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September 2008

Saving Made Easy

Money may be tight, but small adjustments in spending can make a big difference. Ways to save:

Raising the deductible on car and homeowners insurance could save you up to 15 percent.

If you save $5 per workday by bringing lunch from home you could accumulate up to $1,300 a year, or $108 a month. Brown bagging it three times a month saves $234 a year. If invested for 30 years, that could grow to $29,000.

Turn date night into savings: cut out one entertainment outing a month and save $600 a year.

Opt for more exemptions on your federal taxes. Invest the monthly savings instead of taking a large tax return.

Send a portion of raises and extra money to your retirement account.

Saving for Retirement Day

Financial sacrifices now equal security later.

by Tracey Lamphere

Dr. Michael Roberson, 63, and his wife Becky, 61, of Duncanville, own a dentistry practice and aren’t ready to retire. But 25 years ago, they started investing in IRAs for when that time would come.

“You’re not necessarily going to drop dead at 70,” Becky says. “We saw early on that you better have a lot of money put away.”

While increased longevity, fewer guaranteed retirement income programs and shrinking returns on investments have contributed to decreased retirement savings, many Texans can still reap retirement’s rewards with proper planning.

Nationally, men who turned 65 in 2007 can expect to live about another 17.5 years, up five years since 1940, while women of the same age will live another 20 years, according to Social Security statistics. Today, one out of four 65-year-olds will live past age 90. One in 10 will live past age 95.

A Long Haul

About 74 percent of middle-income Texans who are 58 years old and expect to retire at 65 are at risk of outliving their assets, according to a June 2008 study by Ernst & Young LLP. Nearly 60 percent of Texans newly retired at 65 run the same risk. Nationwide, more than half of the 77 million baby boomers have not saved enough to sustain a long retirement.

The Robersons won’t claim their Social Security benefits until they reach full retirement age of 66 in order to avoid income restrictions. They’ll continue building their IRAs and will keep their 38-year-old practice open for several more years. But for one in four baby boomers, working past age 65 isn’t a want, it’s a must.

Planning Ahead

Changes from a manufacturing to a service economy, high employee turnover and the cost burden of pensions have shifted the onus of saving and investing to the employee. Nationally, from 1992 to 2005, the share of private industry workers participating in pension plans decreased from 32 percent to 21 percent.

Employer-based retirement savings programs such as the 401(k) are a good start, but unlike Social Security, these accounts do not adjust for inflation.

Dallas retiree Jim Artz, 68, was automatically enrolled in a profit-sharing pension at American Desk Manufacturing of Temple, where he worked for 25 years. But Artz didn’t rely on just that for his nest egg. He has invested in the stock market since his 20s.

“My family didn’t have a lot of money growing up,” says Artz. “Whenever I was able to start saving, I did.”

His commission-based wages resulted in some years in which his family would barely scrape by, and other years when he could put $20,000 to $30,000 into savings.

Many Texans who have pensions are finding additional ways to build their savings. Bob Buehler, 60, and his wife Ginger, 53, received pensions after completing nearly 30-year careers in state government. But in their 40s, they realized they needed more savings if they were going to retire without reducing their standard of living. They each opened 401(k) and 457 savings accounts offered by the state and contributed the maximum. They now travel and spend time at their West Texas ranch.

Time to Grow

If you plan to retire at 65 years old and invest 8 percent of your salary in a 401(k), time is on your side. See how your retirement contributions add up:

AgeSalaryMonthly
Investment
Rate of
Return
Savings
25 $35,000 $233 8% $818,828
35$50,000$3338%$499,598
45$65,000$4338%$256,746
55$80,000$5338%$98,160

Career-free Living

A rule of thumb often quoted by investment and retirement advisers states that annual retirement income should be equal to about 70 to 80 percent of pre-retirement wages. The Buehlers, who began saving for retirement while in their 40s, had no intention of cutting living costs after they retired in 2007. In fact, they were told their expenses were likely to increase.

“We did a lot of make-up for not saving early on,” says Bob.

In order to ease the transition of his anticipated retirement in 2004, Artz began tracking his family’s expenses in 2001. Having already avoided debt all of his life, he kept his spending reasonable and began reporting every purchase of more than $30 on a spreadsheet.

No Guarantees

Social Security is still the main source of guaranteed retirement income of individuals aged 65 and older, accounting for about 40 percent of that income, followed by pensions and annuities at 20 percent. Wages and salaries make up about 25 percent of retirement income, and income from assets is 14 percent.

A married couple with $75,000 of pre-retirement income and a pension plan have a 31 percent probability of outliving their financial assets as new retirees. A couple at age 58, seven years away from retirement and with the same income, is estimated to have a 57 percent probability of outliving their assets, according to a report by Ernst and Young. Several factors, including insufficient savings and market volatility, contribute to this rise.

The 58-year-old would need significantly more savings to achieve the same retirement preparedness as a new retiree at age 65, according to the report. For example, a married couple near retirement with a $75,000 income and covered with a pension would need to increase savings from 9 percent to 30 percent for the next seven years to reduce the probability of outliving assets to the same level as the retired couple.

“Few mistakes can do more damage more quickly than selling during a major stock market decline. If the investor sells shares during a decline, he could lock in losses that it may take years to recover.”
– Glenda Summers, certified financial planner

Finding Calm in Rough Waters

In her 21 years as a financial planner, Glenda Summers of the firm Lucien, Stirling & Gray in Austin, has seen people fall into several common pitfalls of saving, the first of which is panic.

“Few mistakes can do more damage more quickly than selling during a major stock market decline,” she says. “If the investor sells shares during a decline, he could lock in losses that may take years to recover.”

Summers says a working person should have three to six months of emergency savings, while a retiree should have a year or more of emergency savings. And bear in mind that inflation can eat away at those savings.

“It’s very important that you invest in such a manner as to decrease the risk of loss of purchasing power due to inflation,” she says.

She recommends having diverse investments to keep ahead.

“Too many people move too much money at retirement to CDs, bonds and money markets,” she says. While these are considered safe short-term investments they rarely keep pace with inflation over the long haul – a retirement that may last several decades. FN

For more information on retirement planning and Social Security benefits visit www.ssa.gov.

Bob and Ginger Buehler - Photo by Barbara Schlief
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