Planning For Retirement

HE-736, New April 1998. Fred Waddell, Extension Family Resource Management Specialist, Associate Professor, Human Development and Family Studies, Auburn University

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Why People Don't Save

People have many excuses for not saving. Some people think that they must first take care of certain financial responsibilities before dealing with others. This first-things-first thinking only leads to costly procrastination. During our lives, we must handle many financial responsibilities at the same time. We don't say, "I'll wait until my children are grown before I give to my church," or "I'll wait until I've paid off my house before saving for a vacation or for my children's education."

Procrastinating is very costly for your future financial security. Instead of thinking in terms of an either-or use of your money, which results from a misguided first-things-first belief, think in terms of a little of both. A little spent on something you want now and a little spent on something later will give you a sense of security and peace of mind.

People make excuses that they "can't afford to save" or "don't have the self-discipline to save" and ignore the severe consequences of not saving. You can have enough money for a financially comfortable retirement without working yourself into an early grave and without depriving yourself of a fulfilling life.

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How Does Your Financial Future Look?

Ask yourself these questions about your future:

• Is a safe, secure, and comfortable future something I really want?
• Do I want a secure future as much as something to buy?
• What kind of picture do I have of myself retired? Is it a hazy, gray, or dark picture, or is it a colorful one in which I am financially secure and enjoying life?

Make a mental picture of your financial future now. If you are not saving for retirement, you probably have no mental picture of your financial future at all, let alone a picture of yourself financially comfortable and secure. Notice how bleak your financial future appears (in black and white rather than in color) or how fuzzy or hazy it is, and with no movement and no sound. Get the picture? What you are seeing now in your mind is exactly what you'll be seeing later in your life unless you begin regularly saving and investing for your retirement.

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How Much Should You Save?

If you earn $25,000 annually, Social Security will replace about 40 percent of your earnings. However, at higher income levels, Social Security replaces far less income: just 28 percent if your average annual earnings are $40,000 and only 20 percent if you earn $60,000. You will need to replace between 55 and 65 percent of your before-retirement income from various sources. The maximum pay taxed by Social Security is $68,400 in 1998.

If you are elderly or disabled, you may receive Supplemental Security Income (SSI). SSI is a federal welfare program for the elderly and disabled run by the Social Security Administration. Money for it comes from general taxes, not Social Security taxes. The monthly payments you can expect from SSI are far less than what you would receive from Social Security (Table 1).

You can close the gap between Social Security payments and the income you will need in retirement without becoming a workaholic or an obsessive saver. When estimating your retirement needs, follow these four steps:

1. Estimate how long you'll live.
2. Determine how much you spend now.
3. Subtract expenses you won't have after retirement.
4. Add additional costs you are likely to have after retirement.

Step 1. Estimate how long you'll live. With a safety margin, a reasonably healthy middle-aged man should plan on 90 years; a woman, 93.

Step 2. Determine how much you spend now. Make a fairly accurate estimate of what your living expenses were last year, but don't obsess over the details. Table 2 lists some major expenses and gives some comparisons of those expenses before and after retirement. Use this list of expenses to help you estimate your living expenses.

Table 1. Monthly Payments Of Social Security And Supplemental Security Income In 1998

	Monthly Payment 1998
Social Security Income
Maximum retirement payment	$1,342
Average retirement payment, individuals	$765
Average retirement payment, couples	$1,288
Supplemental Security Income
Average disability payment	$722
Maximum SSI, individuals	$494
Maximum SSI, couples	$741

Table 2. Comparison Of Expenses Before And After Retirement

EXPENSES

Mortgage	*	Generally paid off by retirement (often 25-30% of a typical family's expenses)
Other Debts	*	Usually paid off by retirement
Transportation	*	On average, 47% less after retirement (only $3,572 compared with $6,702 for someone under the age of 65)
Children	*	Normally have no more children's expenses, which often require as much as 15 to 20% of a family's income
Clothing	*	On average, 22% less for clothing and related services such as dry cleaning after retirement ($567 a year vs. $727 for those under 65)
Entertainment and Leisure	*	Generally 18% less after retirement ($1,109 vs. $1,345)
	*	Generous discounts on entertainment, travel, lodging, meals, and recreation are available for seniors. Even supermarkets sometimes offer special senior citizen discounts on certain days of the week.
Savings and Investments	*	Immediately before retiring, many people save between 10 and 20% of their preretirement incomes for retirement. This saving usually stops upon retirement.
Income Taxes	*	As incomes of retired people drop substantially, the marginal tax rate drops also.

