Retirement?

 

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Retirement is a dream of everybody. We are all interested in having a luxurious retirement style, such as more time with your family, more money, to travel different places, or to do whatever we want to do and enjoy the rest of our life. But, what are the qualifications of retirement? In another words, what does it take to retire? Is it because of age? Statistic show that 98% of the Americans are either broke or dead when they reach the age of 65; and 23% of them still have to work. Therefore, the qualification of retirement is money or a financial security but not the age. In this paper, I am going to analyze and explain the possibility of having financial security for your retirement.

Everyone usually has the "Three Boxes of Life" - Education, Work, and Retirement. We first acquire enough education, then we use the knowledge from education to find a job, and then most people try to retire with the money they earned from the job. But according to Mr. Richard Bolles in this book The Three Boxes of Life "A survey indicated that over 63% of the students felt that they had received little or no training in school which would help them find a job. Likewise, they felt that they have been given or no help by the job in preparing for retirement." Therefore, industries and government ran pre-retirement seminars for their employees; those seminars tended to focus upon finances. A retirement plan was established at that time.

Retirement planning began in 1875 when the Railway Express Company established what was believed to be the first industrial pension in America. The second formal plan was established in 1880 by the Baltimore and Ohio Railroad Company. James A. Jorgensen in his book The Graying of America he said, "Along the steel rails that fanned out across America during the late nineteenth century spread the startling promise that retirement could mean more than a gold watch - that one could hope for financial independence during old age." Many of the early pension plans were more in the form of pension arrangements. The workers had no rights in the plan and none were over intended. The plans were considered gratuities, not wages, and the business owners were free to turn the payments on and off like a faucet. It was not until after the Second World War that pension plans experienced a meaningful growth rate because of the very tight and competitive labor market coupled with the very high demand for consumer goods. Thus, the Supreme Court upheld a ruling by the National Labor Relations Board that pension plans were subject to collective bargaining between the employer and the union. With the unions now leading the way, by the 1950s the growth of private retirement plans finally got out of control, reaching almost ten million workers who were covered under some 13,000 plans. The number of private plans had mushroomed to about 230,000 different plans in 1970 and about 350,000 today.

Today, as Joseph C. Buckley said in his book The Retirement Handbook, "The modern idea calls for retirement to a new life rather than retirement from life." They divide the new life into two parts. The first one is that retirement means changing a new career or occupation in which he can continue to grow in personal value and usefulness. The second one is the enjoyment of the life, years that can be the richest, fullest and happiest of our lives. But this success and happiness in retirement, as in any period of life, depends on the effort, knowledge and common sense you bring into play. Preparation for retirement is fully as important as preparation for a career in a trade, profession or business. You must learn how to live in retirement just as you learned to live in other stages of your life. Deciding what is best for you in retirement requires objective thinking about yourself, your ambitions, your retirements and abilities. Adjustments to a new way of life and provision for financial security must be made. The basic decisions to be made are purely personal and must be made by you. But a great deal of study and research has been devoted to helping you reach wise decisions. In this paper, various kinds of retirement plans are analyzed and I truly believe that you can find one for yourself.

