Warm in the Winter Years

You've worked so hard, you've had a good life, you are ready to relax a bit and enjoy yourself. But wait! You have nothing to retire on. You've not had a plan in place.

Welcome to Week Five and the subject of retirement planning. It may be difficult for some of you in your 20s or even 30s to think about setting up retirement—especially if your current income is small and you are dealing on a day-to-day basis with bills and job searches. For those of you in your 40s and 50s who have not set up a plan, you may be thinking it's too late. It is never too late. Your investment strategy will simply have to be more aggressive than that for those younger than you, but it is possible to do something.

It is important to include retirement in the budget you created for yourself in Week Two. Even if you can find only $20 or $25 a week to put toward your retirement, that is a start. That $20 or $25 a week is $1,120 to $1,400 a year that you will be investing in your future.

Gene Bowan of Zuk and Associates, Inc., said "You always have to put some percentage of your income away for retirement. With a fluctuating income you must decide on a base percentage that will go into your retirement account. It may be low, but it gives you a baseline even in bad years that you will have going into the accounts. In good years, you can increase that percentage. That's why a 401K is successful. The money is taken off the top and you never see it."

Individual Retirement Accounts, or IRAs, offer a wonderful option for actors who are not employed by a company that offers a retirement plan (which we will discuss later). You can contribute up to $2,000 a year to this account. Currently, there are two different types of IRAs—traditional IRAs and Roth IRAs.

If your income is within the qualifications, a Traditional IRA offers a tax-deduction in the current year. For instance, if you are in the 28 percent tax bracket, and you invest the maximum of $2,000 into a Traditional IRA account, you will save $560 in income taxes that year (28 percent times $2,000). Additionally, as time goes on, your initial investment plus the account's earnings continue to grow, tax deferred, until you are ready to retire and withdraw from the account. At that point you will pay income taxes on the amount you withdraw each year. With few exceptions, you cannot withdraw the money from this account until you are at least 59 and a half years old without paying an early withdrawal penalty.

The Roth IRA offers the investor the possibility of having money grow tax free after the initial investment. In other words, if you invest $2,000 in the year 2000, you will not receive a tax deduction on that investment as you would a Traditional IRA. However, at the time of withdrawal, you will pay no taxes on that money. Whatever growth your investment has made will be untaxed. For the long-term investor, many financial advisors feel the Roth offers better growth. Others, such as Mark Pash of Pash & Benson International, Ltd., feel that it is best to "do a Traditional IRA if you are in a 28 percent federal tax bracket. You don't know what taxes are going to be 30 years from now. It could be a better investment to save that money now and reinvest it over the time of that 30 years." In other words, taking the $560 you save in income tax and reinvesting it each year toward retirement could potentially give you a greater return because income tax rates may be low when you are ready to withdraw from your accounts.

The Traditional IRA and the Roth IRA have different eligibility requirements, advantages, and disadvantages. Research these two options in detail, assess your current financial picture, and assess your financial goals for retirement. Then you can decide what is best for you.

Give Till It Hurts

Some of you work for companies on a part-time or full-time basis. These companies offer you the option of the 401K Plan. Without question you should be investing the maximum contribution into that plan from every one of your paychecks. Don't even think about it. You will get by on what your check is, and you will, at the same time, be saving an incredible amount of money. Do an experiment if you don't believe me. Go to the individual at your company who manages the plan and set up your maximum contribution. See what happens and how you deal with the change in your check for the next quarter. I bet you will make the adjustment and not need to reduce it. That's my challenge to you!

Let's look at a 401K Plan. Unlike the IRA, the government allows you to put away up to $10,000 a year toward retirement under a 401K Plan, set up and managed by your employer. Usually, under this plan, you will have options as to where you want your investment to go—mutual funds, bond funds, or specific equity holdings such as stock in your company. You can diversify these investments and manage them in a way that comfortably fits your personal risk tolerance and goals. Many companies will add a contribution to your investment based on their profits that year and the distribution system setup. In other words, along with your own investment, you will be given an additional amount of money based on your income and contribution to the 401K Plan. You can invest in the 401K Plan and put $2,000 into an IRA every year. There is just no reason at all not to invest in a 401K Plan—even if you think you won't be at the company for long.

If you do not work for a company but are self-employed, there are other options available to you, as well. There is the SEP (simplified employee pension plan), the Keogh, and the SIMPLE. Bowan said, "The SEP is less costly than the Traditional or Roth IRAs because there are no annual filings necessary. You cannot have a SEP and a Traditional IRA, however. The SEP can take up to 13 and one quarter percent of your income." You have the option of investing this money in many places—mutual funds, banks, discount brokerage firms. An employer is obligated to set up a SEP for any employees who worked for that employer three out of the last five years.

The Keogh Plan is another option. It allows you to invest more than the SEP (20 percent or $30,000 per year, whichever is less). Under the Keogh you will find two different types of plans: the money-purchase plan and the profit-sharing plan. Each has its own benefits. The money-purchase plan requires you put in the 20 percent investment and locks you into that annual commitment. The profit-sharing plan allows for more flexibility. You can also combine the two options to create a retirement plan that you can live with easily. In this case, employers must provide for employees who have worked for the employer for at least one year.

Under the SIMPLE Plan, you can invest up to $6,000 a year. Again, employers are obligated to care for employees. With the SIMPLE Plan, employees have to have been compensated $5,000 within the past two years. Employers decide whether to match their contributions dollar to dollar or 2 percent of their income up to a maximum of $3,000 per year.

Live Long and Prosper?

Pash suggested, "Consider funding qualified plans first. That means IRAs. After that, just start to build reserves. Turn to investing. Here you should be interested in growth, not income. When you retire, you will liquidate your investment to live on, or if needed at that time, you can invest it for income. A youngster should invest his or her money for growth. When you are older you want to gear your investment toward income." Pash feels that the initial investment in IRAs is so important that you should even "borrow to fund IRAs. It's short-term borrowing, and I recommend it. So you'll be borrowing $30 to $50 a month for a year, but you'll be getting an average of a 15 percent return for the next 20 years."

Pension plans no longer can be relied upon as they were in the past, and the future of Social Security is not certain. Said Bowan: "Retirement is the key issue with life expectancy ever increasing. Insurance companies are saying that 84 is now the average age. Well, you retire at 60-65 years old. The average age of life expectancy used to be 72. You would work to 65 and have seven more years for your nest egg. Now it has to last you 20-24 years on average. This is creating problems for retirees today."

This week I would like you to start thinking about finding that extra money for investment in an IRA. Begin to research a Roth vs. a Traditional and see which is right for you. If you already contribute $2,000 a year to an IRA, start thinking about where you can put additional money. Take a look at Week Three on savings, and research Mutual Funds that might be right for you. If you are not taking full advantage of a 401K Plan, walk into your personnel office today and commit your maximum contribution. If you are self-employed, look into a retirement plan that is comfortable for you. Take steps toward your future. It will help to make the present even more fulfilling and purposeful. Have a good week! BSW