One For Your Money

No man is so wise that he may not

easily err if he takes no other counsel but his own.

BEN JONSON

Do you know your savings account balance; your credit rating; how much money you can expect to have in retirement; whether you have enough life insurance to protect a spouse or any dependents; your net worth; how much money you spend each month; and whether your investments are appropriate in today's economy?

   If you have the answers to these questions, even if they are only estimates, you are exceptionally well aware of your financial resources. Historically, women have been especially ill prepared to save, invest, and manage their money. Some are single parents struggling as widows to raise children; others are beyond their careers, facing retirement without the support of a male provider; still others are married to husbands who fancy themselves to be good financial planners but only begrudgingly share knowledge of the couple's economic situation. To all, I say don't hesitate to ask questions,

Page 64

to study investment opportunities, and to give attention to your resources. All too easily they slip away and are lost for a lifetime.

   Business and governments continually employ a variety of consultants, yet individuals often do not take advantage even of the advice available to them at no charge through financial agencies. "In a multitude of counselors there is safety," Proverbs 11:14 reminds us. But who wants to listen to advice, especially if it flies in the face of our own guarded opinions?

   The political philosopher Edmund Burke was impressed by the multiplier effect of advice: "He who calls in the aide of an equal understanding doubles his own; and he who profits by superior understanding raises his powers to a level with the heights of the superior understanding he unites with."¹ Taking advice is a delicate issue. Many a fortune has been lost through wrong advice; many friendships have ended through friendly advice that cut too close to the bone. People sometimes reject wise counsel given in the spirit of friendship. Dr. Samuel Johnson, an Englishman of the nineteenth century, observed that "vanity is so frequently the apparent motive of advice that we, for the most part, summon our powers to oppose it without any very accurate inquiry whether it is right."²

   How do you know when to accept financial advice?

   All of us, I'm certain, have had friends who willingly, and far too often ignorantly, offered us financial and investment advice. I vividly recall a close colleague and friend suggesting a sure-fire financial opportunity in the purchase of a top-grade Arabian horse, or a portion thereof! The horse belonged to a seemingly successful Arabian horse ranch. I purchased a portion of an Arabian horse (I'm not quite sure which part of the anatomy it was) for several thousand dollars. (I can't miss an investment.) Not many months later a disease hit the horse ranch; and my horse, among others, went to horse heaven — and took with it my investment.

Page 65

   Lesson learned: be very careful what investment counsel you accept, even from well-meaning friends.

   On another occasion, a very successful publishing executive friend convinced me that investing in a new 3-D project

with Disney Productions could do nothing less than quadruple my invested funds. I bit — considerably. Not long after that, we all realized that the 3-D market had closed up, and our investment went down the drain. Why it took me so long to learn not to invest in these can't-fail new projects I'll never know. But I did learn.

   Private pensions sprang up in the forties and flourished in the fifties as employers set up programs to provide financial independence and increased leisure time for employees.

   Seminars and workshops designed to prepare employees for the financial and emotional adjustments of later years became popular in the fifties. Early retirement incentive packages that often seem too attractive to pass up leave many persons prematurely cut off from work, frequently with little or no preparation.

   The Age Discrimination in Employment Act (ADEA) and its 1986 amendments give legal protection to most workers over the age of forty, but early retirement is becoming increasingly popular. Records of the Social Security Administration show that more workers are electing to start receiving reduced retirement benefits at ages sixty-two, sixty-three, and sixty-four rather than waiting until age sixty-five or

Page 66

older to collect full benefits. This trend is more noticeable among male workers than female workers.

   Inflation affects retirement plans for many people. The low birthrates in the 1970s may lead to labor shortages in the 1990s; older workers may then be persuaded to stay on the job, instead of being encouraged to move out and make a place for younger employees. The growing numbers of women entering the work force will affect retirement patterns. Because female employees tend to begin working later in life than their male counterparts, they may need to remain in the work force longer than men of the same age to become vested in their pension plans.

LAYING A FINANCIAL FOUNDATION

During your years of employment, income meant a paycheck every week, fortnight, or month. While you kept working, the paychecks, interest, and dividends kept coming in.

   That paycheck ends with retirement. Most of your income will now be derived from other sources — sources that have been building up over the years. Until now, they've remained largely untapped. No matter when your retirement begins, it is never too early or too late to begin the important planning required in order to sustain that income.

   Let me suggest that you use the following outline as you plan your future, no matter where you are in your age bracket, prior to your retirement.

1. Prepare a list of your needs and desires after the paycheck stops.

2. Determine which sources of income will be relatively permanent (pension, Social Security benefits), and which will be temporary (part-time work, debts owed to you).

Page 67

3. List sources of income which will keep paying after the death of the person receiving the income (spousal benefits on a pension). Will income continue after the death of a spouse who is receiving the pension benefits? Get precise figures here; don't guess at them.

4. Find out which sources of income will be stable and which will fluctuate with interest rates and the upward and downward movement of stocks and bonds. No one can predict the exact course of such investments, but make a calculated guess.