Step 3. Subtract expenses you won't have after retirement. You may find that you can live comfortably on as little as 55 to 65 percent of your preretirement income.

Step 4. Add additional costs you are likely to have after retirement, such as health care, travel, and care of adult children.

Health care. Your health care expenses are likely to increase by 25 percent when you retire. Medicare beneficiaries spend the following portion of their annual incomes on health care.

	Portion of annual income
All beneficiaries	19%
Poor (income up to $7,755)	35%
Near poor (income up to $9,693)	23%
Middle income (income up to $31,020)	17%
High income (income above $31,020)	10%
Note: Income levels are for individuals. Source: American Association of Retired Persons

Supplement free Medicare coverage with a reasonably priced "medi-gap" insurance policy.

Extensive travel. Expenses for travel may increase for a while. However, extensive travel usually subsides when people reach their early 70s.

Adult children. Grown children may need your financial help.

Use Tables A, B, and C in completing the How Much You Need To Save For Retirement worksheet. An example is shown below.

Worksheet: How Much You Need To Save For Retirement

Years until retirement
Years of retirement*
Total annual retirement expenditures
Annual Social Security payments	-
Annual pension and retirement plan income	-
Annual retirement income gap	=
	÷12
Supplemental monthly income (SMI) needed	=
Inflation factor from Table A (see below)	x
Adjusted SMI (ASMI)	=
Expected annual return on investment
Expected annual inflation (or use 3%)	-
Expected real annual return
Net rate (NR) from Table B (see below)	x
Required savings (ASMI x NR)	=
Factor from Table C	x
Annual investment in tax-deferred plan**	=
Less employer's contribution	-
Your annual contribution	=
*Males--Assume life expectancy of 90 years; females--assume life expectancy of 93 years. **Through 401(k), 403(b), or IRA plus personal investments

Table A. 1996 Dollars Adjusted For Anticipated Inflation

Number Of Years To Retirement	Inflation Factor*	Number Of Years To Retirement	Inflation Factor*
5	1.16	25	2.09
10	1.34	30	2.43
15	1.56	35	2.81
20	1.81	40	3.26
*Based on a 3 percent annual inflation rate

Table B. Amount You Must Save To Generate $1 Per Month

Number Of Years You Plan To Withdraw $1 Per Month	Annual Net Rate (NR) Of Return On Investment (After Inflation)
	5%	6%	8%	10%	12%
15	$136.98	119.10	105.34	93.83	84.15
20	$152.16	140.28	120.35	104.49	91.73
25	$171.77	155.98	130.43	110.96	95.90
30	$187.06	167.63	137.19	114.90	98.19
35	$198.97	176.26	141.73	117.29	99.45

Worksheet: How Much You Need To Save For Retirement--Example

Years until retirement		20
Years of retirement*		25
Total annual retirement expenditures		$40,000
Annual Social Security payments	-	$16,000
Annual pension and retirement plan income	-	$12,000
Annual retirement income gap	=	$12,000
	÷12
Supplemental monthly income (SMI) needed	=	$ 1,000
Inflation factor from Table A	x	1.81
Adjusted SMI (ASMI)	=	$ 1,810
Expected annual return on investment		8%
Expected annual inflation (or use 3%)	-	3%
Expected real annual return		5%
Net rate (NR) from Table B	x	$171.77
Required savings (ASMI x NR)	=	$310,900
Factor from Table C	x	$00.0219
Annual investment in tax-deferred plan**	=	$6,808.71
Less employer's contribution	-	$ 750.00
Your annual contribution	=	$6,058.71
*Males--Assume life expectancy of 90 years; females--assume life expectancy of 93 years. **Through 401(k), 403(b), or IRA plus personal investments

Table C. Amount You Need To Invest Annually To Have $1 In The Future

Years To Retirement	Expected Rate Of Return On Investments
	7%	8%	9%	10%	12%
5	$0.1739	0.1705	0.1671	0.1638	0.1574
10	$0.0724	0.0690	0.0658	0.0627	0.0570
15	$0.0398	0.0368	0.0341	0.0315	0.0268
20	$0.0244	0.0219	0.0195	0.0175	0.0139
25	$0.0158	0.0137	0.0118	0.0102	0.0075
30	$0.0106	0.0088	0.0073	0.0061	0.0041
35	$0.0072	0.0058	0.0046	0.0037	0.0023
40	$0.0050	0.0039	0.0030	0.0023	0.0013

