Recipe for a rich retirement

Black Enterprise, Oct, 1995 by Donald Jay Korn

WHEN YOU THINK OF RETIREMENT, you probably half-close your eyes, sit back in your chair and dream a little. Maybe you see yourself sleeping late, then strolling down a Paris boulevard, stopping in the boutiques and galleries before winding down at a favorite sidewalk cafe. Or perhaps you think you'll be an early riser, steering your cabin cruiser out to deep waters where you'll do battle with a wity marlin.

Now, open your eyes and face reality. Whatever your retirement dream, it's probably going to take money--more money than you realize. By facing these realities today, you can be prepared for tomorrow, when you make the fateful switch from "worker" to "retiree."

The first reality you must recognize is that your retirement may last much longer than you expect. Although 65 is the "normal" retirement age, many executives, professionals, and business owners call it quits at 62, 60 or even earlier. In fact, if you work for a large organization intent on "downsizing," you may find yourself involuntarily retired in your early to mid-50s.

That's what happened to Barbara McKnight, a veteran of nearly 40 years at the Bell system. After working her way up to a position as a facility supervisor, she received an early retirement buy-out package from Bell Atlantic in 1991, at 57. "After six weeks of retirement, I decided I wasn't ready yet," says McKnight, who went back to work at the University of Pennsylvania in a clerical position. "Since then, I've been promoted to management," says McKnight, now 60, "so I plan to stay here for several more years. The academic world is a lot less stressful than the corporate world was."

Even if McKnight waits until she's in her mids 60to really retire, she can expect to live another 20 years, according to IRS tables. And that's just the average--her retirement might be even longer. "People tend to underestimate how long they'll need their money," says Bruce Temkin, a retirement specialist with Louis Kravitz & Associates, an employee benefits conslating firm in Encino, Calif. "The joint life expectancy of a retired couple in good health is age 90. When you plan for retirement, you really should be thinking in terms of 25 or 30 years." For many people, retirement will last nearly as long as their working careers!

That can be an extremely long time to go without a paycheck. Therefore, the first step in planning a long, comfortable retirement is to get a realistic estimate of what your retirement income might be. When you make these projections, err on the side of conservatism: When it comes to your retirement, safe beats sorry by a wide margin.

Despite the scare stories that surface from time to time, your retirement income will include Social Security benefits. That's the good news. On the flip side, Social Security benefits won't keep you in champagne and caviar. They're nice to receive, but far from lavish.

You're entitled to a "full benefit" from Social Security if you retire at 65. If you've had the maximum amount of wages withheld for Social Security taxes most of your career and retire this year at 65, you can expect to receive a benefit of about $1,200 per month, or $14,400 per year. If you've been earning less, you can expect a correspondingly lower benefit. Each year, benefits go up a bit, matching increases in the cost of living.

Rather than waiting until 65, you can receive Social Security retirement benefits as early as 62, at your election. The catch? You get a reduced benefit that's locked in for the rest of your life. If you retire on your 62nd birthday, for example, you'd receive an 80% benefit; that is, if you'd be entitled to a $1,000 monthly benefit at age 65, you'd get $800 instead. Then, if the Social Security cost-of-living adjustment is 3% the next year, you'd get a $24 raise instead of $30. And so on, year after year.

Each month you delay your retirement after you reach 62, you get a slightly higher monthly benefit. In fact, if you wait to start benefits until after 65, you'll get a bonus, pushing your monthly check still higher. So when is the best time to begin collecting Social Security? "If you're really ready to retire, start collecting benefits at age 62," says Charles Auerbach of Jaffe Auerbach, a financial planning firm in Memphis. "If you wait until 65, it will take you about 12 years to catch up to the three years of extra benefits you receive from 62 to 65." However, if you plan to do substantial part-time or freelance work, you may be better off waiting until 65, or even later. Earned income may reduce your Social Security benefits.

This is by no means the end of the Social Security story. Married couples likely will be entitled to two checks, whether or not both spouses had careers. Divorced and widowed spouses may be entitled to benefits as well. (Call the Social Security Administration at 800-772-1213 for a Request for Earnings and Benefit Estimate Statement, which will give you an idea of what your family's benefits will be.

Even the most generous Social Security benefits, though, will be much lower than what you were earning, so you'll need more income for a comfortable retirement. Where will that money come from? If you worked many years for a large employer, you may be entitled to a pension.