In this chapter, I'll not provide a lot of specific information for you to use to plan for retirement, but I will offer lots to think about--sort of a retirement checklist--and I'll direct you to resources you can use for your retirement planning.
I live in the United States and I'm sure most of our readers live there too. Therefore, much of the advice in this chapter is aimed at residents of the United States. I know some of our readers reside outside the U.S.A., many of them in Canada. Wherever I can I'll refer to resources for Canadians and others.
This is an online document and can easily be updated. I encourage you to suggest corrections, updates, and additional information.
To determine if you should have a retirement plan or begin to plan for retirement, use the following flow chart:
It is never too early to begin to plan for your retirement. The sooner you do, the more likely you will enjoy retirement as a comfortable, secure person.
When did I begin to plan for retirement? Ummmm, when it was almost too late. I was 37 years old before I began saving and investing part of my income. Until that time, none of my employers, except the U.S. Air Force had a retirement plan. I was in the Air Force only three years, nine months, and twenty-seven days; too little to earn any retirement benefits.
At the age of 37 (1967), I was employed by a company that offered both retirement benefits and a retirement savings plan. Because the company contributed 50¢ for every dollar I saved, I couldn't pass up the savings plan; but I still felt immortal, so I elected not to make the small contributions necessary to earn retirement benefits. Fortunately, four years later, another company bought out the division I worked for, and that company had a retirement plan that required no contributions.
I was very lucky. In the winter of 1994, I used a spread sheet provided by my employer to estimate both my Social Security benefits and my retirement benefits. I was amazed to discover that my monthly income after retirement would be about $2.00 per month less than my take home pay.
At that time, my wife was was ill and needed lots of care, so I sent a email to my boss to tell him I wanted to retire as soon as possible. Happily, a few minutes later, my boss came charging into my office to try to talk me out of retiring.
I did retire at the end of 1994. Somehow, my boss figured out how to get along without me, and I was able to come home to take care of my wife, who died seven months later.
I had no carefully made, documented retirement plan, but I did have a plan. I was lucky to be in a situation where a simple thought process constituted a viable plan. I am now in a situation where I can choose to do work that I want to do. Sometimes I get paid for my work and most often not. Either way, I'm reasonably comfortable and secure.
If you are a young and self-employed with no retirement plan, you may be cheating yourself. If you older and self-employed, you may be in deep trouble. If you are responsible for your own benefits, you should have a detailed, documented retirement plan.
Self-employed people are fortunate that retirement can be a process instead of an event. If you reside in the United States, you might plan to begin retiring at age 59-1/2, when you can begin to withdraw from pretax savings without a penalty. Then at age 62, you might begin to receive both Social Security payments and income from pretax savings, thus further reducing your dependence on earned income, perhaps even to zero.
Of course, if you are young, it might not be wise to include Social Security as a vital element in your plan, because by the time you retire, Social Security payments may be insignificant or may begin so late in life as to be unimportant.
As you decide when to retire, consider your attitude and mental state, as you consider the advantages and disadvantages.
We often hear stories about someone retiring and dying a few months later. Your enjoyment of retirement is pretty much up to you. If you have provided for your security and if you decide to continue to be a busy, active, happy person, retirement can be a blast!
It sure is for me!
Unless you have the good fortune to get by with a simple plan like mine was, you will probably need to make more than one pass through the planning process. This is because so many planning considerations are interdependent. If you are relatively young, you may find that your plan is a living document that changes as your circumstances change.
The order in which you do your plan is not important. Just jump in where you feel most comfortable or where you have the most information, and press on. Don't worry about thorough your plan is. Do the best you can with the information at hand, and improve on it as you learn more, and as your career develops. Make assumptions early, and fill in with real data as it becomes available.
You need to work out two key factors.
The first factor will depend on many other parts of your plan. The second factor will be determined by
An Internet web page, Retirement Funding Calculator, lets you estimate how much you should save each month to accumulate the amount of retirement savings you think you will need. Its location is http://www.waddell.com/fun_ill .html
Another Internet web page, Retirement Income Calculator, lets you estimate how long your retirement savings will last during your retirement. Its location is http://http://www.waddell.com/ inc_ill.html
If you begin saving for retirement early and invest wisely, you will can be reasonably sure you will have a comfortable retirement. "Wisely" doesn't necessarily mean safely because you will need to attain the best compromise between safety and return on your investment(s).
