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Ginger Applegarth

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GLOSSARY

Reverse Mortgage

A reverse mortgage is a loan agreement with a lending institution in which a senior citizen gets a monthly income based on a percentage of the equity in his home, prevailing mortgage rates and actuarial life expectancy. Once the senior dies or enters a nursing home, the lending institution gets the deed to the house if the deceased's family can't pay back the loan. So you may eventually be signing your home over to the bank.

f you find it hard to think about planning for your retirement, there is an alternative. Put on a paper hat and repeat after me: "Would you like fries with that?"

A recent survey by a Big Six accounting firm shows that unless we save a great deal more than we currently do, three out of four Americans over the age of 20 will have less than half the money they need to retire and maintain their pre-retirement standard of living.

In fact, on average they would have to reduce their expenses by 60 percent in order to make it through their twilight years without running out of money.

If your after-tax expenses currently run $50,000 a year and you retire today, you would have to cut your spending by at least $30,000 if you want your money to last as long as you do. And that huge cut in your budget assumes that you have the good sense to die on the day you spend your last penny. If you survive longer than the actuaries estimate, you'll outlive your money. The good news is that you're reading this article. At the very least, you've already taken the first step and started to think about your retirement needs. The bad news, if there is any, depends on how soon you plan to retire and how much you've already set aside.

If you're 65 and today is your last day of work, and you're spending $30,000 a year, you need $480,000 in assets to maintain that standard of living in the face of inflation - especially if you don't care about leaving an inheritance behind. If you want to retire and live on your interest and dividend earnings alone, you would end up passing on $600,000 to some lucky beneficiaries, because you will need that much in assets.

Most people know vaguely about the coming retirement crisis, but the problem is that not enough of them are doing anything about it. Retirement seems so intangible and distant. If the choice is between spending an extra $2,000 to get the luxury option package on your new car or funding an IRA, guess which usually wins?

We have a natural human tendency to be optimistic. We may think that somebody else will be in trouble at retirement, but it surely won't be us. In practice and in conversation, I encounter four main reasons why people don't put as much money as they should (and realistically could) towards retirement.

1. "I've gotten this far in life without much planning, so I'm sure I will manage to get by at retirement."

No such luck. It is virtually impossible that your retirement income will exceed your current paycheck, and the only borrowing that you will likely be able to do is to get a reverse mortgage.

2. "I know I am going to be getting an inheritance someday, and that should take care of my retirement."

Your parents may well be in good financial shape, thanks to being part of that lucky post-war generation of unparalleled affluence. Even middle-income people may well have estates of $1 million or more. But you need to be aware that inflation, longevity and the rising cost of long-term medical care can eat away at the value of your inheritance, which you may not get until you're in or near retirement.

3. "I haven't done much for retirement. It's just too late to try."

"Too late" is just an excuse to keep spending. It is never too late. It is better to have something when you reach retirement than nothing at all. You won't have anyone to blame but yourself. And you will have daily opportunities to do so when you have to deny yourself things that you want or need.

4. "It's too soon to start thinking about retirement."

It is never too soon to think about retirement. Often people defer putting money into their retirement plans because they want to save for a new house or for college for their children. But there are tangible tax benefits that you get now, because your contributions usually reduce your taxable income, and your investment grows tax-free until you take it out. Even if you end up having to withdraw your investment early, after eight or 10 years, you will probably end up having more money after paying the 10 percent penalty than if you had saved that money outside of a tax-exempt retirement plan.

It's hard to get yourself motivated to save for retirement because it generally requires spending less money now. You can always pay a financial planner to help you get organized, but in the end you have to motivate yourself to change and follow the planner's advice.

There are lots of other places you can go for retirement advice - books, magazines, television and, of course, the Internet - but you probably already know the basics of what to do. Put as much money as you can in a tax-deductible retirement plan, let it stay there and grow tax-deferred until you take it out, and invest for the long term. It's really that simple

When can I retire?

Articles

Will Social Security Live as Long as You Do?
How to Decide If You Can Retire Early
Is a Million Dollars Enough?