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Some Tips To Make Saving Easier

Pay Off Your Debts Now

People today carry an average balance of $4,700 on their credit cards during the year. By paying off your credit cards, you earn the equivalent of 27 percent interest on your money (if you are in the 28 percent tax bracket). Once that debt has been paid, the monthly credit payment can then be reapplied to paying off your mortgage or to saving for retirement.

Furthermore, in the event of a job loss or other financial emergency, you avoid the prospect of having creditors and debt-collection agencies harassing you for payment. When paying off your debt, use the power-pay principle: as you pay off each debt, apply the payment for that debt toward your other debts to pay them off much faster.

Take a moment now to add up all your total balances and monthly payments on your credit cards, loans, and other credit. Once you have done this, develop a plan to pay off this debt entirely without replacing it with additional debt that you can't fully pay off each month. For some people, this means cutting up their credit cards. For others, it means putting their credit cards on ice (in the freezer) or in a drawer out of sight until those credit card and debt balances have been completely paid off.

Save For Emergencies

Financial emergencies are facts of life. While we can't predict exactly what kind of financial emergency will occur each year, financial emergencies, sometimes very severe ones, are going to happen. Not having a savings fund for emergencies can be very costly and very worrisome.

Even in these good economic times, layoffs are claiming about a half-million workers a year. It's a trend that is likely to continue as companies respond to hard times by reducing the size of their workforces. Some workers have found themselves caught up in such downsizing several times. Many of these people who have been laid off are unprepared for such an emergency because they have high levels of personal debt and little or no savings. Moreover, men and women are often rehired at wages averaging 10 percent below their previous wages. Men 25 to 54 years old are often rehired for wages averaging 20 percent below their previous wages. Even if you receive severance pay, you may need to use some of your savings for times when you don't have an income. The amount of your emergency savings fund should be one-months' gross pay for every $10,000 in salary. Also, remember that this emergency fund has to cover all emergencies, not just times of unemployment. When planning the amount of your emergency fund, consider the following factors:

• Debt load. If you have a lot of debt, you will need more emergency funds.
• Income stability. You'll need more emergency savings if your income fluctuates, is unpredictable, depends on commissions, or is seasonal.
• Job security. Job security is fast disappearing. If this is a possibility, and if you have no working spouse, you need to have a larger emergency fund.
• Chance of a long-term disability or illness. If your health or your family's medical history is problematic, you'll need a larger emergency fund.
• Chance of a large expense such as your parents' nursing home care or other family emergencies. "Layer" your emergency fund by placing some money in passbook savings and some in a money market mutual fund. If a financial emergency occurs, you can use your passbook savings or your money market fund, or you can borrow against the equity in your home mortgage with a home equity loan.

Contribute To Employer-Sponsored 401(k) And 403(b) Plans

One out of four Americans today is not taking advantage of the best savings and investment alternative available partly because they fear locking up their money. Employer-sponsored 401(k) or 403(b) plans allow you to save up to $10,000 per year from your gross income and are fully tax deductible. In addition, your employer contributes a certain amount to your 401(k) or 403(b) plans.

If you haven't been contributing to a 401(k) or 403(b) plan, there are catch-up provisions for people who have at least 15 years of service with an employer. In these cases, employees can contribute as much as 20 percent of their income, up to $12,500 annually. A $15,000 lifetime cap applies to cumulative catch-up contributions of more than $10,000.

Borrowing Money From A 401(k) Or 403(b) Plan

Most people think that the only time they can take money out of these plans is at retirement, if they become disabled, or upon reaching age 591/2. This is not true. You are allowed to take out a loan or make a withdrawal from your 401(k) money when you really need the money. Twenty-three percent of people who borrow from a 401(k) plan do so to start a business, buy a house, or pay down debts. However, remember that when you borrow money from your plan, you are taking money out of your retirement fund needed for your retirement.

