Parker - Retirement planning-- scared or prepared?

Sunday, June 15, 2003

If you are planning on winning the lottery, don't bother reading this. For the rest of you, however, it is never too early to begin planning for a comfortable retirement.

Given the new economic realities of retirement planning, building up a nest egg is a top priority. No longer can you rely on the government or employer-provided pensions to carry you through your retirement years. The long-term viability of the Social Security system is uncertain, given the crust of aging baby boomers who will begin retiring after 2010.

The private sector is shifting away from defined benefit plans - which promise a certain payout for long-time workers after they retire - to other types of arrangements like 401(k) defined contribution plans, which place greater responsibility for retirement investing on employees.

Additionally, Americans are living longer than ever before, so to avoid outliving your savings, you'll need to set aside more now to finance a retirement that could last over 20 years.

Unfortunately, when it comes to retirement planning, many people are more scared than prepared. Three out of four working Americans are worried about not having enough savings for retirement, yet over half have not begun to save for retirement, according to a recent New York Times/CBS poll.

Retirement planning may seem like a struggle, but you can reach your goals if you develop a disciplined savings strategy.

The first step is to set your goals: when would you like to retire and what kind of lifestyle will you maintain during retirement? Next, you may want to contact a financial professional to help you estimate what your expenses in retirement will be, how much you will receive from Social Security and your employer's pension, and how much you'll need to make up any shortfall between retirement expenses and income. Full Social Security benefits now accrue at age 67 for someone born in 1960.

Don't relay too heavily on the rough rule of thumb that you'll need about 70 percent of your pre-retirement income after you stop working - your expenses for health care and leisure activities, for instance, may increase as you get older.

Whether you have 25 years or five years until retirement, take full advantage of the time you have until you retire. Obviously, the earlier you begin, the more you will end up contributing over time. Additionally, starting early lets you generate a greater payoff down the road due to the process of compounding - the process by which the investment earnings you accumulate begin to generate earnings of their own. Compounding benefits increase with time.

Avoid the habit of contributing to your retirement fund only if there happens to be any cash left over at month-end. Without fail, set aside a specific amount each month for retirement before paying other bills. Saving even a small amount regularly is much easier than trying to save it all at once.

Another tip: contribute as you can to any tax-deferred retirement plan offered by your employer. A 401(k) plan, for instance, lets you contribute pre-tax dollars and exclude any investment earnings from your yearly taxable income until you withdraw your money later at retirement. As an incentive for you to save, some employers match some or all of what you contribute, which can help build up your nest egg even more. Withdrawals prior to age 59 are subject to a 10 percent penalty and income taxes.

Choosing the right investments isn't easy. Your portfolio will be shaped by several factors, including your age, time horizon, tax bracket and risk tolerance. All investments are subject to varying degrees of risk, but one type of risk in particular - inflation - is often overlooked. Inflation erodes the value of your savings over time and takes its toll on most types of investments, including those which are considered "safe" such as money-market funds.

Naturally, you want to be cautious with your retirement savings, but investing too conservatively can keep you from reaching your goals. Avoid putting all your eggs in one basket by diversifying or spreading your savings among several types of investments, such as stocks, bonds and money market accounts. Diversification may help moderate the risks inherent in investing, but diversification cannot eliminate the risk of investment losses.

If planning for your retirement seems like a daunting task, contact a qualified financial professional for help. He or she can help you devise a strategy to meet your goals and suggest the most appropriate investments for your retirement portfolio.

Michael L. Parker, CFP, is a Certified Financial Planner practitioner in Sikeston with securities and advisery services offered through Lincoln Financial Advisors. He is a broker/dealer and registered investment adviser. (mparker50@aol.com)

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