Chapter 6
PLANNING FOR THE FUTURE
Chapter Goals/Competencies:
- Invest in profitable retirement plans early on.
- Learn the importance of long-term health care planning and maintain it throughout your lifetime
- Compare different types of life insurance policies and knowledgeably choose the best one for you.
- Plan for future college education costs.
Preparing for Retirement
Key Scripture: Gray hair is a crown of splendor; it is attained by a righteous life - Proverbs 16:31
Three overwhelming concerns of older Americans are physical security, health care, and financial independence. Only 1-2 percent of Americans are estimated to be financially independent when they reach age sixty-five. With health costs rising dramatically every year, many elderly people are faced with impoverishment. Through necessity, Americans are giving increased attention to the needs of this growing population.
Barring unforeseen circumstances, your retirement years can truly be the golden years of your life. They can be years for enjoying family, children, and grandchildren who, in turn, can benefit from your vast experience. Your "autumn" days can be used for pursuing enjoyable avocations—this time at your own pace. "Children’s children are a crown to the aged, and parents are the pride of their children" (Prov. 17:6).
For anyone fifty years of age and older, membership in the American Association of Retired Persons (AARP) is worth considering. For a nominal yearly fee of five dollars, you will receive "Modern Maturity," an excellent magazine with the latest information on health care, finances, politics, travel, and much more. In addition, AARP issues a bulletin that keeps you up-to-date with their pro-elderly activities in Washington, D.C. For information or membership, write:
American Association of Retired Persons
601 E Street NW
Washington, DC 20049
Begin Early
An extremely important formula for financial success is: Income = Principal x Interest x Time. Retirement independence uses the same formula, but older people have lost one critical ingredient—time. "Whatever is has already been, and what will be has been before; and God will call the past to account" (Eccl. 3:15). The secret for successful retirement living is to begin saving consistently while you are young.
Given enough time, compound interest generates interest upon interest upon interest. Finally, in the later years of the saving process, your retirement fund will increase at a highly accelerated rate. "He who gathers crops in summer is a wise son" (Prov. 10:5).
The principal question asked is, "How much is enough for retirement?" Since each person’s answer will be different, you should begin with what you are living on now. If your family is currently living on $25,000 per year, you should be able to live on the same amount in retirement. In fact, your expenses will probably be less since you will not have education, child-care, and hopefully, mortgage or debt expenses. If you feel that $25,000 will be enough, then you must determine the assets and investments needed to maintain that amount in retirement.
The first step is to save according to a disciplined plan while you are young. Discipline is a key factor. You must decide that you will never—under any condition—withdraw funds from that account. Think of it as "spent money." If you rationalize that first withdrawal from your retirement account, you can be sure there will be a second, a third, and a fourth. Soon the account will be depleted, and you will be back where you started—with nothing. So always think of your retirement contributions as irretrievable expenses. Since you cannot know how many years your retirement funds will be needed, it would be wise to let compound interest work for you as long as possible. Chart 6-A, "Results of Withdrawals," will help you determine how long your invested money will last if you withdraw a specified percentage yearly.
Now that you understand the importance of time and principal, you need to look for investments that will give the greatest return—both from income earnings as well as tax savings. Several retirement investment plans are mentioned here.
For most people the best investment is an Individual Retirement Account (IRA). A worker who is not already covered by a retirement plan can deduct up to $2000 a year in IRA contributions; a couple with only one income can deduct $2250. The earlier in the year you make your investment the better. If you wait until the last minute—April 15—to make your contribution, you have left your money unsheltered for several months and have lost considerable compound interest.
The major benefit of an IRA is that its earned income is not taxable until withdrawn at the age of fifty-nine and one-half. An ordinary savings plan may require up to 28 percent income tax on the interest earned. With an IRA you defer that tax. An added benefit is the earning of income on the tax you would have paid. For a person in the 28 percent tax bracket, the return on a $2000 IRA annual contribution over a twenty-five year period at 10 percent interest is $216,364. An investment without tax deferrals would only be $155,782.
Very similar to the IRA is the Keogh plan, designed strictly for self-employed persons. Based on the net earned income of the individual, the annual contribution can run as high as $30,000. A self-employed person, such as a physician, realtor, architect, consultant, or writer, can shelter a large percentage of his or her eligible income.
The zero bond security is excellent for a long-term investment such as retirement. Its interest rate is fixed or locked in for the length of the bond period, and it takes full advantage of compound interest. Most zero bond securities are ten years or longer in duration. While the initial cost is minimal (like a U.S. Savings bond), your earned money is actually the face value of the bond. Therefore, zero bonds require significant advance planning because the value lies in longevity. "He who gathers money little by little makes it grow" (Prov. 13:11). Never buy a zero bond security unless you plan to hold it until it matures. Many investors lose money by selling early because of tax liabilities and commissions.
Other plans such as the 401A or 403B (for non-profit organizations) allow payroll deductions to be made to retirement accounts. Sometimes your employer will match your contributions. If you have an opportunity to participate in such programs, by all means do so. You will benefit greatly, especially if your employer contributes.
Life Application:
One possible retirement option for those who are financially prepared is a continuing care retirement center. Such centers provide meals, various amenities (i.e. housekeeping), and a secure environment for the rest of your life. Nursing care is provided if the need arises. Not every resident requires extensive nursing care, but for those who do, the care is funded by fees paid by all the residents. A monthly fee is charged along with a substantial entrance fee. The continuing care retirement center is actually a type of risk pooling much like that used by insurance companies.
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