Special exceptions. Provided your plan permits it, you are allowed to borrow from your own 401(k) or 403(b). When you borrow from these plans, you don't have to pay taxes on the loan, and you don't have to pay a penalty to the IRS. Two types of loans are allowable:

• Short-term loan. You can take a short-term loan for any reason. The loan must be repaid quarterly over a period of up to 5 years.
• Long-term loan. You can take a long-term loan for one reason--the purchase of your primary home. Your employer will require documentation in the form of a sales contract or other proof of purchase of the home.

You can pay off the principal and interest through regular paycheck deductions. However, the interest paid on a loan secured by your pretax deferrals is not deductible even if it is used to purchase a home. Moreover, the interest rates are relatively low, and you have access to your money today while at the same time saving for retirement. Also, when you borrow money from these plans, the interest you pay is to yourself because it goes back into your plan.

Caution: If you leave your job before repaying the loan, you may be required to repay the whole unpaid balance in full. The IRS will consider this as a taxable distribution if you don't repay it, and you will have to pay a 10 percent penalty on top of the taxes. However, if you retire and still have such a loan outstanding, you can make arrangements with your employer to repay the loan through deductions from your pension check. The 10 percent penalty may not apply.

Hardship distributions. Another way of taking money out of your 401(k) is through a hardship distribution. A hardship withdrawal is allowed when you are in significant and extreme financial need and you can't get money from another source, or if the distribution from the plan is necessary to satisfy that financial need.

IRS rules require that the financial need be for one of the following reasons:

• To purchase your primary residence
• To prevent foreclosure on the mortgage that is on your primary residence
• To prevent eviction from a primary residence that you rent
• To pay significant medical expenses
• To pay tuition and related fees for the next 12 months for you, your spouse, or your children
• To pay funeral expenses

The amount of the hardship withdrawal cannot exceed the amount you actually need to cover the hardship.

401(k) Strategies If You're Retiring Soon

If retirement is in sight, you should think about the best way to get your money out of your 401(k) or 403(b). Start by talking to your benefits manager or financial planner. He or she will probably talk to you about one of these options:

• Roll it over. You can put your 401(k) or 403(b) funds in an individual retirement account (IRA). Your money will keep growing tax deferred.
• Take out cash as you need it. You'll simply pay income taxes on the amounts you take out. If you're earning less in retirement, you might be in a lower tax bracket.
• Take the money and run. Before you do so, consider that you'll have to pay hefty taxes right up front. Also, your money will no longer grow tax deferred.
• Take a lump sum with a twist. If you're over age 591/2, you can take advantage of a lump-sum withdrawal with income averaging a once-in-a-lifetime deal that may cut your taxes on distributions. Check with your benefits department or financial planner for more information.
• Buy an annuity (a contract with a life insurance company that guarantees you a steady income, usually for life). You can also have your employer buy the annuity on your behalf.

Open An Individual Retirement Account (IRA)

In 1998, Congress created the Roth IRA. If you meet certain criteria, you can withdraw interest and earnings from your Roth IRA account tax free! To determine if a Roth IRA is right for you and if you should consider converting your traditional IRA to a Roth IRA, consider the following facts:

• Any taxpayer with earned income is eligible to contribute to a Roth IRA, but eligibility phases out between adjusted gross incomes (AGIs) of $95,000 to $110,000 (single) and $150,000 to $160,000 (married filing jointly).
• Your contributions are made from after-tax dollars; they are not deductible.
• You can contribute up to $2,000 each year depending on your adjusted gross income, but you cannot contribute more than $2,000 to both IRAs.
• Interest and earnings grow tax deferred and under certain circumstances are tax free.
• After 5 or more years, you can withdraw tax free and penalty free all interest and earnings if:
  • You are at least 591/2 years old
  • You use the money to purchase a new home, no more often than every 2 years (Cumulative home-purchase withdrawals cannot exceed $10,000.)
  • You become fully disabled
  • The money is paid to your beneficiary after your death

Determining Which IRA Is Right For You

So, which IRA is right for you? Though individual circumstances vary, most experts agree that you should first contribute as much as you can to your employer-sponsored pretax retirement plan. Then, and only then, should you consider contributing to an IRA. Assuming you've maxed out on your employer's plan, which IRA is right for you? Consider the following generalizations:

• A traditional IRA might best suit you if you are eligible to make deductible contributions and expect to be in a lower tax bracket when you need the money, usually at retirement.
• A Roth IRA might best suit you if you have 5 or more years until you need the money and you expect to be in a higher tax bracket when you need the money.

