Plan today or pay tomorrow - saving and investing for retirement - B.E. Money Management Special Section

Black Enterprise, Oct, 1994 by Carolyn M. Brown

MOST PEOPLE SHUDDER AT the thought of being forced into early retirement. Not Randy Heflin, who is now the owner of Sharp Focus, a photography studio. Two years ago, when the television station where he was employed was undergoing management changes, the Phoenix-based commercial photographer decided to shoot for a lifelong dream of owning his own business.

"They made me an offer and I took it," grins Heflin, who was 46 at the time. Heflin, who had spent more than 20 years in media sales with an NBC affiliate in Michigan and an independent affiliate in Arizona, received a year's salary--more than $50,000.

Heflin used the severance pay to keep a roof over his head and his business (a third of his three-bedroom house is devoted to the photography studio). He had been stocking up on photographic equipment for 10 years.

The former amateur has turned his high-priced hobby into a full-fledged business, earning enough to cover $3,000 a month in living expenses. He has some 75 accounts, including corporate clients such as MCI, ABC and the Muscular Dystrophy Association, plus a few weddings, family reunions and baby pictures here and there.

But Heflin put a lot of thought into this career switch, and the decision about what to do with $180,000 from his company pension. He invested $110,000 with Roger Engemann, a renowned Los Angeles-based equity portfolio manager, who has averaged 18% to 20% over the last 20 years. The other $70,000 was invested with Rubye Nasser-Norsig, a financial consultant with Merrill Lynch, in Phoenix.

The combined accounts comprise some 45 growth-oriented stocks in various industries, including Microsoft, Time-Warner, Whole Foods, Walt Disney, Wal-Mart and Coca-Cola. While the portfolio managed by Engemann was down 4% last year, Heflin's vintage stock is bound to rise in price over the next couple of years.

That's fine with him, since he insists he won't have to touch his portfolio for another 15 years. It's strictly for retirement. And he needs that money to grow to around $2 million to maintain his current standard of living, according to his financial advisors.

Heflin also knows that his retirement dollars should remain separate from his personal cash cushion and education funds. So, he's working on a separate plan to finance his 2-year-old son's education.

As long as business remains in the black, Heflin can continue to live his life as photographer extraordinaire and not fret about his retirement funds. However, the picture for most people from Heflin's generation is not that rosy.

A snapshot of 76.5 million baby boomers--those born between 1946 and 1964--shows they are facing a looming cash crunch. Regrettably, 34% of those over age 40 have put aside less than $30,000 for retirement, according to a survey by the market research firm, Yankelovich Partners, and the Boston-based full-service brokerage house, Fidelity Investments.

"Unless they [baby boomers] can find a way to increase their personal savings, they may have to accept a lower standard of living in their retirement years," says Roger T. Servision, managing director at Fidelity. "They won't have a financially secure future if they don't commit to saving at least 6% to 8% of their pretax income every year."

Face it, the only way you'll avoid a bare-bones retirement is to squirrel away as much money as possible and as soon as possible. The new reality is that Social Security and employer pensions won't support your retirement living expenses.

Fewer companies offer traditional pensions or defined benefits plans, which are funded entirely by the company. Now firms are pushing defined contribution plans, namely the 401(k), which is funded solely or in part by the employee.

Whether you have to select mutual funds for your 401(k) plan, open an individual retirement account (IRA) or buy an annuity, how you spend your retirement is entirely in your hands. It's your job to create a financial plan that ensures that your nonworking years are indeed golden and not blue.

ACHIEVING A SECURE RETIREMENT

Ideally, you will need 70% to 80% of your final working income to maintain a similar lifestyle in retirement, due to diminishing Social Security and pension benefits. The average annual benefit that will be paid in 1994 is $8,088, according to the Social Security Administration. If your pension doesn't have a cost-of-living adjustment, and most don't, forget about your benefit keeping up with inflation. Assuming 4% inflation, for example, a $20,000 pension today will be worth about $13,511 in 10 years.

According to 1990 U.S. Treasury Department data, retired households with annual incomes of more than $20,000 met only 20% of their yearly expenses with Social Security benefits. Another 15% was covered by company pensions for those who were more fortunate. The remaining 65% was covered mainly through personal savings and employment.

When asked, most people will say they want to "save more and spend less." But when you look at the numbers, spend now and save later is what they do. In 1993, consumer spending increased faster than disposable income, driving down the savings rate to 3.8%, notes Lincoln Anderson, a Fidelity economist.