Retirement planning: Charting a course for your retirement destination

Providing for retirement is the single most important long-term financial goal of most Americans. Because we are living longer, some of us can plan to spend 20 or even 30 or more years in retirement.

And, although most are concerned about being able to afford retirement, few are adequately preparing for it.

In a recent Gallup Poll, more than 40% of Americans said they were worried that they would outlive their retirement savings. Yet, despite their concern, 25% said they did not have an investment plan to meet their future financial needs. Further, according to a study by the research group Public Agenda, only 29% of pre-retirees and 16% of baby boomers have saved a large enough nest egg to carry them through retirement.

With growing anxiety over the availability of Social Security benefits and diminishing corporate sponsored pension plan benefits, there is a pressing need to adequately prepare for retirement. Whether you are five years or 25 years from retiring, recognizing the need to take charge of your retirement planning is the first leg of the journey toward attaining retirement goals.

For many individuals, the financial strain of meeting a monthly mortgage payment or quarterly tuition bill, or the expense of caring for an elderly parent, often overshadows their good intentions of investing for retirement. Others simply assume that Social Security and company pension benefits will be enough to provide a comfortable retirement.

Still others may neglect to actively manage the personal savings and investments they have set aside. Their retirement assets may be anchored in investments that are no longer the best alternatives in light of their changing needs.

In general, many people are like ships without rudders when it comes to retirement planning. They just meander with no set course. Yet they hope to be able to one day retire and do the things of which they have always dreamed - travel, buy a second home, start a new hobby . . . live in dignity.

None of these goals can be fully realized without first charting a financial course. Doing so requires careful preparation and realistic goal setting - determining where you are now, where you would like to be in the future and what you may need to help get you there.

The process of developing a sound financial plan begins with three basic steps:

Review your individual retirement objectives -- What do you hope to accomplish? How do you want to spend your retirement? Your goals need to be both specific and realistic.

Determine your time horizon -- How long do you have until you will retire? Is this time horizon flexible? How much control do you have over your time horizon?

Outline your tolerance for risk -- How much risk? which, in some form or another, is inherent in all investments -- are you willing to take? Are you prepared to lose a portion of your hard earned money? Are you willing to watch your investments fluctuate in value, hoping to enhance your potential for greater returns?

Whether you are presently fearing it or looking forward to it, your retirement may finally let you pass the days as you please, so long as your nest egg can provide for your financial needs. The size of the nest egg you will need, then, depends almost entirely on how and where you spend your retirement.

When you retire, you may find yourself in a lower income tax bracket. Living costs may also change. Some expenses, such as a mortgage or child's college tuition, may disappear while others, like medical or travel outlays, could increase.

A traditional rule of thumb suggests having an annual amount equal to about 75 % of your income the year you retire. For example, if you were to retire today and your present salary is $80,000, you may need an inflation-adjusted $60,000 for each year you live in retirement.

In order to maintain your standard of living and enjoy your retirement years without working, the nest egg you accumulate must be able to support your annual income requirements. The table on page 5 will help you estimate the total nest egg you most likely need to provide 75 % of your current salary for a 25-year retirement that begins at age 65:

• Select the age and salary that best fit your current situation from the table on the following page.
• Find where the appropriate age row and salary column meet. This is the projected nest egg you may need at retirement.

Calculations assume a 4% inflation rate during retirement (which may, however, be either higher or lower) and a hypothetical 8% investment return. Principal will be depleted after 25 years. No tax consequences were considered. All returns are hypothetical and are not intended to represent the performance of any specific investment. Investing involves risks and you may incur a profit or a loss.

While, at first, your projected nest egg may seem unattainable, remember: You do not have to earn it all. Much of what you need can come from your retirement investments working for you. Over time, the power of compounding investment earnings building on investment earnings -- can provide the opportunity for growth in the value of your investments.

Once you establish a financial target, even a rough one as indicated by this chart, we can work together to develop an investment plan designed to help you attain it.

In large part, your future security may depend upon how effectively you manage your retirement assets. While choosing from among the many alternatives available may seem daunting, seeking an acceptable rate of return earned by investments with which you are comfortable can make a big difference in the amount of funds available for retirement.

Of course, any investment strategy must go beyond simply choosing the investments with the highest historical rates of return. Although most investments fluctuate in value, the market value of an investment that offers a higher potential for return tends to vacillate more than an investment with a lower return. This fluctuation is known as volatility.

