The Experts

The following experts reviewed our volunteers' information and made a number of specific recommendations, including a few that have already been followed and improved the finances of some participants. The analysts also offered some general tips for readers who are starting to think about retirement planning.

* Gregory Robert Anderson, second vice president of TIAA-CREF Trust Co., the nation's largest private pension fund and a certified financial planner.

* Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries.

* Laurence J. Kotlikoff, an economics professor at Boston University and author of "Generational Accounting, What Determines Savings."

* Martha Priddy Patterson, director of employee benefits policy and analysis for KPMG LLP's Compensation and Benefits practice and the author of "The Working Woman's Guide to Retirement Planning: Saving and Investing Now for a Secure Future."

Dennis Dean Kirk, 48 Falls Church

Kirk is a trial lawyer whose income is erratic. He worries that his savings for retirement have been "de minimus," and about saving for his son's college tuition. "I'm a single dad with a 9-year-old son, and it's critical to look at long-range planning for his education," he said.

An added burden is that Kirk accumulated about $100,000 in credit-card debt while he was going through a divorce.

Ron Gebhardstbauer, senior pension fellow for the American Academy of Actuaries, looked at Kirk's finances, running the information through Quicken financial-planning software first, then critiquing Quicken's results and adding his own thoughts.

Although retirement planning is important, Kirk's more immediate problem is that his current living expenses exceed his income. So Gebhardstbauer recommended Kirk first take several steps to cut his costs.

For example, Gebhardstbauer recommended that Kirk convert his credit-card debt into a second mortgage, which he has enough equity in his house to do. This step could reduce his annual interest expenses by about $10,000. He also suggested Kirk consider refinancing his first mortgage if he could get a lower interest rate and save some money.

Kirk followed this advice, and just slightly more than a week ago he refinanced his mortgage, which had been at 21 percent. That step alone reduced his monthly expenses by $2,800. "Sometimes lawyers are slow to do the kind of things they would advise for clients," he said.

Now he hopes to be able to reduce his debt and begin saving for both goals: his retirement and his son's college education.

Kirk has $95,000 in his Keogh and $34,000 in Roth IRAs, but withdrawing money from them is not advisable--he would have to pay income tax plus 10 percent of the amount withdrawn.

Last year Kirk moved $19,000 in retirement funds into a Roth IRA, which increases his tax bill for this year and three more years. Gebhardstbauer recommended that Kirk not put any more money into his Roth IRA, because it doesn't work to his advantage. That's because Roth IRAs benefit people whose tax rate is likely to be higher in retirement than currently--which is not Kirk's situation.

When his cash flow improves, Gebhardtsbauer said Kirk should invest in his existing Keogh plan, a simplified employee pension (SEP) or a Simple IRA. An SEP is a pension plan Congress created for small businesses--including self-employed lawyers--that requires the employer to make the same percentage contribution on behalf of each employee in the firm. The Simple IRA allows a worker to invest in an IRA through payroll deductions. The drawback to these plans is that they limit maximum contributions more than other retirement plans, but that isn't a concern for now, he noted.

Gebhardtsbauer noted that Kirk, as a lawyer, has done an excellent job of taking care of some chores that many people his age put off. He has a will, a power of attorney for health care and a living will. He also has life, health, disability and long-term-care insurance.

Job: Lawyer

Annual earnings: Widely varied, from $17,000 in 1997 to $68,000 in 1998.

Sources of retirement income: Keogh plan, Roth IRA.

Other assets, savings and investment: $1,000 in savings, house valued at approximately $250,000.

Alicia O. McPhie

Sterling

Alicia McPhie has worked for the federal government for 25 years and hopes to be able to retire in 10 more years. In the meantime, she would like to attend graduate school to prepare for a second career after she retires from the federal government. She estimates that will cost about $50,000.

"I made a conscious effort to start seriously planning about five years ago," she said. "I didn't want to go into retirement, as a divorced female, poor."

As things stand now, she probably won't. When she retires after 35 years as a federal worker, she'll receive an inflation-indexed pension equal to about 64 percent her salary. Until then, however, she'll be contributing 7 percent of her salary toward her pension, which means she doesn't have the money for other expenditures. On top of her pension, she has approximately $45,000 in savings plans and an IRA.

