Your Retirement: A Financial Planning Guide 1980 -Jennings, Cynthia L., SEA Home Economist Tippett, Katherine S.

, SEA Home Economist Science and Education Administration Home and Garden Bulletin 230, USDA, 1979. 34 pages Revised November 1980 Archive copy of publication, do not use for current recommendations. The PDF file was provided courtesy of the National Agricultural Library.

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Agricultural Network Information Center

**' Your Retirement: A Financial Planning Guide

xSrX UNITED STATES ItilM DEPARTMENT OF AGRICULTURE

PREPARED BY SCIENCE AND EDUCATION ADMINISTRATION

HOME AND GARDEN BULLETIN NUMBER 230

YOUR RETIREMENT: A FINANCIAL PLANNING GUIDE

CONTENTS

Preretirement Assess your retirement income and expenses Women need special plans Retirement Review your holdings * Anticipate changes Living on your retirement income Resources Organizations Publications

3 3 19 20 20 .22 26 30 30 32

Washington, D.C.

Revised November 1980

YOUR RETIREMENT: A FINANCIAL PLANNING GUIDE

By Cynthia L Jennings and Katherine S. Tippett, SEA Home Economists1

Whether your retirement is far in the future, or you are ready to enjoy its benefits now, this publication can be helpful to you. It can answer your questions on how to prepare for an adequate retirement income, how to anticipate changes that may affect that income, and how to manage your income during retirement. Retirement can be a new and rewarding phase of your life. Like any new venture, however, a

successful, happy retirement doesn't just happenit takes planning and continuous evaluation. Thinking about retirement in advance can help you understand the retirement process and gain a sense of control about the
Family Economics Research Group^ Agricultural Research, Science and Education Administration, Federal Building, Hyattsville, Md. 20782,
1

PRERETIREMENT

futureeven when, as is true for most persons,, you can't control everything. Just anticipating the changes ahead can be useful. If you are young, the section on preretirement will be most useful to you. You can figure out where your income will come from when you retire and, if necessary, plan how to supplement this income. If your income level rises as you grow older, you will want to reevaluate your income plans and possibly adjust the amount you are investing towards your retirement. If you are close to retirement, you will want to decide on your goals for retirement and figure out whether you can meet these goals. Making a budget by using the guide in the preretirement section (p. 4 ) can help you. The section on retirement (p. 20 ) will help you to understand the phases of retirement and suggest ways to live on your retirement income and take advantage of services offered for retired persons. PRERETIREMENT To start, you will want to anticipate your retirement years by analyzing your long-range goals. Retirement can mean many things. What does it mean to youan opportunity to stop work and rest? Or does it mean time to travel, develop a hobby, or start a second career? Where and how do you want to live during retirement? Once you have considered your retirement goals, you are ready to evaluate the cost of your plans and whether you can afford them. Assess Your Retirement Income and Expenses Four major steps in planning your retirement income are (1) estimating needs, (2) adjusting for inflation, (3) evaluating planned retirement income, and (4) increasing income if needed.

Estimate Your Spending Needs

The exact amount of money you will need in retirement is impossible to predict, but you can estimate your needsconsidering changes in spending patterns and where and how you plan to live. Your spending will likely change. A study conducted by the Bureau of Labor Statistics (BIS) on how families spend money shows that retired families use a greater share for food, housing, and medical care than nonretired families. Although no two families are alike in how they adjust spending with changes in life cycle, the following tabulation can serve as a guide for anticipating your own future spending patterns.

PRERETIREMENT

Spending patterns of retired and nonretired families1 (Percentage of total family income before taxes) Retired2 Nonretired3 Total family income before taxes Consumption expenditures: Food . . Housing Transportation Clothing Medical care Personal care Other4 Taxes . Gifts and contributions .. Personal insurance Miscellaneous

100

100

19 29 11 4
9 2 10 6 8 2 0

14 21 14 5 4
2 11

16 4 7 2

Expenditure patterns are for all families and single consumers in 1972-73. From Consumer Expenditure Survey: Integrated Diary and Interview Survey Data, 1972-73, Bull. 1992, U.S. Department of Labor, Bureau of Labor Statistics, 1978. includes persons over the age of 50 who reported receiving retirement income and who did not work either full time or part time. includes self-employed, and salaried and wage earners. includes recreation, reading, education, alcoholic beverages, tobacco products, dry cleaning and laundry, and miscellaneous expenses.

