HOW TO RETIRE SUCCESSFULLY
Today's workers must cover more of the costs themselves. But they have new tools for the job
Lately, we are working harder and longer--and surrendering more in taxes--yet are still lamenting that we'll never retire as comfortably as our parents. With fewer workers supporting a larger cohort of elderly dependents, Social Security is unsustainable, and Medicare costs are out of control. Despite a lifetime of paying for both, most of us are unlikely to receive our full share of either. Guaranteed pensions and retiree medical coverage are becoming obsolete. Personal savings are at a record low. The message is constant and comes from all corners--economists, investment advisers, politicians, and the press: ''Retirement is a luxury only the rich can afford.'' Meanwhile, the rest of us fret that we'll be spending our golden years flipping burgers at the golden arches.
But just because a guaranteed safety net no longer exists does not mean that we will free-fall into old age impoverished and infirm. A financially secure retirement is still within reach if you're willing to maximize the numerous savings and investment opportunities available, and adjust your expectations.
To be sure, today's workers must cover more of the cost of retirement themselves. But the baby-boom generation has several advantages that current retirees did not. Baby boomers have bigger incomes, greater pension entitlement, and higher net worth than their parents and grandparents did at comparable ages, according to the Employee Benefits Research Institute (EBRI) in Washington. For much of the past decade, many boomers have climbed aboard a raging bull on Wall Street, leaving many of them with far greater nest eggs than they expected. And employment rates are up for women, thus boosting their pension coverage, suggests William G. Gale in a report for the Brookings Institution.
Moreover, today's employees have multiple sources of retirement income. Individual retirement accounts (IRAs), a variety of stock-ownership programs, and insurance provide benefits unavailable to workers of yesteryear. Folks are investing smarter and earlier. Retirement planning no longer takes place in the employee cafeteria at age 64, says Jerry Potts, marketing director for MFS Funds in Boston. ''Now, companies are offering much younger employees a wide range of educational and financial-planning services.''
EMPTY PIGGY BANKS. Even though baby boomers are more knowledgeable about saving and investing and can use a wide array of vehicles to manage their assets, the personal savings rate has declined from more than 7% throughout the 1960s to just under 5% in 1996. But the savings crisis may be overstated. In a study for Merrill Lynch & Co., Stanford University economist Douglas B. Bernheim found that excluding the equity in their houses, baby boomers were saving only about one-third of what they will need in retirement. Yet when housing wealth is included, more than two-thirds of boomers likely will be able to maintain their current standard of living in retirement.
What's more, when you add in the money invested in equities, the situation seems even less dire. Since the personal savings rate measures only the share of income not spent, it does not give a completely accurate picture of Americans' financial well-being. It ignores the paper profits that employees hold in stocks and stock mutual funds and the ultimately positive effect that capital-gains buildup has had upon many people's net worth. ''You have a situation where workers are saving more than ever from their perspective, yet the savings rate is low,'' says EBRI President Dallas L. Salisbury.
Similarly, the oft-predicted collapse of Social Security is not quite as cut and dried--nor as catastrophic--as it appears. According to economic forecasts, the Social Security trust fund will be exhausted by 2029 unless benefits are reduced or taxes increased. Yet this shortfall is predicated on assumptions of slower economic growth than the U.S. has enjoyed for the past several years. In contrast, higher productivity resulting from efficient use of information technology means greater wealth, which should make funding Social Security easier.
Doomsayers contend that even an exceptionally strong economy will not be enough to offset the anticipated age wave. But in fact, the greatest challenge facing Social Security is not the number of older people but the cost and level of their medical care, says Sandra L. Reynolds, an assistant professor of gerontology at the University of South Florida in Tampa.
ADDED BENEFITS. Since few employers offer retirees medical insurance, most rely on Medicare, the taxpayer-funded insurance program for the elderly and disabled. By the time today's workers retire, the financially troubled Medicare system will look very different. Not only is the eligibility age likely to be raised to 67, but richer seniors may also ultimately pay higher premiums.
The good news is, future retirees may actually receive more benefits--such as coverage for prescription drugs, vision and hearing tests--for less money by joining one of the growing number of Medicare health maintenance organizations (HMOs). Their signing-on will also negate the expense of supplementary Medigap insurance policies, which cover most of the hefty fees Medicare won't. Enrollment will be optional, and participants maintain the right to switch back on a monthly basis into the traditional fee-for-service Medicare system if dissatisfied. Since these HMOs are still relatively new, patients may not be able to pick a doctor they like, and facilities may be limited. But as competition intensifies, Medicare HMOs will develop stronger national networks with improved coverage and service, figures Henry S. Moyer, a partner at the employee-benefits consulting firm of Hirschfeld, Stern, Moyer & Ross in New York.
With life expectancies on the rise, however, the biggest threat to retirement savings will be the cost of long-term care. Since Medicare offers only limited nursing-home coverage, more and more young employees are planning ahead and buying long-term-care insurance policies on their own or through the handful of employers--such as IBM, Alamo Car Rental, and Wells Fargo--that offer a group plan.
