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ARCHIVED  November 19, 1999

Early start makes for wealthier finish

Wishing for a worry-free retirement?

Then worry now not later. Delaying retirement planning or forgoing it completely are the two biggest mistakes people make, say financial planners, insurance agents and accountants. They put at the top of their retirement-planning list two simple words…

Start now

Financial planners in particular urge clients to start planning for retirement as soon as possible. Individuals should start saving early for retirement and stay committed to their plan, said Kelly Giard, a financial consultant with A.G. Edwards in Fort Collins.

“The later they start, the more they have to give up in terms of current income,” he said. “I generally recommend they start as soon as they have any discretionary income.”

Giard suggests that people treat retirement savings like any monthly bill. They should commit money on a monthly basis into a retirement fund of choice, an Individual Retirement Account or 401(k) plan. If necessary, people should adjust their lifestyle to ensure that they save.

“Save first, spend the left over,” Giard said.

Many younger clients find this concept difficult to grasp. The booming economy, low levels of inflation and the long run of the bull market has contributed to planning mistakes, especially by those under 40.

“The market has had a phenomenal five years,” Giard said, “people think they put money in the market and then can sit back and wait for it to work for them instead of continuing to save.” He calls faith in the market in lieu of saving the biggest fallacy around retirement planning.

The market and a consumer-friendly economy entice people to spend their cash on luxury items — a tendency that can have severe consequences. For clients under 40, the difference between saving and spending $200 a month significantly affects when and how well they retire, Giard said.

Low levels of inflation also have caused individuals to underestimate of the cost of retirement, said Ken Whitney, a partner in the Greeley-based accounting firm of Anderson Whitney PC. “It’s a still a big number if you live long enough, because of compound interest,” Whitney said. People should plan for retirement not at what the dollar’s value is today but at what they anticipate its value to be when they retire.

Take full advantage

To overcome mistakes made in their youth, Whitney encourages clients to take advantage of a retirement plan as soon as they have the opportunity.

Given the growing array of retirement plans, Giard regards the 401(k) as the instrument of choice. He recommends that anyone with access to one use it. Regular IRAs place limits on an individual’s contribution, of $2,000 per year. Whereas, a 401(k) allows participants to contribute $10,000 per year and often includes matching contributions and profit-sharing through the participant’s company.

“It’s not unusual for an individual to save a lot through 401(k)s. We will see more 401(k) millionaires,” Giard said.

However, Whitney warned that people often make mistakes when withdrawing from their IRAs, which include the funds they roll over their 401(k)s. At age 701/2, participants must begin withdrawing money from the IRA or face penalties. The money they take out is taxed, like a paycheck, according to their income bracket, he said.

If the individual postpones withdrawing more than the minimum required funds and dies with substantial funds still in the IRA, state and federal governments will tax the larger lump sum remaining in the IRA at a higher rate. The government also subjects the funds to estate taxes.

“Individuals are postponing taxation at a lower bracket for a higher bracket — a phenomenon known as bracket creep,” Whitney said. He recommends people withdraw more money from their retirement fund, regardless of need, to avoid hefty taxation upon death.

Insurance fills the gap

Still, ways exist to offset the burden of estate taxes. Individuals can buy a life insurance policy to cover estate taxes, said Harley Elbert, a financial-services representative for MetLife Financial Services in Loveland. The government allows individuals to pass on only $650,000 to their beneficiaries without paying estate taxes, which can range from 37 percent to 55 percent based on the amount of the inheritance. The estate has nine months to pay the taxes, and often beneficiaries must sell the property to meet the tax burden, Elbert said.

Life insurance can also help in planning for the care of loved ones after the beneficiary’s death. Everyone should coordinate social security benefits and pension provisions to determine their permanent life insurance needs, said Mike Buderus, district manager of The Prudential Insurance Co.

The terms of pension plans vary from company to company. If someone takes the full pension amount upon retirement, their spouse will receive no further compensation when they die. However, if they opt for a reduced benefit, they will get a smaller amount of their pension each month, but their spouse will receive 50 percent of the reduced benefit when they die, Buderus said.

Pension payouts should factor in to determining the amount of permanent life insurance you need.

“I would do a calculation to determine how much — if I take the full amount — do I need in a permanent life insurance policy in order to provide for my wife’s support to make up the amount I lost by taking the full amount,” Buderus said.

Another insurance product, long-term care policies, have become more prevalent in retirement planning. “It’s wise, it’s asset management,” Buderus said.

According to the National Center for Assisted Living, the number of residents living in assisted-living facilities will increase rapidly in the next 25 years. Center statistics project that in year 2000, 1.25 million people will reside in assisted-living facilities. That number will jump to 1.5 million by 2010 and by 2025, could rise as high as 2 million.

The same study showed that assisted-living facilities are becoming more costly. Thirty percent of facilities had an average monthly rent and fees of $1,501 to $2,000, while 17 percent had a monthly rent and fees ranging from $2,001 to $2,500. Some facilities charged more than $3,500 a month.

Given the cost, most people who can’t self-insure should consider long-term care policies, Buderus said, especially as government funding levels decline. Medicare doesn’t pay for independent living or assisted-living facilities.

Those who choose a long-term care policy should purchase one during their 50s, when it is inexpensive, rather waiting until their 70s, when the costs may be prohibitive, Buderus said. He added one caveat for the younger purchaser: Be sure to include either a simple or compound rider to the policy to help keep up with inflation.

Additionally, Buderus advises insurance shoppers to make sure the policy includes home health care benefits because not all policies cover it. Things to look for in home health care benefits include whether a rider is attached and whether it is a reimbursement or indemnity plan.

Many of these issues are complex and often require the assistance of someone with expertise in these fields. On the bright side, retirement planning has practically become industry unto itself; so finding the right people to help you plan a worry-free retirement should be snap.

Wishing for a worry-free retirement?

Then worry now not later. Delaying retirement planning or forgoing it completely are the two biggest mistakes people make, say financial planners, insurance agents and accountants. They put at the top of their retirement-planning list two simple words…

Start now

Financial planners in particular urge clients to start planning for retirement as soon as possible. Individuals should start saving early for retirement and stay committed to their plan, said Kelly Giard, a financial consultant with A.G. Edwards in Fort Collins.

“The later they start, the more they have to give up in terms of current income,” he said. “I…

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