You can estimate which of the following expenses may be lowered or eliminated: Work expenses.You will no longer have to make payments into your retirement system. You will not be buying gas and oil for the drive back and forth to work or paying bus fares. You may be buying fewer lunches away from home. Clothing expenses.You probably will not need as many clothes after you retire, and your dress may be more casual. Housing expenses.If you have paid off your house mortgage by the time you retire, your cost pf housing may be reduced, although increases in property taxes may offset this. Federal income taxes.Federal income taxes will be lower. No Federal tax needs to be paid on some forms of incomesuch as social security, railroad retirement benefits, and certain veterans' benefits. A retirement credit is allowed for some sources of income such as annuities. After 65 years of age, an extra deduction is allowed for both husband and wife. You probably will be paying taxes at a lower rate because your taxable income will be lower. Under the U.S. Civil Service retirement system, income is not taxed until the amount you have invested in the retirement fund has been returned to you. After that, the income you receive is taxable. You can estimate which of the following expenses may increase: Insurance.The loss of your employer's contribution to health insurance and life insurance will increase your payments. Medicare, however, may offset part of this increased expense. Medical expenses.These expenses vary from person to person, but general trends indicate that medical expenses increase with age.

PRERETIREMENT

Expenses for leisure activities.With more free time, many retirees want to spend more in this area. You may want to put aside extra money for a retirement trip or other large recreation expenses. Gifts and contributions.Many retirees who continue to spend the same amount of money on gifts and contributions find that as income decreases, expenses in this area take a larger share of the budget. Some retirees may want to reevaluate their spending in this category. Estimate Your Living Needs Where you live in retirement can influence your financial needs. You must make some important decisions on whether to move or stay in your community and whether to stay in your present home or move to another type of housing. Everyone varies in needs and preferences; you are the only one who can determine the location and housing that is best for you. Before moving, consider what it involves. Moving is expensive, and returning to your former home if you are not satisfied with your new location may be impossible. Consider the social aspects. Will you want to be near your children, other relatives, and good friends? Are you prepared for new circumstances? The best way to be reasonably sure you will like a different area is to try it out. Do not limit your stay to a weekend or week. You may want to check with others on the range of weather conditions throughout the year. You also will want to know something about the people living there and the activities. Consider renting for a year before you make a commitment to move. If you decide to retire in the same community where you have been living and working, you can

estimate some of your future living costs based on past expenses. If you plan to move to a new location, the information in the tabulation on the next page can give you some idea of comparative costs of living in different parts of the country. The index figure 100 is used to represent the average cost of an intermediate-level budget for a retired couple for all cities of the United States. This guide shows the index figure for selected cities in each region. Comparing the index figures of a specified area 6r city with the area you live in will give you an idea of how your expenses will be affected by a change in location. This index is based on the experience of couples but may still be helpful to single persons as a general guide. The second big decision involved in determining where you will live is what type of housing is best. As we grow older, our housing needs often change. Ease and cost of maintenance and nearness to public transportation, shopping, church, and entertainment become important to the retiree.

PRERETIREMENT

Index of cost of living for a retired couple in selected cities and areas1 (Average cost in all U.S. cities = 100) Area Urban United States Metropolitan Nonmetropolitan areas2 Northeast: Boston, Mass. Pittsburgh, Pa Nonmetropolitan areas Index .100 103 90

..... 118 : 102 99

North Central: "Cleveland, Ohio 104 Cincinnati, Qhio-Ky.-Ind, 98 Non-metropolitan areas . . . . . . . . . . . . . . . . . . . 92 South: Washington, D.C.-Md.-Va. Durham, N.C. .... Austin, Tex Orlando,--Fla , Baton Rouge, La. Nonmetropolitan areas West: San Francisco-Oakland, Calif Bakersfield, Calif. Nonmetropolitan areas
1

107 96 94 93 91 86

106 94 91

Based on an intermediate budget for a retired couple (husband age 65 or older), autumn 1977. Estimates developed by U.S. Department of Labor, Bureau of Labor Statistics. 2 Nonmetropolitan areas in each region indicates places
with population of 2,500 to 50,000,

