Monday, October 22, 2007

Retirement Planning and Another Rainy Monday Morning

Retirement Planning and Another Rainy Monday Morning

Although there is no scientific proof that we think about retirement most often on a rainy Monday morning, it would have to rank high among the reasons of why folks focus their hard earned cash on reaching those final days. The idea of dragging ourselves out of bed to go off and do a job we may or may not be necessarily enamored with doing, can seem especially hard as the list of things we would rather be doing grows.

But few of us use work and the paycheck that comes from the job you do in a way that would limit the number of Monday mornings you have yet to face.

Consider the employee who participates in a 401(k) plan. She or he is probably contributing the same amount to their tax deferred plan as they did when they first signed up for the program.

In the mean time, the nature of your job has changed. If you haven’t left for greener pastures at another company, you may have received some time based or merit raises. Bonuses aside, the increase in pay was probably quickly, even seamlessly absorbed into your daily budget. And there is your retirement plan, the one you set up all those years ago, languishing.

But wait, you might say. As your pay increases, so does the amount taken out of your check if you have set yourself up to have a certain percentage removed. But it is not enough to take a percentage of a percentage. If you receive a 2% raise, a $1,000 a week paycheck would increase by $20. A 5% deduction of pre-tax income would see an increase of exactly one dollar a week or $52 a year.

You have basically two choices. Dave Barry, humorist and author who at one time suggested investing in tiger poo instead of mutual funds said, "You still have time to salvage your retirement! All you need to do is develop some financial discipline, develop a realistic budget, avoid frivolous spending, pay off your debts and start putting away a meaningful amount of money each month for the future. Don't be discouraged! You really can do it, if you put your mind to it and use your magic time-travel ring!"

Or you can funnel a percentage of that raise (or all of it) into your 401(k). Suppose the increase in pay you receive takes place on a annual basis. Suppose that you take that modest cost of living adjustment of just 2% we mentioned above. This is almost a negligible amount when you look at it on a week-to-week basis on a $52,000 yearly income to about $20. This may not seem like much except when you apply it to your future. That $1,040 extra bucks is huge to your retirement plan.

In the book, I ask you to look at work from your current point of view. You may enjoy your work. The vibrancy and daily rigor a great job can give you are hard to replace during retirement.

The Bureau of Labor Statistics publishes a monthly report on employment. This report can be an indicator of economic strength or weakness and depending on who you are – average Joe or a Wall Street investment type, it can mean nothing or everything. What we miss in those numbers, which for the most recently published unemployment rate in September was 4.7%, is what they tell us about the future. This number comes with all sorts of caveats and often is re-adjusted for one reason or another.

One other number we should look at is the Civilian Labor Force Participation Rate. For September, it was estimated that 66.0% of the population was working.

Yet, according to National Atlas, a government mapping site, the growth of the population, especially among those who are aging, could spell disaster.

The site reports that “for the population 65 years and over, the growth rate in the South (16 percent) was nearly three times the growth rate in the Northeast. And the growth rate in the West (20 percent) was more than three times that of both the Northeast and the Midwest for this age group.

“The 50-to-54-year age group experienced the largest percentage growth. Of the 5-year age groups, 50-to-54 year olds experienced the largest percentage growth in population over the past decade, 55 percent. The second fastest-growing group was the age group 45 to 49.

“The baby-boom cohort entered these two age groups during the past decade. The third fastest-growing group in the past decade was 90-to-94 year olds, which increased by 45 percent.”

To me, this signals some tough competition for fewer jobs. If you had planned on working in your later years and you haven’t decided what that some other job will be. You had better ramp up those savings while you have a chance.

If you did plan on working well into what would normally be considered retirement age, now is the time to cultivate a new career.