Mirror, mirror on the wall, what is the most secure of all?

March 1, 1997
Aahh ... retirement! The word conjures up silver-haired seniors basking in the sun on a beach in Florida or other semi-tropical locations - all the time in the world to play shuffleboard and canasta. Even if you`re in your 20s, 30s or 40s, it is not too soon to begin thinking about the days when you no longer will be a slave to the alarm clock and the 9-to-5 grind in the dental office. It is true that nobody can predict the future, and the future probably will not be what we expect. But we still

Retirement planning sets up a hygienist`s `new phase` in life, but the key word here is `planning`

Cathleen Terhune Alty, RDH

Aahh ... retirement! The word conjures up silver-haired seniors basking in the sun on a beach in Florida or other semi-tropical locations - all the time in the world to play shuffleboard and canasta. Even if you`re in your 20s, 30s or 40s, it is not too soon to begin thinking about the days when you no longer will be a slave to the alarm clock and the 9-to-5 grind in the dental office. It is true that nobody can predict the future, and the future probably will not be what we expect. But we still need to plan ahead. Where do we begin? What needs to be considered?

First, retirement isn`t as much of a departure as it is an arrival. It marks the beginning of a new phase of life. The joys offered by a busy, productive retirement don`t just happen. They are planned, deliberate, and often amendable choices that you make long before retirement. This particularly is true when you consider the financial aspects of retirement. Deciding to plan for the future now instead of later is critical and can mean the difference between financial security and disaster.

Instead of retirement planning, experts in the field say it is better to think that you are planning for your financial future. Funding the future comes from "working and accumulating money so that when you don`t work any longer, you can live off the money you have put away," according to Kathryn Hollister, a partner at Deloitte & Touche in Cincinnati, Ohio.

It is this saving behavior that needs to be encouraged in order to establish a nest egg for retirement, job loss, or disability, Hollister added.

The three phases of earning

In financial planning, according to Deloitte & Touche, a person generally is considered to have three time periods:

- The accumulation years, ages 24 to 45.

- The conservation years, ages 45 to 65.

- The retirement years, ages 65 and up.

These three periods may overlap, and the ages could vary for any given individual. However, certain guidelines apply during each period. During the accumulation years, the groundwork is laid to meet financial goals throughout a person`s life. It is important during this time to understand the sources of income, what the expenses may be throughout life, whether the income will cover these expenses at any given time, and, finally, insurance-coverage needs.

During the conservation years, earnings will be at peak levels. This is when a person needs to make adjustments or revise what expenses will be for the remaining years, focus on investments and retirement funds, and develop an estate plan.

Then, during the retirement years, a person reaps the benefits of his or her earlier planning.

Generally, financial planning can be likened to a stool with three legs - Social Security benefits, personal savings, and retirement-plan benefits [company pension, profit-sharing, 401(k) plan, Keogh, IRA]. If the three legs of this stool are strong, financial planners say that you can feel confident of a financially comfortable retirement.

Social Security and a company pension rely on someone else taking care of you. Jean Coombs, a financial consultant with Wheat First Butcher Singer, explains that Social Security payments are adjusted for cost-of-living increases, but you have no control over the size of fixed income sources. In a world of uncertainty, it is comforting to know that you can take care of yourself by creating, controlling, and contributing to your own retirement savings plan.

How much will you need?

How much you need in your plan depends on how much you`ll need when you retire. To think about spending in retirement years, you have to start by thinking about your spending today and add for inflation. Financial experts say that financial needs during retirement fall into several categories:

- Fixed expenses, including housing, insurance premiums, taxes.

- Recurring basic living costs, which are subject to some control, such as expenses for food and utilities.

- Discretionary expenses, which are incurred voluntarily and include gifts, travel, and recreation.

As you consider these future financial needs, focus on the fixed and basic living expenses that you have today. Review each expense in order to reduce or eliminate costs whenever possible. Remember that some expenses may be lower in the future because the children are grown, the house is paid off, there are no commuting-to-work expenses and your taxes may be lower. Of course, if you are planning to pursue a new career or travel during retirement years, more money will be needed for these activities.

Once you have arrived at a required annual dollar figure, add 4 to 5 percent annual inflation from now until you reach the year of planned retirement. For example, if your expenses are $20,000 per year today and you have 20 years until retirement at age 60, add 4.5 percent annual inflation. Using these figures, you will need about $48,234.28 per year at retirement.

Coombs said another formula for determining retirement spending needs is to calculate 70 to 90 percent of current spending patterns and then adjust 4 to 5 percent for inflation each year until retirement.

