Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 14, 1994 TAG: 9403150182
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
It's never too early or too late - even after retirement - to plan for the 20 or more years most people live after leaving their careers.
By the year 2000, the Institute of Certified Financial Planners said, about 100,000 people in the United States will be 100 or older.
Even now, the planners said, the joint life expectancy of a man who is 70 and his 67-year-old wife is 22 years from now. That means one of them will likely live at least to age 89.
Younger people still have the opportunity to set aside more money. But those who already have retired must take steps to stretch their dollars.
Let's say you figure you need $3,500 a month, or $42,000 a year before taxes to maintain your current standard of living.
Part of that will come from Social Security, which is indexed - meaning it rises each year based on the previous year's rate of inflation - and part from a pension plan, the level of which is fixed for life.
Consider the table on this page.
It shows that some of the money each year must come from the $300,000 that our hypothetical retiree has accumulated during his/her working life.
Now factor in inflation, which requires that more money be spent each month to maintain the original standard of living.
As the table shows, by the age of 81 the retiree will need $6,124 a month to maintain the original lifestyle, assuming inflation runs at 3.8 percent, the average over the last 10 years.
But at a 5 percent return on capital - which one might average over time from money market funds, certificates of deposit and short-term bonds - the capital will be drained away by the time the retiree reaches age 81.
At that point, the financial planners said, one would be forced to live on Social Security and the pension plan, or $3,248 a month less than the accustomed standard of living.
Time to panic?
Not if you begin now to make adjustments, the planners said. The institute noted you have three ways to stretch your money:
Reduce expenses.
Increase the yield on your investment savings.
Find new sources of income. This may mean taking out a reverse mortgage on your home, selling a second home or other expensive asset and reinvesting the money, or working part time.
If you earned an extra $500 a month through part-time work for the first five years after retirement and reduced living expenses to $3,000 a month you would stretch the retirement dollars to the age of 90, even at a 5 percent return on savings.
You may also want to make ``what if'' projections on the annual rate of return being earned by your retirement assets.
If the assets are not earning enough to last until age 90, a common target age for retirement planners, you may want to consider reinvesting some of the portfolio funds into higher-earning assets in an attempt to increase the overall rate of return.
This would increase your investment risk, but it would decrease the risk of inflation.
A way to accomplish this, the planners said, is to earn 9 percent, which might be expected from a 50-50 split between stocks and bonds.
For example, even at the $3,500 monthly standard of living, the assets will last until age 89 (instead of 81) if the portfolio earns an annual pretax return of 9 percent.
Assets actually will increase if a 9 percent return is coupled with a $500 cut in expenses and five years of part-time work.
The planners said the first priority in any investment portfolio - regardless of your stage of life - is diversification.
This is best accomplished by spreading your funds among several categories such as stocks, bonds, real estate and money markets funds.
The easiest way to accomplish this is through mutual funds, according to the financial planners, but people can invest directly if they have enough assets, time and knowledge.
``By spreading your investments through different types of assets,'' the planners said, ``you should be able to weather most any economic storm and continue to build a portfolio for your future needs.''
The planners said many people retire with the funds tied up in the stock of their former employer. But even the best companies, they said, can suffer a sudden decline in value.
The second priority is to protect yourself against inflation. Even at the recent 10-year average gain of 3.8 percent, most things will cost twice as much in less than 18 years.
``Many retirees overlook this investment risk because they are more concerned about avoiding `risky' investments,'' the planners said.
``Thus, they tend to put their money into `safe' [usually lower-yielding] investments such as certificates of deposit, U.S. Treasury securities and money markets that produce current income.
``These types of investments typically are part of a well-diversified portfolio,'' the planners said. ``But there are risks to being `safe.' Over time, falling interest rates can dramatically cut the interest income earned from these investments.''
Consequently, the planners said, ``one should invest not only for current income but for capital growth as a hedge against the effects of inflation and taxes.
``Even a conservative mix of stocks, bonds and cash not only can earn a healthy return to stay ahead of inflation and taxes, but actually reduced overall portfolio risk,'' the planners said.
And, as the exhibits show, beefing up your return by only a few percentage points can make a dramatic difference over time.
by CNB