- The Washington Times - Tuesday, December 5, 2000

Fifty-five million Americans are age 55 and older, according to data from the U.S. Census Bureau. Of that number, 35 million are 65 or older. The baby-boom generation (1946 to 1964) numbers 76 million. By 2030, the 65-and-older population will double to 70 million. The fastest-growing segment of the older population are those 85 and older.

Americans' longer life span means many will spend more years in retirement, which, in turn, will require more planning and financial resources.

What steps should be taken to prepare for retirement? When should one start financial planning? What assets will be needed to retire? What about Social Security benefits? What about the effects of no longer working? Will part-time work be an option? Will relocation be a factor?

Planning from the beginning

For Sara and Jim Lucas of Reston, these questions in large part have been resolved. Mrs. Lucas retired from the federal government three years ago with a buyout incentive after 20 years of work. She anxiously awaits her husband's retirement in July after 36 years of government service.

"When I chose to go into federal service, I actually made my first planning decision about retirement," Mr. Lucas says. He made that decision in college and upon graduation joined the Air Force.

"The Air Force advised its officers to do long-term financial planning," he says. After completing 12 years of active duty, Mr. Lucas served in the Air Force Reserve, and having just turned 60, he is eligible for military retirement benefits.

After 38 years of marriage and living in the same home for two decades, the couple plan to sell their town house next spring. Their 32-year-old daughter recently married.

"Our biggest decision right now is when and whether to relocate," Mr. Lucas says.

A recent survey by AARP, "Understanding Senior Housing," polled people ages 45 and older, and 75 percent said they plan to stay in their current residence. Those respondents age 55 and older were even more adamant, with 89 percent saying they didn't plan to move.

How much do you need?

Unlike the Lucases, Pat LeMay and Eugene Epperly of Fairfax have been married for 2 1/2 years. This is a second marriage for both, and each has grown children two from his first marriage and three from hers which makes their retirement planning more challenging.

"In a second marriage, it's different," Ms. LeMay says. "He has children; I have children. Therefore, we structured our finances because we would like some of our worldly possessions to go to our children. We'd also like things to go to our spouse, too. We had to work all that out."

The couple worked it out by setting up three "pots" of money each has an individual pot, and together they have a joint pot, which includes their house, their cars and a savings account.

Mr. Epperly retired from the federal government in 1994 after with 30 years of service.

"It was prompted by a buyout that was the sweetener although the retirement course I attended said don't do it for that reason," he says. "The main impetus was it was going downhill. I decided to take the money and run it was a good decision."

He started consulting on a part-time basis when his youngest son went to college in 1996.

"I enjoy doing this," he says. "Something like this is an easier transition than just stopping."

His wife took a different approach.

"I have been planning for my retirement from the day I went to work," she says. At 59, after 20 years of government service, Ms. LeMay will retire in December at 36 percent of her highest three-year average salary.

Ms. LeMay has educated herself over the years by taking retirement seminars and doing lots of reading.

She also advocates talking to other people.

"In talking to others, I've found they all seem to claim that you don't need as much money as you think. What I have read is you need between 70 and 80 percent in order not to cut back. However, from the people I've talked to that have retired, they say no way."

Thomas Grzymala, a certified financial planner with Alexandria Financial Associates, takes a different view.

"Let's say a person retires at 65. They want to make that trip to Europe or Hawaii. From 65 to 75, they will be spending as much money as usual. From 75 to 85, they will be slowing down and may want to start gifting more to the kids. After 85, they may be spending more for medicine than ever."

Taking stock of the finances

Mr. Grzymala says the most essential ingredient in preparing for retirement is taking an inventory and preparing a balance sheet that shows your net worth (assets minus liabilities).

"The vital reason for doing a balance sheet is determining how much estate planning you should do. Right now, anybody can give to their heirs $675,000 tax free.

"The second instrument in retirement planning is a cash-flow statement, which shows over the period of a year how much comes in and how much goes out." He says the most important number is how much it costs to live at present.

"We use that number to see how much money it will take you to live on in retirement," he says.

For example, if it takes $4,000 a month to live, and retirement is 25 years (300 months) away, assuming a modest inflation rate of 3.5 percent, that $4,000 will be almost $9,600 a month, he says.

Never too late to plan

Financial planners advocate starting retirement planning long before the end of a career becomes a reality. Pat Clayton at 50 is 16 years away from retirement. She lost her mother to breast cancer six months ago, which prompted her to enroll in a retirement course offered by Fairfax County Public Schools.

"I keep thinking I am pretty independent and I shouldn't have to pay somebody to figure this out," she says, "but at this point, I don't have the time. It is kind of overwhelming."

