Start Planning Long Before The Party
By Stan Hinden
When you mention the word "retirement" these days, the first thing anybody thinks about is money. And that's perfectly logical. If you want to enjoy your retirement, you're going to have to build a sizable nest egg that can support you for many years.
As a result, many people are carefully saving and investing for the future, as my colleague Martha Hamilton reports today in a series of insightful accounts. People who start early will have a great advantage. Time is an investor's most powerful asset.
With the benefit of hindsight, I can see a lot of things I should have done differently.
‹‚Fooling with money. My wife, Sara, and I saved money diligently for many years in our company 401(k) plans and we opened tax deductible IRAs individual retirement accounts whenever we could. But while we did a lot of things right, I also made a serious investment mistake.
In an earlier column, I reported that during a period of market turmoil I moved my company savings money out of a stock fund and into a low-interest money-market fund. Unfortunately, I left it there for almost six years while stock prices soared. That gaffe, I figure, reduced my retirement savings by about $70,000.
My basic blunder was trying to outguess the market. I realized later that when you sell stocks or mutual funds in a falling market, you merely lock in your losses. Unless you go back in quickly, you won't be around when the market turns and prices go back up.
When I left tThe Post, I rolled over my savings to a brokerage account and decided it would be fun to manage my own portfolio. It was fun. But in retrospect, it was also a bad idea. I was not as good a stock picker as I thought I'd be.
I had a few winners but many more losers. I was too risk-adverse to take a flier on America Online Inc., Yahoo Inc. and Amazon.com in the days when those Internet stocks were relatively cheap.
My timing was poor. I sold some stocks too soon and missed big gains. In other cases, I bought too late, only to watch the stocks retreat.
I invested in small companies that I thought ran good businesses. But some weren't as good as I thought. Several stocks I bought did quite well in part because of mergers.
Perhaps, our best stock investment was in General Electric Co. Sara worked at GE for 21 years and bought GE stock through her payroll savings plan. Many years ago, I convinced persuaded Sara to sell a few of those shares after the price had gone up. But when GE shares continued to rise, and when GE split 2-for-1, time after time, Sara said, "We're not going to sell any more GE stock."
She was right. And today, a good chunk of our savings are is tied to the price of GE shares.
What did I learn from all this? Generally speaking, stock picking is a job for professionals who have the financial experience and tools to analyze a company's finances and its prospects. Investing is a task for those who follow a strict discipline in stock selection whether it's an emphasis on dividends, earnings growth, or increases in market share.
This is not to say that the pros do not often guess wrong. They do. But from what I can see, their chances of guessing right are better than my chances. So, if I had it to do it over, I would put my 401(k) rollover money into a mutual fund with a solid track record or into the hands of a money manager with an equally strong record.
‹‚The cost of retirement living. When I retired, I did not have a good idea of what it would cost to live in retirement. Thus, I did not know how much income I would need.
Clearly, I should have spent more time figuring out how much we had in savings and how much we would receive from Social Security, pensions, investments and part-time work. If I had done that, I would have had a better idea of what kind of retirement we could afford.
Because I didn't do that, I had to spend a lot of time trying to match our spending to our income.
Financial planners often say you need about 80 percent of your working income to maintain your lifestyle in retirement. That percentage didn't work for Sara and me. We discovered we needed about the same income in retirement that we had when we were working full- time and sometimes more.
Our living expenses have not changed much since we retired. Our mortgage, condo, electric, telephone and insurance payments are all about the same perhaps even a little higher.
Our food bills are about the same. And we probably eat out more often than we did before. We save on commuting expenses and our clothing costs are lower because we don't need as much business-wear as before.
Perhaps, our biggest retirement expense has been for vacation travel: We've taken several cruises and made some domestic trips to visit relatives and friends. Although we've had to dip into our savings to pay for those trips, we both felt that, at our ages I'm 72, Sara is 70 it's a good idea to enjoy life while you're still able to do so.
‹‚The Uncle Sam factor. If I had it to do over, I'd spend a lot more time learning about several complicated but important topics. They include Social Security, Medicare, Medicare HMOs, "medigap" policies, long-term care insurance, pensions and IRA withdrawals.
While these subjects can make your eyes glaze over, you have little choice but to learn about them. Why? Because there is a window of opportunity for you to make some key retirement decisions before you retire. But you can only do so if you are well-informed. If you wait until after you retire to learn what you need to know, that window of opportunity may close.
Let me give you two examples:
First, long-term care insurance, which pays a limited amount toward the cost of nursing-home and home care. The cost of these policies is tied to your age. Let's take a policy that pays $80 a day for three years. We have two people: One buys the policy at age 55 at a cost of $700 a year. The other waits 20 years, buys the policy at age 75 and pays $3,500 a year.
If both people pay for their policies until age 85, the older person would have paid a total of $35,000 over a period of 10 years. The younger person would have paid for 30 years but a total of only $21,000.
Admittedly, very few people start thinking about long-term care insurance when they are 55. And, frankly, there are questions about whether you need such insurance, or whether it is worth the money. That decision will depend on your financial situation and the state of your health.
But the point is: When you are 55 or 60, there is an opportunity to buy long-term care insurance cheaply if you want it.
But you're not going to be able to make that decision unless you've taken the time to find out what long-term care insurance is all about.
Here's another example: medigap policies.
Many retirees who go on Medicare also buy medigap, or secondary, insurance. Medicare covers 80 percent of approved medical charges. A medigap policy generally will pay the other 20 percent.
By government fiat, medigap policies come in 10 standard varieties A through J offering different levels of benefits for different prices. These policies are sold by many companies. But not all companies sell all policies. And policies sold in some states may not be sold in others.
So, before you retire, you should decide if you are going to need a medigap policy and, if so, where to buy it. It's a decision that will require a lot of study. These policies can be both confusing and costly, so you will want to shop around carefully.
And that is only the beginning. There's a lot more to learn about Social Security, Medicare, IRA withdrawals and other subjects. But it won't do you much good if you try to learn it all after you retire. The job of preparing for retirement starts long before you have your farewell party.
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