5. Ask yourself when, if ever, it might be wise to dip into your accumulated principal.

When to Tap into Your Principle

Let's say you have $10,000 invested at 7 percent, compounding quarterly. You can withdraw the following monthly amounts for the stated number of years. At the end of that time, the $10,000 will be gone:

Page 70

After you have worked a specified period of time for an employer under a pension plan, ERISA requires that you be given the nonforfeitable right to certain earned benefits.   T or F

Yes, this right is called vesting. By law, employer contributions must vest in accordance with a choice from certain schedules set by the government. For example, if your employer chooses a schedule that requires that you be 100 percent vested after five years of service, then even if you lose your job after five years, you will eventually be entitled to a pension based on the pension plan formula.

Your pension will probably be reduced if you retire early.   T or F

Usually there is a percentage reduction in benefits for each year a person retires before he or she is 65.

The law ensures that your spouse will get your full pension when you die.   T or F

Most pension plans are required to provide a joint-and-survivor annuity provision. If you and your spouse do not reject the provision in writing, when you die your spouse is entitled to receive at least half of your monthly benefits for life. If you elect these benefits, however, your monthly pension payment might be lower than if you had rejected the survivor annuity.

Employers can fire employees to deprive them of their pensions.   T or F

Page 71

If you think you've been wrongfully denied a pension, you can take legal action. You will, however, need to prove there are no valid reasons for dismissal or for denial of benefits.

You are entitled to a complete explanation of your pension plan in easily understood language.   T or F

Employers must give each employee a booklet that clearly describes the pension plan and its benefits.

It's your right to know how the money in your pension plan has been and is being invested.   T or F

You have the right to know. If you think your pension money is being invested unwisely, you should contact the Administrator of Pension and Welfare Benefit Programs, U.S. Department of Labor.

Some pension plans reduce benefits according to your Social Security retirement income.   T or F

Some plans do provide for a Social Security offset by which your Social Security retirement benefit is considered when determining your pension payment. You may be left with little pension, or none at all.

Taking Retirement Now or Later?

Should you take early retirement or work as long as you possibly can?

   The answer varies from one individual to another. The wisdom of taking an early retirement could depend upon the structure of your pension plan and also upon your work history. Another one, two, or three years of work could increase your pension benefits considerably. Determine this

Page 72

factor as soon as possible, certainly before you make any premature decisions to retire.

   Many financial programs offer retirees a choice of taking all of the accumulated money in one lump sum or taking one of a variety of annuity plans. With the lump-sum payment, the money is yours to use as you see fit. You can do a rollover into an IRA rollover account and gain control over the investing of your assets while deferring the payment of taxes. With the annuity plan, you receive a certain monthly payment for a fixed period of time, or for the life of the employee or spouse.

   Some employees can choose between annuity programs that terminate when the employed person dies; others pay a smaller amount per month to the ex-worker, and upon his or her death continue payment to a surviving spouse for a certain period of time.

   This decision (lump sum or annuity) could be the most important one you will make with respect to your retirement income. Individual situations differ, but here is a typical example.

   David Henderson, a retiree, must choose between a $60,000 lump sum payment or a $500-per-month annuity for life. If he chooses the annuity and lives for twenty years, he will have received a total of $120,000 ($500 per month times twelve months equals $6,000 per year, times twenty years equals $120,000). If he lives for thirty years, he will have received $180,000. But if he lives only five years, he will have received only $30,000. If he chooses the lump sum payment, he could invest the entire amount at the current rate of 8 percent per year. This would generate an annual income of only $4,800 or $400 per month (compared to the annuity payment of $6,000, or $500 per month). But that income could continue indefinitely, or until he or his survivors withdrew money from the principal amount.

   The trade-off in this case is between a somewhat higher monthly income for a fixed period or a slightly lower income

Page 73

for an indefinite period, plus the availability of the full principal amount (in exchange for the monthly income).

"Much will depend on... being ready, willing, and able to manage your nest egg."

   Which would you choose? The decision can be crucial. Much will depend on the availability of conservative investment opportunities at the time you make the decision, plus your being ready, willing, and able to manage your nest egg, as opposed to having the annuity company manage it for you on a worry-free, carefree basis.

   (The foregoing example does not take into account federal income taxes on either the lump sum or the monthly payout plans. Naturally, those would have to be calculated.)

   Should you decide to choose the lump sum payout, you might be eligible for favorable tax treatment on that money. If you put otherwise taxable proceeds into an IRA rollover account, you can postpone paying such taxes and earn interest or dividends on the entire sum on a tax-deferred basis until you withdraw the money. The advantage of a rollover account is that you can have control over your investments, because you have more investment choices than you have with an annuity.

   It might also be possible to take advantage of a technique known as averaging. This allows you to pay the taxes due on the lump sum for the year in which your tax bracket might dictate. Under the 1986 Tax Reform Act, if you were at least age fifty on 1 January 1986, and you receive a lump sum in 1987 or after, you can choose from two different averaging formulas — a five-year plan and a ten-year plan. The advice of a tax counselor is recommended to determine the best

Page 74

choice in your circumstances. Persons under fifty on 1 January 1986 are limited to the five-year averaging plan.