Converting A Traditional IRA To A Roth IRA

Deciding whether or not to convert a traditional IRA to a Roth IRA should be based on two criteria. First, consider if a Roth IRA suits you at all, as summarized in the previous section. Second, consider the special tax consequences resulting from conversion.

When you convert a traditional IRA, all deductible contributions and tax-deferred interest and earnings become taxable as ordinary income. However, the 10 percent early withdrawal penalty, which generally applies to distributions prior to age 591/2, is saved. If you intend to use some of the converted funds to pay the taxes, you will then have that much less to deposit into your new Roth IRA. And depending on how much the tax bill comes to, your account might never earn enough to make up for the amount used to pay the taxes. On the other hand, if you have another source of funds to pay the taxes, the Roth IRA could outperform a traditional IRA.

However, if you convert a traditional IRA to a Roth IRA during 1998, you can spread the tax payments over 4 years, and the 10 percent federal tax penalty for early withdrawal (prior to age 591/2) will be waived. For conversions after 1998, the entire tax must be paid in the year of the conversion. While this may be good news for some people, that conversion will result in an increase of your taxable income for 1 year or over 4 years, depending on when you convert. This additional taxable income could drive you up into a higher tax bracket. If so, you may end up paying a higher tax rate on more of your income--not just the deducible and tax-deferred portions of the traditional IRA. Also, to be eligible to convert your traditional IRA, your combined adjusted gross income must be less than $100,000.

Pay Off Your Mortgage Early

Paying off your mortgage early is very important. Not only can it become a key means of saving for retirement, but money saved in this way is flexible. With a home equity loan, you can deal with a financial emergency or help pay for a child's college education. Also, if you become unemployed, your mortgage holder may be more willing to make temporary adjustments or other concessions in your monthly mortgage payment if you have been prepaying on your mortgage.

Money saved by paying off your mortgage early is tax deferred and earns interest at the same rate as your mortgage interest rate. In other words, prepaying an 8 percent mortgage is the same as earning 8 percent interest tax free on your prepayment. For someone in the 28 percent tax bracket, it is equivalent of earning 10.24 percent on a taxable investment like stocks or mutual funds.

Some people prefer to make a small additional payment with each monthly mortgage payment. This payment can be automatically deducted from your payroll check and paid directly to the mortgage company. Others prefer to make additional payments yearly and use any windfall or extra income for this purpose (Table 3).

Table 3. Savings By Prepaying Mortgage

Extra Money Paid Per Month	Amount Of Mortgage, Interest Rate, Number Of Years	Mortgage Shortened By	Total Interest Saved
$100	$75,000	12 years	$78,000
	10%,
	30 years
$25	$75,000	5 years	$34,000
	10%,
	30 years
$100	$75,000	3 years	$10,505
	7%,
	30 years

Although you lose an important tax deduction when your mortgage is paid off, plan your prepayments so that your mortgage will be paid off by the time you retire. House payments usually consume 25 to 30 percent of a family's pretax income, so no longer having to make house payments considerably reduces the amount of money you will need in retirement.

Use Income Tax Refunds For Retirement Planning

About 70 percent of people who file income taxes each year get tax refunds. The average refund in 1997 was $1,375, which represents a $115 overpayment each month throughout the year. Even though this "windfall" is nothing more than an overpayment of their income taxes throughout the year, some people won't adjust their W-4 federal income tax forms or apply for Advanced Earned Income Credits (EITC) because they like getting an income tax refund each year. This makes as much sense as overpaying phone bills every month just to get this extra money back a year later without interest.

People overpay their taxes because they mistakenly believe that their federal income tax is a one-time obligation that comes due every April. They believe that they win if they get a refund and lose if they owe money to the IRS. People also overpay their income taxes each month because they think that they can't save money any other way and see this overpayment and the refund of their own money at tax time as a means of "forced savings."

Rarely is the income tax refund used to purchase life, health, or auto insurance or to get needed dental or medical care. It is also rarely saved or invested. Income tax refunds are usually spent on things people think they can't live without. By adjusting the tax withheld (W-4) form to include one or two more federal and state exemptions throughout the year, additional money is available in each paycheck to pay off credit balances each month and earns the equivalent of a whopping 27 percent. This simple adjustment in your income tax withholding is a less expensive way to have what you want, including a financially secure retirement and an emergency fund.