Here are some examples of how retirement savings can grow over several years:
I invested 7% of my income for 28 years, and on the day I retired, my retirement savings account had accumulated $71,000. A poor return on investment? No, putting two sons through college and bailing them out when they made poor decisions ate up a few hundred thousand over the years. Still, I am able to draw about $400 per month from that account, yet it still grows by about $5000 per year. Not too bad. Most of my retirement savings are pretax money (401-k money), so I have to pay income tax on what I withdraw, but at a low rate because my taxable income is about half what it was when I was earning a salary.
If you are responsible for your own benefits, you should employ an investment advisor. He or she can help you to avoid the pitfalls and maximize your return on investment, safely. A qualified investment advisor can also help you to minimize your taxes, especially should you die before you expect to.
I often listen to a radio talk show by a local Certified Investment Planner. He recommends that you choose an advisor who has no ties to any particular investment or insurance company, and thus can help you to select investments from a wide range of possibilities. This seems to me to be very reasonable.
The radio advisor also suggests that you select an advisor much the same way you would select a medical doctor. Use the advice of friends who are working with an investment advisor and change advisors if your relationship with a current advisor isn't all you want it to be. Here is a case where STC can be really helpful. Just announce at a chapter meeting that you are looking for an advisor and want recommendations.
If you have worked for one or more employers, they may pay pension benefits to you when you retire. Most employer-provided pension plans are designed to replace a portion of you pre-retirement income. The benefits you will receive are usually based on how much you earned during your employment and the number of years you were employed.
My former employer had such a plan. It was designed so that our combined pension income and Social Security payments would replace a portion of our pre-retirement income. Because Social Security payments are usually free from income taxes, our taxable income should be less, therefore our total income needs would be less.
I am fortunate that I was employed long enough and had sufficient earnings, that my combined Social Security and pension benefits are just a couple of dollars less than my take home pay at the time I retired.If inflation heats up, my benefits will remain almost unchanged, so I will have to depend on savings and earned income.
If you are in your fifties or older, earn all or most of your income in the United States, and that income is or has been subject to FICA taxes, you will most likely receive Social Security benefits, after you retire. If you are young, earn most of your income in the United States, and that income is or has been subject to FICA taxes, you may see little, if any, Soc ial Security money after you retire.
The Canadian Pension Plan (CPP) is also designed to replace income after retirement and, theoretically, is paid for by taxes on income earned in Canada. There has been much discussion about the Canadian Pension Plan on the Internet newsgroup, soc.retirement. That discussion is mostly about recent changes to the plan and what a poor plan it has become. It appears to me that the CPP has problems similar to our Social Security.
If you still have several years until you retire, I suggest that you do not depend greatly on future benefits from Social Security, the Canadian Pension Plan, or similar plans provided by governments. A good retirement investment plan; and if available, pension benefits; are far more likely to provide security in your retirement years.
The U.S. Social Security Administration (SSA) has a very nice Internet web site at http://www.ssa.gov/. Just about everything you could want to know about Social Security is available there and they are planning to add several very useful interactive services.
Be careful if you plan to continue to work for pay after you start drawing Social Security benefits. In 1997, if you are under 65, and if you earn more than $8016 per year, your benefits will be reduced by $1.00 for every $2.00 you earn. If you are 65 or older, and you earn more than $11,280 per year, your benefits will be reduced by $1.00 for each $3:00 you earn. Income from non-work sources, such as interest and pension benefits, doesn't count.
One of the most useful interactions available at the SSA site is that you can request an estimate of your benefits at retirement. This report will also include a record of your all of your lifetime earnings subject to FICA tax. I found it very interesting to see that in 1940, when I was 10 years old, I earned $84.16. That year, the first when I had reportable earnings, I delivered a weekly, throw-away newspaper.
The Canadian Pension Plan is summarized on a web page at http://www.hrdc-drhc.gc.ca/hrdc/isp/cpp/cppove_e.html -. Human Resource Development Canada, which administers the CPP, has a web page at http://www.hrdc-drhc.gc.ca/hrdc/menu-en.html.
In the United States, most retired people pay income tax only on a portion of their income, so federal and state income taxes are usually less than when most of our income was pay for work. This is because most Social Security benefits are not taxable.
