Making Sense of Retirement Planning

Robert and Barbara Cupani, both 67, celebrated their 42nd anniversary by taking a 21-day cruise through Europe. But this wasn’t the only trip for the Long Island-based couple in 2007. They also spent two weeks in Alaska, 10 days in San Francisco and had several weekend trips throughout the Northeast.

The reason they can afford such a carefree lifestyle is that they started their retirement saving when they were in their 30s. (He was a male nurse. She worked for a cosmetics company.) The Cupanis consider themselves lucky, compared to some friends. “We know people who live with their kids or are just getting by on social security,” Bob says. “Sometimes we feel guilty when we talk about the trips, but this is something we planned for and we’re not going to stop until we see everything.”

Financial experts say that nearly one-third of all Americans who are working have nothing saved for retirement. That’s surprising, given that a whopping 95% of Americans have some type of financial-related retirement fear, such as running out of money, according to Ben Stein, honorary chairperson of the National Retirement Planning Coalition.

You may be one of those people who is concerned, or who hasn’t yet begun a retirement plan because the choices are overwhelming or you think you aren’t making enough yet to save. These worries are normal, but don’t let them keep you from your dreams for the future. Prudent retirement planning now can alleviate many of your fears—and, like the Cupanis, you can soon be on your way to making your retirement dreams come true.

Jump Start Your Retirement Plan

In the early stages of planning, think about the long days of retirement. It’s great to imagine having all those extra hours to do the things you’ve always wanted to do, yet some people feel lost without their working day connections.

“My estimation is that retirement planning should be about looking ahead financially as well as socially,” says Jan Cullinane, co-author of The New Retirement: The Ultimate Guide to the Rest of Your Life. “What are you going to do? Are you really the type of person that is defined by your job? How will you replace the social contacts you have through your job? You should really start thinking about all that and making lists so you can better prepare for it all.”

Another issue to consider is where you want to live after retirement. A home near work will no longer be an issue. And your current home, if it’s an “empty nest,” may be too large and too expensive to maintain. If you think you want to move, start researching the options sooner rather than later, especially if you are nearing retirement age. This decision can have a big impact on both your future finances and your quality of life.

To figure out your retirement cost-of-living, experts suggest you should anticipate needing about 70% of what you currently live on to get by when you reach retirement age. The reason for that drop is that you won’t be commuting or going to as many work events. You’ll generally scale back commitments as you age. Some advisors do caution that you should think about your goals thoroughly, so that you have enough money to do whatever you desire. You may want to travel or maintain club memberships, which can be just as costly if not more than they are now.

While you’re contemplating your future, it’s also important to focus on the present just a little bit. Retirement saving starts with understanding and evaluating your current financial picture. Something you can do is start a spending log to see just where your money is going. This may also help you envision living off that leaner income later on. If you have a frugal lifestyle now, it will be easier in retirement. But, if you’re spending every penny you earn, perhaps it’s time to see where you can scale back a bit.

As you figure out your retirement plan, a financial professional can help you solidify your goals and find the best way for you to save for your retirement dreams. Financial advisers will usually offer a free consultation and your local bank will have someone who can guide you and answer any questions you might have.

Olivia and David Desimone, a 50-something couple from Athens, GA, began planning for retirement in their 40s.

“We attended a free workshop by A.G. Edwards on investing and financial planning,” Olivia says. “A complimentary meeting with one of their brokers was included. He steered us toward a mutual fund that let us automatically invest every month.”

Olivia and David also did a lot of reading before deciding to get into individual stocks, and started subscribing to investment newsletters.

So whether you decide to remain right where you are, spend your retirement traveling or play golf every day, a qualified professional can help you figure out what your saving options are, and help you choose the best ones based on your retirement plan.

Learn Your Retirement Options

There are two main types of formal retirement savings—Individual Retirement Accounts (IRAs), and employer-sponsored retirement plans, which include traditional pension plans and defined-contribution plans, such as 401(k) and 403(b) plans.

“A 401(k) is the most common plan that is funded by employee contributions and [often] matching contributions from the employer,” says Bob Carlson, author of The New Rules of Retirement: Strategies for a Secure Future. “The major attraction of these plans is that the contributions are taken from pre-tax salary, and the funds grow tax-free until withdrawal.”

Participants in a 401(k) plan generally have a number of different investment options, usually from a menu of mutual funds. These funds typically include a money-market fund, bond funds of varying maturities—short, intermediate, long term—and various stock funds.

