THE NEW REALITIES OF RETIREMENT

Your retirement will bear little resemblance to what prior generations experienced. How much money you’ll need , how long you’ll spend in retirement, and how you’ll fund your retirement will be very different from prior times. Unfortunately many people have not come to grips with these evolving changes, allowing retirement myths to impede their progress in achieving their retirement goals. Some of the most serious myths include:

Myth: Your retirement will only last a few years.

Reality: This was true in the 1950s when the average retirement age was 67 and the average life expectancy was 71. However, now the average retirement age is 61 and the average man who reaches age 65 will probably live to 80, while a woman will live to 85. Thus, the average man needs to fund 19 years of retirement while a woman needs to fund 24 years of retirement (Source: Secure Your Future, 1996). To be on the safe side, many financial experts recommend that you plan on living to age 90.

Myth: You’ll only need 60% to 80% of your pre-retirement income during retirement.

Reality: This may be true if you plan on sitting around during retirement, but for more and more people, retirement involves extensive travel and expensive hobbies. Retirement is no longer viewed as a time to slow down, but is now considered a time to enjoy the better things in life. You should analyze your individual situation and desires for retirement before accepting this general rule of thumb.

Myth: Social Security and pension plan benefits will provide enough income for your retirement.

Reality: Even at their current levels, Social Security benefits will not support a very lavish retirement. Someone who worked 35 years and earned $15,000 annually can count on Social Security providing 50% of his/her pre-retirement pay. But as your income goes up, the percentage of your pay that Social Security replaces drops significantly. Someone who earned $64,500 would receive 25% of this pay in benefits, while someone making $100,000 would receive 16% of that amount in Social Security benefits (Source: The Wall Street Journal, March 12, 1997). And many believe that changes will need to be made to the Social Security system in the future, probably involving reductions in benefits.

Many companies are switching from traditional defined-benefit plans to defined-contribution plans, such as 401(k) plans. Even if you are covered by a defined-benefit plan, most plans do not provide for cost-of-living adjustments, meaning that the purchasing power of your pension may decrease significantly over a long retirement. Defined-benefit plans typically pay higher benefits to employees who have worked for long periods at the same company. But today, the average worker switches jobs once every 5.7 years, which will result in lower pension benefits (Source: Personal Financial Adviser, 1995).

These new realities could mean that the quality of your retirement will be largely dependent on the amount of money that you accumulate, either through retirement vehicles or in personal investments. To meet that challenge, you should consider the following:

Start investing now. To reach your goals, it is important to make investing a habit and to start that habit as soon as possible.

Use tax-deferred investment vehicles. Be sure to invest in your company’s 401(k), 403(b), or other defined-contribution plan as soon as you are eligible. These plans usually allow you to reduce your gross pay by the amount of your contribution, so you don’t pay current taxes on the contributions. In addition, your earnings accumulate tax-deferred, with taxes paid on contributions and earnings when funds are withdrawn. Amounts withdrawn before the age of 59 ½ nay be assessed a 10% federal tax penalty in addition to normal income taxes.

Spend time analyzing your investment choices. How much you have at retirement can depend o how much you invest and your rate of return on those investments. Review your investment options, utilizing alternatives that are appropriate considering the long-term nature of your retirement savings. Even small differences in rates of return can have a significant impact on the ultimate size of your nest egg.

Don’t use your retirement funds for anything other than retirement. Don’t be tempted to borrow from your 401(k) plan or to spend part of a lump-sum distribution. Raiding your nest egg now will only make it more difficult to meet your future retirement needs.

Call at (800) 878-4036 for help. Accumulating a nest egg sufficient to fund a retirement that may last 25 or 30 years is a daunting task. If you’d like help with the process, just call us at (800) 878-4036.

SHOULD YOU BUY THE AMERICAN DREAM?

