Retirement planning guidelines

Let's face it, most of us would rather do just about anything than work on our retirement plans. But the reality is, if everyone does not take it on as a personal priority, it will never get done. I can't stress enough how important it is for all Americans to begin planning today for their financial futures, making sure they will have enough retirement income to last as long as they do.

There are a few basic retirement planning guidelines that will help Americans unlock the door to a financially secure retirement:

• Think about your "retirement horizon" -- Today many retirees will retire earlier and live in retirement longer than their parents did. A retirement of 20 years or more is becoming more and more common. This longer "retirement horizon" means that your retirement income will have to last longer and go farther, particularly if you plan on living an active retirement lifestyle.
• Plan for income -- Social Security was never intended to meet all of your retirement income needs -- it typically only provides about one-third of the average American's retirement income. Unless you have a large employer pension plan, which most of us do not, another reliable source of guaranteed income is necessary to help cover your retirement costs for as long as you live. Annuities are one option a growing number of Americans, including myself, have selected as a means to generate this income.
• Account for inflation -- Inflation can wreak havoc with your savings if you don't plan for it. For example, today's U.S. inflation rate is about 3 percent. Assuming inflation continues at this rate on average, your $50,000 in savings in 2005 would be worth roughly half its current value in 24 years. What can you do about this? Make sure your retirement plan includes investments that provide large enough returns to outpace inflation.
• Manage your fear factor -- Many Americans fear they will not have the resources necessary to achieve financial security. In fact, a recent study showed that a whopping 95 percent of Americans have some type of financial-related retirement fear, such as running out of money or outliving their savings. Don't let these thoughts paralyze you from taking action. Prudent planning now can alleviate many of these fears.
• Talk to a professional -- Retirement planning can be a complex process. For many, it's difficult to even know where to begin. Talking to a qualified financial/retirement planner is a great place to start. If you don't know who to contact, start by asking family, friends or associates who can point you to someone who has helped them. You can also talk to other financial professionals you know -- your banker, life insurance agent, investment broker, accountant, or estate-planning attorney -- who can point you in the right direction.

As more baby boomers inch closer and closer to retirement, many need to shift their traditional thinking from a focus on simply saving for retirement, to ensure that their hard-earned nest eggs work better for them. Making sure that they will have enough retirement income to supplement Social Security, help cover retirement expenses and last the duration of their retirement, is key to retirement planning success.

The main idea I want to impress on Americans is that the quality of your retirement will be based on the quality of your retirement income, and that will be based on the quality of your retirement planning and your commitment to your plan. It's just that simple."

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- By Ben Stein, National Retirement Planning Coalition

Americans need to be financially literate

The current debate over privatization of Social Security -- whether or not individual accounts are added to the program -- demonstrates the acute need for improving financial literacy in the United States, according to Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI).

"Unfortunately, no matter how you look at the statistics, the bottom lines are the same: Financial literacy in the nation is not good, and most Americans are not planning for their financial future and saving for retirement and other life events," Salisbury said, speaking at a hearing by the House Committee on Financial Services. "To change that, we need to sustain and expand the national effort to increase the delivery of financial education."

Salisbury cited statistics showing that Social Security is the only source of income for 25 percent of retirees, and the primary source of income for 66 percent of retirees. With the vast majority of this nation's retirees depending on a program that is facing a financial shortfall, Salisbury said it is crucial that more Americans learn the basics of how to handle money and control their finances. (Related article: Baby boomers clueless about retirement planning)

"Whatever results from Social Security reform, Americans will need to understand how the program works and how it affects their overall financial future," Salisbury said. He added that "this won't be easy to do," since EBRI research shows only 18 percent of workers know at what age they will be eligible for full Social Security benefits, even though Americans have been getting annual benefit statements for years. "Clearly, most people do not read or understand their Social Security benefit statements," he said. (Related article: Retirement planning tips for young Americans)

Salisbury defined financial literacy as "the ability to recognize, analyze, and appropriately act upon financial matters affecting one's life demands and goals, both during working years (when people are making decisions about spending, saving, and planning for the future) and during retirement (when people must assess how long they are likely to live, manage their assets, and determine how much they can spend each year and not run out of money)." (Related article: Tips on guaranteed retirement income)

He noted that "it has been consistently documented that Americans are not financially prepared," but that all Americans need understand the many aspects of financial risk and how to deal effectively with each aspect of financial risk. Among the major financial risks he listed were not saving, having excessive debt and bearing excessive interest expense, not diversifying investments, and the risk of outliving the money individuals have saved. (Related article: Personal finance tips for retirement)

To get the public to the point of being prepared, he said, both public and private efforts are needed to begin teaching individuals how to track expenses, how to budget, the meaning of compound interest, the nature of a stock and a bond, the danger of inertia, and much more. Salisbury noted this effort has already begun, and there are extensive and growing coalitions aimed at improving financial literacy; nevertheless, he added, "as a matter of public education, it is quite a challenge."

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Salisbury's full testimony before the committee is on the Internet at http://www.ebri.org/

How to save more for retirement?

The Social Security privatization debate may be headed for a close and the Bush administration is probably looking for an exit strategy, but there was a positive side to it. It created tremendous awareness about retirement planning. Here are some tips on how to be better prepared for retirement.