“I started working full-time with a credit-card company four years ago,” says Donald Eggers, 29, of Rye, NY. “My company matches my 401(k) savings up to 6%, and until a few months ago, I never even put one dollar into my account. I started thinking about it after talking to some friends, so I met with an advisor at my local bank and he explained why it was important for me to start. Now I have 12% of my salary going in.”

Cullinane has seen hundreds of cases like Donald’s. “You really need to take the time and see what your company offers and take advantage of any matching to its fullest,” she says. “When you are just starting to plan, this is important. It could also affect you if you are looking for a new job or negotiating a new contract. You should know what’s out there for you.”

Plans similar to a 401(k) include a 403(b), offered by nonprofit organizations such as hospitals, schools and religious organizations and a 457(b), which is exclusive to government employees. Whatever the case may be, if your employer offers you a chance to save directly, take it. It’s one of the easiest ways to prepare for retirement.

If your company doesn’t offer a retirement plan, or if you’d like to put away even more for retirement, an IRA is the next option to consider. Currently, you can save up to $4,000 each year in an IRA. (If you’re over 50, you can make extra catch-up contributions of up to $1,000.) There are two types: a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals, and, if you qualify, your contributions may be deductible; a Roth IRA, by contrast, doesn’t allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals.

If you are offered a retirement-savings plan through your workplace, begin using it. If not, ask a financial advisor to set up the IRA that works best for you. You’ll be surprised how easy it is to get started once you understand your options.

Health Matters

Savings plans will set you up for living expenses, but what about health care as you age? Most health insurance doesn’t cover custodial (nursing-home) care. Accounting for this in your initial retirement plan will make things less burdensome for you and your family.

“God forbid you get a stroke or Alzheimer’s or break a hip, and need to go into a nursing home,” says Carlson. “People need to start thinking about long-term care insurance. You can amass a ton of money and then it could all go to paying for nursing care or assisted living.”

If you’re unprepared for such eventualities, your entire savings could vanish. Long-term care insurance may not be a concern for most people starting out, but it should be. Museum worker David Farrell, 58, was wise enough to look into post-retirement health insurance for himself and his wife.

“I knew from my grandparents that if you can’t care for yourself and wind up in an assisted-living facility, they basically take all your money,” David says. “My grandfather amassed a nice savings account—and of course, you always think that you will get a nice inheritance someday, and he would kid with us about us being able to pay for college and things like that—but it all went when he got sick because he didn’t have the proper insurance.”

Another thing to be aware of is that early retirement may leave you in the lurch when it comes to health coverage.

“People who plan to retire before 65 need to pay special attention to the issue of health insurance,” says Ellen Hoffman, who writes a regular retirement column for BusinessWeek. “Many employees will not get any retirement health coverage from their job. Retiring before Medicare eligibility at 65 will require paying for your own health insurance, which could be prohibitively expensive. Also, the cost of Medicare has been rising and is likely to continue to go up.”

Diversity Is Key

There are many ways to make your money grow as you patiently wait for retirement. Diversification is an important consideration when investing, be it in stocks, bonds, mutual funds or anything else.

“However your retirement-savings plan is structured, make sure it is well diversified to lower your overall investment risk,” Carlson says. “This strategy means investing in different asset classes and among the securities of many issuers.”

Younger savers can invest more aggressively, but shop around for funds with more of their assets in equities (stocks). For example, T. Rowe Price’s 2010 fund includes about 65% of its assets in stocks, while Fidelity’s 2010 fund invests only about 50% in equities. Remember, if you invest too conservatively for fear of losing some of your principal, you may not reach your goal. However, some experts advise caution.

“As we’ve seen lately, there’s also a lot of volatility in stocks,” Carlson says. “As you age, you’ll want more of your money in bonds and money-market accounts. These have lower returns than stocks, but they also have far lower volatility.”

By anticipating your needs in all areas of your retirement, you can simplify what is a daunting process. Make a budget of your spending habits, look into any retirement plans your company offers and talk with a financial advisor about your options. Even with these seemingly small steps, you’ll be on the path to future security.

“Everyone wants to have that dream retirement life,” says Cullinane. “For most of us, when we retire, it’s the first time in our lives when we have the time and money to do the things we always wanted to do. When you’re younger you have the time but not the money. When you’re working, you have the money but not the time. Make sure you plan to have the life you always wanted and you will understand why they call them the golden years.”

Just ask the Cupanis.