There are many housing alternatives. Consider how each of the following alternatives would meet your housing needs: Staying in your present house without renovating. Renovating your present house. Federal loans from the U.S. Department of Housing and Urban Development (HUD) are designed especially to rehabilitate or convert older homes. These loans have low interest rates and favorable terms for older adults. For more information, contact your banker or your county or city government. In addition, your county's Farmers Home Administration office has loans and grants available to certain homeowners for making urgent home repairs. Buying a smaller house that is easier and less expensive to care for and is in a more convenient location. The sale of your larger home could provide extra cash for retirement. If-you are over age 55 and have been living in your present home for 3 of the last 5 years, you do not have to pay Federal income tax on the first $100,000 capital gains profit from the sale of your house. But you may use this exemption only once in a lifetime. Renting an apartment, a smaller house, or a room in a hotel. Renting has many advantages for the retiree. First/you can move more easily. Monthly costs usually are fixed and predictable. Maintenance and repairs are minimal. Special services and facilities may be provided at little or no additional cost. If you are at the low- or moderate-income level, you may be eligible to rent public or subsidized housing. A disadvantage is that many rental units are being converted into condominiums and you might have to buy or move. Rents usually increase with inflation and may become too expensive for a retiree on a fixed income.

PRERETIREMENT

Purchasing or renting a mobile home. The purchase price is usually less expensive (per square foot) than other types of housing, and a mobile home can be easy to care for, Another appeal is the neighborly atmosphere of the typical mobile home park. Mobile homes, however, have some disadvantages. Unless properly anchored, they can be damaged by high wind, and they have low resale value. Buying a condominium or becoming part of a cooperative. These forms of housing are a cross between homeownership and the conveniences of an apartment. (In a condominium, you own the unit in which you live and assume a shared responsibility for costs of the common areas. In a cooperative, you buy a share of the cooperative corporation that owns the housing development.) Living in a retirement home or community. Many types of housing developments are designed especially for older people. Many of these developments offer a combination of independent living with group activities,

convenient facilities, and special services or medical care. Since retirement facilities vary widely in their cost and facilities, make comparisons and visit them several times before making a final decision. Do not feel that your immediate choice in housing has to be permanent. If you enjoy working in the yard and garden, moving to a house with grounds could be a first step. When you want less work later on, you can change to an apartment or hotel. Now that you have considered your probable retirement situation, you are ready to list estimated expenses. Using the following worksheet, list your present expenses and estimate what these expenses might be if you were retired.

PRERETIREMENT

Your expenses
Now

Item Per month Per year

Retirement
Per month Per year

PRERETIREMENT

Adjust for Inflation

Inflation factor table

You now have a list of your probable monthly and annual expenses if you were to retire today. With inflation, however, these expenses will not be fixed. Almost everything will cost more. The effect of inflation can be especially severe for retired people who cannot easily increase their income. The following tabulation shows how prices have been rising rapidly in the four categories where retired people spend most of their money. For every dollar you spent in 1970 on: Food Housing Medical care Transportation You would have paid in 1979: $2.04 1.91 1.99 1.88

Years to retirement

Estimated annual rate of inflation between now and retirement 6% 7% 8% 9% 10% 11% 12% 13%

5 . 8 . 10 12 15 18 20 25

1.3

1.4

1.5

1.5

1.6

1.7

1.8

1.8 2.7

1.6 1.7

1.8 2.0

2.1 2.3 2.5 2.8

1.8 2.0 2.2 2.4 2.6 2.0 2.3 2.5 2.8

3.1 3.4

3.1 3.5 3.9 4.3 5.5 6.3

2.4 2.8

3.2 3.6 4.2 4.8

2.8 3.4 4.0 4.7 5.6 6.5 7.7 9.0 3.2 4.3 3.9 4.7 5.6 6.7 8.1 9.6 11.5

5.4 6.8 8.6 10.8 13.6 17.0 21.2

Source: Adapted from Consumer Price Index, U.S. Department of Labor, Bureau of Labor Statistics, 1979.

Note: Figures taken from a compound interest table showing effective yield of lump sum investments after inflation.

To help you cope with this probable increase in your expenses, plan your retirement income needs accordingly. By using the following inflation factor table you can approximate what your monthly and annual expenses will be when you retire.