One of the best ways to manage the risk inherent in any investment portfolio is to spread savings among a variety of asset types with different behavior patterns, a principal known as asset allocation. Over time, all categories of investments cycle in and out of market favor. Stocks, bonds, cash and cash equivalents often react differently to changes and events in the economy and the financial markets, and generally do not move in unison. Some will perform better than others in any given situation.

By diversifying your savings among several asset types, you may be able to take advantage of the growth potential taking place in different sectors of the market. You may also avoid having all of your savings in one type of asset that may perform poorly.

You will also need to consider the number of years until your retirement when developing a retirement plan.

For example, if you are a younger investor, and depending on your situation, you may be able to withstand short-term fluctuations in the value of your investments. Time can be your ally and, should you experience losses from your investments, you may have many years ahead to make a recovery. In this light, you may want to seek to maximize growth by concentrating your portfolio in stocks and growth mutual funds. Yet even when you are at or approaching retirement, you may want to consider maintaining a portion of your assets in stocks. Your retirement could last 20 years or more, and the returns from stocks may help you keep pace with inflation.

As you begin to approach retirement, you may begin to shift some funds from stocks to bonds. Although past performance does not guarantee future results, bonds tend to be more stable than stocks and are designed to provide a predictable cash flow. Shifting some assets into bonds, therefore, may help moderate the overall volatility of your portfolio and provide more attractive returns than moving directly into short-term investments, such as cash and cash equivalents.

At retirement, preservation of your capital will become a primary concern and may necessitate a shift to shorter-term investments like U.S. Treasury bills, CDs and money market funds for some of your assets. These exhibit virtually no volatility, but provide little or no protection against inflation. For this reason, you should consider maintaining a position in equities. How much you allocate to short-term investments will depend on the level of access to your funds you require.

To encourage Americans to save more, Federal legislation has created several tax-favored savings vehicles. You may be fortunate to have access to one or more of these through your employer, such as a 401(k), 403(b), SEP or SIMPLE plan. You may also invest in an IRA and enjoy the benefits of tax-deferred earnings. Even common stocks and traditional asset managers provide some of the benefits of tax deferral.

The advantage of using a tax-deferred vehicle rather than a taxable alternative for retirement planning purposes is illustrated below. Assuming an 8% rate of return a $100 investment made in the beginning of 1997, an effective tax rate of 28% and a time period of 30 years, consider these hypothetical results:

Basically, investing on a tax-deferred basis involves paying taxes later rather than sooner. With a tax-deferred investment, not only do contributions to the investment grow without taxation, but returns from the investment that are reinvested will grow without taxation as well. Of course, funds do become taxable upon withdrawal with traditional IRAs.

No matter what your age, promptly beginning your retirement investing is vital, because time can be a great ally. Consider the following hypothetical example to demonstrate the possible effects of long-term investing: Someone who begins investing 15 years before retirement to accumulate a $200,000 nest egg would have to invest $6,820 each year, in comparison to the $1,635 required of someone with a 30-year time horizon, assuming an 8% annual rate of return. (This theoretical example assumes investments are made on the first of the year and returns are compounded annually.)

Planning for retirement early on is particularly important for the baby boom generation. The cost of retirement for this group is expected to be much higher than for prior generations, due to longer life expectancies, the anticipated steady rise in health care costs, less financial support from Social Security and Medicare, and the eroding effects of inflation.

For all practical purposes, inflation is a permanent part of our lives. However, unless it shoots to alarmingly high levels, as it sometimes does, inflation is rarely discussed or even noticed. It begins to show itself most dramatically at exactly the worst time often when you are retired and no longer have a salary keeping pace with the cost of living.

For instance, consider this hypothetical situation, suppose you plan on retiring with an annual income of $50,000. If you assume a 4% inflation rate and wish to maintain your standard of living, you will require an annual income of more than $74,000 in 10 years and an unbelievable $110,000 after 20 years of retirement. It's a daunting situation, but if you begin to plan now, you can protect yourself against the perils of inflation.

Haphazard investing rarely works. Indeed, everyone needs a retirement plan that evolves with changes in their personal lives.

Charting an investment course in today's often stormy financial seas is not as difficult as you might think. We can help you assess your present situation and design a plan to help meet your particular retirement goals.

Our business is people and their financial wellbeing. We devote our best efforts to meeting and, when possible, exceeding our clients' expectations. Our objective is to serve you effectively, efficiently and distinctively -- whatever your particular retirement needs.

With sound planning and the appropriate investment vehicles, your retirement destination can be within your reach. Let's begin charting your retirement course today.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.