What she doesn't have is enough savings to pay for graduate school, said Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries. While she conceivably could withdraw the money from her retirement accounts to cover some of those expenses, he said he wouldn't recommend doing so. The combination of the penalties, taxes and reduced retirement income is too steep a price to pay.

And she doesn't have much equity in her home, which she and her boyfriend bought just two years ago, to borrow against.

Instead, he recommends that McPhie reduce expenses, try to save more and also consider going to a less-expensive school.

When she retires, Gebhardtsbauer suggests that she consider choosing the annuity option from the Federal Thrift Savings Plan. An annuity guarantees a fixed or variable payment.

Gebhardtsbauer estimates that her living expenses in retirement will exceed her pension benefit by about $12,000 a year (in today's dollars). If McPhie were to withdraw $12,000 a year from the savings plan, eventually she could run out of funds. But when she retires, she will have enough money in the plan to pay for an annuity that would guarantee the same $12,000 per year as long she lives.

The price of the thrift plan annuity is set by assumptions about longevity that are closer to those for men than for women, which makes it a good deal for women because they tend to live longer than men. In addition, thrift plan annuities cost less than those purchased through an insurance firm because the thrift plan is so huge.

Annual earnings: $94,000

Job: Equal employment opportunity manager, Small Business Administration

Sources of retirement income: Civil Service Retirement System (a federal pension program), Thrift Savings Plan (a federal savings and stock investment plan), Roth IRA.

Other assets, savings and investment: Half interest in a home worth an estimated $295,000

Letitia Gomez and Sabrina Sojourner; 45 and 46, Northeast Washington

Sojourner, the former "shadow" member of the House of Representatives from the District and an unsuccessful candidate for D.C. Council, is a management consultant who lives in the Brookland section of Washington with her domestic partner of eight years, Letitia Gomez.

Their concerns are "similar to most couples in that we want to make sure we can live comfortably--we're not looking to live extravagantly" in retirement, said Sojourner. But their retirement plans are different from those of most other couples in that--because they can't legally marry--Sojourner can't count on receiving survivor benefits from Gomez's pension plan or Social Security, and Gomez can't count on receiving survivor benefits from Sojourner's Social Security.

This is more of a potential problem for Sojourner, since Gomez earns substantially more. If Gomez were to die first, Sojourner would have a hard time making ends meet.

Their problem arises from the fact that most employers--including the federal government--don't provide survivor benefits for domestic partners, nor does Social Security.

Gomez may leave the portion of her tax-deferred savings plan that she contributed to Sojourner, but not the portion contributed by the Navy.

Laurence J. Kotlikoff, an economist at Boston University and the author of "Generational Accounting: What Determines Savings?," analyzed the couple's financial plans using Economic Security Planner (ESPlanner)--a software that he and two other economists have developed.

Sojourner and Gomez want to save for an emergency fund, and Kotlikoff recommended that they do it through instruments that are non-tax-favored--which allow money to be withdrawn readily, without paying taxes or penalties, such as CDs and money-market funds. ESPlanner recommended that the couple immediately increase their non-tax-favored saving by about $1,000 a year and reduce spending by the same amount, gradually increasing annual savings to about $3,400 by 2008.

Each woman anticipates receiving an inheritance while in her sixties. That money should go straight into savings, according to Kotlikoff's analysis.

Because Gomez earns substantially more than Sojourner, Kotlikoff recommended that Gomez increase the amount for which her life is insured from $200,000 to $431,374. But he recommended that Sojourner stop buying life insurance because Gomez earns enough that she won't need it, and they would do better to save the money being spent on insurance premiums.

Jobs: Sojourner is a self-employed management consultant; Gomez is a community planner with the Department of the Navy

Annual earnings: Sojourner, $28,000; Gomez, $65,000

Sources of retirement income: Sojourner, Social Security; Gomez, Social Security, pension, employer-sponsored retirement savings plan, individual retirement account.

Other assets: A house worth an estimated $138,000 and approximately $800 in other savings.