Investing Your Own Pensions

If you earn income from your work, you are eligible for an individual retirement account (IRA). If you are self-employed, you are eligible for a Keogh plan (known as the self-employed person's plan.) And if your employer offers the 401(k) plan, you can take advantage of that.

   While retired persons should not take excessive risks, they should be aware that leaving their money in simple money markets may be detrimental to their long-term purchasing power. Use the formula in table 4.1 to calculate whether or not your portfolio is maintaining its purchasing power.

   If a negative balance is incurred year after year, the purchasing power of the retirement account could be severely diminished.

Page 75

THE UNIVERSAL SAFETY NET

A generation ago, the federal government made a law that provides a safety net for people who arrive at the age of

retirement without funds to sustain them. The Social Security Administration was part of Franklin Delano Roosevelt's New Deal, arriving with fanfare in 1935 when I was a kid of nineteen. For the first time in history, workers sixty-five and older were guaranteed an income when theirs dried up.

   My friend Peter Drucker pointed out in the 16 January 1975 issue of The Claremont [College] Collegian, that when Social Security began in 1935, seven people received benefits for every one hundred in the labor force.

   The Social Security program has changed many times, prompted by the continuing objective of financial soundness for the system while providing comprehensive protection for American families. In 1991, an estimated $265 billion in benefits were paid to approximately 40 million people. Some 133 million Americans are working and paying into Social Security. For additional information write to:

Social Security Administration

Wilkes-Barre Data Operations Center

P.O. Box 20

Wilkes-Barre PA 18711-2030

Page 76

Income from Social Security Benefits

Wouldn't it be nice if you could stop work one month and Uncle Sam would start sending you checks the next month for the rest of your life, so that you could maintain the standard of living to which you had grown accustomed? Social Security isn't quite that simple. Much planning is necessary to make certain that you receive what you are entitled to.

   First, visit the office of the Social Security Administration in your area (call first). Get the most up-to-date literature on benefits that you can find. In addition to retirement benefits, there are provisions for disability benefits, for the survivors of a deceased worker, and for the dependents of a retired or disabled worker. Medicare is also available to those sixty-five and older and to long-term disabled persons; both will be discussed later in this section. The Social Security office can also provide you with an inquiry card, "Request for Statement of Earnings." By completing and submitting that card to the Social Security Administration, you will get a statement of the Social Security earnings that have been credited to your Social Security number. It is wise to check on the accuracy of these amounts. The office can also give you estimates as to the amount of Social Security benefits you'll be entitled to receive upon retirement, but it won't be able to give you more specific amounts until you are at least sixty or within a few months of actual retirement.

   In addition to inquiring about your retirement benefits, you should definitely contact your Social Security office if:

• You cannot work because of an injury or illness that is expected to last at least a year.
• You are sixty-two years old and plan to retire soon.
• You are within three months of age sixty-five and can enroll in Medicare, even if you do not plan to retire.

Page 77

• A worker in your family dies.

• You are age sixty and a surviving spouse.

• You, your spouse, or your dependent child suffers permanent kidney failure.

   Social Security benefits are not automatic. You must file for them on prescribed forms, with specific documentation, and, for some claims, within certain time limits. Survivor benefits, in particular, are often left unclaimed because the survivors do not realize they are available.

   Many variables can affect the size of your Social Security benefits. For example, you may retire as early as sixty-two, but if you choose to retire before sixty-five, you will receive a lesser monthly amount than if you wait until age sixty-five.

   If you continue working, whether part-time or full-time, you will lose some or all of your Social Security benefits if your income from work exceeds a certain annual amount. In addition, if you continue to work once you have started receiving Social Security benefits, you will have to continue paying Social Security taxes on your earnings, as will your employer. The amount of those taxes will, of course, depend on your annual earnings. Your benefits also will be recomputed to take account of additional earnings so that your benefits can, in some instances, increase later on.

   If your income exceeds a certain amount once you have started receiving Social Security benefits, a portion of your benefits will be subject to federal income taxes. Income for this purpose includes one-half of your Social Security benefits and any tax-exempt interest income. The threshold amounts are twenty-five thousand dollars for individuals filing single tax returns, thirty-two thousand dollars for couples filing joint returns, and zero for married individuals filing separately who lived with their spouses at any time during the tax year. As much as one-half of your annual Social Security benefits can be subject to taxation in whatever

Page 78

tax bracket you happen to fall for that year. If your income from all sources falls below the previously noted amount, you need not worry about this potential tax. But if your income from all sources exceeds those amounts, you will have to do a separate calculation when completing your federal income tax return.

   Needless to say, these provisions in the Social Security law strongly influence the feasibility of your continuing to work once you have reached the age at which retirement benefits are available.

