Whether you're 25 or 55, you need to have an effective retirement plan

February 03, 1991|By PHILIP MOELLER | PHILIP MOELLER,SUN BUSINESS EDITOR

The recession, weak real estate markets and widespread uncertainty about any number of economic issues makes this a very tough time in which to plan and adopt a retirement strategy.

When so many potentially negative factors are out there, I become Mr. Worst Case Scenario and advise people to plan for the worst but (it is hoped) bask in the best when the time comes. When investment experts and institutions do this, it's called being prudent; when newspaper hacks adopt such a stance, it's called being too negative.

As far as retirement's concerned, your first order of business may be to ask yourself how well you'd handle the involuntary form of retirement, either through being laid off or pushed into an early-retirement program.

This question is of special interest to those aged 55 to 65 -- the primary group affected by early-retirement programs and, usually, the folks who find it hardest to find new work after losing a job. However, anyone who loses a job may be facing great hardships.

Advice is cheap, but please sock away some funds and assets in a worst-case family-protection program. Unless you're absolutely convinced your job will be there in six months (with you in it), you ought to increase your financial cushion against tough economic times.

Yet, despite some sporadic attention to retirement issues -- catastrophic health insurance, the adequacy of Social Security funding and better individual retirement accounts -- society is not well-equipped for the Age of Retirement.

What's more, neither are most individuals. And while you may not be able to do anything about society's larger problems, you certainly can do something about your own retirement future.

As today's installment of this series will stress, a dollar put aside today is worth three, four or more dollars put away down the road, when that "sometime" you're always talk

ing about finally arrives.

Stated more simply: Delay is deadly to your financial health.

Further, increasing life expectancies will create lengthy retirements for many of us. Anyone who is 55 years old today can be expected to live another 24 years, and if you've reached 65, you have another 17 years ahead of you, on average. Yet, as retirement years lengthen into retirement decades, so does the need for money. Escalating costs for health care and housing have become threats to elderly people, as well as object lessons about the need to shore up our retirement finances.

The cumulative effect of these social and economic trends is the sobering realization that the elderly are often on their own. And as tough as that can be under any conditions, imagine what it's like without a decent retirement program to at least provide financial support.

Fortunately, retirement planning for most people does not require fancy consultants or financial planners. It does require time. Most important, it requires a commitment and a willingness to take responsibility for your financial future.

If you are 25 years old, do you need to plan for retirement? Yes, in a sense. Every dollar you put into a retirement plan today will be eight times as valuable as the dollar you put away roughly 25 years from now.

One of the most impressive rule-of-thumb formulas I've ever seen is the one that calculates how long it will take a quantity to double if it's growing each year by a certain percentage. The rule says that if you divide a quantity's annual percentage growth rate into 72, the answer is the doubling time of that quantity.

So, if money is the quantity in question, and it's drawing interest at the rate of 8 percent a year, it will double in nine years (72 divided by 8 equals 9). After 18 years, it will have quadrupled and, in 27 years, it will be eight times its original size. If you were astute enough to earn 12 percent a year on your money, it would have a doubling time of six years, meaning that in 30 years it would have increased by a factor of 32 -- in effect earning a return of 100 percent on the original investment each year.

Applied to the examples of our doubling rule, the presence of inflation makes achieving a good return on your retirement funds that much more important. More to the point, even a single percentage point difference -- say, 8 percent a year instead of 7 percent -- will mean a great deal over the time frames involved.

As impressive as the statistical bit of wizardry surrounding the doubling rule might be, it won't be impressive enough to cause most younger people to plan for their retirements. Traditionally, retirement planning has been a very adult game played by the over-50 crowd.

For those who do want to play the game seriously, there really are only two parts to a retirement plan -- what do I need and what will I have? Neither exists independently of the other, of course. Even the richest person ultimately encounters limits that force him or her to alter spending plans. Likewise, your ideal retirement scenario may require frequent readjustments as you approach retirement. That's fine.

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