Next Steps

Go to Money's Lifetime Planner

			RETIREMENT

			It's Never Too Soon to Start Saving Ginger Applegarth Decision Center

	.......................................... WEB LINK Ask the Experts Financial Planners .......................................... GLOSSARY Reverse Mortgage A reverse mortgage is a loan agreement with a lending institution in which a senior citizen gets a monthly income based on a percentage of the equity in his home, prevailing mortgage rates and actuarial life expectancy. Once the senior dies or enters a nursing home, the lending institution gets the deed to the house if the deceased's family can't pay back the loan. So you may eventually be signing your home over to the bank.		f you find it hard to think about planning for your retirement, there is an alternative. Put on a paper hat and repeat after me: "Would you like fries with that?" A recent survey by a Big Six accounting firm shows that unless we save a great deal more than we currently do, three out of four Americans over the age of 20 will have less than half the money they need to retire and maintain their pre-retirement standard of living. In fact, on average they would have to reduce their expenses by 60 percent in order to make it through their twilight years without running out of money. If your after-tax expenses currently run $50,000 a year and you retire today, you would have to cut your spending by at least $30,000 if you want your money to last as long as you do. And that huge cut in your budget assumes that you have the good sense to die on the day you spend your last penny. If you survive longer than the actuaries estimate, you'll outlive your money. The good news is that you're reading this article. At the very least, you've already taken the first step and started to think about your retirement needs. The bad news, if there is any, depends on how soon you plan to retire and how much you've already set aside. If you're 65 and today is your last day of work, and you're spending $30,000 a year, you need $480,000 in assets to maintain that standard of living in the face of inflation - especially if you don't care about leaving an inheritance behind. If you want to retire and live on your interest and dividend earnings alone, you would end up passing on $600,000 to some lucky beneficiaries, because you will need that much in assets. Most people know vaguely about the coming retirement crisis, but the problem is that not enough of them are doing anything about it. Retirement seems so intangible and distant. If the choice is between spending an extra $2,000 to get the luxury option package on your new car or funding an IRA, guess which usually wins? We have a natural human tendency to be optimistic. We may think that somebody else will be in trouble at retirement, but it surely won't be us. In practice and in conversation, I encounter four main reasons why people don't put as much money as they should (and realistically could) towards retirement. 1. "I've gotten this far in life without much planning, so I'm sure I will manage to get by at retirement." No such luck. It is virtually impossible that your retirement income will exceed your current paycheck, and the only borrowing that you will likely be able to do is to get a reverse mortgage. 2. "I know I am going to be getting an inheritance someday, and that should take care of my retirement." Your parents may well be in good financial shape, thanks to being part of that lucky post-war generation of unparalleled affluence. Even middle-income people may well have estates of $1 million or more. But you need to be aware that inflation, longevity and the rising cost of long-term medical care can eat away at the value of your inheritance, which you may not get until you're in or near retirement. 3. "I haven't done much for retirement. It's just too late to try." "Too late" is just an excuse to keep spending. It is never too late. It is better to have something when you reach retirement than nothing at all. You won't have anyone to blame but yourself. And you will have daily opportunities to do so when you have to deny yourself things that you want or need. 4. "It's too soon to start thinking about retirement." It is never too soon to think about retirement. Often people defer putting money into their retirement plans because they want to save for a new house or for college for their children. But there are tangible tax benefits that you get now, because your contributions usually reduce your taxable income, and your investment grows tax-free until you take it out. Even if you end up having to withdraw your investment early, after eight or 10 years, you will probably end up having more money after paying the 10 percent penalty than if you had saved that money outside of a tax-exempt retirement plan. It's hard to get yourself motivated to save for retirement because it generally requires spending less money now. You can always pay a financial planner to help you get organized, but in the end you have to motivate yourself to change and follow the planner's advice. There are lots of other places you can go for retirement advice - books, magazines, television and, of course, the Internet - but you probably already know the basics of what to do. Put as much money as you can in a tax-deductible retirement plan, let it stay there and grow tax-deferred until you take it out, and invest for the long term. It's really that simple .
			When can I retire?
			Articles \|

			Will Social Security Live as Long as You Do? How to Decide If You Can Retire Early Is a Million Dollars Enough?

			Next Steps \|

			Go to Money's Lifetime Planner Illustration by James O'Brien Copyright 1998 Microsoft Corporation