus, N.J. "Retirees get hit hardest on inflation. Make sure there's an
inflation buffer."
There are other complications as well. "If you have both a {traditional} pension as well as a
401(k) plan, you may not need to go through that kind of portfolio switch," because the pension
will supply cash in the event of a market dip, said Bob Bein of A. Foster Higgins & Co., a
Washington consulting firm. "The amount of personal savings also plays a role. You've got to look
at the entire financial picture and not focus on any single element."
* Evaluate borrowing needs.
Many people don't need to borrow after retirement, but some do. For example, if you still have a
child to put through college and are planning to tap your home equity, it's easier to borrow while
you're still working. Banks take great comfort in that regular paycheck.
Even if you're not planning to borrow, consider setting up a home equity line of credit. That will
allow you to borrow against your house if the need should arise.
* Start educating yourself as a
consumer.
Retirees, especially those who have received lump sums from their pension or saved carefully
through their 401(k)s or other tax-deferred plans, are likely to have a lot of cash. This attracts
crooks and scam artists in droves. Many offer investment schemes or business opportunities that
are quite tempting to someone who might have been thinking about starting a business anyway.
*
Think about your living situation.
Do you plan to move when your retire? While you're still working is a good time to scope out
Florida, Arizona and other traditional retirement places if you're leaning that way. "Develop a
checklist for things that are important to you -- climate, distance from family, cost of moving,
public transportation facilities," Koski said.
Also keep in mind, especially if you are a relatively young retiree, that a place that seems great
when you're 60 -- a golf-oriented resort area, for example -- may not be suitable when you're 80.
"Makes sure there are people where you are going that meet both your current and anticipated
need," Koski said.
* Talk to people in your community and from your company who are already
retired.
These folks have firsthand experience with the decisions you're facing and can tell you what they
did and how it's working out.
"Ask What kinds of things were you surprised at?' and Five years before retirement, what would
you have done differently?' " Bogosian said. "Know what you should have done while you still
have some time to do it."
* Think about what you will do with your time.
Getting up, going to work and getting home again typically takes 10 or so hours a day. Now,
unless you plan to work or start a business, you'll have to fill those hours with other activities.
Think over the idea of taking classes or developing a hobby that will keep you busy and feeling
rewarded.
* Discuss these matters with your spouse.
This might seem obvious, but Bogosian said a surprising number of men "leave the female spouse
out" of the decision-making process. This is truer of older couples, and it is in this age bracket that
women particularly are in need of financial information, since they are more likely to have been
stay-at-home wives.
But their life expectancy is greater than men's, so they are more likely than their husbands to suffer
the consequences if the money runs out or they end up with a big bundle of assets they don't
understand.