Today, there are more than 350,000 private retirement plans in the United States. Actually, we can summarize them to seven categories.
1. Cash
Cash used to be something we could get our hands on every now and then, especially back before the surge in inflation began. Certainly, earning interest on cash is better than not earning any at all. Note that cash in the bank only gives you a flexibility of accessing but not a good preparation for retirement. Since the income from your interest can only offset one-third of the inflation, we have to find some other ways to generate income that is at least match up or beat the inflation.
2. Money Market Funds
Money market account requires a minimum balance of $2,500 to avoid under balance charge. Its normal transactions are limited to six items per month with no limit withdrawals at the counter. The only advantage of money market account is higher interest rate than the normal savings or checking accounts. However, the interest is still not high enough to beat the inflation.
3. Individual Retirement Accounts (IRAs)
There are three kinds of individual retirement accounts: 401K, Traditional IRAs, and Roth IRAs.
a. 401K
Basically, 401K is a kind of money savings if there is no company match. If there is company match, 401K becomes a good benefit for you. For example, your company will match the first $1,000 of your $4,000 contribution for that year. It means that you only contribute $3,000 for that year but you are investing totally of $4,000 in your 401K. Moreover, the $3,000 you invested is tax-free.
b. Traditional IRAs
Traditional IRA is the simplest IRA. Your maximum contribution for each year is $2,000 and it's tax-free. By the time you are 59½ years old, you can start taking out the money and you have to pay tax, as it is a part of your income at that time. If you withdraw the money before 59½ years old, you get a 10% penalty plus the income tax.
c. Roth IRAs
Roth IRAs was established by a Congressman called Roth in 1996 and started in 1997. Its basic characteristics are non-deductible at all times and $2,000 annual maximum. As a long-term investment, you will find the Roth IRA is the best of all. For example, if you contribute $2,000 each to 401K and Roth IRA with the same interest rate, 30 years from now, you can get about $68,514 more. Why? Because Roth IRA is tax non-deductible. You can withdraw your money after 5 years with no income tax payable and no penalty while the 401K and traditional IRAs have to pay income tax and/or maybe penalty at the time you withdraw. This is just a simple comparison for the Roth IRAs and the Traditional IRAs and 401K. More information can be found in How the Roth IRA Really Works by Salomon Smith Barney.
4. Annuities
Tax-deferred is the most attractive feature of an annuity. Same as the traditional IRAs and 401K, if you withdraw the policy before 59½ years old, you are still subject to taxable and a 5% penalty. There are 5 popular ways for withdrawal when you reach 59½ years old.
a. Lump sum - You take all the money, principal and interest, at one time.
b. Guaranteed payments to you as long as you live - The insurance company pays you on monthly basis until you die; but if you die, the insurance company keeps any remaining balance.
c. Guaranteed payment with balance to beneficiary - This pays less monthly than (b), but all the funds are paid out.
d. Guaranteed payment to you, then to your spouse when you die, and the remainder (if any) to the beneficiary when your spouse dies - This pays less than (b) and (c).
e. Payments for a fixed period of years not a lifetime - Monthly received are more than (b), (c), and (d) but what if you live forever, you really don't want to run out of money!
5. Real Estate
Investment real estate - A property you do not necessarily occupy, but purchase for income or tax write-offs or both. Most people consider investment real estate to be an "IDEAL" investment. That is "I" stands for income, "D" stands for depreciation of the building, "E" stands for equity buildup, "A" stands for appreciation in the value of the property and "L" stands for leverage. It is a good idea if you purchase the building and rent it out. You simply take the rent and pay for your mortgage. Basically no money has to come out from your pocket on a monthly basis. When your mortgage is paid off, the rent will then becomes a residual income.
6. Collectibles
During the late 70s collectibles that were considered a "hard asset" were in vogue as a hedge against rampant inflation. Collectibles like arts, Chinese porcelain, stamps, coins, antiques, gold, silver, diamonds, and etc. are valuable after a period of time. Though there are a lot of valuable collectibles, the problem is that you need to know what you are buying and how do you regain your investment plus the profits at the time you want to sell.
7. Investment
There are three big categories: Mutual Funds, Bonds, and Stocks.
a. Mutual Funds
The mutual fund business began in the 1920s and up to now; there are tones of different mutual funds for you to choose to invest. Usually, they are low in risk and high in return with a period of time not less than 5 years. The concept of mutual fund is rather simple. An investment company acquires shares from the public and uses the money to invest into common stocks, preferred stocks, corporate bonds, and often US government securities and bank certificates of deposit. Some funds invest in a combination of all these financial instruments but some invest only in bonds, money market instruments or specific groups of stocks.
b. Bonds
The concept of bonds is ultimate security. They are issued by the US government, state and municipalities, school districts, other government agencies and subdivisions, and by corporations. In effect, we are giving them a loan, and in turn, they pay us interest for the use of our money. Sounds good, doesn't it? From the safety standpoint, it is. The highest rate and safest investment we can make is in US government obligations. Other issues would all rank behind it. There are a lot of different kinds of bonds, such as debenture bonds, mortgage bonds, revenue bonds, zero coupon bonds, tax-free zero coupon bonds, US Treasury bills, US Treasury notes, and US Treasury bonds, government agencies bonds and US savings bonds, etc.
c. Stocks
As Thomas L. Nolan said in Retire Easy, "Stock - something makes you rich but not without risk." Firstly, you must have to remember that you are finding a financial security for your future retirement. Therefore, you have to look for stocks which have good potential, good management, and good history. Please note that the curve of the stock market is just like a roller coaster. They always go up and down. If you are lucky enough, you will make a fortune out of it. For example, if you have 100 shares of Microsoft in 1985 at the price of $20.00 per share, you are a millionaire now. Of course, you do not know which stocks will go up, but if you have some knowledge about the company, it always helps.