But now the case for home ownership is not quite so clear cut. While the emotional reasons still are compelling for many, the financial reasons are not so conclusive, especially with housing prices in many areas of the country barely keeping pace with inflation. So before purchasing your first home or upgrading to a larger home, consider the following points:

Carefully evaluate the after-tax costs of owning versus renting for at least a five-year period. In addition to the obvious expenses, you’ll need to factor in likely rent increases, potential housing appreciation, closing costs, sales commissions, and foregone investment income on your down payment. If you’re likely to move in a few years, it may be better to rent. Many people find it takes at least three to five years of appreciation just to cover closing costs and sales commissions.

Realize that non-financial issues are also important in your decision. The security of owning your own home may be more important to you than any financial disadvantages. On the other hand, you may not want to be responsible for the upkeep on a home. Or you may find that by renting you can live in a nicer area than you can afford to buy in.

When you own a home, you need to be prepared to pay for routine maintenance as well as the occasional significant repair, such as a roof or furnace.

Don’t automatically purchase the largest home you can afford. It may make more sense to purchase a smaller home and use the money you would have spent to diversify in other investment vehicles.

Be cautious of extensive home-equity loans and creative financing. If you maintain too much debt, you may end up with your debt exceeding the proceeds when you sell your home.

Home improvements may not add substantial value to your home. Proceed cautiously before investing in a major remodeling project.

If you’d like help analyzing some of the financial aspects of purchasing a home, please feel free to call us at (800) 878-4036.

A COLLEGE FUNDING STRATEGY

Children aged 10 or younger: With eight or more years before your child enters college, you have the time to help you meet your financial goals. Since inflation can have a major impact on the total amount needed, you should consider this when determining how much to invest and what types of investments to use. You may want to consider more aggressive investments, since your long time frame can help you to overcome any short-term setbacks while keeping ahead of inflation.

Carefully consider whether you should invest in your name or your child’s name. There are pros and cons to each alternative. You can transfer $10,000 per year ($20,000 with your spouse) to each child with no gift tax implications. For children under 14, the first $650 of investment income is tax free, the next $650 of investment is taxed at the child’s tax rate (usually 15%), and the remaining income is taxed at your marginal tax rate. Generally, when the child reaches age 21 (or 18 in some states), the child has control of the money and can use it as he/she wishes. Also, saving in your child’s name may affect his/her ability to qualify for financial aid. Under the current financial aid system, 35% of a child’s assets must be used for college education costs, compared to 5.6% of your assets (Source: The College Board).

Children aged 11 to 14: With four to seven years left until college starts, you may want to select more conservative investments. If you are just starting to save for college now, you may find the amount you need to save quite large. However, it is important to start investing so that you can have some funds accumulated by the time your child enters college.

If you are sure that your family income will preclude your child from receiving financial aid, you may want to consider investing in your child’s name after he/she turns 14. Starting in the year the child turns 14, all investment income is taxed at his/her marginal tax rate. For 1997, that means that your child needs $650 of investment income before paying any federal income tax and will only pay 15% income tax on up to $24,650 of income.

Children aged 15 to 18: At this point, you will want to continue becoming more conservative with your investments since college is very close. If you are just starting to plan for college now, it may be extremely difficult to accumulate the significant sums you will need over such a short time. Take time to investigate the financial aid process to see if you qualify for aid and to research your options for borrowing for college.

The earlier you start funding your child’s college costs, the more options that will be available. If you’d like to discuss your options in more detail, feel free to call at (800) 878-4036.

ARE YOU READY FOR EARLY RETIREMENT?

While thoughts of an early retirement are certainly enticing, you should make sure that long retirement will be financially secure. Please call us at (800) 878-4036 if you’d like help developing a plan to retire early.

NEWS AND ANNOUNCEMENTS

When we face fluctuating market conditions, clients often want to know whether they should liquidate their current investments and look for other alternatives. Normally, I tell them that this is probably not to their advantage. When we selected your investments, we attempted to select vehicles which would fulfill both your current and long-term objectives. Thus, we have taken into account the fact that the market will have fluctuations.

During times like these, we often counsel patience, counting on the fact that historically, over a reasonable period of time, the investments we have chosen may help achieve your objectives.

If you have any questions as to how these concepts apply to your specific investment activities, please call at (800) 878-4036.

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