Laura Winig writer
Rod Morata photographer
When my grandparents retired in 1980 at the ages of 65 and 67, they sold their Michigan home, bought a small bungalow in Florida and lived comfortably on their social security, my grandfather’s generous pension and the interest on their substantial savings. They died with money in
the bank, equity in their home and the peace of mind that came with knowing they were unlikely to outlive their money.
The retirement outlook for most Americans isn’t as rosy. Workers are retiring younger and living longer, which means they’ll need much bigger nest eggs than their grandparents had. Experts tell us not to count on the government or expect our employers to worry about our golden years; social security is a wild card bet at best and pensions are fast becoming a quaint memory. Employers have been shutting down defined-benefit pensions since the 1980s, and those lucky enough to have them have good reason to believe they won’t be able to count on them when it’s time to retire, given the recent trend among blue chip firms—most notably United Airlines, Polaroid, and Verizon—to terminate or freeze their pension plans.
Yet despite these dire circumstances, Americans have decreased their rate of saving, from an average of 8 percent of disposable income throughout the 1960s, 1970s and early 1980s to about 2 percent now, according to the US Department of Commerce Bureau of Economic Analysis.
“It’s a recipe for disaster,” notes Henry Paap, a financial advisor for Wachovia Securities, and Wellesley resident who specializes in retirement planning. Paap says often people don’t begin their retirement planning early enough, or if they do, they approach the process haphazardly or simplistically. “Retirement planning is more than just saving. It’s doing long term planning in anticipation of the time when your stream of income will be reduced,” he says. “It’s planned saving and understanding the benefits—including the estate and tax benefits—that come from the saving process.” Philip Stathos, associate vice president and financial consultant in A.G. Edwards’ Wellesley office, describes retirement planning as the art and science of mapping out an investment plan that will yield a large enough nest egg to allow you to achieve your life goals. “The objective is to create enough assets to allow you the flexibility to choose how and when you work. For many people, the paradigm of retiring on the beach is passé; now retirement can mean having enough assets to choose new careers without the necessity of having to make a certain amount of income to support you in retirement,” he says.
No matter what your age, Paap recommends starting now. “Whatever you can afford, put it away—now. It’s good discipline to make your retirement saving a mandatory expense,” he says. George Padula, CFA, CFP and president of Danforth Associates, a Wellesley-based investment management firm, agrees, and advises his clients to “pay themselves first.”
One good place to start is with your employer’s 401k plan, which offers several benefits over other investments. It reduces your taxable income, grows at a tax-deferred rate and, if your employer matches your contribution, it’s like free money. You can contribute as much as $15,000 annually to your 401k account, and if you’re over 50, you can contribute even more—$20,000 in 2006.
If your employer doesn’t offer a 401k plan, consider an Individual Retirement Account (IRA). In 2006, you can make a tax-deductible $4000 contribution ($5000 if you’re over 50), and you can contribute even if you’re contributing to a 401k (though you will not receive a tax deduction for the IRA).
But perhaps the best advice is to sit down with a financial advisor who can help you learn about all of your options. “A good advisor will need to study your tax returns, social security statements, earnings and investments, inheritance situation, anticipated college expenses, insurance, etc. in order to begin the process,” explains Paap. Your advisor will ask you when you want to retire and will use a life expectancy table to estimate how long your money will need to last. Be prepared for a surprise: you may need more than you think—70-80 percent of what you currently earn is a good rule of thumb. Padula says that when executives accustomed to working 12-hour days retire, they often use the time for philanthropic or other pursuits. “People need to prepare now—budget now—for how they want to spend their time,” he says.
Paap says that spending doesn’t decrease as much as people think. “With nothing to do, you’re going to spend money on travel, dining out, hobbies,” he explains, noting that retirees’ spending tapers off once they reach their 80s, but for many, that leaves 15 or more years of significant spending.
You will also need to plan for variables such as inflation, which has historically averaged 4 percent per year. Practically speaking, this means that something which costs $5 now is likely to cost $10 in 30 years, so your rate of return, as well as the amount you save, needs to keep pace. Says Paap, “It’s important to remember that you’ll need money even if the market isn’t rewarding you; you have to have enough to survive a bear market.”
Long range planning is fine if you have years of saving ahead of you, but what if retirement is just around the corner and you’re not sure if you’ve banked enough? Or perhaps you’ve paid off your mortgage and have plenty of equity but it’s tied up in your home? In the words of one retiree, “You can’t take your home to Roche Bros.” If this describes your situation, consider investigating a reverse mortgage. This type of mortgage allows you to borrow against the equity in your home and receive a lump sum or monthly payment until you or your heirs sell the home. At that time, the principal and interest fall due. Stathos acknowledges that retirees who want to stay in their homes need a way to tap the equity in their homes, but he believes that despite their growing popularity, reverse mortgages are far from perfect. “They are very expensive and not very flexible,” he says, noting that closing costs can be much as five times higher than traditional mortgages. Paap recommends reverse mortgages, only as a means of last resort. “I’m of the old school; I think less debt is more,” he says.
Alternatively, you could take advantage of Massachusetts’ tax deferral program, which allows seniors to defer their real estate property taxes. In Wellesley, residents over 65 with incomes of less than $50,000 per year can apply through the Board of Assessors office to defer 100 percent of their property taxes. When the home is sold, the deferred back taxes, plus 3.79 percent interest (for fiscal year 2006), are paid to the town. (Weston has a similar program.) As with any such program, check with a financial or tax advisor or lawyer before plunging in, since you are authorizing a lien on your property.
Regardless of which strategies you choose, the key to retiring successfully is to plan thoroughly, save early and take stock of your progress as you reach key milestones.