Lynn Halverson and Douglas Lee,

47 and 42, Ellicott City

Halverson and Lee have been married for less than two years. Both have retirement savings--a total of about $175,000. But Halverson said, "We were just kind of saving, saving, saving without really thinking about specific goals and objectives."

They were concerned about how to maximize their current and future investments. Halverson also noted that members of her family tend to live into their mid-90s. Initially, they also wondered whether they should sell the house they were living in and buy a more expensive one, so they could use bigger mortgage interest deductions to reduce their taxable income. After filling out the questionnaire and talking to a financial planner as part of this project, they did so.

Among the anticipated expenses that could affect their ability to save for retirement are college tuition expenses for Halverson's 19-year-old son and for Lee's two children, who are 15 and 12.

Gregory Robert Anderson, second vice president of TIAA-CREF Trust Co. and a certified financial planner, looked at their savings. He focused first on the need for future tuition funds. He noted that they should try to save for college expenses for Lee's children (expenses for Halverson's son are being funded through current cash flow).

Anderson recommended setting aside approximately $125 a month in an intermediate bond fund (assuming a 3.8 percent after-tax rate of return). He also noted that Lee is repaying a 401(k) loan at a rate of $700 a month. When the loan is repaid in two years, the $700 a month could be invested to save for college tuition.

He also recommended that the couple continue to maximize contributions to retirement plans, which should allow them to retire on the timetable they want. He recommended diversifying investments by putting 10 percent of their money into money-market funds, 25 percent into fixed-income securities and 65 percent into stocks, of which up to 20 percent could be in international equities. He also suggested that Halverson seek higher rates than she is earning with her bank IRAs, which are currently invested in short-term CDs, by switching to longer-term CDs or money-market mutual funds.

As the couple participated in this project, they decided to borrow from Halverson's 401(k) plan to help buy their new $332,000 house, which has a separate bedroom for each of their children and extra room where the couple can play chamber music together, their avocation. They moved in last month. When they sell their previous home, they expect to pay back the 401(k) loan.

Anderson said that they should repay the 401(k) loan as quickly as possible. Although many households are tempted to borrow from a 401(k) plan to cover current expenses, they have to pay taxes and penalties and are likely to reduce their retirement income by doing so. The quicker they can pay back the loan, the longer that money will have to grow over time.

Job: She is a researcher and administrator for a government consulting firm; he is a lawyer with the U.S. court system.

Annual earnings: Hers, $84,500; his, $88,816.

Sources of retirement income: Hers, Social Security, 401(k) plan, previous pension; his, Keogh for self-employment, IRA, pension, employer-sponsored savings account.

Other assets: $20,000 in certificates of deposit; house worth an estimated $332,000.

Kishan and Padma Baheti

54 and 51, Great Falls

Kishan Baheti and his wife, Padma, have considerable savings toward retirement--approximately $1.2 million in tax-favored accounts. They immigrated to the United States from India in 1970.

"We were fortunate that we had excellent educations in India and we were able to grow with the financial and intellectual opportunities here," said Kishan Baheti, who began to accumulate retirement savings when he worked for General Electric Co. "I believe it's one of the best things Congress has done for the common man is allow this tax-deferred gilding of the wealth."

Indeed, the Bahetis are saving more than necessary and creating occasional current cash-flow problems, said Laurence J. Kotlikoff, an economist with Boston University and author of "Generational Accounting: What Determines Savings."

For example, the Bahetis have been covering some current spending by borrowing money from a home-equity line of credit. That debt has been accumulating at a rate of about $1,200 a month. One cost they've covered this way is the approximately $6,700 a year they spend to buy Oracle stock at a special, relatively low price offered to employees. So far, Kishan said, the stock has increased in value at a higher rate than the interest they pay on that borrowing.

But if the Bahetis reduced their investment in Oracle stock, that would reduce their need to borrow, said Kotlikoff, who looked at the Bahetis' financial planning using Economic Security Planner (ESPlanner), a software program that he and two other economists developed.

