The following are answers to questions commonly asked about preparing for the costs and considerations of retirement. The questions were answered by Roger M. Smedley, a Certified Financial Planner and a member of Salt Lake Riverside Stake high council. Brother Smedley has served as national vice president of the Institute of Certified Financial Planners.
Question: What general advice can you share with those planning retirement?
Answer: President Ezra Taft Benson said it best, "Plan your financial future early; then follow the plan." (To the Elderly in the Church, general conference, Sept. 30, 1989.) The key is to start early, when time is your ally.
Q: Please discuss some of the basic things we, as members of the Church, should be doing financially to prepare for the future.
A: Proper financial planning should include payment of tithes and offerings, having a sufficient emergency fund and a year's supply of food, clothing, fuel and so forth. Living within our means is the basis for all financial planning.
Q: When is the best time to start saving for retirement?
A: There is never a "right time" to save or invest money. Young couples struggle to have children, clothe and feed them, buy a car, house and so forth. Next it's braces and glasses and possibly pep club uniforms and letter jackets. Most parents find that mission, college and wedding funding requirements come very rapidly.
Many people in the accumulation phase of their lives have a "triple squeeze" problem. They may be taking care of aging parents, trying to feed and fund their mission- and college-bound children, all while they are striving to save for their own retirement.
As a practical matter, what typically happens is that funding retirement becomes one of the last financial priorities. Even though funding retirement is vital, it is not considered urgent.
The good news, however, is that relatively small amounts of money, say $50 or $100 per paycheck, compounded over 15 or 20 years in retirement accounts can make a significant contribution to one's overall retirement needs. (See chart on this page.)
One of the best-kept financial planning secrets is that the rate of saving is far more important than the rate of return, particularly in the early years. The best way to save for retirement is automatically through payroll deduction and regular transfers and third party drafts from checking accounts into retirement accounts and mutual funds. It takes consistency and planning. It can be done, but you have to start early. However, if you didn't start early, start now.
Q. What if I have already retired? Is it too late to plan?
A. What you want to do is protect what you have, and do the very best you can with those valuable dollars. The less money you have, the more important those valuable dollars become. There are many tax-free, intermediate bond funds that are paying nearly 6 percent interest. Invest only through national companies with solid reputations.
Q: Are some retirees afraid to spend their money?
A: When you are in the retired, or spending, stage it may be psychologically difficult for some to start spending what has taken years to accumulate. This is particularly true for those who lived through the 1930s depression. According to James Thompson, manager of consumer affairs for the American Association of Retired Persons, the single greatest fear of retirees is becoming dependent.
Q: How does lifestyle following retirement influence spending?
A: Once people retire they tend to go through three different phases. For those "chronologically gifted" between the ages of 65-74, it's the "Go-go" years. For those between the ages of 75-84, it's the "Slow-go years. For those individuals aged 85 and over, it's the "No-go" years.
When an individual initially retires, his or her spending habits don't normally change instantly. In fact for some people, spending may actually increase through such items as missions, travel and entertainment. It is not uncommon for people to make significant purchases such as automobiles or motor homes upon retirement. For most people the home should be paid off prior to retiring. Also, the costs of long-term care and medical needs should be planned for and considered.
Q: What are some of the things one needs to plan for in retirement?
A: We need to make two different planning assumptions: What would happen to us, financially, if we live to a ripe old age? What would happen to others, financially, if we died prematurely? None of us particularly likes to consider these possibilities, but they are very real.
Q: What are the major sources of retirement income?
A: Typical sources in the United States are Social Security, Company-sponsored retirement plans, Income from other employment obtained after retirement, Charity, Income from savings and investments. Much uncertainty exists with government and company-sponsored plans, particularly if you are trying to plan over 10 or more years. The problem with these plans is that they are based on what the government or your company can afford, not on what you will need. Other employment after retirement may work in the short run, but not in the long run. Charity, of course, is not a viable option. The single, best option is to put funds away that are independent of government or company-sponsored pension programs.
In addition, many companies have savings plans for retirement that will augment employees contributions. For example, if you put $1 in, the company will add $.25 or $.50. It's like a 25 or 50 percent instant return.
Q: What about making investments with high rates of returns?
A: For most of us, it is better to protect what we already have than trying to make spectacular gains. In making any investment, it is best to ask these three questions.
What is the most I stand to lose?
What is the most I stand to gain?
Is the risk worth the reward?
Most people skip the first question.
Q: Please discuss risk.
A: Every investment has at least two types of risk. A certificate of deposit has purchasing power risk and interest rate risk. Purchasing power risk means that the principal and interest may not keep up with inflation and taxes. Interest rate risk means that if interest rates are rising, and you are locked into a lower rate, you will not earn as much as you could. Many people take too much of the wrong types of risk and not enough of the right types of risk. A good mutual fund with a consistent track record minimizes risk of loss and helps increase earnings potential.