Effects of Continued Employment on Social Security Benefits

Many senior citizens find that they must continue working beyond their normal retirement date in order to have the money they need to live comfortably. Others choose to continue working, not so much for financial gain, but for psychological and social benefits. Some happily await the termination of their so-called real job so they can begin a long-desired new career, which may be full time or part time. The reason a person continues working after normal retirement age often determines whether or not such work will require a financial investment on his or her part.

   If you continue to work as an employee in the same capacity as before, no financial investment will be required, of course; but don't be surprised if, after you have calculated the net effect of Social Security and other taxes on your income, you find yourself working for less per hour than you may have earned twenty or thirty years ago.

   If you intend to make a personal investment to accomplish certain work goals, then you must undertake some very serious planning. Entering the business world — whether starting from scratch, buying an existing business, or investing in a franchise — can be rigorous and challenging. Perhaps the greatest warning to heed is this: embarking on a new business always takes a lot more capital than anticipated. You

Page 79

are risking the depletion of your retirement capital to achieve a hoped-for level of income. And what if that income never materializes? It has long been a rule of thumb that new business ventures do not even break even until between the second and third year of operation. Can you afford to subsidize yourself for that long? Do you want to forego interest or dividends you could have earned by investing your money in a more assured way?

   In short, if you have always longed to sell guitars or repair computers or be a chef or make model airplanes, it might make more sense to do that as someone else's employee, at least temporarily, to see if you really do enjoy it. The trial period can save you the potential disaster of losing a large portion of your capital on something that did not work out either financially or psychologically. If, after the trial by ordeal, you still want to proceed with this new career, you can do so with more assurance of success.

   In sum, once Social Security checks start coming, you face some hard decisions if you continue to work for a salary. You will have to continue to pay Social Security taxes on your income from work. In addition, if you earn too much from work, you can lose some Social Security benefits and possibly even have to pay some income taxes on those benefits you do receive.

   Fill out the following questions to determine whether it will pay you to keep drawing a paycheck.

A. Annual Social Security benefits at age:

62 $ ________

63 $ ________

64 $ ________

65 $ ________

B. How much money can you earn from salaried employment each year before you start losing Social Security benefits? $ ________

Page 80

C. If you earn $ ________ (projected earnings) $ ________, you will lose $ ________ of your Social Security benefits;

D. In addition, you will pay $ ________ in Social Security taxes.

E. That leaves you with $ ________. Will it pay to work? Are there benefits beyond the financial rewards?

F. If your earnings from all sources (work, investments, etc.) push you into the bracket where your Social Security benefits will be subject to income taxes, how much more will you stand to lose?

INCOME FROM ASSETS

The house they live in is the biggest single source of potential income for most people nearing retirement. Many people in this age group also own their own business or professional practice. The sale of that asset can be a very important source of income. Further, almost everyone owns assets that are not producing income but that could be sold and turned into a source of income.

Equity in a House

If you have owned your house for more than just a few years, you no doubt have acquired tens of thousands of dollars in equity. A combination of inflating values and the reduction of your mortgage debt through the years leaves you with an untapped source of considerable wealth. But how can you turn that wealth into cash in your pocket?

   One quick way, of course, is the home equity loan. You've seen the ads: borrow against the equity in your home and have all the cash you want, to do whatever you want.... The only trouble is that you have to pay that money back, and with interest. So, while an equity loan provides a source of income, it also creates debt that has to be paid, and paid on

Page 81

time. And if you borrow merely to create some investment dollars, it is a virtual certainty that you will pay a higher rate of interest on the loan than you will earn on the investment — if it is a safe and prudent investment. To earn more on the investment than you are paying in interest on the loan, you will have to take some risk with the money. If the risk doesn't pan out, you could be a loser all around; you could lose your investment dollars but still have to repay the loan, plus interest.

   Like many retirees, you may decide to sell your home and move into more compact quarters. You may choose a smaller house, a condominium, or an apartment. This is an effective way to create more spendable cash and still keep a comfortable roof over your head. However, choosing a different type or different size dwelling is a very personal matter, which we will discuss in another section of this book. If at all possible, you should rent the new quarters for at least a few months before you make the major decision to buy. It is worth the delay to ensure that you will be happy in a different kind of environment.

   Selling your home also presents you with another decision: do you want to receive cash for the total amount of the sale, or are you willing to take back the buyer's IOU in lieu of cash? If you do want to cash out, the buyer will have to find financing. If interest rates are high, that could be a problem. At the very least, it could cause some delay in closing the deal. Nevertheless, there is nothing quite as satisfying as walking away from a major transaction with all cash in hand. It eliminates any problems in waiting for monthly payments to come or in being an absentee landlord.

   On the other hand, if a buyer is able to make a reasonably good down payment (at least 15-25 percent of the total purchase price), and if the buyer has a good credit history, it might be possible for you to turn your equity into a regular monthly check at an interest rate higher than you could earn through conventional sources.

