Industries Banking/Finance

Retirement 101

If you want that gold watch, you might have to buy it yourself

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Print this page by Doug Childers

John Kostyniuk might be only 38 years old, but he started planning his retirement a decade ago. And he already knows it won’t look like his parents’ retirement. “Both my parents retired after 30 years with the same company,” the Richmond resident says. “And they have pensions.” 

Kostyniuk’s employer canceled its pension plan five years ago, and he expects to depend on his savings during his retirement. In addition to contributing 16 percent of his income to his company’s 401(k) plan, he also has an investment portfolio dedicated to his retirement. If all goes as planned, Kostyniuk hopes to retire in 20 years.

Kostyniuk’s retirement strategy isn’t unusual. Chances are, you won’t follow the path your parents and grandparents took into retirement, either. In many cases, they stopped working altogether, and they lived comfortably on pensions they earned by working for the same company for decades.

Today, many of us will have worked for several companies by the time we reach retirement age, and the pension plan will soon join the secretarial pool on the list of corporate extinctions. And while we might trim back hours, many of us won’t stop working altogether. Blame baby boomers for that.

“That generation has reshaped everything as they matured,” says Tim Lee, managing director of Alexandria-based Monument Wealth Management. “Now they’re reshaping the way retirement works. They tend to focus on finding ways to keep themselves active.”  For many boomers, retirement will entail leaving their full-time careers for entrepreneurial startups, part-time work or consulting gigs.

On your own
That doesn’t mean we’re all going to retire in the same way, though. Individual situations will depend largely on how well we’ve each planned for our retirement years. Without the security of a pension plan — or maybe even Social Security for younger workers — we’re all on our own.

Indeed, retirement strategies can differ dramatically just from one end of the boomer generation to the next.

“We’ll work some Social Security benefit into our projections for clients who are 60 years old or older,” says David K. Henderson, founder of The Hender­­­­­­son Group in Staunton. “But 55 and younger, no. I’m not going to work it into their projections at all because I don’t know if it will be fully means-tested” — that is, with benefits based on a retiree’s income — “or possibly be there at all.”

By comparison, Social Security represents 20 percent to 30 percent of the incomes of Henderson’s clients who are already retired — “Not huge, but significant,” he says. Their Social Security benefits could change, too. “My guess is people in their 60s will receive Social Security, but it could easily become more heavily taxed.”

The prospects for younger workers receiving Social Security benefits are even more dire, experts say. “Thirty-somethings need to plan for their own retirement,” says David Barrett, president and CEO of Barrett Capital Management in Midlothian. “They should operate like they’re not going to receive Social Security. Just act like it doesn’t exist.” 

The rule also applies to workers lucky enough to have a pension plan. “Don’t rely on anything,” Barrett says. “If you don’t have the money in your pocket, it might never become your money.”

That can be a scary proposition for young families. Barrett’s son, Matthew, is a neurologist training as a fellow in movement disorders. He and his wife consider retirement a hurdle that lies on the far side of a long line of hurdles. “Currently, our focus is on saving for a house and eliminating graduate education loans,” he says.

His wife, Julia, has a 401(k) account through her employer, but Barrett doesn’t have that option yet. The Barretts, both 31, are expecting their first child. Neither of them expects to receive Social Security benefits when they retire. So, like most workers, they know saving for retirement is their responsibility.

“Eventually, we will consult with a financial adviser,” Matthew Barrett says.

Slow and steady
So how much do you need to save in order to retire comfortably?  That depends on your lifestyle. “For some of my clients, if $20,000 isn’t coming in a month, they’re not retiring,” Henderson says. “Others are successful on $5,000 a month. It becomes a very personal decision on how you want to live. If you have no debt and your health care is primarily provided through Medicare, a larger percentage of your retirement income becomes discretionary.” 

A year before they reach retirement, Henderson encourages his clients to “practice” retirement. “It helps them work through some of the lifestyle and expense changes they’ll live with,” he says. “It sometimes helps them realize their expectations are greater than needed. Differentiating needs from wants is difficult for many of us.”

Regardless of your needs, retirement specialists agree you should save early and save often, and curb your spending as you age. “Debt needs to decline every decade, and savings need to increase every decade,” says James Cox, a financial adviser and partner with Harris Financial Group in Colonial Heights. (Cox manages Kostyniuk’s investment portfolio.)

In some ways, retirement planning today is less about saving than it is about debt control or reduction, Cox says. “If I talk to someone who is looking at retirement, I ask about their home mortgage. If it’s paid off, I move on to question two.”
Here’s the good news for thirty-somethings who want to retire at 65 or 70: You can still do it. And you don’t have to live like a monk to achieve it, says Lee. Putting away $4,000 a year beginning at the age of 30 could lead to “a substantial nest egg at 60.”

For many of us, the simplest retirement strategy is contributing to a 401(k) plan, which has replaced pension plans in many companies. “You should start saving for retirement the day you enter the work force,” Cox says. “If you start a 401(k) then, you’ll never miss the money.”  And contribute at the highest allowable rate, he adds. “Aspire to put back as much as you can and let the government subsidize your retirement.”

But don’t stop there, experts say. “Families need to have endowment accounts just as universities do,” Barrett says. “Segregate money and come up with a plan where you can live on it the rest of your life.”

And how should you invest that retirement endowment fund?  Despite the stock market crash that terrified investors in 2008, many experts say that a prudently diversified portfolio built primarily around equities remains the best strategy, especially for younger investors. “People in their 20s and 30s can and probably should have 80 or 90 percent in equities,” Henderson says. The reason is simple:  “Over time, equities have historically outperformed debt, and people in their 20s and 30s are young enough to rebound from the markets’ inevitable declines.”

Conversely, older investors need to shift their investment allocations away from risk. But that doesn’t mean abandoning equities altogether. “In many cases, having 60 percent in equities and 40 percent in bonds works pretty well,” Henderson says. “At retirement, most people still have another 25 years, and equities will help your portfolio outperform inflation.”

In the end, the moral of retirement planning is a familiar one:  Slow and steady wins the race. Soon after David Barrett’s firm opened eight years ago, a man asked him to help him plan for retirement.

“He’d had $5 million in investments and was talking about retirement, but he’d lost $4 million in the dot-com bust,” Barrett recalls. “I told him we’re a slow and steady investor, and he said, ‘I’ve got to find somebody to help me because my wife doesn’t know.’”

The man chose to invest with a firm that claimed it could double his money every two years. “He lost everything,” Barrett says. “Now he’s in his early 70s and back in the work force.” 

And that’s not the sort of late-in-life work boomers would like to face. 

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