The daunting prospect of baby boomer retirement will soon be an overwhelming reality, and it is slowly sinking in for 50- and 60-somethings who find themselves faced with the option of early retirement.
The bottom line is simple: Whether you are considering early retirement or waiting it out, have your plan in place now.
Vivian D. Hairston, a financial consultant with Merrill Lynch, is well aware of the problems facing this next retirement generation. When you add in the special consideration women encounter when contemplating retirement, you've got an issue Hairston says requires immediate attention.
"The fact of the matter is that women now make up around 50 percent of the work force," says Hairston, who counts women as 70 percent of her client base. "A lot of times, that is the first time we (women) are introduced with investing. You're met with this 401(k) plan, they tell you to pick out your investments options and you don't know what to do."
Working women face other issues. On average, they make only 70 cents to every dollar that a man makes and are more likely to take time off from their careers to care for their family. Often, women contribute less to their retirement than men.
And when you consider that women tend to live longer than men -- an average of seven years -- it's even more important to take investing seriously.
Hairston advises clients both male and female to "look at a financial goal and attach a cost." Here are a few of her ideas on how to start the process.
"There is a misconception about Social Security," says Hairston. "Social Security should only be about 18 percent of retirement income."
That's why she advises clients to do a few things to ensure they have enough saved to live comfortably.
First, make the maximum contribution to your 401(k). At the very least, she says, contribute what the company will match. Another option, especially for women trying to catch up on their retirement savings, is to set up an IRA or Roth IRA. A traditional IRA contribution is a pretax option, while a Roth has no tax implications at the time of distribution.
Also, revisit your retirement investments at least once every year to make sure you are contributing all you can. If your finances change, don't think of it as extra money.
Says Hairston, "Every dime should be allocated."
The best bet for your retirement is to invest wisely.
"You want the highest return for the least amount of risk," she says.
Boring perhaps, but if the last year didn't illustrate this point, nothing will. Hairston says a balanced and diverse investment strategy will prevent overexposure to market volatility. And, depending on where you are, some risks are not worth taking, even for a high return.
Hairston warns of getting overly excited.
"I had a 70-year-old client come to me wanting to invest a lot of his money in a dot-com start-up," she says.
Don't be seduced by high growth, get-rich-quick investments, she says. But, at the same time, don't be frightened of sound investing.
The magic number
Don't think of your retirement fund as a means to pay off debt. If you are younger than the magic number -- 59 1/2 -- taking money out of a 401(k) or IRA may be costly. For example, if you fall into the 28 percent tax bracket and withdraw $100,000 from either account, you'll receive only about $80,000. Then, there's a good chance that $80,000 will count as extra income and force you into a higher tax bracket. And, don't forget the 10 percent penalty for early withdrawal.
Hairston says when it's all accounted for, you've paid approximately 38 percent in penalties and taxes. Unless the APR on your mortgage is higher, you're shooting yourself in the foot.
Ensure your comfort
"Think about it this way; something that costs $50,000 today will cost $100,000 in 20 years with a 4 percent rate of inflation," says Hairston.
The inevitable rise in consumer goods prices will catch many people off guard. A new car, washing machine or refrigerator can stymie the best budget with a steady income, so imagine the ripple effect it can have when income is fixed.
And, with the uncertain future of medical costs, health care is an unknown variable. You can't control rising costs, says Hairston, but you can prepare for them.
"More and more of my clients are getting long-term health insurance," she says.
For women, this is especially important because 70 percent of all nursing home residents are women 65 and older.
Cover the bases
Hairston suggests investing in long- and short-term disability insurance. Your ability to make money is your greatest asset, but if something happened that prevented you from performing your job, what would be your source of income?
Some compensation plans provide disability insurance, but the devil is in the details. Make sure you opt for the package you need.
When you leave before the ninth inning
"I see more and more of my clients taking early retirement," Hairston says.
In this age of consolidation and work force reductions, employees are finding themselves faced with ending their current careers sooner than expected.
While receiving a nice chunk of severance in one lump sum may be appealing, Hairston warns that it's important to factor in what the tax implications will be. If a year's worth of severance comes on the heels of nine months of salary, you could find yourself jumping up a bracket into a hefty April tax bill.
One way to avoid the tax crunch is to structure your severance so it is paid out in monthly installments. If that's not possible, Hairston says you may want to attempt to defer payment until after the last year you work. How to reach: Vivian D. Hairston, 216-363-6564
Kim Palmer (firstname.lastname@example.org) is managing editor of SBN Magazine.