"Retire in Florida on $250 a Month" said the headline -- accompanied by a picture of an attractive and obviously aflluent couple in their 60s, standing happily amid the lush greenery of a subtropical golf course.
Ridiculous? Well, it didn't seem ridiculous when it appeared in magazine ads not too many years ago -- well within the memory of many of us.
But we all know that in today's economic environment t it would certainly be ridiculous to expect to retire anything but severe poverty on $250 a month. Those who based their retirement planning on the promise in that and similar ads are hurting.
Does that mean you shouldn't bother planning for retirement, since the future is so uncertain and even "the best laid schemes . . . gang aft a-gley?"
Of course not; in fact, given today's uncertain economic climate, retirement planning is more important than ever. The lesson is not to stop planning, but to tailor your plans to cover a range of possible futures.
Take a look first at the retirement programs built into your job: social security for most people; company pension plans for some; civil service or military retirement for many in this area. It is importnat that you understand the provisions of your work-related benefits so that you can integrate those benefits into your overall program.
Any of these plans, alone or even in combination, is likely to bring you less income after retirement than you draw during your working years. Expenses may be somewhat less; but if you hope to continue at least the same standard of living after retirement as you enjoyed before, you should be planning for supplemental income.
The big question: Given the present economic turmoil and the confusion and uncertainties about what lies in the years ahead, what do you do?
Unless you have a rich uncle in Australia or a sure winning ticket in the Maryland lottery, you have to do it the hard way. You pull a little money out of each paycheck and stash it away somewhere for retirement
The saying is a lot easier than the doing. But if you can't discipline yourself into a regular savings program, don't bother to read any further.
For those of you who are still with me, here are a few basic rules:
Anticipated ("Possible") return is directly proportional to the risk. The greater the chance for gain, the greater the risk of loss; conversely, if you seek a high level of safety, you must accept a relatively low level of probably return.
The younger you are, the greater the amount of risk you can accept. As you approach retirement age, your investment techniques must become more conservative.
The only people who can afford to gamble on the "big killing" are those who no longer need to.
The attraction of tax-emempt or tax-deferred investments grows with you income. The spread between taxable and tax-emempt yields (on comparable investments) generally means that if you're below the 32 percent tax bracket you probably shouldn't worry about avoiding the tax bite.
(5)Keogh (for the self-employed) and IRA (for those not covered by a retiremet plan at work) offer the advantage of tax deferral both on the principal amount invested and on accumulated earnings. Anyone eligible for either of these programs who fails to us it is missing a good bet.
Most of the standard investment media qualify for use as a Keogh or IRA vehicle. But don't use a tax-exempt or tax-deferred investment, since each of these programs is itself a tax-derral scheme.
There are two basic types of investment media: fixed and variable. The fixed return investment is one in which the principal amount remains unchanged throughout the life of the investment, and usually (though not always) the yield is specified in advance.
This group includes passbook accounts and certificates of deposit at savings institutions; federal Series E and H bonds (EE and HH after Jan. 1, 1980); Treasury bills nd notes; GnmaY pass-throug mortgages and unit trusts; and bonds issued by government agencies and "instrumentalities."
All of the above carry government insurance or guarantees on both interest and principal. Fixed-dollar investment that do not carry fedeal guarantees include money market funds; short-term income trusts; corporate bonds; and municipal (tax-exempt) bonds.
Fixed-dollars investments provide no protection of the principal amount against inflation, although the yeild might be high enough to compensate for the erosion in purchasing power of that principal. This has not been true recently.
In effect, then, even as insured fixed-dollar investment contains an element of speculation: You're gambling on the future course of inflation. Any attempt to protect your capital against inflation requires a look at equities.
Equities are variable investments; both the value of the invested principal and the yield can vary with economic conditions and the success of your particular choice. Keep in mind the first principle: The expectation of increasing value and incresing yield carries the inherent possilbility of loss.
The group of variable investments includes corporate stock; real estate; gold, silver or diamonds; collectibles such as coins, stamps, or antiques; oil and gas drilling partnerships; railcar leasing arrangements;and and similiar investments involving ownership of (equity in) a capital asset.
Mutual funds haven't been mentioned in either category because they come in many shapes that span both groups. The money market funds, for example, invest in large-size CDs and short-term corporate paper; some funds specialize in corporate stocks; other in corporate or muncipal bonds; and still others limit their holdings to government securities.
You can also invest your retirement funds in an insurance annutiy, issued in either fixed or variable form (or in combination). An annuity offers the advantages of a lifetime income and tax deferral on earnings during the accumulation period.
But historically annutiy yields have lagged behind yeilds on other comparable investments, perhaps because of the built-in uncertainties of actuarially determined life expectancies.
After you have looked at the profusion of alternatives available (in greater depth, I hope, that this brief overview), what's the bottom line? You have to take a look first at your particular situation and determine your individual objectives, then select the option that best suits your needs.
And because the economic future is so uncertain, you should develop a strategy that includes several alternative. Diversification among types as well as among specific investments of the same type offers the best hope of protection against unpleasant surprises at retirement time.
One final thought: Financial planning for retirement involves much more than a long-range invetment program. Among other things, you should regularly review your insurance coverage in the light of changing family circumstances (particularly as your children become self-supporting).
Similarly, your will is not a static document. It, too, must be reviewed.
Look at the pros and cons of joint versus separate ownership of assets. And if the combined estate of you and your spouse exceeds $200,000, you might want to consider the effectiveness of gifts and of both living and testamentary trusts in reducing potential estate and inheritance tax liability.