Everyone strives for that payoff in the future
– age 65, when the kids are out of the house, it’s time to
retire, and there’s nothing but rest and relaxation ahead.
Everyone strives for that payoff in the future – age 65, when the kids are out of the house, it’s time to retire, and there’s nothing but rest and relaxation ahead.
But there are more and more people working past the age of 65, partly because, like a lot of people, they didn’t plan financially for their retirement.
Retirement planning is “like breathing – it’s something you’ve got to do,” said Barbara Andres, a CPA and partner at Bianchi, Lorincz and Company in Hollister. “It’s important to plan because the sooner you plan, the less Draconian the measures will be.”
Retirement is expensive. Experts estimate that retired persons will need about 70 percent of their pre-retirement income to maintain their standard of living after retirement. A few years ago, people lived on average to the age of 78. The average age is now 88, Andres said.
One of the most obvious ways of planning for those golden years is to put money into a 401(k) account – a retirement investment plan that allows employees to put a percentage of earned wages into a tax-deferred investment account selected by the employer. Most companies contribute to the amount an employee adds to their 401(k).
The key, Andres said, is not to cash out a 401(k), but to roll it over wherever an employee changes jobs. Cashing it out subjects the sum to a 10-percent federal penalty and 2.5-percent state penalty on top of regular taxes.
People should start deferring money into a 401(k) as soon as they can, Andres said.
“If you start at 25, you’re in pretty good shape,” she said. “The likelihood is that you won’t have to do a whole lot more than that.”
Also, the earlier people start deferring money into a 401(k), the more time the account will have to grow.
People in their 30s and 40s who are starting families are advised to start saving money for their children’s college education as soon as they’re born. By the time they reach the age of 50, they’re trying to save for retirement, pay off their house and fund their child’s education, Andres said. If they have money already saved for college, that’s one less thing to be paying for later in life, she said.
Some mistakes people make include buying fancy cars and having “huge” mortgages, said Ira Marshall, a registered investment advisor in Morgan Hill. This can leave people “high and dry,” he said.
“If you spend money faster than you make it, you’ll never retire,” Marshall said. “It’s not how much you make, but how much you keep.”
When a person starts to get closer to retirement, they need to look at maxing out their 401(k), Andres said.
Hollister resident Harry Samuelson has been retired from education since 1986. He made a point to plan for retirement through his school district, the state and a teachers association.
“You’ve got to schedule and plan for things,” Samuelson said. “If you go out and spend everything, you’re not going to be good.”
Times have also changed, Samuelson noted. Wages weren’t that high when he was working, but neither were house payments and the price of gas for commuting.
Samuelson also invested in certificates of deposit and bought property to be financially secure for retirement. He also bought his house when prices were low.
“Sometimes, you’re at the right place and the right time,” he said about the increase in the value of his home. “I couldn’t buy my house back today – I bought it for $19,000 and it’s probably worth $300,000.”
Marshall said that although property management is a great way to plan for retirement, a person’s finances need to be “carefully thought through and monitored and, ultimately, diversified.”
Marshall offers fee-based financial planning, which is a little different than traditional financial planning. Marshall said he believes it’s difficult to come up with a generic, one-plan-fits-all for retirement.
“People have to map out their needs,” he said. “The basics are rarely in place – there’s often no updated estate plan, no power of attorney, no fixed income investment.”
Social Security, in which the federal government collects 6.2 percent of an employee’s wages, is an important aspect of planning for retirement. The program pays the average retiree about 40 percent of pre-retirement earnings, according to the Social Security Administration. But Andres advises against expecting Social Security to supply enough money for retirees to survive.
Diversification is an important part of retirement planning.
“The most successful people I’ve seen are not the ones driving Beamers,” Andres said. “They’re the ones that buy a modestly priced house, wait for their salaries to go up, set up a savings account. Then they move into a new house and rent their old house.”
The bottom line is that it’s very important that people take an active role in mapping out their own financial affairs.
“Most people don’t understand how money works and how they can make money work for themselves,” Marshall said.
For more information on retirement planning, go to www.ssa.gov or call Andres at (831) 638-2111 or Marshall at (408) 779-4049.