Before making any decision to pick any of the above categories, I have to remind you that something is very important about your preparation - inflation.

Thomas L. Nolan in his book Retire Easy said, "Inflation is a common and frightening phenomenon nowadays. It is one of our national priorities, yet the mysteries about its origin, extent, and even definition seem to evade common outstanding." If inflation was described simply as ever-higher prices, we would be in close agreement with the experts who call it "upward movement of the average price levels." During the 70s, inflation averaged between 6% to 14%. Nowadays, inflation rate is around 5% to 7½%. If the inflation rate keeps at 5%, a dollar only worth 61 cents after 10 years and only worth 48 cents if it keeps at 7½%. It means that you need $1.62 or $2.06 after 10 years for the $1.00 value as of today. Isn't it terrible? $10.00 today only worth $1.10 after 30 years if inflation rate keeps at 7½%.

Let's forget the inflation a while and we discuss the government's retirement plan - The Social Security System.

James A. Jorgensen in his book The Graying of America reported that in November 1934, President Roosevelt stated, "What I am seeking is the abolition of relief altogether. I cannot say so out loud yet, but I hope to be able to substitute work for relief." Then the Social Security Act was formed in 1935. It was a positive direction since the benefits would be prepaid from workers' earnings. The biggest legal pyramid scheme was established. On January 1, 1937, the system went into operation. It allowed all the workers retired at age of 65 and could get money from the Social Security System, which they had contributed for at least 10 years. By that time, the average expectancy of life was 61.7 years old. In 1950, the working population and the retired population are in 16 to 1. It meant that 16 working people took care of 1 retired person with a Social Security tax of 1.50% deducting from the income. It was very easy for everyone at that time and everyone was so happy with the system. But things changed when they discovered the "Baby Bomb".

"Baby Bomb" - as reported by World Journal on April 8, 1998 - happened from year of 1946 to 1964. There were more than 76 million babies born during the period, which was after the World War II. According to the Social security Act, they are all eligible to have the social security when they reach age of 65, which is from year 2011 to 2029. That means 2 working people have to take care of 1 retired person. In addition, the life expectancy goes up to 77 years old, which is 16 years older than 50 years ago. How can 2 working people take care of 1 retired person? In fact, the Social Security System would be bankrupted by the year 2029. As it was indicated in the World Journal, "The only way to save the system is to reduce the benefits and to raise the retirement age."

All the above are the possible ways to make income or a financial independent for retirement. But Social Security is not reliable; cash, money market funds, IRAs and annuities are subject to inflation; and investments are subject to risk. Only real estate and collectibles investments are not affected by anything. On the other hand, their values are going up with inflation. Of the two investments, though collectibles gives you the value, you can only sell them for one time. Only investments in real estate can create residual income for you. With residual income, you can retire easily.

What is "retirement"? The definition of retirement is to go away or to depart or seclusion and its characteristic is having money or a financial security. Residual income is a kind of financial security. With a financial security, you can retire any time you want. We all want freedom and security for our families and ourselves. We want more money than we have now. We want health and happiness. So, now, plan for your retirement! all you need to so is planning. If you plan for it, you will be able to remove the question mark for retirement.




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