First, choose from the lefthand column the approximate number of years until your retirement. Second, choose an estimated annual rate of inflation. This cannot be predicted accurately and will vary from year to year. In 1979, the inflation rate was 11 percent. Third, find the appropriate inflation factor corresponding to the number of years until your retirement and the estimated annual inflation rate. (Example: 10 years, 11 percent inflation yields a 2,8 inflation factor.) Fourth, multiply the inflation factor by your estimated retirement expenses. (Example $6,000 x 2.8 = $16,800.) Annual inflated retirement expenses

PRERETIREMENT

You may wish to refigure your inflated retirement income needs several times during the preretirement years, since unforeseen circumstances may change your estimate of the inflation factor or your retirement expenses. Once you retire, use the inflation factor table to help plan ahead,
Evaluate Your Retirement Income

Now that you have some idea of what you will need during retirement, let's examine your sources of retirement income, which may be coming in from various income retirement plans or investments. Social SecurityThis is the most widely used source of retirement income. It should not be your only source, however. Social security covers almost all kinds of employment and self-employment, with the Federal Government being the biggest exception. If you are eligible for social security, you may collect monthly retirement benefits at age 62 or older, or disability at any age under 65 if a severe disability prevents you from working a year or more. Your eligibility for social security benefits generally is based on your lifetime earnings record (or your spouse's earnings record) and your age. You must be "fully insured" under social security to be eligible for retirement and disability benefits on your own earnings record. This means that you must have credit for a certain amount of work covered by social security. The amount of work needed for both retirement and disability benefits depends on your age and ranges from 11/2 years to 10 years. A person who reaches age 62 in 1980, for example, needs Tk years of covered work to be fully insured. In addition to being fully insured, a disabled person (except a person disabled by blindness) also needs credit for some
10

recent work under social security. For specific information contact any Social Security office. If you are a dependent of a worker who is covered under social security and who has retired, become disabled, or died, you also may be eligible for a social security check. Monthly retirement or disability payments can be made to a retired or disabled worker's: Unmarried children under age 18 (or 22 if fulltime students). Unmarried children age 18 or older who were severely disabled before age 22 and who continue to be disabled. Wife or husband age 62 or older. Wife under age 62 if she's caring for worker's child under age 18 (or if child is disabled) who's getting a benefit based on the retired or disabled worker's earnings. Monthly payments can be made to a deceased worker's: Unmarried children under age 18 (or 22 if fulltime students). Unmarried son or daughter age 18 or older who was severely disabled before age 22 and who continues to be disabled. Widow or widower age 60 or older. Widow, widower, or surviving divorced mother if caring for worker's child under age 18 (or if child is disabled) who is getting a benefit based on the earnings of the deceased worker. Widow or widower age 50 or older who becomes disabled within 7 years of a worker's death, or within 7 years after the widow or widower stopped receiving benefits for a surviving child. Dependent parents age 62 or older. Check can also go to a divorced wife (who has not remarried)at age 62 or older, or a surviving divorced wife at age 60, or to a disabled surviving divorced

PRERETIREMENT

wife age 50 or older if the marriage lasted 10 years or more. Children may be eligible for social security benefits based on grandparent's earnings under certain conditions. Social security benefits are not paid automatically. You must file an application. If you have decided when you will retire, phone or visit any Social Security office about 3 months before that date to file your application. Bring proof of your age and a record of your most recent earnings (for example, W-2 statement or tax return). You may wish to visit the office toward the end of the week or the month as it is less crowded then than at other times. If you are contributing to social security, check your record of earnings for accuracy about every 3 years. This is especially important if you have changed jobs frequently. Ask at the Social Security office for a post card form to use in requesting a statement of your earnings. If you are age 56 or older, you can also ask for an estimate of what your retirement benefits will be at retirement age. The amount of your monthly payment check is based on your average earnings covered under social security (or those of the insured worker's) and on your age. Social security benefits are protected against inflation. Benefits automatically increase whenever living costs climb 3 percent or more in a previous year. If you are contributing to social security, check your record of earnings for accuracy about every 3 years. This is especially important if you have changed jobs frequently. Ask at the Social Security office for a post card form to use in requesting a statement of your earnings. If you are 56 or older, you can also ask for an estimate of what your retirement benefits will be at retirement age.
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PRERETIREMENT