Table 4 shows the average income tax refund received by Americans from 1985 to 1997. It shows how much money recipients would have available for their retirement if they had put just these income tax refunds into a retirement fund. The table also shows how much of a monthly annuity they would draw from this for 25 years during their retirement.

Table 4. Using Income Tax Refund For Retirement

Year	Average Refund	Years to Retire	@	@	@
			8%	10%	12%
1985	888	35	13,129	24,955	46,886
1986	920	34	12,595	23,504	43,321
1987	922	33	11,687	21,414	38,808
1988	897	32	10,528	18,939	33,711
1989	881	31	9,574	17,217	29,562
1990	916	30	9,217	15,984	27,443
1991	970	29	9,038	15,387	25,947
1992	1,020	28	8,800	14,709	24,362
1993	1,013	27	8,092	13,280	21,602
1994	1,069	26	7,907	12,741	24,259
1995	1,178	25	8,067	12,763	20,026
1996	1,244	24	7,888	12,253	17,880
1997	1,375	23	8,073	12,312	18,634
Totals	$13,293		$124,595	$215,458	$372,441
Monthly annuity for 25 years: @ 5% to 8%			$728-962	$1,260-1,663	$2,177-2,875

Plan For Retirement On Just $1 A Day

When you give your money to the IRS to hold for you for a year before returning it to you without any interest, you lose not just the interest you would have earned by saving your overpayment of your taxes each month, but the more than 18 percent interest you would not have paid on your credit cards and other credit obligations. When this amount is compounded over your entire lifetime, the savings are considerable. This savings can make the difference between a retirement with or without financial peace of mind. There are better means of "forced" or "automatic" savings than by overpaying your income taxes every month. There are many kinds of automatic payroll deductions for savings and investments where your money can grow at rates ranging from 6 percent or more and be compounded over many years.

Table 5 presents another powerful example of what changing your W-4 income tax withholding can do. By taking just one more exemption and arranging for automatic monthly deposits of this small amount into a mutual fund, you would save a great amount by the time you retired and would receive monthly annuities for 25 years of retirement.

By adding two more exemptions, you can double these retirement savings and monthly retirement amounts. When combined with Social Security retirement benefits, you can have a comfortable retirement even if you begin saving just a dollar a day when you are 25 years old until retirement at age 65. Even if you begin saving one dollar a day when you are 35 years old, you still can have a financially secure retirement. However, the longer you wait before starting to save for retirement, the more you deprive yourself of the magic of compounding and of a financially secure retirement.

Table 5. Effect Of Withholding Exemptions On Retirement (1997)

One additional withholding exemption for people in:
15% tax bracket
Dollars Invested Each Month	$33	$33
Number of Years	30	40
Future Value at 10% Interest	$74,596	$208,695
28% tax bracket
Dollars Invested Each Month	$62	$62
Number of Years	30	40
Future Value at 10% Interest	$140,150	$392,093
31% tax bracket
Dollars Invested Each Month	$69	$69
Number of Years	30	40
Future Value at 10% Interest	$155,974	$436,361
36% tax bracket
Dollars Invested Each Month	$80	$80
Number of Years	30	40
Future Value at 10% Interest	$180,839	$505,926
39.6% tax bracket
Dollars Invested Each Month	$87	$87
Number of Years	30	40
Future Value at 10% Interest	$196,662	$550,195

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The Power Of Compounding On Savings

Because of the powerful effect of compounding on savings over many years, a small change in tax withholding will enable you to pay off your home sooner, provide money for your retirement, and provide peace of mind, a sense of security, and self-confidence. You can do this without depriving yourself or sacrificing. Earnings from money put into an IRA or other retirement plan are tax deferred and for many people may be tax deductible. Procrastination can be very costly, as the following example illustrates.

Investor A invests $2,000 a year for 10 years, beginning at age 25. Investor B waits 10 years, then invests $2,000 a year for 31 years. Table 6 shows a comparison of the total contributions and the total value at retirement of the two investors.

