Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 16, 1995 TAG: 9510160085
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Contrary to what many baby boomers may think, the CPAs said, some experts believe that Social Security still will be available when the huge wave of post-World War II babies reach retirement age.
If those experts are correct, however, the problem is that there may be less money to go around or that the benefits retirees receive will be taxed more heavily.
The amount of Social Security these retirees will get is based on how much they've earned during their working careers. Generally, the more you've earned, the more you can collect. However, boomers should plan to supplement their government benefits with other sources of income if they expect to maintain their present lifestyle.
To start the planning, obtain an estimate of future benefits. To do this, call the Social Security Administration -1-(800)-772-1213 - and request a Personal Earnings and Benefit Estimate Statement. The automated answering system instructs callers to "press 2" on a touch-tone phone to obtain information.
But the answering system actually asks callers to give their names and addresses to receive a form in the mail within two weeks. The form must be completed and returned to get information about benefits.
Another traditional source of retirement income is pension plans. However, two factors common to careers of this generation - voluntary job-hopping to further a career and involuntary changes because of corporate downsizing - baby boomers are finding they may not qualify for the generous pensions their parents received by staying with the same company for most of their working lives.
That's because each time you switch jobs, you must meet company vesting period before you qualify for a pension contribution. As a result, those who change jobs frequently can lose years of pension-saving opportunities.
If you're entitled to any retirement benefits from a current or former employer, the accountants said, you should determine exactly how much you'll be receiving during your retirement years so that you can plan accordingly.
A rule of thumb says to maintain a comfortable lifestyle during retirement means you will need the equivalent of 70 percent to 90 percent or more of your preretirement income.
Social Security pays the average retiree today about 40 percent of preretirement earnings, the CPAs said.
Making up the difference is up to you.
If your employer offers savings programs to supplement Social Security benefits, the best strategy is to take full advantage of them. These generally are called 401(k) plans or some other form of tax-deferred savings. These plans allow you to invest money for retirement directly from your paycheck and before current taxes are deducted. Tax laws encourage employers to match a portion of individuals' contributions.
If you're self-employed and not eligible for a 401(k) plan, considering one of three options for accumulating savings that postpone taxes until the money is withdrawn and, presumably, you are paying taxes at a lower rate because of lower income.
The first option is to set up a Keogh plan. With a Keogh plan, you can make tax-deductible contributions toward your retirement.
Annual contributions to a Keogh plan cannot exceed the lesser of $30,000 or 20 percent of an individual's annual taxable compensation. It cannot exceed $150,000 a year. Contributions to Keogh plans can be deducted now, while earnings are tax deferred. Taxes are paid at retirement.
You also should consider investing in an Individual Retirement Account. All taxpayers who earn income can deposit up to $2,000 each year in an IRA.
Individuals who are not covered by a retirement plan at work, or who have modest incomes, may be able to take a tax deduction for their contributions to an IRA.
But the advantage of making an IRA contribution, even if you can't deduct the contribution, is that the money earned on the account accumulates tax-free. The CPAs said this makes it an attractive retirement-planning vehicle for anyone.
Tax-deferred annuities are another option for building retirement savings. An annuity is a contract promising to pay you a regular income during retirement in return for the premiums you pay during the period when the money is accumulated.
The tax on income earned from your annuity is deferred until you withdraw your savings, just as with an IRA or Keogh. However, contributions are not tax deductible.
The CPAs said the biggest challenge for most baby boomers is to invest aggressively.
Lower interest rates have made it harder to build a retirement fund with fixed investments such as certificates of deposit and Treasury securities. While growth stocks are considered to be volatile investments in the short term, most boomers now have 20 years or so before retirement. Thus they can afford to ride out the storms by choosing stocks and mutual funds that promise higher returns.
The society recommended that baby boomers begin a diversified savings strategy today in order to finance a comfortable retirement.
And if you believe you'll have insufficient income to retire comfortably, give some thought to how you can turn a hobby into a business or market your talents to earn extra income.
by CNB