Can't retire? Save more, work longer

PERSONAL FINANCE

March 07, 2004|By EILEEN AMBROSE

SOCIAL Security's long-term financial problems are hardly secret, but Federal Reserve Chairman Alan Greenspan still managed to stun many with his suggestion to cut future benefits.

Greenspan warned a congressional committee last month that it will be difficult for Social Security to keep its promises to future retirees. He recommended that Congress slow the pace at which benefits grow or raise the retirement age.

Greenspan also encouraged lawmakers to act soon, so those still in the work force have time to save more and adjust their retirement spending plans.

In four years, the first of the baby boomers - a generation of 78 million - will start tapping into retirement benefits, and the number of workers supporting those benefits through payroll taxes will decline.

People also are living longer, adding more stress to the system.

Today, 65-year-olds can expect to live four years longer on average than their counterparts in 1960, according to government figures. In that time, too, 65-year-olds have more than doubled their chances of reaching age 90.

A 2001 Gallup Poll found that 41 percent of workers don't expect to receive benefits when they retire. Experts say that's too pessimistic. Even without a fix, there's enough money to pay full benefits until 2042, and payroll taxes thereafter will cover 73 percent of benefits.

Still, just how or when Congress will cure Social Security's ills isn't clear. Many experts agree, though, that future benefits will not be as generous as today's. That means workers are going to have to save more and make other changes to shore up their own retirement.

"The more you can rely on yourself to fund your retirement, the more control you have and the more options you have," said Stuart Ritter, a financial planner with T. Rowe Price Associates in Baltimore.

Where to start?

"Regrettably, ... Americans, in spite of their fears, hopes and dreams, don't seem to be saving aggressively," said Dallas Salisbury, president of the Employee Benefit Research Institute.

If workers started saving 10 percent of their net income with their first job, they could stop saving by their mid-40s and 50s, let their investments grow and quit work when they hit retirement age, Salisbury said.

Few get such an early start. Still, a late start is better than none.

A simple and tax-friendly way to save is through a workplace retirement plans, such as a 401(k). Money goes in before you see it and before taxes, which reduces your current tax bill.

The money is taxed as regular income when withdrawals are made in retirement. This year, workers can set aside up to $13,000 in a 401(k) or similar plan. Those 50 and older can squirrel away an extra $3,000, or $16,000 total.

An added perk is that many employers match workers' contributions, a return that's hard to beat elsewhere. Put as much as you can into the account, not just enough to qualify for the employer match, Ritter advised.

If you're already making maximum deposits into your work plan, consider an individual retirement account, particularly a Roth IRA if you're eligible, suggested Ritter. With a Roth, money goes in after taxes have been paid, but tax-free withdrawals can be made in retirement. "If income taxes go up, you're not affected by that," Ritter said.

Workers can contribute up to $3,000 this year in an IRA. Those 50 and older can put away up to $3,500.

Spend less

Don't have spare dollars to save? Look where you can cut spending, such as waiting an extra year or two before replacing a car or borrowing books from the library rather than buying them, Ritter said.

Even small sums can add up over time.

"That's the tradeoff. You can make a small adjustment now in lifestyle that helps avoid a drastic adjustment later on," Ritter said.

Don't drain accounts

One troubling 2001 statistic is workers ages 55 to 64 on average had only $55,000 in 401(k)s and IRAs combined. It's not that they weren't saving.

"People take money out of their 401(k) when they move from job to job," said Alicia Munnell, director of the Center for Retirement Research Center at Boston College. "Often they are spending it on sensible things - a down payment on a house or graduate school."

But once gone, that cash is hard to replace.

Work longer

Many retirees start taking Social Security benefits at 62 or 63, Munnell said. "If we can get that up to 65 and 66, that helps a lot," she said.

Older workers today are healthier than in the past, and a potential labor shortage will make them more attractive to employers. By working longer, employees will have more time to build up 401(k) accounts, fewer years of drawing down assets and larger monthly Social Security checks, Munnell said.

But younger workers can't count on having a job as long as they want. "You can't say, `No, problem. I'm 28. I'm a hard worker. I'll work until 75.' If you're lucky, it turns out that way," said J. Mark Iwry, a senior fellow at the Brookings Institution and a former benefits tax counsel for the Treasury Department.

"Many people find that a health problem gets in the way of their plans to work longer," Iwry said. Some older individuals, too, might not be able to land a job, or their only option is a low-skilled, low wage position.

Invest in a home

"In our economy, you're usually better off owning than renting in the long term. Real estate values have appreciated historically," he said, adding that for most people, their house is their largest asset at retirement.

For those without enough cash in retirement accounts, being able to take out a reverse mortgage or a home equity loan, or the ability to sell the house and move to an apartment, can make all the difference in their retirement, he said.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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