Retirement planning aught to start decades before the fact

Almost everybody who works eventually retires. That seems like a simple enough statement, but considering how many people end their working years with little or no pension beyond social security, one would think retirement was still the privilege of the rich, as it was earlier this century and before.

Today, over half of all American worker retire on nothing more than social security, and only about 31 percent have public or private pensions, a situation that, for many, almost guarantees continued work after age 65 or dependence on others.

This, says Jane V. King, a vice-president and financial planner with Keystone Massachusetts Inc., helps point up the need for adequate financial planning that begins decades -- not a few years -- before retirement.

The fact that many people are not financially prepared for retirement does not mean they are unwilling to do so, according to a survey on pensions and retirement completed last year.

Conducted by Louis Harris & Associates Inc. for Johnson & Higgins, a pension consulting firm, the survey questioned employees, retirees, and business leaders on their attitudes toward retirement and pensions. More than two-thirds of the employees said they would be willing to contribute to a retirement plan or increase their contributions, if it would increase their retirement income.

"Of course, what people say they're willing to do and what they will actually do are often two different things," observes George J. Guilbault, a vice-president at Johnson & Higgins.

The survey also found that 81 percent of working people felt they should have the same standard of living after they retire as when they were working; yet 58 percent of all employees had not given any though to how much money they will need when they actually retire. And more than 20 percent of employees between 50 and 64 years of age said they expected to be able to retire without a pension.

It is only after retirement, it seems, that the importance of pre-retirement planning is fully appreciated.While only 10 percent of retirees who said they had done enough financial planning before retirement felt they had inadequate income, the claim of too little income was made by 56 percent of retirees who admitted they had not done enough planning or no planning at all.

Although many retirees did accept some of the blame for being in poor financial straits, many more pointed to inflation as the prime culprit: Over 40 percent of retirees said inflation had seriously reduced their standards of living since they left the work force.

Retirement planning "is not high on the list of priorities" for most employees, says T. D. Beggs Jr. retirement administrator for the Foxboro Company in Foxboro, Miss. "It's only been in the last few generations that retirement has lost much of its negative image. Now it's something everybody has to be aware of."

Getting people "aware of" the fact that they are going to be retiring, Mr. Beggs says, is sometimes the hardest thing he has to do in pre-retirement planning, and he mainly deals with Foxboro employees who are within a year or two of retirement. For younger workers, it is sometimes harder, though an increasing number of people in their 20s, 30, and 40s are going more today to prepare themselves for retirement, he observes.

What, then, should people do it they are interested in pre-retirement planning that leaves them with enough income to live on and cope with inflation?

Keystone's Miss King and others first urge people to begin -- several years before retirement -- a program of assembling as many pieces of potential income as they can afford. The pieces could include company pensions, individual retirement accounts, annuities, insurance policies, an possibly some conservative, long-term investments, such a government bonds.

But the first thing anyone should do, Miss King says, is make sure that if you are working for an employer, there is a pension plan at all. "Many people don't bother to find out what benefits or guarantees they have," she laments. "They often just assumed they have a retirement plan, and they don't."

If there is no pension plan, the employee is eligible to start one of his own. The most common method for doing this is trhough an individual retirement account (IRA), which can be started at most banks, savings and loans, insurance companies, or other financial institutions. Under an IRA, a person can deposit up to 15 percent of their annual income, or $1,500 a year. This money is sheltered from taxes until age 59.

If the company does have a retirement plan, the employee should fine out what kind it is, whether it is a defined-benefit plan that guarantees a specific income at retirement, or whether it is some form of profit-sharing plan that depends on the underlying performance of the company or the pension-fund investment. "There's no guarantee with this oen," Miss King cautions.

Even if the company does have a good retirement plan, the employee may want to add to it on his own through an annuity. These can be purchased through insurance companies and some brokerage houses. Some employers make them available through their employee benefit offices. With an annuity, a certain amount of after-tax money is set aside each month in an account, that like an IRA, earns untaxed interest until it is withdrawn at retirement.But unlike an IRA, there is no limit on the amount that can be put into an annuity.

In addition, teachers and employees of nonprofit organizations are eligible to set up, through their employers, tax-deferred annuities that use pretax income. Thus, the worker is not only saving, he is placing himself in a lower tax bracket during his working years.

And there is a different kind of retirement planning which Mr. Guilbault of Johnson & Higgins advocates: preparing for work after retirement. He does not feel financial reasons should be the only ones that motivate people to stay in the work force after 65. Retirement is not right for many people, he says, and they should begin early the search for ways to keep themselves active, if they choose.

"We should get across to people that the idea of giving up at 65 and going into the human scrap heap is bad news," he says. "You should ask yourself, what do you want to do for life fulfillment?"

To this end, Mr. Guilbault suggests some people may want to take part of the money they would otherwise invest as retirement income and spend it on the education, equipment, or both needed to move into a new career after retirement, or even a few years beforehand, on a part-time basis. Retailing and accounting courses, for instance, might be useful for a person who has always wanted to run his or her own store, he suggests. Or a set of welding equipment might be just the thing for someone who wants to do free-lance welding work in the garage.

To help in this effort, Mr. Guilbault feels Congress should permit some of these expenses needed to prepare for "advanced careers" to be tax deductible. In the long run, he believes, it would save the government money, since the older workers would be paying taxes longer.

This redirecting of retirement income need not be confined to the main "bread winner," Mr. Guilbault notes. One man he knows cut back on his life insurance coverage and used the money he would have spent on premiums to pay for the completion of his wife's college education, an investment that would potentially leave her more financially secure than an insurance settlement.