Ms. Clayton changed careers three years ago and is self-employed. She previously had a company retirement plan, profit-sharing and stock options and didn't worry about retirement planning.

Mr. Grzymala says it's never too late to start planning for retirement. He recommends sitting down with a financial planner after reviewing some of the Web sites that offer financial-planning tools, such as www.vanguard.com, www.quicken.com, www.troweprice.com and www.fidelity.com.

However, he says, those four sites will provide four different answers.

"The Web-site tools are just tools. The average person may do two to three Web sites and make an appointment with a fee-only financial planner and say, 'Here's the results, what do you think?'"

R.H. Trowbridge III, a chartered financial consultant with Financial Strategies Group in Fairfax, concurs.

"You've got to have a plan. Take an inventory what are my assets, what are my liabilities, what is my cash flow and start doing the basics. If you lay it out and swim around in it, solutions kind of pop up on their own."

The inventory forces thinking about lifestyle and what changes may be necessary to retire at a desired age. By analyzing these expenditures, one may be able to find ways to cut costs and limit consumption, freeing up additional funds for investment. Paying off credit-card debt is the first step in cutting costs and learning to live within a fixed budget.

Developing a budget

"The Retirement Sourcebook" suggests creating a retirement budget before retiring to determine the affordability of a particular lifestyle. Develop a budget for each venture planned.

Once this is done, examine the sources of retirement income, including Social Security, IRA accounts, 401(k) plans and other investment vehicles, company pension, insurance annuities, etc. Determine how much of a shortfall there is and find ways of filling that gap. It may mean working part time in retirement.

The reality is that many retired people do work part time, and this employment provides roughly 30 percent of their income, according to a study, "Income of the Population 55 or Older, 1996," produced by the Social Security Administration (SSA) in 1998.

A 1998 AARP study, "Baby Boomers Envision Their Retirement," found that eight in 10 of this age group planned to work part time in retirement. Sixteen percent said they would not work.

How much money is needed to retire? As Mr. Grzymala pointed out, a good rule of thumb is to look at how much money is being spent now. What can be cut back to invest more for retirement? Often, it's the little things that add up over the course of a year. If a worker cuts spending to invest just $100 a month at 8 percent interest, that $1,200 annual investment will grow to $59,295 in 20 years, thanks to the magic of compounding. A monthly investment of $439 at 10 percent interest will grow to $1 million in 30 years.

Joy Chambers, an estate-planning lawyer in Alexandria, says, "Conventional wisdom is increasingly that you need to keep a percentage of your portfolio in growth stocks to hedge against inflation. A lot of people when they retire want to get into more secure investments like bonds. The bad thing to do is wait until you are on the cusp of retiring before buying bonds because it might not be the right time to sell stocks or to buy bonds."

Though bonds are safe, Ms. Chambers says, they do not keep up with inflation, and that can be a problem for people on a fixed income.

Ms. Chambers also advises having an up-to-date will, a durable power of attorney and a medical power of attorney. She also says the documents should be less than five years old. "Banks do not like old documents because it worries that you revoked it," she explains.

When to retire

Deciding whether to retire at 62 or 65 often is a dilemma. Retiring at 62 means a permanent reduction in monthly Social Security benefits. However, it takes an additional 12 years to make up for delaying benefits until 65, according to the SSA.

Not knowing how long an individual will live complicates this issue. Is it worthwhile to take reduced benefits at an earlier age? If the benefit is not necessary to maintain a retiree's lifestyle, delaying probably makes sense. However, if it is necessary, placing a time value on those extra years may help make the decision easier, financial planners say.

A new law (retroactive to Dec. 31, 1999) that eliminates earnings limits for those 65 and older means no loss of Social Security benefits for those who work. Previously, benefits were reduced by $1 for every $3 earned above $17,000 in 2000.

Be aware, however, that those younger than 65 still will lose $1 for every $2 in earned income above $10,080 for 2000. However, according to the SSA Web site, "If you lose benefits because of work, your benefit will be increased later to account for the months you didn't receive a benefit before reaching full retirement age."

Once in retirement

If working in retirement is not an option, it is important to plan in advance how to fill that time.

"The most important thing you can do for retirement is to cultivate interests that you feel passionate about so that you stay energized. You need to use your mind," Ms. Chambers says. (Read more on our Senior Living Section on Page E7.)

Jim D'Amico, a 61-year-old retiree in Reston, says there are four ingredients to a successful retirement: to be financially prepared, to develop genuine interests, to maximize good health and to have good friends and a social life.

Remember, Grandma Moses had her first art exhibit at the age of 78.

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