Another alternative, Kotlikoff said, would be to buy Oracle shares but quickly sell them at higher prices to provide more cash. He also noted that a large investment in a single stock can be risky.

Kotlikoff said his software also indicated that Kishan is buying more life insurance than necessary. His policy pays $650,000 if he dies. Kotlikoff said the software recommended coverage of $180,000 for Kishan, because if he dies while both Bahetis are working, his family's taxes and household expenditures would be reduced and the family would get additional income from his pension and Social Security survivor benefits.

Another issue for the Bahetis is how to save for college expenses for their 11-year-old daughter and 9-year-old son. Their oldest daughter, 24, has completed college. Both Kishan and Padma expect to retire about the same time they finish paying college tuition.

When the Bahetis' second child starts college in 2005, Kishan will be age 59 1/2 and able to withdraw funds from his IRA without penalty, although he will have to pay taxes on the amount. As an alternative, he may want to reduce his contributions then to his employer-provided tax-favored savings account.

He contributes 9.8 percent of his pay to the plan, of which the NSF matches 3 percent. If he is earning $125,000 a year at that point, reducing the savings to 3 percent would free $8,500 a year for college expenditures. And he could borrow from his 401(k).

Patricia Ann Smith, 47

Arlington

Patricia Ann Smith plays the viola with the Washington Chamber Symphony and plays from time to time with the National Symphony Orchestra. She is also the director of the Madison Ensemble, which plays at weddings and other events. But as a freelance violist, her income is erratic.

She lives in a large house, but has reduced her monthly mortgage payments through several refinancings and doubts that moving someplace smaller would reduce her housing costs significantly.

Smith said that she was prompted to think harder about her own planning for retirement as a result of spending time with someone who was older and who had virtually no retirement savings. "That made me think, 'Gee, I'm further ahead than he is,' but it made me think I should go back and start reviewing mine."

Martha Priddy Patterson took a look at Smith's finances. Patterson is the director of Employee Benefits Policy and Analysis for KPMG's Compensation and Benefits practice. She is also author of "The Working Woman's Guide to Retirement Planning: Saving and Investing Now for a Secure Future."

First of all, said Patterson, Smith needs to know what she can expect in the way of Social Security payments; what, if anything, she can expect from her pension, and the terms of a small annuity that currently provides her with slightly more than $1,000 a year.

She can obtain the information on Social Security benefits by filling out a "Request for Earnings and Benefit Estimate Statement" (Form SSA-7004). Smith is covered by the musicians' union pension plan, but expects to receive little if anything from it because it has so many restrictions on being vested and penalties for breaks in service.

Nonetheless, said Patterson, Smith needs to understand the pension rules well enough to make sure that she is not losing benefits unnecessarily. For instance, said Patterson, if the plan requires a certain number of weeks' work per year to qualify, it might pay to take a week-long job that wouldn't be attractive otherwise if it helped her to qualify.

Patterson's main recommendation had to do with how Smith has been investing. She said she was impressed with the amount--nearly $156,000 that Smith had managed to save and invest on her relatively low salary. But most of her savings and investments are in low-risk, low-return instruments--$94,000 in certificates of deposit and money-market funds.

"Given the erratic nature of her income, I can see why she would want more money in cash equivalents for an emergency," said Patterson. But there is a way to manage that money to produce better returns, she said. "She needs to take that money and ladder her CDs," she said. By that, Patterson meant that she should buy a five-year CD, followed by a four-year, three-year, two-year, one-year and six-month CD. In six months, when the short-term CD matures, she should put that money into another five-year CD. The idea is to have CDs that mature at intervals of six months to a year one after another but that earn the higher rates available for longer-term investments.

Patterson, who stresses that she is not a professional financial planner, also thinks Smith might invest more in the stock market through mutual funds with good longer-term (five- to 10-year) returns.

"Given her income," Patterson said, "the wise financial decision would be--particularly now that her home could sell for a very high value--would be to very seriously consider selling her home and buying a smaller apartment or home and investing the money she makes."

"Nothing is more important than peace of mind and happiness and living day to day," said Patterson. Those considerations might rule out selling the house, she said. But, in evaluating this option, Smith should consider that "it's not just the mortgage payment, it's the real estate taxes, heating the place, painting the place." Selling the house might yield $50,000 or so to invest for the future.