Table 6. How Time Affects The Value Of Money

Investor A				Investor B*
Age	Year	Contribution	Year-End Value	Age	Year	Contribution	Year-End Value
25	1	$2,000	$2,188	25	1	$0	$0
26	2	2,000	4,580	26	2	0	0
27	3	2,000	7,198	27	3	0	0
28	4	2,000	10,061	28	4	0	0
29	5	2,000	13,192	29	5	0	0
30	6	2,000	16,617	30	6	0	0
31	7	2,000	20,363	31	7	0	0
32	8	2,000	24,461	32	8	0	0
33	9	2,000	28,944	33	9	0	0
34	10	2,000	33,846	34	10	0	0
35	11	0	37,021	35	11	2,000	2,188
40	16	0	57,963	40	16	10,000	16,617
45	21	0	90,752	45	21	10,000	39,209
50	26	0	142,089	50	26	10,000	74,580
55	31	0	222,466	55	31	10,000	129,961
60	36	0	348,311	60	36	10,000	216,670
65	41	0	545,344	65	41	10,000	352,427
Value at Retirement			$545,344	Value at Retirement			$352,427
Less Total Contribution			($20,000)	Less Total Contribution			($62,000)
Net Earnings			$525,344	Net Earnings			$290,427
Note: Assume a 9 percent fixed rate of return compounded monthly. All interest is left in the account to allow interest to be compounded. *Investor C (age 45) invests $2,000 a year for 21 years. At age 65, he has $123,844. $42,000 contributed = $84,844 net earnings.

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Working After Retirement

Retirees who return to work often do so relatively quickly and primarily for economic reasons. Travelers Corporation and Affiliates surveyed 1,400 retirees (750 men and women registered with the Travelers' retiree job bank and a 650-person sampling of nonregistered retirees) to find out why they did or didn't work after retirement and to identify ways to give retirees more work options. About one out of four Travelers' retirees had returned to work, and two out of three had returned within a year of retiring.

While many returned workers said they derived social and emotional benefit from working, most said they went back to work to meet living expenses or pay for major special purchases. One-third reported working at jobs that they felt underused their skills, but most of these said they were satisfied to have it that way.

Those who went back to work were more dissatisfied with their initial decision to retire. Many had retired early and therefore had lower Social Security and pension income than they might have had.

Most nonworkers said they didn't need extra money and were too busy with other activities. A significant number, however, said they might like to work were it not for poor health, care-giving responsibilities, transportation problems, and concern about losing Social Security benefits if they worked too many hours.

Some people simply don't want to retire until much later in life. If you suspect you may be one of these, there is no reason for you to stop working at any particular age. It may make more sense to keep working as long as you can to maintain the income level you wish and allow yourself to continue finding purpose and meaning in work.

Delaying retirement can give you an opportunity to change jobs or careers, volunteer your time, or start your own business. You need not work full time but can do part-time or temporary work, job-sharing, or telecommuting.

Plan and prepare for a retirement job before you retire by developing new skills. Improve your skills in fields or income-producing hobbies that you enjoy doing. Develop plans for marketing yourself and your services and products. Your new job after retirement may be even more satisfying than the job you held before retiring.

Working After Retirement

Once you reach 70, you can earn as much you like and still collect full Social Security benefits. Until then in 1998, you're limited to $14,500 a year ($1,209 a month) or $9,120 ($760 a month) if you're under 65 (figures are indexed each year for inflation). Working beyond these annual limits (before age 70) hardly pays. For each $3 you make, you lose $1 in benefits. Deduct federal income tax, Social Security tax, and state and local taxes, and you're left with little more than the cost of lunches and transportation to work.

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Saving For Retirement When You're Starting Late

Procrastination is very costly. The longer you procrastinate, the more you deprive yourself of the magic of compounding and a financially secure retirement. Table 7 shows the cost of procrastinating.

Table 7. The Cost Of Procrastinating

Start Saving at Age	*A. Save	B. Retirement Income	**C. Net Earnings
25	$2,000 for 10 years	$545,344	$525,344
35	$2,000 for 30 years	$352,427	$290,000
45	$2,000 for 20 years	$123,844	$84,844
* Assumes a 9 percent fixed rate of return compounded monthly ** Net earnings = Retirement income minus your contribution (B-A = C)

People say they procrastinate primarily because:

• "I have too many debts."
• "I can't afford to save because I don't have enough money."
• "I can't save."
• "I'll start saving for retirement after I've bought a house, saved for my children's education, etc."