Other public pension plans.Besides social security., the Federal Government administers several other retirement plans (for Federal Government and railroad employees). The largest of these public administered pensions is the LAS. Civil Service Retirement System with both the Federal employee and the U.S. Government contributing to this system. Employees covered under this plan are not covered by social security. The Veterans Administration provides pensions for many survivors of men and women who died while in the Armed Forces and disability pensions for eligible veterans, The Railroad Retirement System is the only retirement system administered by the Federal Government that covers a single private industry. Many State, county, and city governments operate retirement plans for their employees. To learn more details about each retirement system, contact the appropriate administering agency. Private pension.Another source of retirement income for you may be the pension plan offered by your company. As private pension plans vary, you will need to go to your company's personnel office or union office to find out the specifics of your plan. You should find out: When do you become eligible for pension benefitsEligibility for pension benefits usually is determined by age and years of service as a member of the retirement plan. The sooner you can become a member of the retirement plan, the sooner you can accumulate work credit towards a pension. You should know the exact basis on which you receive work credit. You need to know what a year of credited service is, whether there is a cutoff point before or after which no credit is given, and, especially,
12

whether a break in service cancels all previously earned credits. What benefits will you be entitled to-Every private pension plan has a benefit formula that is used to determine the size of your pension. It usually is based on both your years of service and your level of earnings. Some formulas, however, merely specify a set amount to be paid for each year of service or a flat pension for all qualified retirees. Sometimes the amount of your social security benefits will be deducted from your pension benefits, Find out about all the possible benefits to which you are entitled. Some plans provide benefits for dependents; some provide for disability; and some provide death benefits for your survivors. Some plans provide increasing benefits tied to the cost of living while others have fixed retirement payments. What happens to your pension if you change jobs"If you have a vested interest in your company's plan, you are entitled to a retirement income even if you change jobs and work for a different company. Vesting provisions are determined by how long you have been a member of the plan. If you leave your company before being vested, you get back only your contributions to the plan plus interest. Vesting gives you a claim on your employer's contribution and whatever benefits it will purchase for you. Some plans provide for graded vesting (for example, 50 percent vesting after 10 years, increasing each year to full vesting after 15 years). If you leave a company when partially vested, you are entitled to that portion of the deferred pension. Some pension plans allow for portability. This allows you to carry earned pension benefits from one employer's pension plan and invest them in another plan when you change jobs.

PRERETIREMENT

Individual retirement plans.If you are employed but are not participating in a corporate pension plan, a government retirement plan (Social Security or Railroad Retirement do not count), or another taxsupported retirement plan, you can still provide for a retirement income through an individual retirement account (IRA). You also can receive a tax deduction now for your contributions to such an account. An IRA is a retirement plan that allows you to put up to 15 percent of your salary or $1,500 a year, whichever is less, into an IRA investment program and not pay taxes on it until you retire. You may not use the IRA funds before age 591/2 without tax penalty, and you must start withdrawing funds no later than age 701/2. Your employer may contribute 15 percent of your salary or $7,500, whichever is less, to an IRA in your name. However, you must include your employer's contributions in your gross income. If your employer makes a contribution that is less than the maximum allowed, you may contribute the difference and receive a tax deduction for that amount. If you are a nonworking spouse, you also can participate in an IRA if your working spouse puts half of his or her annual IRA contribution into a separate account in your name. The total amount contributed to both accounts cannot exceed 15 percent of your spouse's salary or $1,750, whichever is less. Many sources are available for you to use as an IRA. A few examples are insurance companies, banks, savings and loan associations, mutual funds, stocks, and retirement bonds. The Internal Revenue Service (IRS) requires the seller of an IRA to give you a disclosure statement 7 days before you sign a contract. This statement

must include facts about interest rates, tax requirements, and penalties, as well as fees and commissions. Because of the complexity of tax rules and choices of IRA's available, consult your nearest IRS office and a specialist, such as a lawyer or accountant, to make sure that you qualify for the tax benefits and that the type of IRA you've chosen fits your investment needs. If you are self-employed, you are eligible to establish a Keogh plan. The Keogh plan (also known as HR 10) is a tax-deferred retirement investment plan very similar to IRA. Under the Keogh plan, you may contribute up to 15 percent of your net business income, but no more than $7,500 a year. In addition, if you employ full-time or regular workers, you must include those workers in your pension plan. Other income sources.Don't forget any income-producing holdings you may have that will contribute to your retirement income. Some investments that often yield a regular contribution to retirement income are annuities, insurance policies, interest from savings accounts and bonds, dividends from stocks, and rent from real estate investments. Some investments such as savings bonds or insurance policies often yield a lump-sum retirement benefit. If you plan to work part-time during retirement or will be pursuing a hobby that will bring in money, estimate your income from these sources. However, income from part-time retirement work may reduce your social security benefit.