Page 82

   For example, if you cashed out of the sale of your home and had $100,000 in hand, you could invest it safely in a federally insured savings certificate at a rate of, say, 8 percent. On the other hand, if you took the buyer's IOU, you could expect to earn at least 2-4 percent higher on that same $100,000 debt. This is because home mortgage interest rates tend to run at least 2-4 percent higher than the interest rates payable on certificates of deposit. Naturally, the savings certificate is federally insured, whereas the buyer's IOU is not. But the buyer's IOU is secured by a lien on the house. If he or she fails to pay, you can take the house back and sell it all over again.

   There are other ways to turn the equity of your home into income. One way is called the sale/leaseback. In this type of arrangement the homeowner sells the property outright to another party, and the buyer simultaneously gives the homeowner a lease on the property, usually with lifetime renewal rights. The seller thus receives a large sum of cash but is required to make monthly rental payments to the new owner. The feasibility of this method depends on the tax benefits available to the parties; it is usually most workable when parents and children are the respective sellers and buyers.

   Another method, known as the reverse annuity mortgage, involves a lender's making monthly payments to a homeowner. The monthly payments constitute a debt, plus interest, that the owner will have to repay either upon moving out of the house or, via his or her estate, upon the owner's death. This method has been tried by numerous financial institutions in recent years, but to date no one has devised a program that makes it feasible for the broad mass of people.

   Before you embark on any program involving a transaction on your home, you should consult an attorney and an accountant for the proper legal and tax advice. There are important income tax implications to selling a home. If you proceed properly, you can save many thousands of dollars in income taxes.

Page 83

Sale of a Business Asset

Whether full-time or part-time, such interests can represent a greater source of income than you may have suspected. Even the most modest little retail outlet in the most modest location can have some value. The shop may have a steady and loyal clientele, a good lease at advantageous rents, or simply a lot of good will. Any or all of those items can be turned into dollars. Professional practices, even if you have been operating solo, can similarly have substantial value. And most partnerships, if they were properly formed in the first place, will have some form of buy-out arrangement stipulated in the partnership agreement.

   Wise selling of an interest in a business or practice will require some legal and accounting advice in advance. You can also obtain counsel from your trade or professional association. The associations also might have means of putting you in touch with interested buyers.

   As with selling your home, you will have to decide whether or not you want to cash out of your business or take back the buyer's IOU. The same basic principles prevail in reaching a decision: getting a substantial downpayment, checking the buyer's credit history for reliability, and structuring a good interest rate on the IOU. Structuring the price for the sale of a business or practice can be more tricky than for the sale of a house. It is not uncommon for the sale of a business to be based on a certain fixed amount of money plus a share in the profits that decreases over a period of years.

   Again, as with the sale of a house, there would be some concern if the buyer defaulted. If you have cashed out, of course, this problem would not arise. But if your income depends on the continuing success of the business once it is in the hands of the new owner, you should protect yourself to every extent possible.

   Your best protection against default is to include a clause in the sale contract that would allow you to hire someone else to run the business for you at the first indication that the

Page 84

buyer is not going to be able to continue making payments. The sooner you can intervene, the better off you will be. Once the business has been run into the ground by a negligent owner, it may be too late to salvage anything. It would also be wise to protect yourself against the unexpected death of the buyer. You can require that a life insurance policy on the buyer be taken out in your name as part of the original sales agreement.

Nonproductive Assets

You may have thousands of dollars worth of personal effects and collected items for which you have no further use. These may include furniture, coins, stamps, precious metals, furs, appliances, tools, works of art, china, silver, crystal, linens, and so forth. Sentimental value is one thing, but cash is something else. By converting any or all of these items into cash and then prudently investing that cash, you can create a source of income that can make the difference between comfort and discomfort in your retirement life. In addition, by selling any of these items upon which you had been paying insurance premiums, you can cancel the insurance and put those premium dollars to more productive use. Seek the counsel of a professional appraiser for any items that you believe to have artistic or antique value. Items that you cannot sell can be donated to your favorite charity or its thrift shop. This will allow you to take a tax deduction (for those who itemize) based on the current market value of the items. Every dollar you save in income taxes is a dollar that you can spend or invest.

INSURANCE ASSETS

Varying levels of income can be obtained through different kinds of insurance plans: health, life, and disability.

Page 85

Medicare

Medicare, in effect, provides you with reimbursement to meet some of your hospital and medical costs once you have reached age sixty-five. Medicare is a two-part insurance program operated by the federal government. Part A, the hospital insurance plan, is available to most Americans when they reach age sixty-five, whether or not they are retired. File for coverage three months before reaching sixty-five. If you do not enroll in Medicare, you will not be entitled to the benefits. The government does not automatically enroll you. Disabled persons may qualify before age sixty-five.

   Part B, the medical insurance plan, is a voluntary program that covers certain doctor's services and other items not covered under Part A. Get further details on Medicare from your Social Security office. Remember that Medicare does not cover all of your healthcare expenses. Large gaps may exist between the Medicare protection and your actual medical expenses. Thus, it is wise, at the earliest possible time, to purchase a supplemental private plan that will fill in some of the Medicare gaps. Perhaps such a plan is available as an extension of your group health plan at work.

