by Bonnie Ayers Namkung

Avoid Future Shock with a Retirement Plan
Walk through your financial planning now and put your feet up later

Whether your retirement dream is lazing in a rocking chair on your porch or gliding through the Italian countryside on a bike, now is a good time to think about how to finance it.

Social Security was never designed to fully support U.S. retirees, and with the staggering number of retiring Baby Boomers expected to strain Social Security in the next few years, it’s unclear how much government funding you’ll get when it’s your turn to put your feet up. To truly enjoy your post-working years, figure out how to bring your own resources to the retirement table.

“Financial planning works,” according to Money magazine. Citing a study by the Consumer Federation of America, Money reveals, “Middle- to upper-income folks with a [retirement] plan had double the savings of those who didn’t.”

Twice named to Money’s list of top financial managers, certified financial planner (CFP) Beverly Tanner of Larkspur, Calif., says, “When people come to me, they don’t have a plan and don’t understand their investments. Have someone explain! Don’t invest in something if it makes you uncomfortable. For retirement, of course, saving earlier is better but it’s never too late to start.”

Brian Drevs, a CFP with Midwest Financial Consultants in Des Moines says, “Procrastination is the number one retirement savings problem. Small-business owners often tell me that their money is put to better use in their company than in a retirement plan. That is, to some extent, factual, but if you don’t set the funds aside, retirement gets completely overlooked.”

After 35 years of advising people about their money, Skip Nichols, CFP, with Financial Planning Resources in Tulsa, says he knows why people put off retirement planning. “Because they don’t know where to start,” Nichols says. “I recommend they get as much education on the subject as possible, so they can make good decisions.”

Inflation is low now, but over the last 60 years it has averaged about 4 percent per year. “That means every 18 years the cost of living doubled,” Nichols says. “If you retired at age 60 and needed $5,000 a month to live comfortably, then 18 years later you’d need $10,000 a month. If you didn’t factor that in, you’d have to go back to work or change your lifestyle.”

Diversify your investments

Nichols says, “Make sure you’re not putting all your retirement-fund eggs in one basket. Look at the people at Enron, for example. And, if you’re counting on the sale of your business being your retirement fund, then you’ve got your current livelihood and retirement in one basket. That is very dangerous. Diversify your investments, then stick with your plan.”

Follow the rules for each program

“Retirement programs are like envelopes with particular tax rules attached,” says Barbara Bachelder, CFP, of Wealth by Design in Novato, Calif. “You can put in the kind of investments you want, as long as you follow the rules associated with that envelope.”

Each program — SEP Plan, Traditional IRA, Roth IRA, 401(k), or the new Solo 401(k) (see sidebar for details of each plan) — differs in the amount you can contribute per year, its suitability for individuals or companies with employees, and in the amount of time and expense required to administer it.

A financial planner will help you choose the right retirement plan, and provide guidance on the kinds of investments that match your growth criteria and level of risk tolerance.

Get more than one opinion on your best plan

“People make money and money makes money,” says Bachelder. “That’s an important concept — you work hard, and you need your money working for you, too.

Pay yourself first; put away what you can without destroying your quality of life.”

Bachelder advises people to talk to a financial planner by the time they reach age 35 or 40 at the latest.

“Your first visit to an adviser is like going to a doctor, you share personal information that you don’t usually share,” Bachelder says. “There’s an assumed level of intimacy because of the nature of the information you divulge. I find that once people answer my questions, they are too willing to hand over their money and take my advice. When you’re making big decisions about your future, just like if your doctor has advised surgery, it’s wise to get a second opinion.”

THE NUTS AND BOLTS OF RETIREMENT PLANS An SEP Plan, or simplified employee pension plan, is one of the most popular plans for small-business owners. The plan can be set up with little paperwork and allows business owners to set aside as much as 25 percent of their compensation, up to $40,000, into an IRA account. An added bonus is that business owners don’t have to file tax returns or get approval letters from the Internal Revenue Service. In addition, you can deduct the amount you invest from your federal taxable income, and many states let you take deductions as well. A Simple IRA is good for companies with fewer than 100 employees. Employees can contribute up to $7,000 of before-tax salary in 2002. Employer contribution is required, but there are minimal administrative costs and fewer reporting requirements than a 401(k). A Traditional IRA is appropriate for individuals and allows a maximum tax-deductible contribution of $3,000 in 2002. Tax on earnings is deferred until withdrawal at retirement. Many financial planners recommend a Roth IRA for individuals because although you contribute after-tax funds, earnings and withdrawals at retirement are federally tax-free. The maximum contribution for 2002 is $3,000. A 401(k) is a comprehensive retirement plan best for businesses with more than 30 employees. The plan allows flexibility in plan design. In 2002, employees can contribute up to $11,000 of pre-tax salary. Employer contributions are not mandatory, but companies can opt to match contributions or share profits. The plan requires regulatory reporting and incurs more administrative costs than simpler plans. A Solo 401(k) is new in 2002 and is for sole proprietors and their spouses. Contributions up to $40,000 per year are allowed for each person and business owners can borrow from the plan to fund company growth.

Check out financial planners

When you begin putting together your plan, choose an adviser carefully: ask friends for referrals and interview two or three money managers before you sign on with someone. Inquire about their credentials. “You don’t need to be licensed to hang up a financial planner shingle,” says Bachelder, “and this is one of the most critical, complicated parts of people’s lives. I took eight courses and passed a rigorous two-day exam to become a certified financial planner. The license is a way to know a planner meets the professional standards in the industry.”

Ask how the planner gets paid. “Some financial planners work for a company that sells specific financial products,” says Bachelder, “and they get commissions on those sales. Other financial advisers charge a flat fee for their services, based on the size of a client’s investments, or an hourly fee, and offer a wide variety of investments. I went independent, because I didn’t want the pressure of having to sell only one product.”

Martha Thorup, a CPA (certified public accountant) in Norvato, Calif., says poorly chosen financial planners can cause problems. “In my accounting practice I’ve seen clients whose money has been mucked up by financial planners,” Thorup says. “People should do more research on their own, and really read documents before they sign them.” Thorup suggests reading Suze Orman’s books. “She writes about finances in layman’s terms, and it’s not as dull as you think,” says Thorup, “especially when it’s about your money.”

Keep a cool head during economic storms

“People make emotional decisions, and it costs them money,” Nichols warns. “If the stock market gets crazy, like now, instead of staying with their plan, people get fearful. They wait until their investment account goes down by 20 percent, and then sell all their mutual funds and put it in 3-percent-
interest savings accounts.”

When the market goes back up, these people buy back in, at a higher price than they sold. “If you’re diversified,” says Nichols, “then just stay on the train. Long-term performance is what counts.”

Nichols finds that a few people are truly interested and like to research and handle investing themselves. But, 95 percent need a professional adviser to keep them from jumping in and out of investments without a plan. “We help people make better decisions from the beginning, help them save taxes, and meet their goals,” says Nichols. “This is a passion for me; good retirement planning changes people’s lives.”