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PRERETIREMENT

Will you have enough money during retirement?Now that you have reviewed all your possible sources of retirement income, estimate what your annual retirement income will be using the following form. Don't forget to inflate incomes or investments that increase with the cost of living (such as social security) to what they will be when you retire. (Use the inflation factor table on p. 9 .) Compare your total estimated retirement income/as figured on page 14 , with your total inflated retirement expenses, as figured on page 9 .If your estimated income exceeds your estimated expenses and a large portion of your planned income will automatically increase with
Retirement income

the cost of living during your retirement, you are in good shape. You probably will want to evaluate your plans every few years between now and retirement to be sure your planned income is still adequate to meet your planned expenses. If, however, your planned retirement income is less than your estimated expenses, now is the time to take action to increase your retirement income. In addition, if a large portion of your retirement income is fixed and will not increase with inflation, you should make plans for a much larger retirement income to meet your inflating expenses during retirement.

Source

Amount per year Income now inflated income

PRERETIREMENT

Your Age at Retirement

Determining Additional Income Needs

An early retirement can be costly. Although you can collect social security benefits as early as age 62 (age 60 if you are a surviving spouse), these benefits are permanently reduced when you collect benefits before age 65. Once you receive a reduced benefit payment, you will receive a reduced amount for the rest of your life. You are not eligible for Medicare until age 65 unless you become disabled and receive disability checks for at least 2 years. If you are no longer covered by your company's health insurance program, you may find health care extremely expensive between the year of an early retirement and age 65. If you will be collecting a private pension, the amount you receive may be reduced with an early retirement. Since pension benefits are often based on the average of the top 5 years of salary, an early retirement could reduce the number of high-earning years on which your pension is figured. Recent legislation makes it easier for you to delay your retirement. The legislation prohibits employers from forcing most employees to retire because of age before they are 70 and eliminates mandatory retirement altogether for most Federal employees. A delayed retirement can increase your retirement income. If you reach age 65 after 1981 and decide to delay retirement, your social security benefit later on will be increased 3 percent for each year from age 65 to 72 that you were eligible to receive benefits but did not take them. If you reach age 65 in 1981 or earlier and delay getting benefits, the present retirement credit of 1 percent a year will continue to apply. If you are a surviving spouse of a worker who was entitled to this delayed retirement benefit increase, then you can receive this increased benefit also.

To figure the amount of additional retirement income you will need, take the following steps: 1. Estimate the number of years you will be in retirement. From the tabulation on the next page you can estimate your average life expectancy upon reaching retirement age. Allow a safety margin in your estimate by choosing a figure several years a higher th#n the highest applying to either you or your spouse. (For example, a retiring husband and wife, both age 65, would have 13 and 18 years, respectively, of expected lifetime. They should estimate their retirement to last about 20 years2 years more than the highest figure.) 2. Estimate your inflated expenses for retirement.Multiply your annual inflated retirement expenses from page 9 by the number of years you expect to be in retirement (from step 1). $_ 3. Estimate your total retirement income. Multiply your annual retirement income from page 14 by the number of years you expect to be in retirement (from step 1). $ 4. Figure the amount of additional retirement income needed.Subtract total income (step 3) from total expenses (step 2). $_

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PRERETIREMENT

Average future lifetime

Age at retirement

Average remaining years Male Female

50-54 55-59 60-64 . 65-69 70-75

24 20 16 13 11

30 25 21 18 14

Source: U.S. Department of Health, Education, and Welfare, National. Center for Health Statistics, 1974 data.

Providing for Additional Income Needs

How can you provide for this additional retirement income? You will want something safe, but adequate, to keep pace with inflation. The best way to achieve both goals is to have a retirement fund that includes two parts safe, guaranteed-income investments, and riskier high-growth investments. Low-risk investments.The guaranteed income part of your retirement fund consists of money paid into lower yield yet very safe forms of investment. This part of your fund already may be taken care of through social security or another retirement plan as mentioned in the last section. If you would like to add to this part, other low risk investments are: Savings accounts and certificates. Institutions such as commercial banks, savings and loan associations, or credit unions offer the safest form of investment through savings accounts. The rate of return, however, is often lowat or below the rate of inflation. You may purchase savings certificates, which require a larger initial investment than a savings account,