John and Jill Charlton,

46, Chantilly

John Charlton has 24 years' active duty in the Air Force and plans to retire in two years. He anticipates working at a second career, perhaps into his mid-sixties. Jill Charlton is just returning to the paid work force, part time, after working many years at home taking care of four children, the youngest of whom is 16.

John has an advantage that is rapidly disappearing from the world of retirement benefits. He has a fairly sizable defined pension benefit, indexed to inflation and fully funded by his employer. His contribution has been, as he says, "only my blood, sweat and tears."

When he retires, he will be eligible to receive a pension equal to 65 percent of base pay, which will provide him with approximately $50,000 a year. Although the couple have two Roth IRAs, they have relatively little in savings and should try to add to their savings between now and John's retirement from his second job, said Martha Priddy Patterson, director of employee benefits policy and analysis for KPMG's compensation and benefits practice.

John is looking for a job after retirement from the military that would pay $50,000 to $60,000 a year. Patterson said John should, if he has the chance, take a job with a defined-benefit pension plan and then elect to take the benefit when he retires from his second career in a lump sum if the plan permits.

The reason? Defined-benefit plans require employers to contribute enough money to provide pension benefits from the time the pension begins until the expected time of the worker's death. A worker who is leaving may be able to elect to take it in a lump sum or over time. If a worker elects to take it in a lump sum, that sum--along with the interest it earns--must be enough to provide equivalent benefits for the worker over the same period of time. As a result, a lump sum would be larger for a worker with 10 years on the job retiring at 65 than it would be for another worker with the same tenure retiring at 50--because actuarial tables anticipate that the money would have less time to increase through investment earnings.

Patterson also recommended that the Charltons try to save at least $4,000 a year in a regular IRA to increase their retirement income. Assuming earnings of only 6 percent, that amount could add up to $147,000 in 20 years, and at a 10 percent rate of return it would amount to $229,000. Saving more would be better, she said.

Jobs: He is a U.S. Air Force colonel; she is a part-time office administrator

Annual earnings: His, $99,370; hers, $3,000.

Sources of retirement income: His, Social Security, military pension, Roth IRA; hers, Social Security, Roth IRA.

Assets: Approximately $64,000 in savings and investment and a house worth approximately $245,000.

Financial Questionnaire

As a starting point for retirement planning, we asked our volunteers the following questions. They are based on a questionnaire used by KPMG LLP, which our panel of experts modified and expanded.

Occupation:

Sex:

Do you have a spouse or partner?

Do you file taxes jointly or singly?

Your birth date:

Number and ages of any children under 19:

Your current yearly salary or earnings from self-employment:

At what age do you expect to retire from all work, full or part time?

How many years will you have worked full time when you retire? How many part time?

Your anticipated salary or earnings the year before retirement:

Your anticipated salary or earnings halfway between now and retirement:

At retirement, will you be eligible for Social Security benefits? How much?

If, at retirement, you are expecting to receive pension payments, what percentage of your current salary do you expect to replace?

Do you plan to receive your employer pension for your life only or for the life of your spouse or partner too?

If your spouse or partner will receive a share of your pension benefit, what percent?

If you have money in a company-sponsored retirement savings plan -- 401(k), 403(b), 457 or profit sharing -- what is the amount?

What portion of your retirement savings plan above represents after-tax contributions?

If you are currently contributing to a company-sponsored retirement savings plan, what percentage of your pay are you contributing?

What percentage does the company match?

If you have money in an IRA account or a Keogh plan, what is the amount?

If you have additional after-tax savings and investments (such as savings or money-market accounts, stocks, bonds or mutual funds), what is the combined total worth?

What percentage of your assets, both tax-favored and not, are in stocks?

If you have life insurance, how much will be paid when you die?

How much is its current cash value, if any?

Do you anticipate receiving an inheritance from any source? If so, how much do you expect to receive and when?

If you receive income from any other source, how much is it annually?

How long do you anticipate continuing to receive the additional income?

What is the market value of your home?