Another best-kept financial planning secret is that if you can get 3 percent more on an investment, in 25 years you will have twice as much money without twice as much risk.
Q: What about loans to family members?
A: As a general rule, beware of co-signing loans and making loans to family members. This may jeopardize assets and, more importantly, damage family relationships.
Q: What about debt after retirement? Does it ever make sense for a retired person to borrow money?
A: As a general rule, you want to be debt-free as soon as possible in your life. This certainly applies to retirement. It is difficult for me to think of a good reason to borrow after retirement. The bad news about borrowing is you have to pay it back. Some borrowing before retirement is appropriate, however. For most people, purchasing a home represents a worthwhile purchase and a productive use of debt. Non-productive debt, however, is buying an asset that quickly depreciates, such as a brand-new car every year. Also, never borrow to invest.
Q: What is the best investment to make?
A: Believe it or not, for individuals with personal debt, getting rid of that personal debt is one of the smartest moves they can make. Why? Because it has one of the highest financial payoffs.
Credit card debt is a good example. If you are paying on a credit card with a 19.8 percent interest rate, you would have to earn 27.5 percent on an investment, before taxes, to pay off that credit card interest.
Q: Are wills and trusts necessary?
A: A will is one of the most important legal documents you will ever sign. If you die early in life, it designates who will raise your children to maturity and who will manage and distribute all of the assets you will have managed to acquire. A trust allows you to make distributions over time. Because these documents are so important, I would not attempt to do it myself. Also a living will or a health-care power of attorney is also important.
Q: Even though we are talking about planning for retirement, please comment on what should be done to provide financial security in the event of death before retirement.
A: Your responsibility to provide for your family doesn't end at death. "But if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel." (I Tim. 1:5.) This scripture's context is usually taken to mean providing for our families while we are alive. However, it is also holds true upon our premature death or disability. A client once told me that he had six children, that he made $30,000 per year and that he had $30,000 in life insurance, which he considered adequate. Evidently, he had never talked to a widow.
ADDITIONAL INFORMATION
Did you know?
Much pertinent information regarding retirement is not well-known. The following quiz illustrates some of these important but obscure facts.
The importance of planning for the future - including retirement - is illustrated by the story of Joseph in Egypt. Through the power of the Lord, Joseph interpreted Pharaoh's dream of seven years of plenty followed by seven years of famine. What amount did Joseph direct Pharaoh to save during the seven years of plenty?
A. 1/7
B. 1/5
C. 1/4
D. 1/3
The average age at which a woman becomes a widow in the United States is:
A. 56
B. 60
C. 64
D. 68
Out of 100 women in the United States reaching age 65, how many are widowed, divorced or single?
A. 64
B. 71
C. 78
D. 85
If a husband and wife are the same age, how many years longer will the wife statistically outlive her husband?
A. Two years
B. Five years
C. Eight years
D. 11 years
What percentage of the population have annual incomes of $20,000 or more upon retirement?
A. 4 percent
B. 9 percent
C. 13 percent
D. 17 percent
For most people, what percentage of their current income do they require upon retirement?
A. 50 percent
B. 60 percent
C. 70 percent
D. 80 percent
Answers
B. Joseph directed Pharaoh to save 1/5 (or 20 percent) during the good years. (See Gen. 41:34.) By dividing financial resources between food storage, mission-funding and retirement, we should be saving a similar percentage today.
A. According to James Thompson, manager of Consumer Affairs for the American Association of Retired Persons (AARP), the average age at which a woman becomes a widow is 56.
D. According to a Social Security publication, 85 out of 100 women will be alone at age 65. Here's the breakdown: 41 will be widowed, 29 will be divorced and 15 will have never married.
C. Women statistically will outlive their husbands by about eight years. However, most husbands and wives are not the same age. If a wife is five years younger than her husband, she should plan on being alone about 13 years.
A. According to a Social Security Administration publication, only 4 percent of the population have incomes of $20,000 or more at the retirement age of 65 or older.
C. Most people need about 70 percent of their pre-retirement income, assuming the house is paid and the children are gone. However, a special need, such as a child with disabilities, may require additional funds.
Investing $100 per month investment
INTEREST RATE 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS
4% $6,652 $14,774 $24,691 $36,800 $51,584
6% 7,012 16,470 29,277 46,435 69,646
8% 7,397 18,417 34,835 59,295 95,737
10% 7,808 20,655 41,792 76,570 133,789
Cost of retirement
Includes 3% increase in expenditures yearly to account for inflation
MONTHLY EXPENDITURES* 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS
$1,000 $64,808 $140,091 $227,540 $329,123 $447,123
1,250 81,010 175,113 284,425 411,403 558,904
1,500 97,212 210,136 341,310 493,684 670,684
1,750 113,415 245,159 398,195 575,965 782,465
2,000 129,617 280,182 455,080 658,246 894,246
*From pensions, Social Security and other assets