but yield a slightly higher return. To receive this higher return, the money must be kept in the account for a specified periodusually 1 year or more. Bonds.When you buy a bond, you are lending your money to the issuer of the bond whether it is the U.S. Government, a municipality, or a corporation. U.S. Government bonds, the safest type of bond, include savings bonds, treasury bonds, and Federal Agency bonds. Series E savings bonds, treasury bonds, and Federal Agency bonds are bought at less than face value, reach maturity within a stated number of months or years, and can be cashed in for the face value. Series H savings bonds are sold at face value and held to maturity with interest being paid semiannually. Municipal bonds are sold by local or State governments to raise money. Although municipal bonds have a record of being safe investments, you should consider the highest rated AAA and AA General Obligation Bonds. Because income from municipal bonds is tax exempt, they are especially desirable to those in the higher tax brackets. Corporate bonds are the riskiest type of bond; however, they also have a fairly high rate of return. They usually are considered long-term investments. Corporate bonds are rated, with the highest quality bonds receiving ratings of AAA, AA, A, and BAA. The lower the rating the more risk is involved and the higher the rate of return.

16

PRERETIREMENT

Life insurance.Insurance companies offer several types of savings policies; however, their returns are usually low. A whole life insurance policy, besides providing life insurance coverage, builds up a cash value that can be used by you in retirement. An endowment policy offers decreasing term insurance with a paid-up savings plan. You pay premiums and receive insurance protection until the policy is maturethe end of the endowment period. At that time, premiums and insurance coverage stop and you are entitled to the face value of the policy. You can receive payment either in a lump sum or in the form of monthly income. Annuities, purchased from life insurance companies, offer no insurance protection. They are a type of savings plan in which the investor is guaranteed an income for a specified period of time. An annuity can be purchased with a lump sum or with installments over a period of time. You can purchase a "straight" annuity that will provide income as long as you live, or you can buy a ''joint and survivorship" annuity that will provide income for two lives (usually husband and wife) as long as either person remains alive. Higher risk investments. The other part of your retirement fund should be invested in high-growth investments that will protect you from a decline in the value of your money. Such a precaution is called a "hedge against inflation/' One such hedge against inflation is to put some of your money into investments that usually increase in value during inflation, such as real estate. If you own your own home, you already have some protection against inflation. Of course, there are risks involved, and investing in real estate involves a fair amount of capital in the

beginning. For some people, however, this is an excellent way to beat the costs of inflation on a long-term investment. Other investments that usually increase in value during inflation, if good choices are made, are common stocks, bonds, alnd mutual funds. These investments all involve a certain amount of risk and should be thoroughly investigated first. The amount you put into each part of your retirement fund should largely depend on your age and personal situation. If you are many years away from retirement, you can take more risk with retirement money than if you are within a few years of retirement. If you have several dependents, large debts, or low income, you may be constrained in your ability to make risky high-growth investments. From the following tabulation you can determine how much you should invest monthly in either a low-yield investment (guaranteed income) or a high-yield investment (riskier income) to reach your goal for additional retirement income (as figured on p. 15 ).

17

PRERETIREMENT

Determining investments And it will be If you need this amount total extra money for retirement years before retirement

10

15

20

25

You should save this amount each month In an investment yielding a 6% rate of return

$ 5,000 $10,000

$ 74.40 148.81

$ 31.57 63,13

$ 17.88 35.77

$ 11.32 22.64

$ 7.59 15.18

$15,000 $20,000 $25,000 $30,000

223.21 297.62 372.02 444.05

94.70 126.26 157.83 189.68

53.65 71.53 89.41 107.39

33,97 45.29 56.61 67.95

22.77 30.36 37.95 45.57

In an investment yielding a 9% rate of return $ 5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $ 69.68 139.35 209.03 278.71 348.38 418.06 $ 27.43 54.86 82.29 109.72 137.15 164.58 $14.19 28.38 42.57 56,77 70.% 85.15 $8.14 16.29 24.43 32.58 40.72 48.86 $ 4.92 9.84 14.76 19.68 24.60 29.52

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PRERETIREMENT

Women Need Special Plans

The suggestions in this publication for planning and evaluating retirement income are especially important for women. If you are a woman, married or unmarried, do not assume your financial security is assured without first determining where your retirement income is coming from and how much it will be. If you are a married woman whose work has always been in the home, you may not have taken an active role in family financial planning. You should do so now. Life expectancy records show that women tend to live longer than men. This means you may have to manage your finances alone in your later years. You can make special plans for retirement in the following ways: Learning about family finances and property and knowing your financial advisers.Your husband can help by including you in planning for retirement income. Knowing what to do if your husband dies.Learn what procedures you will have to go through to change the title on property or joint bank accounts and to collect social security, veterans', or insurance death benefits. Examining your retirement income fund. Will you be eligible for social security benefits as a spouse or survivor based on your husband's earnings record? If you are eligible for widow's benefits and are over age 60, you can continue to receive them even if you remarry. Are you covered under a survivor's clause on your husband's pension plan? Your husband may have to specifically elect survivor's benefits for you. If your husband contributes to an IRA, he also can contribute to an account for you.