Life Insurance

Your life insurance needs may be drastically different when you enter retirement than they were in the early stages of

Page 86

your career. Back then you may have had a family to protect; if so, they are likely grown now, and the need to protect them has diminished. Consequently, it may be feasible for you to cut back on the amount of your life insurance. However, first determine whether your spouse or grown children may still need that protection. With ordinary life insurance policies (as opposed to the typical term insurance policy), it is possible to either cash in your policy, borrow a substantial sum of money against it, or convert your insurance to other types of plans. The following table illustrates the conversion values in a typical policy.

   Table 4.2 illustrates a policy with a face value of $10,000. At the end of twenty years, as you can see, the cash/loan value is $2,890. That means you can stop paying premiums and cash in the policy for that amount of money. Or you can borrow that amount of money from the insurance company and continue paying premiums on the policy, remaining insured for the original face value less the amount of the loan. In other words, you could have $2,890 in hand and remain

insured for $7,110, provided you continue paying the premiums and the interest on the loan. You do not have to repay

Page 87

the loan itself. If the loan is not repaid upon death, then the proceeds payable to the beneficiary will be the lesser amount — the face value minus the loan.

   Another option is to stop paying premiums and convert the policy to paid-up life (though in some cases you may be better off borrowing the cash value and investing it). In this instance, after twenty years, the amount of paid-up life insurance would be $5,180. Without paying another penny in premiums, you would remain covered for the rest of your life for that amount.

   You can also convert to extended term insurance. In this case, you stop paying premiums, and you remain covered for the full face amount of the policy, but for a limited amount of time; at the end of 20 years that time would be 22 years, 303 days. In other words, you continue to be fully insured from the time you stop paying premiums for almost 23 years, at the end of which time the coverage ceases. In all of these instances, of course, the premiums that you otherwise would have been sending to the insurance company stay in your pocket and are, therefore, an indirect source of income to you.

   You may have purchased life insurance policies years ago of the endowment type or the paid-up-at-sixty-five type. With those types of policies your values are already at the

Page 88

fullest, and you can start taking an income out of them while still retaining a major portion of the insurance. Check with your agent or the company that issued the policy for specific details on such plans.

Disability Insurance

This protection was beneficial while you were working, but once you stop working, you obviously do not need insurance against being unable to work due to disability. Stop paying premiums for this coverage and keep the money for yourself.

INCOME FROM INVESTMENTS

This broad and very important subject is covered in much greater detail in the investment strategies section. For purposes of this section, we will focus more on the attitudes that can lead to a successful income-generating program with your investments.

   First, let us define some terms for purposes of this exercise. Let us consider investing to mean putting your money to work with a high degree of assurance that it will grow into a known amount of money in a known period of time. And let us consider speculating to mean putting your money to work in such a way that you will never know how much money you will have at any future time. The difference, as you can see, is critical. With investing, you know what to expect. With speculating, you don't.

   Investing your money so it will provide an assured return covers the arenas of saving certificates (certificates of deposit), government bonds, highly rated corporate bonds, and to a limited extent, some high-quality preferred stocks whose dividends can be relied on and whose market fluctuation is minimal. Speculating, or putting your money to work with no guarantee as to what will happen to it, covers most other arenas: the stock market, real estate, commodities, precious metals, and collectibles.

Page 89

   Many salespersons and institutions — banks, savings and loans, mutual funds, insurance agents, precious metals dealers, municipal bond sellers, and so on — are vying for your money. If someone is trying to sell you something, however, you had best ask yourself if the sale is more in the salesperson's best interests or your own. Not all salespeople of financial products and services have the best interests of their clients at heart. Many of them, it should come as no surprise, have their own best interests at heart. The burden is upon you, the buyer, to beware of all the pitfalls that lurk in financial products, no matter how glowing a pitch the salesperson gives.

   Financial institutions are also developing new forms of investment almost as fast as the printing presses can turn out the prospectuses. Many of these new investment techniques are very sophisticated and require a great deal of study. Salespeople will not always tell you everything you need to know, and you may not have the patience to interpret the prospectus, which explains all of the risks and other details. It would be prudent to make up your mind at the outset that you will not invest your money unless you know exactly where it is going, what will happen to it, and how you can get it back, if at all, if you do not like what is happening to it.

   Despite all of the new investment vehicles created in recent months and years, there is still nothing that compares with the simplicity, safety, and convenience of federally insured deposits. Naturally, you can get higher returns elsewhere, but you assume a higher risk accordingly. Conservatism is the order of the day. If you make a serious mistake, you might not get a chance to rectify it.

WHAT FINANCIAL INSTITUTIONS OFFER

Once you and your financial advisers have discussed the best way to attain your goals, you'll find a wide variety of financial products and services from which to choose.

Page 90

   Banks, savings and loan associations, and credit unions were originally designed to serve the needs of the business community. They also provided checking and savings accounts, and personal loans for individuals. Savings and loan associations and mutual savings banks, often called thrifts, were established primarily to pool depositors' savings and provide mortgage loans; but now they provide other services as well. Credit unions, which also accept deposits and make loans, are associations of people united by a common bond, often a place of employment. Today there are more similarities than differences among these various institutions.

