Saving for the years ahead?

Nearly 75 percent of American workers are confident they will have enough money to live comfortably in retirement, according to the 2000 Retirement Con-fidence Survey conducted by the Employee Benefits Research Institute (www.ebri.org).

Nearly 75 percent of American workers are confident they will have enough money to live comfortably in retirement, according to the 2000 Retirement Con-fidence Survey conducted by the Employee Benefits Research Institute (www.ebri.org). Such statistics indicate more people are starting early to save for the years ahead. Still, emerging trends may impact your retirement planning strategy:

• People are living longer and more vigorously than ever before. In 2002, a 65-year-old is expected to live 20 more years to age 85, according to the IRS' Life Expectancy Tables used to calculate retirement distributions. With improved medical technology and people taking better care of themselves than in previous generations, life expectancy could be higher by 2011 when the first baby boomers reach retirement age, according to J.K. Lasser's Your Income Tax.

• Late-life employment is becoming the norm. With better health but insufficient financial savings, more people are finding it necessary to work longer or start second careers after retirement.

• Social Security will contribute less to retirees' incomes. The 1999 Social Security Survey sponsored by The Third Millenium, a national nonprofit organization, found that 50 percent of Americans consider a Super Bowl bet a better investment than Social Security. With the Social Security Trust Fund projected to expire in 2037, 66 percent of Americans believe elected officials should act now to bolster the system.

Most experts agree Social Security will still exist in 50 years - but with fewer workers and more retirees, almost certainly it will provide fewer benefits. As the system is reformed, we may see the normal retirement age pushed out further and benefits squeezed tighter.

• Old-style, guaranteed company pension plans are going the way of the rotary phone. Defined-benefit plans are employer-paid pensions that guarantee retired employees a monthly check based on salary and years of pay. If trends continue, these plans will continue to fade away. Instead, companies consistently are choosing to offer employee-funded, defined contribution plans such as 401(k)s, giving employees the responsibility of saving for retirement.

Five steps to retirement planning

When you think about retirement, you may assume you will be covered by Social Security benefits, your company's pension plan and your personal savings and investments. But with 76 million baby boomers (people born between 1946 and 1964) and millions of Generation Xers (born between 1965 and 1978) poised to reach retirement in the new century, traditional sources of retirement income may not prove adequate for tomorrow's retirees. Instead, taking charge of your own future is the key to a financially secure retirement. Here are some helpful guidelines:

• Start now.
• Pay yourself first.
• Take advantage of your traditional IRA (Individual Retirement Account) or Roth IRA.
• Maximize your retirement savings.
• Diversify.

As an example, Steve and Karen Miller plan to retire within two years. At that time, they will need income from investments. The Millers are considering placing a large portion of their retirement savings in short-term bond funds because they believe this will provide adequate preservation of principal. However, the Miller's investment time horizon is not as short as they might think. They could easily spend 20 years or more in retirement.

As you approach retirement you may begin to shift your retirement savings into lower-risk, fixed-income securities. Like the Millers, your goal may be to ensure a steady stream of income throughout your retirement. But should you limit your retirement portfolio to fixed-income securities? That may not be your only choice for the long term. With 20 years or more of retirement ahead, today's retirees can think long term.

Before you shift too much of your portfolio into instruments that appear to deliver security and a steady stream of income, consider these traps:

• Inflation trap. Even moderate inflation will steadily erode the value of what your dollar will buy over time. Although inflation has averaged only about 4 percent a year, the value of a dollar in 1970 buys only about 30 cents worth of goods today.

Safe but low-yielding investments may not allow you to maintain your purchasing power over the years. For example, $500,000 invested in government bonds yielding 6 percent will produce $30,000 in annual income. But after just 10 years, with an inflation rate of 4 percent, that $30,000 of income will only have the purchasing power that $20,000 does today.

o Solution. Balance your portfolio to meet current and future needs. One way to counter the effects of inflation is to keep some of your retirement dollars invested in growth-oriented investments. Although past performance is no guarantee of future results, such investments historically have outpaced inflation by more than 6 percent a year on average.

• Tax trap. If you're like most people, you have some assets invested in taxable accounts and some invested tax deferred. Remember, for every dollar you earn on your taxable investment, Uncle Sam may take as much as 39.6 cents away from you in income tax.

o Solution. Keep retirement funds in a tax-deferred account as long as possible to ensure they'll compound free from current taxes. And, when it's time to begin drawing on your retirement resources, tap taxable investments first. That allows other retirement savings to accumulate at a comparably faster rate because they are not diminished each year by taxes.

• Short-term thinking trap. Many people underestimate how long they will spend in retirement. The average life expectancy after retirement is about 20 years, so it's important that your money keeps working for you.

o Solution. Your expenses likely will change once you stop working, so you may need to develop a new budget. You also may need to answer long-term care questions for yourself and your spouse.

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.

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