1. Save more. The United States ranks last among industrial nations in our savings rate. The federal government is running a large deficit and, like their Uncle Sam, individual Americans prefer to consume now, rather than save now and spend later. In addition, most employers do not offer defined benefit pensions any more. The truth is we need to save more as a nation. And you have to save for your retirement. Someone else is not going to provide for your future. (Related article: Poor saving habits hurt Americans)
2. Live within your means, create a budget and stick to it. When analyzing the solvency of the Social Security system, actuaries and economists assume certain growth rates in the economy and in benefits. A small difference in assumptions can make a great difference in the conclusions. For example, if the economy grows by 3% rather than 1.5%, there is a tremendous difference in whether there will be enough money to pay the bills. The reason for this is the power of compounding over decades. Use this knowledge to make your own projections and to alter your spending and saving choices. If you need assistance with such things as goal setting and investment choices, seek professional help from an independent fee-only financial advisor. (Related article: Americans concerned about retirement but do nothing to fix the situation)
3. Plan ahead so that your money lasts as long as you do. Since 1940, life expectancy for those attaining age 65 has slowly and steadily increased. The number of Americans Age 65 or older has increased from 9 million in 1940 to almost 35 million in 2000. The sheer size of the "Baby Boom" generation will cause those numbers to balloon. You may live into your 90’s, which is why many financial planners use age 95 in a retirement needs analysis.
4. To avoid a pinch in your lifestyle, start early. Because we are talking about a system that will be in effect far into the future, the sooner we tackle the Social Security problem the better. The same holds true for individual savers. If you are in your 30’s and want to plan for a comfortable retirement, you may need to save only 10% of your yearly earnings. If you wait until you are 45, you may have to save 20% of your salary. Waiting until you’re in your 50’s may mean that you’ll need to save half of all you earn. (Related article: Retirement planning tips if you are under 30)
5. Create a long-term investment plan and stick to it. The discussion of Social Security’s health in 75 years reminds us that we need to focus on long-term goals and results. Studies show that individual investors suffer when they react to short-term fads and chase last year’s market performance. On the other hand, history proves that planning and patience pay off. Do your homework, make prudent assumptions and stay the course. (Related article: Personal finance tips for retirement)
6. Learn about stocks, bonds, mutual funds, diversification, risk and return. The investments you choose now are important. Learn the advantages and disadvantages of the funds that are available to you in your employer’s 401(k) or 403(b) plans. Create an overall plan that takes into account retirement and other savings. Should Private Accounts come into being, individuals will have to become much more knowledgeable about investing. Why wait? Improve your financial IQ a little everyday.
7. Take a few calculated risks. The current Social Security fund is "invested" in Treasury Securities (it’s really a system where one part of the government lends money to another part). Treasury Securities are of the highest quality but, over the long term, provide low returns (this is what Private Accounts are meant to remedy). As you study the issue, you will probably decide that the biggest risk is not taking any risk. Many financial planners believe that how you allocate your investments (stocks versus bonds, for example) greatly determines your overall results. Remember that risk and return are linked – the higher the risk, the higher the potential return. Unless you’re already rich, you will not achieve your long-term goals by playing it safe (for instance, only investing in bank CDs).
8. Control investing costs. Some people are skeptical of the proposed Social Security Private Accounts because they fear that management and accounting fees will be too high. Realizing that over decades even a 1% change can make a great difference brings home how important it is to control costs in your existing investments. Costs matter and they can be controlled. When comparing mutual funds, pay attention to sales commissions, hidden transaction costs, high turnover, and operating expenses to arrive at expected rates of return. A fee-only financial planner can give you independent, objective advice. Many favor index funds which provide broad diversification and low annual costs.
9. Max out those retirement plans. How ever the Social Security issues are resolved, remember that even now Social Security benefits do not amount to enough to live comfortably. Originally it was put in place to save the old folks from living in poverty. Most people do aspire to do much better than that. Put the maximum amount in employer-sponsored retirement plans such as 401(k)s and 403(b)s to capture employer matches. Then build up assets in Individual Retirement Accounts, whether traditional or Roth. If you can still afford to invest more, max out those employer-sponsored plans. Finally, if at all possible, build up savings in after-tax accounts.
10. Don’t neglect your health. Medicare is actually a larger funding problem than Social Security. The new drug benefit will cost trillions to fund. Your personal health will greatly influence the quality of your retirement. Remember that the choices you make today will influence your health in old age. Like investing, health matters are worth studying. Most experts recommend simple things like getting more exercise, avoiding smoking and consuming less alcohol. Some emphasize smart food choices such as avoiding sugar and refined carbohydrates. Others recommend eating organic produce and avoiding pesticides. Most doctors recommend taking a good multivitamin, and some go way beyond that in terms of supplements. Take charge of your health and learn about what is right for you.

No matter what happens in the current Social Security debate, remember that Social Security alone is not likely to allow you to maintain your present lifestyle once you retire. Even if Personal Accounts are enacted, the ability to put money aside will be phased in and will be rather limited at first. In addition, anyone investing in Personal Accounts will have reduced traditional Social Security benefits.

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- Based on contribution by Roger Streit, President, Key Financial Solutions