   They all offer generally the following services, although there may be distinctions among individual institutions.

   Checking Accounts. In the past, these did not pay interest. Today, many do pay interest if you keep a minimum balance in the account. This type of checking account is sometimes called a NOW account, but different banks have different names for it. Credit unions offer share draft accounts which, for practical purposes, serve as checking accounts for their members. Many of these accounts pay interest. Checking accounts are a great convenience, but you should always find out about minimum balance requirements and service charges before you open an account.

   Savings Accounts. These pay interest on your money, although the amount of that interest has traditionally been limited by federal law. With passbook or statement savings you have access to your money whenever you need it, but you may trade some loss of income (when inflation rates are higher than the interest you're earning) in exchange for convenience and security.

   Certificates of Deposit or Time Deposits. These have minimum deposit requirements and pay higher rates of interest than is permitted on regular savings accounts. The drawback: you must commit your funds for a set period of

Page 91

time, and you face substantial penalties if you withdraw money before maturity.

   Market Rate Accounts. Savings accounts earning fluctuating market rates are called Market Rate Accounts. You may take your money out as you please, but you must maintain a minimum amount in the account at all times in order to earn the higher rate.

   Individual Retirement Accounts. The IRA, tax-sheltered account may permit you to put away up to two thousand dollars each year free of taxes. It may be funded through regular savings accounts (which don't earn much interest), through market rate accounts at some institutions, and through certificates of deposit. One word of caution: once you're past age fifty-nine and a half you may withdraw funds from your IRA without any tax penalty. If you're in a fixed-maturity time deposit, however, you may face interest penalties on withdrawal even if you are fifty-nine and a half. Financial institutions are permitted to waive the penalties, but not all do. As you get closer to retirement, therefore, reconsider your IRA funding. You may open a different account as often as you like as long as you don't exceed a total of two thousand dollars in contributions in any one year. You may also transfer your IRA account from one institution to another, without tax penalty.

   United States Government Savings Bonds. Readily available at these institutions, as well as through payroll deduction plans, these instruments are worth looking into. EE-bonds now pay a variable rate of interest, tied to an index of treasury bills if they are held at least five years. They are redeemable for cash at any time after the first six months.

   Treasury Bills. These fixed-income securities for large amounts are issued by the United States government. They may be bought through commercial banks, usually at a fixed dollar charge. They may also be bought through stockbro-

Page 92

kers, also for a fee, or directly through a Federal Reserve Bank.

THE FIVE-YEAR RETIREMENT PLAN

Retirement isn't a single act in time: one day you're working, the next day you're not, while you hope against hope that everything will work out okay. Many people mistakenly view it like that, however. It's a lot wiser financially and psychologically to begin planning your retirement ten or fifteen years in advance. This long-range planning helps to guarantee the lifestyle and financial security you want in retirement.

   If the date of your retirement is still ahead, try this five-year retirement plan.

   Year 1. Starting roughly two years before actual retirement, review all your previous planning. Project your income during the retirement years using information from the previous sections, especially the section on sources of income. Define your post-retirement needs and your goals and the expenses that go along with them. This section is designed to help you do that.

   Year 2. This is the year just before your actual retirement. During this year you should begin to refine and put into effect the spending and investing patterns you have previously outlined for yourself. Take plenty of time. Phase in the new patterns gradually.

   Year 3. This is the year in which retirement actually takes place, and the planned income and expense patterns must be adhered to as closely as possible. But by now you'll have had practice under your belt, so the adjustment should be relatively easy.

   Year 4. You've been retired for one year now, and you've had a chance to see how well your previously planned in-

Page 93

come and expense patterns work for you. Don't expect perfection. People change. Circumstances change. During this year, making necessary adjustments to your original plans, within the bounds, of course, of your financial abilities.

   Year 5. You've had ample time to experiment, to modify, to learn by trial and error. During this fifth year you should be able to solidify your financial arrangements into a format that will last you indefinitely. Minor tuneups may be needed along the way, of course; and you should be ready, willing, and able to make such changes to your plan. But by this fifth year, you should be comfortable with and in control of your overall financial arrangements.

   All of the planning steps — defining income sources, recognizing needs and goals, setting priorities for those needs and goals, and working out budgets — should not be carried out just in your head. They should be written down with your spouse or close friend. The sooner you do this and the sooner you begin testing the actual patterns that you set out for yourself, the more readily you'll adjust to the new circumstances of retirement. This relatively easy exercise will reward you with peace of mind and a sense of self-confidence that may cause your friends to marvel.

CHANGING SPENDING HABITS

Many of your spending habits will change in retirement. When work ceases, two-car families often become one-car families. Wardrobe needs are diminished. Costly lunches in restaurants — common during working days — are replaced by lunches at home or in friends' homes. Leisure pursuits can be done at more convenient times and at lower prices: matinees for movies and shows instead of evening performances; golf on week days instead of weekends; travel during the off seasons, when prices are considerably below those of normal vacation times. It's best to anticipate such changes in your

Page 94

spending habits and incorporate them into your financial plan at the earliest possible time.