Recently I went through the 18 steps needed to figure out how much of my 1996 Social Security benefits are subject to federal income tax. It turned out that I have to pay income tax on 8% of my 1996 Social Security benefits. If my income from sources other than Social Security had been less, my Social Security benefits might not have been taxable. If my income from sources other than Social Security had been none, none of my Social Security benefits would have been taxable.
Often retired people can reduce their taxable income by reducing their income. If, by the time your are retired, you no longer have mortgage payments, you can live comfortably in smaller home, or you can live in a less expensive location, you can get by with less income, and pay less income tax.
Unfortunately, other types of taxes will continue, and probably increase by the time you retire. You will still have to pay taxes such as sales tax; property tax; and in some parts of the world, value-added tax.
When I was young, and when I ever thought about it, I imagined that one day in the distant future, I would just stop working and begin loafing. Retirement would be a sudden cessation of all work. Later, I heard of people who retired, soon found they had nothing more to live for, and died. I decided that I would live long after retiring and have fun. I would find ways to keep busy and my life fulfilling.
I decided that I would work as a part-time independent contractor after I retired. I estimated that I would earn about $20,000 in my first year after retiring, and gave this estimate to the Social Security Administration. This caused them to withhold the first three months of my retirement benefits, because I would exceed the earnings limit. I got that money back early in 1996.
So how much did I earn the first year? A big, fat nothing! I found that I was unwilling to get out and sell myself. Also, I was having too much fun surfing the Internet and working with people who were trying to get into technical communication. I do volunteer work for STC, my church, and TOPS (Take Off Pounds Sensibly) Club, Inc. I have been working almost as many hours as when I was an employee, but mostly for no pay.
You probably don't need a definitive plan for what you will do after retirement, but you should be thinking about it, and you should look for useful and interesting things to do. It is very important to keep yourself busy, healthy, and happy.
Here are some things you might think about
I'm living in a large, paid-for home that my family moved into 30 years ago. Now, it's just me and my two dogs. I'd have to dispose of so much junk if I were to move, that I haven't considered it.
My encyclopedia tells me that Canada has a national medical-care insurance program that is administered by the provinces. About half of the funding comes from the federal government an the rest from the provinces. I assume this program covers Canadians before and after retirement.
If you are to enjoy your retirement, it is important to reach retirement age in good health and spirit. Keeping fit and healthy in mind and body as you grow older is the key-take good care of yourself now and from now on.
Retirement can be boring and your self-esteem can deteriorate unless you live life as fully as possible. Keeping busy, healthy, and happy after retirement is, in my opinion, accomplished mostly by what you think and what you do.
My paternal grandfather told me that he dreamed, in retirement, of having the time to read all the great books he could find. Unfortunately, he died of complications of obesity before he was able to retire.
Here are some of my suggestions for living fully after retirement:
Also, volunteer work may put you in touch with someone willing to pay for your work. I have found much of my work for pay after retirement though STC. Through my work on a church newsletter, I have discovered an opportunity to help a writer to get a book published, and I expect to share in its earnings, should it succeed.
If you know of or find additional useful retirement resources, please let me (John Brinegar) know, so I can add them here. You can send email to johnbri@primenet.com or phone me at (602) 278-7398.
U.S. Social Security Administration: http://www.ssa.gov/
Canadian Pension Plan: http://www.h rdc-drhc.gc.ca/hrdc/isp/cpp/cppove_e.html
Human Resource Development Canada: http://www.hrdc-drhc. gc.ca/hrdc/menu-en.html
Medicare/Medicaid Information: http://www.hcfa.gov/
U.S. Social Security Administration: 1-800-772-1213.
You can get questions answered and do most of your transactions with the SSA through this number. Normally, you need to go to an SSA office only when you need to show them documents such as your birth certificate and military discharge papers.
When You Get Social Security Retirement or Survivors Benefits: Publication No. 05-10077 Your Medicare Handbook: Publication No. SSA ICN 461250 You can request these publications through the SSA's 1-800 number. They will be sent to you automatically when you apply for Social Security Benefits.
Retire & Thrive, Remarkable People Share Their Creative, Productive and Profitable Retirement Strategies, by Robert K. Otterbourg, Kiplinger Times Business, $15, ISBN 0812926463
If you search the Internet web for "Retire & Thrive," you will find a site that offers this book for sale online.