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Preparing for Retirement

Posted February 06, 2013 in Perry
Stacy and Eric Vaughn of Perry discuss insurance and investment issues with Farm Bureau Agent  David Finneseth (right) in Perry.

Stacy and Eric Vaughn of Perry discuss insurance and investment issues with Farm Bureau Agent
David Finneseth (right) in Perry.

People need to begin investing in their 20s and be consistent in putting money into retirement investments every month to retire with a lifestyle they may envision while still working.

That’s the message from three Perry professionals — Dean Haaland with Haaland Financial Services, Ted Smith with Edward D. Jones and David Finneseth with Farm Bureau.

Of course, now more than ever, what people planned in their retirements may not economically be the case any longer. Many people have been forced into early retirement, laid off or underemployed. Some people have dipped into or drained retirement funds just to get by. Studies have shown that people nearing retirement today either have to continue working longer, or they want to work longer.

“People will need to save as much as they possibly can and learn to live within their means,” says Haaland. He advises people who may be laid off or underemployed to try very hard not to dip into their retirement funds from previous jobs. Not only are there taxes to pay at a high rate, but penalties as well.

Operating within a budget is something people of all ages need to do, Haaland says.
If a person can’t afford to go out to eat without putting it on a credit card, then they should eat at home, he says, adding, “People use credit cards way too easily.”

For working folks, Haaland advises people to take advantage of 401K savings, particularly if there is a company match.

That’s not to say investing is easy or without some risk, but the risk can be minimized. People who are older may want to put less of their investments into higher-risk stocks, while people who are younger have more time on their side and can afford to take more risks with their investments, Haaland says.

He has his clients fill out a questionnaire to help them determine how much risk they can tolerate.

“You want to get a good return, but you also want to be able to sleep at night,” Haaland says.

If a person is within five years of retirement, he or she probably wants to move money to more conservative kinds of investments with fixed or guaranteed interest such as CDs or annuities. However, if a person is close to retirement and does not have much saved, that person may want to invest in higher-return stocks.

“The easiest thing to do is to consistently invest, even it is not a lot every month. I look at it as paying yourself first by putting money into investments and then living off the rest of what you make by living within your means,” Haaland says. “If you have an employer who offers a match for a 401K, you should be matching the maximum allowed. Whatever the company is matching is free money.”

Haaland discussed the difference between a regular 401K and a ROTH 401K. Some companies offer both.

“The difference is that monies withdrawn from a ROTH IRA in retirement have a tax advantage, that being all of the growth is tax-free. A regular 401K plan and a traditional IRA are all taxable when withdrawn in retirement,” he says.

He recommends going with the ROTH, especially for the younger generation, as they have a lot of years for a ROTH to grow and the growth is tax-free.

Ted Smith, a financial advisor with Edward D. Jones in Perry, agreed that people should take advantage of 401K opportunities through work, citing the same reasons as Haaland. He also addressed investing practices of younger adults.

“Some younger people invest too conservatively or not at all,” he says. “Just $1 a day is $30 a month. Most of us waste $1 a day on something we don’t need.”

“Some younger people invest too conservatively or not at all. Just $1 a day is $30 a month. Most of us waste $1 a day on something we don’t need.”  — Ted Smith, Edward D. Jones financial advisor

“Some younger people invest too conservatively or not at all. Just $1 a day is $30 a month. Most of us waste $1 a day on something we don’t need.”
— Ted Smith, Edward D. Jones financial advisor

It’s all about the power of compounding for young people, and it’s amazing how quickly that money adds up, Smith says.

He also addressed the need for having a budget and sticking to it. Smith talked about a couple he worked with who had one teenage daughter. When he sat down with them to go over their budget, they realized there was $2,000 a month they couldn’t account for. They created a budget, stuck with it  and track where all their money was going. They were then able to capture some of that money to use toward retirement investments.

As retirement approaches, people need to look at their balance of investments, Smith says. He advised, as did Haaland, that people nearing retirement should choose investments with a lower risk and to be more diversified.

He also cautioned that people need to look at how much money they will be drawing each month or year when they retire. If they take too much money, the retirement account may be used up before they expected. They need to take a good look at what they need each month to pay their bills and live comfortably in retirement and be realistic about their lifestyles.

Risk assessment
David Finneseth, a Farm Bureau agent, says he will talk with people about what they want to do with their money, what they may or may not want to leave to children or other family members and more.

He also has people fill out a questionnaire to see what risk level clients are willing to take. That information is used to help find clients investments they feel comfortable with, but will still help them make money.

“I ask them if they want to be saving toward college for their children, if they want to leave a ‘legacy’ for anyone specific through life insurance and what their expectations are,” he says.

Finneseth noted that choices about investments, life insurance, even long-term care insurance, are different for anyone looking to invest or planning on retirement.

For the children
Stacy and Eric Vaughn of Perry, both in their 40s, believe their investments are where they need to be at this point in their lives.

“We’ve set up college plans for the girls,” says Eric. They also have a financial planner who helps them make their decisions on investments.

In addition to some investments, Stacy has a 401K and Vaughn has IPERs.

“We also have enough life insurance that if something would happen to one of us, there would be enough money to take care of the girls,” Eric says.

Stacy says she thought it was interesting when she took her first teaching job in Johnston. There was a session on investing and retirement for employees.

“I remember someone saying people should have $1 million by the time they retire,” she says.

Haaland noted that life insurance is a good way to leave something to children because it is tax-free for the person who receives the money.

Dean Haaland, of Haaland Financial Services in Perry, talks about investing for retirement.

Dean Haaland, of Haaland Financial Services in Perry, talks about investing for retirement.

More tips
William Bernstein, a renowned investment advisor and an author of books on financial theory as well as books on practical advice for regular people, was interviewed by New York Money Magazine.

The following excerpt of a question and answer article with Bernstein was taken from that article which was posted online.

How should I be investing near and after retirement?
You want to end up with a portfolio that matches your liabilities, meaning the amount you’ll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses — that is, the yearly shortfall you have to make up after Social Security and any pension.

This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets. That’s your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn’t do well, at least you’re not pushing a shopping cart under an overpass.

What if you are nearing retirement age and you don’t have that 20 to 25 years saved?
You should be working until you get that number. If you’re 65 and you’ve only got half of your living expenses saved, you can retire and you may skate through.

You may die early, or you may have a good market. But there’s a significant chance you’re going to be eating Alpo when you’re 85. That’s the risk you’re taking. The other choice you have is to work a few more years and reduce expenses.”

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