COPING WITH INFLATION

Inflation is one of the great dilemmas of our modern age. It cannot be overlooked, nor can it be predicted. During the late 1970s, the Consumer Price Index (which is the accepted measure of inflation) was in double digits year after year. By the mid-1980s, it had fallen to well below 5 percent for several consecutive years. When the inflation rate is high, people are troubled, psychologically as well as financially. When the inflation rate is low, people tend to be too complacent. They don't take defensive measures against the next bout of serious inflation.

   Also, there was a unique and brief time during the late 1970s when the rate of inflation exceeded the amount of interest people could earn on their savings plans. In short, by leaving your money in a savings plan, you lost money. Prices were rising faster than people's ability to earn. A sad result of this short-lived phenomenon was that all too many people cashed in their savings plans and, lured by fast-talking salespersons, put their money into risky ventures, often suffering serious losses. Had they left their money in the savings account, it would have not earned as much as they would have liked, but at least it still would have been there.

   In the early 1980s Congress changed the regulations that restricted how much interest financial institutions could pay on savings deposits. When institutions were allowed to set their own rates of interest, the typical savings account received a substantial dose of inflation proofing. In other words, savings yields can now increase as inflation increases. This takes a lot of sting out of inflation, especially for people who have well-established savings plans with a variety of maturities that give them the flexibility to take advantage of the best yields as they occur.

Page 95

MEDICAL AND DENTAL EXPENSES

Approximately 40 percent of health care expenses these days are met by Medicare; 25 percent are covered by employer

health plans, pension plans, supplemental health insurance and Medicaid; the rest (about 35 percent) must be paid by the individual. Apply for Medicare benefits three months before your sixty-fifth birthday. The government will not automatically enroll you. At the earliest possible time, examine the Medicare literature and determine what it does and does not cover. In most instances it will be necessary to obtain supplemental private coverage if you wish to have more of your health care costs covered. (Some employer group health insurance programs will continue into retirement to provide you with Medicare supplemental insurance. Check your personnel office to determine if such applies to you.)

   Unlike health insurance, which reimburses you for covered medical expenses charged by any doctor, the health maintenance organization (HMO) might not always allow you to choose your doctor. It will probably, however, reduce your medical expenses enough to offset that inconvenience. If there is an HMO in your area, explore its pricing and service structure.

   It's never too early to evaluate supplementary health insurance plans. Most private health insurance policies re-

Page 96

strict coverage for pre-existing conditions. If you have a health problem at the time you apply for private health insurance, the policy may exclude paying benefits for treatment of that condition for a fixed amount of time. It's wise to obtain supplemental coverage before any such conditions occur.

   In shopping for supplemental health insurance, be certain that you are obtaining the comprehensive protection you need. Many policies will protect you only in the event of hospitalization, and then only for a limited number of dollars per day. Remember that not all medical costs are incurred while in the hospital.

   It is also important to consider what arrangements you may need to make to sustain an independent lifestyle should you become disabled or chronically ill. Long-term care insurance is emerging as one way to help cover the potentially devastating costs of extended care. Nursing home expenses run as high as forty thousand dollars per year in some locations. This type of insurance usually pays a fixed amount per day for nursing home stays and/or home health care visits. The amount and duration of the benefits provided vary from policy to policy, and even this type of insurance is often expensive and could have coverage limitations.

COST-CUTTING TIPS

   You can help your long range financial planning by implementing a few daily habits such as those mentioned below.

• Take advantage of discount coupons, which are available in newspapers and through the mail. It's not advisable to buy products only because of a discount coupon, but it's plain good sense to take advantage of discounts on products you already use. The pennies saved quickly add up to dollars.
• Pay attention to unit pricing when grocery shopping. Unit pricing, which is available in many stores, shows you the

Page 97

cost per ounce or the cost per pound of most products. Considerable savings can often be realized by buying products in large containers. (Caution: don't be penny-wise and pound-foolish by buying containers that are too large: the products may spoil before you use them.)

• Generic brand products can mean substantial savings, particularly for those items whose quality is relatively indistinguishable from brand name items.
• Pay close attention to special sales and seasonal bargains.
• Buy in bulk whenever possible and practical. If you chip in with friends and neighbors, you might be able to buy many products by the carton or case and realize considerable discounts. Most stores provide such price concessions, but only if you specifically ask for them.

   This has been a long chapter. Nothing in it is unimportant. Our Lord had more to say on the subject of money than on heaven. From one vantage point, your money is your very life, for financial resources purchase the things necessary for life.

   One for the money is a line from a frivolous child's game, but this chapter about your money is anything but frivolous. Take care in your generosity toward the Lord's work and toward others to lay a proper foundation for yourself and for those you love.

Chapter Five  ||  Table of Contents