Until recently, these policies, which foot the bill for a variety of services ranging from home health care to nursing homes, were expensive and often underwritten by financially troubled insurers. ''Today, policies are more affordable and available from solvent companies [such as Travelers, UNUM, and John Hancock],'' says Potts of MFS. As of this year, employers and individual buyers may be able to deduct some or all of long-term-care premiums and expenses from their federal income taxes. The tax break will dramatically increase the number of companies that offer coverage, predicts William Steinberg, a consultant at Hirschfeld, Stern, Moyer & Ross. In the meantime, insurers are coming up with novel options for people who do not have access to a group long-term-care insurance plan. For example, a long-term disability policy from UNUM converts to long-term-care insurance once the policyholder enters retirement. But what makes the insurance additionally appealing is that you won't need to provide evidence of insurability, and the policy is portable if you change jobs.
OLDEN DAYS. In spite of an abundance of new employee benefits and more flexible and affordable insurance coverage, many Americans still pine for the way things used to be. But they miss the point. Even given the possibility that Social Security and Medicare benefits will be reduced and that individual contributions will be increased, the government's role in retirement is overemphasized. ''Americans fixate on Social Security's stability, and they forget that it was never intended to be the sole source of retirement income,'' says Neal E. Cutler, professor of financial gerontology at Widener University in Chester, Pa. Even so, 6 out of 10 current retirees use it as such. ''Part of the problem is that people mistakenly assume that Social Security provides an adequate retirement income,'' says EBRI's Salisbury. ''The reality is, it never did.''
Another fallacy is this: Because fewer folks have access to defined benefit plans--which guarantee a fixed annuity for life--their chances of retiring comfortably will be reduced. Yet prior to the passage of the Employee Retirement Income Security Act (ERISA) in 1974, workers who left a company before age 65--regardless of their years of service--often forfeited their pension entirely. As a result, 20 years ago only 50% of defined-benefit-plan participants actually received any money, Salisbury says. Today, thanks to reduced vesting requirements and pension portability, that number has climbed to 85%.
Even if the only retirement plan that your company offers is a defined-contribution or 401(k) plan, you may be better off than you think. Unlike traditional pensions, which pay investors a fixed return regardless of market performance, defined-contribution plans let you control the risk and reward, says Ward Armstrong, president of American Express Retirement Services in Minneapolis.
Encouraged by strong stock market performance, employees of all ages are shifting more of their retirement-plan assets into equities, says Mary Rudie Barnaby, president of the National Defined Contribution Council, an association of 401(k) plan providers. In the 401(k) plans administered by American Express, there has been a dramatic shift toward stocks: In 1987, 65% of assets were allocated to fixed income and 35% to equity. Ten years later, that ratio has been reversed. Today's longer life expectancies even challenge the wisdom of shifting all your assets into bonds near retirement. Financial advisers are recommending that 60- to 70-year-old investors allocate as much as 25% to equities, says David J. Castellani, senior vice-president at CIGNA Retirement & Investment Services in Hartford.
CATCH-UP. An extended bull market has increased assets in 401(k) plans--at a compounded annual rate of 18% over the past decade--to around $810 billion, according to Access Research Inc. in Windsor, Conn. Participation among employees who were eligible to contribute to their company's 401(k) plan rose from 64% in 1986 to 78% in 1996, Access reports. Those numbers are likely to grow if a proposal in Congress becomes law, allowing workers who take extended leave due to illness or childbirth to make catch-up contributions to their retirement plan.
Future retirees will also benefit from stock ownership incentives such as stock option and employee stock ownership plans (ESOPs). Today, there are an estimated 10,000 ESOPs, a fivefold increase in the past 20 years, reports the ESOP Assn. in Washington. ''Giving employees a few hundred shares of stock here and there over time adds up to a significant cash benefit,'' says Castellani. Just ask employees at Lowe's Cos., a large chain of home-improvement centers in North Wilkesboro, N.C. The company makes additional contributions of up to 17% of employees' gross income in Lowe's stock to their employee stock ownership accounts. Many lower-level employees--including janitors--have retired with six-figure accounts, says CEO Bob Tillman.
Indeed, preparing for a comfortable and financially secure retirement can be a full-time job. Whether you want to loll by the pool at your condo in Boca Raton, Fla., or cruise to Branson, Mo., in an RV, getting on the right roa to retirement isn't as daunting as it once appeared. With more investment options and benefits than ever befored, and a progress report just a mouse-click away,
By Kerry Capell in New York
Here’s an interesting question: What would you choose to do for a living if you could pick anything at all? What would you do if no one knew anything about your past work history or credentials, except you?
On the other hand, if I was scared of confrontation or didn’t want to deal with maintenance issues etc … then heading all the way down this path in my head would save me a lot of heart ache and time.
