Just as in dentistry, there should be a systematic approach to conducting the retirement checkup.
Kathleen Adams, RDH, BS
The value of consistent checkups for dental health is obvious to dental hygienists. Financial health requires the same effort. Why should planning for one of life`s foremost financial changes - retirement - be any different? What if you`d like to retire early or scale back your hours? Dental hygiene is a rewarding, yet physically and mentally challenging profession. It`s easy to earn and spend a great salary, planning only for the present, not the future. Many dental offices have retirement plans, but hygienists often do not work enough hours to participate in the plan. Knowing that you can decide when to retire or work fewer hours can relieve much of the stress and burnout associated with our profession. Becoming a dynamic participant in the planning of your own retirement funding is the first step toward attaining this kind of security and freedom.
Just as in dentistry, there should be a systematic approach to conducting the retirement checkup. You can begin with the following steps ...
P Figure out how much you`ll need. A general rule of thumb is that you`ll probably need about 70 to 80 percent of your final working year`s income to live on during each year of retirement. Multiply that number by 25, and you`ll have a reasonable estimate of your income needs. But you`ll also have to consider the role of inflation, which could heavily diminish the purchasing power of your savings over time.
* Take inflation into account. A good way to beat inflation is to earn a higher rate of return than the going inflation rate. Long-term investments, such as stocks and stock funds, may be the best bet. Their long-term growth potential can help you keep up with the rising cost of living. For example, from 1926 to year-end 1998, stocks earned an average annual return of 11.2 percent. That`s significantly higher than the average annual inflation rate, which has been 3.1 percent. Other investment vehicles such as bonds (average annual return 5.8 percent) and Treasury bills (3.8 percent average annual return) historically have not performed as well over the long term, according to Ibbotson Associates, Inc.
* Keep a long-term perspective. It`s important to remember that stocks also carry a higher degree of risk than other investments. But when investing for the long haul - 10, 20, even 30 years - you can minimize the risks associated with stock investing. Why? While stock values can rise and fall a good deal over the short term, the stock market historically has moved in an upward direction. When you put time on your side, you may be able to ride out any short-term volatility and take advantage of the stock market`s long-term potential for growth.
* Monitor your plan. Once you`ve come up with a retirement plan you`re comfortable with, review it regularly to see if it still meets with your goals. When things change in your personal life, such as a large shift in income, adjust your plan accordingly. By regularly checking on how your investments are doing, you`ll be the one in control of your financial future. Chance will have very little to do with it!
* Make saving less taxing. What`s one of the best ways to meet this financial challenge? Maximize your contributions to accounts specifically designed for retirement savings, such as 401(k)s and IRAs.
Here`s a closer look at these plans:
> 401(k)s. In addition to tax deferral on the interest earned, 401(k) plans offer another benefit: Contributions are subtracted from your current taxable income. Since less income is being taxed, you`ll pay less in current taxes. Factor in employer matching of your contributions (if applicable), and you have a tax-favored combination that`s hard to beat.
> IRAs. Once you`ve maximized your contributions to your 401(k) plan, consider setting up an IRA. These tax-favored accounts can make a great supplement to your 401(k) savings. Like 401(k)s, contributions to a traditional IRA grow tax-deferred. (Ordinary income taxes are due upon withdrawal, and any withdrawals made before the age of 591U2 generally are subject to a 10 percent IRS penalty. See your tax adviser for exceptions.) Depending on your income and whether you`re covered by a company retirement plan, your contributions to a traditional IRA may also be wholly or partially deductible. If you are eligible to fund a Roth IRA, and you meet certain requirements, withdrawals are tax-free.
Contributions to a Roth IRA are nondeductible. You can contribute a total of $2,000 each year to IRAs. Penalty-free withdrawals generally can be made for certain expenses, such as purchasing a first home or paying for your child`s college expenses.
Timely IRA contributions could add thousands of dollars to a retirement nest egg. Anyone, for example, who funded his or her IRA on Dec. 31 for this tax year effectively lost a year`s worth of compounding and tax-deferred growth.
Obviously many different retirement plans may be offered in your workplaces. Assuming hygienists are allowed to participate, make sure you understand your options and maximize this plan first. If you are securing your own retirement savings, start immediately! Don`t wait for a triggering event, such as job loss, divorce, or widowhood. Don`t rely on Social Security or your spouse`s pension. Invest in any available tax-deferred vehicles first and then evaluate the need for further savings by examining your personal goals and timelines for retirement. Any action you take today is better than waiting until tomorrow. It doesn`t matter how much you earn; you can start with as little as $50 a month. Take control of your financial future, and you may find your career as a dental hygienist much more rewarding and a lot less stressful.
FYI. If you`re like many Americans who have left their jobs earlier than expected, you may find yourself the recipient of a large lump-sum payment from your former employer`s qualified plan. If you choose to take the lump sum yourself and then roll it over into an IRA, your former employer must, by law, withhold 20 percent to be applied against current income taxes.
On a $50,000 lump-sum payment, for example, you would only receive $40,000. To roll over the full amount, you would have to make up the difference. And if you don`t roll over the money within 60 days, the entire amount may be subject to substantial taxes and penalties.
A direct transfer, however, automatically transfers your money from one account to another. Because it never reaches you personally, there are no withholdings and no potential tax consequences. One hundred percent of your retirement money goes to work for you right away.
Kathleen Adams, RDH, BS, is a financial adviser with Waddell and Reed (www.waddell.com). She is currently trying to initiate money management workshops for hygiene students and specializes in working with dental professionals. She can be reached at (800) 210-1357, ext 7328.