Advice for baby boomers and twentysomethings

USA Today (Society for the Advancement of Education), July, 1996 by Joseph P. Lizzio

IN 1996, the first wave of baby boomers, the largest generation in U.S. history, will turn 50. They are beginning to enter their "pre-retirement" years, a milestone that for prior generations has meant planning for a retirement future. However, significant numbers within the baby boomer generation have put off or simply ignored saving for retirement. A 1991 study conducted by the Investment Company Institute found that just 17% of boomers identified retirement as a chief financial goal. Those who believe that Social Security and pension plans fully will meet their retirement needs when they're 65 may be in for a rude awakening. Together, these plans probably will provide less than half of the approximately 75% of pre-retirement income baby boomers will need to maintain their present standard of living in retirement.

The retirement challenges they face are greater than those of prior generations. In order to preserve their present lifestyles in retirement, late-starting savers are going to have to put aside more money and accumulate retirement dollars faster.

Boomers will need more money than their predecessors to support longer lives. Better health practices and advances in medicine point to more people enjoying a longer, more active retirement. Meanwhile, Social Security will provide approximately 18% of boomers' retirement income, and up to 85% of Social Security benefits may be taxed. For the younger boomers (those born after 1960), the Social Security retirement age is scheduled to reach 67 and may go higher.

Company-sponsored defined-benefit pension plans may be scaled back and fewer employees may qualify for them. Instead, more and more, the focus is likely to be on company-sponsored defined-contribution plans, such as 401(k)s, that offer workers the opportunity to contribute a portion of their income to save for retirement. With defined-contribution plans, the onus to fund the plan for retirement rests with the employee, not the employer.

Though their preparation is lagging, the good news is that, with the proper planning, many in this group can make a comfortable retirement a reality. Not only are today's baby boomers entering their peak earning years, but many are part of two-income families, which often signifies a large discretionary income. This potential for savings, combined with a strong desire for a comfortable lifestyle, should encourage them to put aside more funds during these high-income pre-retirement years. In addition, this generation still has time to select long-term investment vehicles, such as stocks, that have the potential for growth and appreciation.

The pre-retirement situation of boomers demands that they invest differently from their predecessors. They will need retirement programs that seek to minimize risk while maximizing returns and make investing flexible and convenient. Given these factors and objectives, variable annuities may be an excellent investment consideration, Basically, variable annuities are investment contracts between a life insurance company and an individual that contain a choice of mutual fund portfolios. Each is developed around a set objective (for instance, aggressive growth, global investment, or income preservation) to meet the diverse needs of investors. Value of the annuity fluctuates with the performance of the investments the individual chooses. For those investing for retirement, variable annuities provide:

* Growth opportunities through a range of professionally managed investment portfolios.

* Tax advantages. Assets held in a variable annuity grow on a tax-deferred basis during the initial accumulation period, allowing money normally paid as current taxes to compound and grow.

* Liquidity. Depending on the plan selected, variable annuities may provide some access to money free of company-imposed charges.

* Value-added features, such as automatic additions and dollar-cost averaging.

* Beneficiary protection through a guaranteed death benefit.

While baby boomers are thinking along these lines, establishing a systematic investment program may be the furthest thing from the minds of most twentysomethings, who usually are occupied with job hunting or career choice decisions. They may have a steady income for the first time in their lives, but also are faced with many expenses--student loan payments, building a work wardrobe, buying a car, or furnishing a place to live. Nevertheless, twentysomethings can begin to lay the groundwork for a healthy financial future. If you are in your 20s, you should:

* Establish a savings plan and pay yourself first. Even if it's only a small amount, set aside regular savings each month.

* Build an emergency fund. At any age, financial advisors suggest that it's wise to build and keep a liquid account of at least four to six months' worth of expenses as a cushion for an emergency.

* Maintain a good credit record to establish a financial reputation and make renting an apartment, buying a car, or getting a mortgage easier. Paying bills on time is the first step toward a solid credit record. A wise plan is to pay more than the minimum on any outstanding credit card balances.