Such a misguided first-things-first approach inevitably leads to procrastination, which deprives people of the power of compounding. However, what do you do if you have been one of these procrastinators and find yourself getting a late start on saving for retirement? First, forget about early retirement. Postponing retirement saving makes early retirement all but impossible. Second, increase your savings program considerably. People who are in their 50s who have little or nothing saved for retirement are going to have to save 30 to 40 percent of their annual gross income. Here are a dozen suggestions to free up more income for retirement saving. These suggestions apply to both you and your spouse.

1. Keep producing income. Don't retire unless you have to. Most people can increase their pension checks by as much as 100 percent by staying on the job just a few more years. For example, if a 55-year-old earning $70,000 a year with 25 years of service were to retire today, his pension would be $13,900 a year. If he works just 2 more years and gets yearly 5 percent raises, the pension alone would be $19,400, or 40 percent higher. If he works 5 more years with yearly 5 percent raises, his annual pension jumps to $30,500. Building up your pension will return more than any other investment anywhere. In addition, by working longer, your Social Security retirement benefits will be higher, and you will have more years to contribute to your 401(k) or 403(b) plan.
2. Get a second job, or have your spouse get a job.
3. Maximize your contributions to your employer's pension plan.
4. Maximize your contributions to your employer's 401(k) or 403(b) plan. Currently this is $10,000 per year.
5. Contribute $2,000 each year in an Individual Retirement Account (IRA) or in the new Roth IRA. Even though your contribution may not be tax deductible, the earnings are tax deferred.
6. Move to a smaller house. You probably don't need to live in the same house you lived in when your children were at home.
7. Slash your car expenses. When you face a retirement savings crunch, don't spend more than 5 percent of your gross income on a new or used vehicle.
8. Track your spending. Organize your spending so you know where your money goes. This eye-opener invariably surprises people and will allow you to redirect your paycheck in a more productive way.
9. Invest in ways that will produce the greatest returns possible consistent with your tolerance for risk. This means that carefully selected mutual funds or stock portfolio can produce returns that will enable you to compensate for having gotten such a late start. Investing in CDs is not going to be nearly enough to outpace inflation and to make up for all the years that you haven't saved for retirement. Remember the "Rule of 72s": Divide the interest rate yield on your investment into 72 to get the number of years it will take your money to double.
10. Share the cost of college with your kids. They can borrow the part of the money they will need for tuition since they have more time to repay the loans than you have time to save for your retirement. It is better to maximize your retirement savings than to save for your children's education because your retirement savings in a 401(k) or 403(b) is tax deductible and saving for your children's education is less so. You can borrow from your retirement funds for your children's education if necessary, but not vice-versa.
11. Start a home-based business and begin a Simple (Savings Incentive Match Plan for Employees) IRA. In 1997, for the first time, someone who has a home-based business in addition to another full-time job can start a Simple IRA, in which they can save $6,000 tax free, plus 3 percent of their net profit as the employer contribution. For example, someone who has a home-based business that nets only $5,000 a year can still contribute $6,000 plus 3 percent of $5,000, or $150, more for a total of $6,150. This can be a tax-deductible simple IRA contribution, even if they are already contributing the full $10,000 to a 401(k) or 403(b) plan with their employer.
12. Work part time after you retire. You can continue working at a second part-time job or home-based business after you retire from your primary job. Your earnings from this part-time job or home-based business, plus your pension and Social Security income, may make it unnecessary to draw upon your 401(k) or 403(b) or other savings until much later, thus making them last longer.

By taking these steps, your retirement savings will build more quickly even though you did procrastinate and get a late start, and you can enjoy peace of mind while anticipating a more financially secure retirement.

Other Savings Tips

• Save any money you inherit. If you are lucky enough to receive a small inheritance, remember that you got it because your relatives acted sensibly instead of adding to their pile of material stuff. Follow their wise example.
• A modest cabin in the country may turn out to be a better long-term investment than another kind of investment. And if you occasionally rent it out to friends, family, and coworkers, you may be able to buy it without sacrificing much.
• Create a close network of family and friends. Supporting networks receive all kinds of help and services free that others must pay for. They are very important to your financial security and to your happiness during retirement.

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Sources:

Warner, Ralph. 1996. Get A Life: You Don't Need $1,000,000 to Retire Well. Berkeley: Nolo Press.