But remember that retirement is not a point in time, but a period of time. It isn`t enough to save just this amount. Instead, consider how long you may live after age 60. To have over $48,000 available per year for 30 years means a total savings of over $1,172, 400 will be needed from age 60 to age 90, not including inflation over the 30-year span!

Hollister explains that there are many complicating factors to this rather uncomplicated calculation. But it is a way to make a fairly simple stab at targeting your needs when looking at future financial requirements.

The next step is to consider what sort of assets would support this amount of spending. Obviously, most people cannot save this amount of money by just putting a little away each week in a regular bank account. Most people will be required to make investments in stocks, bonds, or mutual funds to accumulate this amount of savings.

The younger you are and the more time you have to save and invest, the less money you have to set aside each year to reach your goals. If you need significant accumulations, seek the advice of a financial professional to help you determine the amount of return that is needed on your investments and the type of investment vehicles that can help you achieve your goals. If you are close to retirement and it appears that you will not have enough funds, there are options, such as delaying retirement for a year or so, to build up more savings.

Keep the checks rolling in

Remember, too, that this rather astronomical savings figure probably will be reduced by Social Security benefits and office pension or retirement plans. You can request a projection of your Social Security benefits by calling the Social Security Administration at (800) 772-1213 and asking for a "Request for Earnings and Benefit Estimate Statement." The SSA will mail you back a projected benefits report to add to your income calculations.

Whether you view Social Security benefits as a significant or minor portion of your retirement resources, you need to be informed about the many factors that can raise or lower the size of your monthly Social Security payment. Check with the nearest Social Security office or your financial professional for further information.

If the practice you work for doesn`t provide an employee retirement plan, think seriously about contributing the maximum amount annually ($2,000) to an IRA. The amount allowed rises to $2,250 for a wage-earner and spouse with no earned income. The contributions to an IRA are tax-deductible.

Coombs points out that self-directed IRAs are available. These flexible plans allow the investor to have more control over the specific investments made in an IRA.

If you are an independent contractor, or have a business on the side, Hollister says you may establish a simplified employee pension or SEP. Hollister said SEPs are similar to an IRA account, but you can contribute more money to an SEP. Hollister also said that many banks offer prototype SEPs and Keough plans that are relatively easy to arrange.

SEPs can also be set up by employers for dental practices. Coombs said that, in an employer contributory SEP, all contributions are made by the employer. The employer can contribute for each participant up to 15 percent of the participant`s compensation (or $30,000 a year, whichever is less). The advantage is that employers can deduct contributions from income tax, and the employee doesn`t pay income tax on these contributions until retirement. In a salary reduction SEP, the employee authorizes the employer to defer the payment of specific amounts of compensation and deposit those amounts in the employee`s SEP-IRA.

A profit-sharing plan, according to Coombs, is a type of defined-contribution plan. As with SEPs, the annual contribution is 15 percent of compensation (or $30,000), and the employer obtains an immediate tax deduction for his contributions. Coombs said the amount contributed by the employer usually varies each year. The final "payout" also depends on the length of time the employee participates in the plan as well as the growth of the contributions in investments.

A 401(k) plan is where an employee can contribute up to a specified amount before compensation has been taxed. These plans are among the most popular offered by many corporations, since they are one of the best pre-tax "savings accounts" available, according to Coombs. If you`re in a 36 percent tax bracket, for example, your take-home pay only decreases by $64 for every $100 you contribute to a 401(k). Employees` contributions are usually withheld from paychecks.

Coombs also suggests annuities. As you pay off a premium (ordinarily a minimum of $5,000), the insurance company pays interest on the premium for a specified period known as the accumulation phase. Earnings accumulate tax-deferred, although withdrawals before age 59 1/2 incur a 10 percent penalty. Fixed annuities generally offer competitive yields, tax savings, and a sense of safety about the investment.

There are other things which can affect your financial planning for the future. Proposals for tax changes are ceaseless, but agreement in direction is limited. The IRS often dictates the direction and disbursement of retirement accounts. Also, personal expenses can change unpredictably and suddenly during a personal crisis that may be long term in nature.

No, you can`t predict the future. But with some planning and savings discipline, your only retirement pressures may be how to manage your new-found freedom and how to fill your time, not where your next meal will come from.

Cathleen Terhune Alty, RDH, is a consulting editor for RDH. She refers frequently to two sources in the article. Deloitte & Touche can be reached at the company`s Web Site (www.dtonline.com). Jean Coombs of Wheat First Butcher Singer can be contacted at (703) 448-1490.