What is the size of your mortgage, and how many years are left on it?

What is your annual mortgage payment?

If you intend to sell your home, when do you expect to do so?

How much do you anticipate paying for housing afterward?

Do you own other real estate?

If so, what is its market value?

What special expenditures do you anticipate (college tuition, second home, etc.)? For any such expenditures, please estimate when they will begin and end and the annual amount.

Do you have long-term-care insurance?

What types of estate planning have you done (up-to-date wills, trusts in place, durable power of attorney, health-care proxy, etc.)?

Financial Terms

Here is a short glossary of some of the most commonly used terms and financial instruments used in retirement planning:

ANNUITY -- A contract that guarantees fixed or variable payments over time. Some investors buy annuities to provide them with a stream of income in the future.

CERTIFICATE OF DEPOSIT (CD) -- A bank instrument that enables a depositer to earn interest on his or her money during a fixed a period of time. The rate

varies depending on the amount invested and the duration of the CD.

CIVIL SERVICE RETIREMENT SYSTEM -- A pension plan for federal workers hired before 1984. Most workers hired since then go into the Federal Employees' Retirement System (FERS).

DEFINED BENEFIT PLANS -- Pension plans that guarantee a specific retirement benefit.

DEFINED CONTRIBUTION PLANS -- Pension plans that require specific rates of contribution but do not guarantee a specific retirement benefit.

ESTATE PLANNING -- Planning for the orderly handling, disposition and administration of assets that are left behind after an individual's death. Includes drawing up a will, setting up trusts and figuring out ways to minimize estate taxes.

INDIVIDUAL RETIREMENT ACCOUNT (IRA) -- A personal retirement account set up by an employed person with a contribution of up to $2,000 a year (or $4,000 for a couple). Contributions may be tax-deductible, and earnings are not taxed until the funds are withdrawn at age 59 or later.

SIMPLE IRA -- Savings Investment Match Plan for Employees for companies with up to 100 employees. Allows workers to put aside up to $6,000 per year; their employers can choose to match contributions dollar for dollar up to 3 percent of the worker's pay or make an across-the-board contribution of 2 percent to each eligible worker. Those opting for the 3 percent match can cut it to 1 percent for two out of any five years.

ROTH IRA -- New in 1998, these IRAs are funded with nondeductible contributions and are not taxed upon withdrawal. Only singles with adjusted gross income of less than $95,000 may make a full contribution (partial contributions may be made up to income of $110,000). Likewise, only couples with income less than $150,000 may make a full contribution, with partial contributions allowed yp to $160,000.

INFLATION INDEXED -- Benefits that rise over time to offset increases in the cost of living, usually as measured by the Labor Department's consumer price index.

KEOGH PLAN -- A tax-deferred pension account for self-employed workers or employees of unincorporated businesses.

PENSION FUND -- A fund set up and invested by an employer or a labor union to provide retirement income for workers. The funds accumulate income and capital gains tax-free which are used to pay benefits.

POWER OF ATTORNEY -- Authorization of one person to make legal decisions and take other actions, such as signing legal documents, on behalf of another person.

REFINANCING -- Revising a payment schedule, usually to reduce monthly payments, for example by reducing the interest rate on a mortgage.

SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) -- A pension plan in which both the employee and the employer contribute to an Individual Retirement Account.

TAX DEFERRED -- An investment which accumulates earnings that are not subject to taxes until the investor takes possession of the earnings -- often at a point at which the investor is in a lower tax bracket than before, such as retirement.

THRIFT SAVINGS PLAN -- A savings and investment plan for federal workers.

VESTING -- Reaching the point, through length of service, at which an employee acquires

the right to receive employer-contributed benefits such as pensions.

401K -- A tax-deferred savings and investment plan in which employees may choose to contribute up to about $10,000 in 1999. Employers often match a percentage of an employee's contributions. Employees control how the assets are allocated among different types of investments. All taxes plus a 10 percent penalty are usually imposed on withdrawals made before age 59.

Sources: Barron's Dictionary of Finance and Investment Terms; J.K. Lasser's Your Income Tax; The Washington Post