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Establishing your own financial identity. Have charges on jointly owned credit accounts reported in your name as well as your husband's. Open a separate savings and checking account (in addition to holding any joint accounts). If your husband dies, you may not be permitted access to joint accounts until the estate is settled. Your own account will provide funds for you to live on during that period. Making your own will,This will insure that your estate will be distributed the way you want it. Women who work outside the home need to evaluate what retirement income might be due them from their own work history. If you have worked continually over the years for one employer, you may be covered by both social security and a company pension plan. If you have worked continually but at many different jobs; or if you have alternated work in and outside the home, you may never have become vested in a company pension plan and retirement income may be lacking. If you foresee this work pattern for yourself, consider establishing an IRA. An IRA could provide continuity to your retirement fund even though your work situation may change. If your company allows you to refuse its pension plan, you will become eligible to make tax-deductible contributions to your IRA. If you choose to use a company pension plan, a "rollover" IRA can help you transfer your interest in one pension plan and invest it in another plan tax free. The IRA rules are complicated and require a lot of advance planning and good timing. Consult with an expert for advice on IRA investments. In addition, ask IRS for a copy of Tax Information on Individual Retirement Savings Programs.

Retirement If you are now ready to retire or are already retired, it is time to look at your present and future situation. Retirement is a changeable state. Just like your life before retirement, situations will change and you may go through several phases. For instance you may be in an active phase in the early years of retirement, with a more dependent lifestyle in later years. The active phase of retirement is characterized by fairly good health and independent living. It may be a time for active participation in a new lifestyle, free of the responsibilities of the work years. The dependent phase of retirement often occurs in the later years of retirement and usually is characterized by physical or mental limitations and more dependency on others. You can prepare yourself for the various phases of retirement by anticipating declining health or a changed family situation and planning for an adequate financial position to meet these changes. Review Your Holdings Reviewing your holdings to make sure they are suitable for retirement is a good idea. Make necessary shifts in your investments and holdings to fit your new circumstances. As indicated in the following tabulation, evaluate your assets and liabilities.

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RETIREMENT

Your holdings /Assets and liabilities Assets: House Other real estate Life insurance U.S. savings bonds Stocks and other bonds Net cash value of business Automobile Checking accounts Savings accounts Other: Total assets Liabilities: Mortgage Personal loans Installment contracts Notes Charge accounts Other: Total liabilities Consider the following factors in reviewing assets: Housing.If you own your house, it is probably your biggest single asset. The amount tied up in your house may be out of line, however, with your retirement income. If it is, consider selling your house and buying a less expensive one. The selection of a smaller, more easily maintained house can also decrease your maintenance costs. The difference saved could be put into a savings account or certificates that
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Amount

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RETIREMENT

draw interest or into other income-producing investments. If your mortgage has been largely or completely paid off/you may be able to get a reverse annuity mortgage to provide extra income during retirement. In this arrangement a lender uses your house as collateral to buy an annuity for you from a life insurance company. Each month, the lender pays you (the homeowner) from the annuity, after deducting the mortgage interest payment. The mortgage principal, which was used to obtain the annuity, is repaid to the lender by probate after your death. Reverse annuity mortgages are fairly new and may not be widely available in your area. Check with your banker or a savings institution about availability and details. Life insurance.Your life insurance might have been set up to provide support and education for your children. Now you may want to convert some of this asset into cash or income (an annuity). Another possibility is to cut back on the face value of your insurance to reduce premium payments. This will give you extra money to spend for living expenses or to invest for additional income. Spend some time learning the retirement possibilities of your insurance. U.S. savings bonds.You may now want to exchange any Series E U.S. savings bonds that you bought for investment purposes for Series H bonds that will pay you interest periodically. Other investments.Consider any other investments you may have. Perhaps at the time you chose them you were more interested in having your money grow than in getting an early return. Has the time come when you want the income from your money? Now you may want to take dividends rather than reinvest them.

Anticipate Changes To make a realistic retirement budget, you will want to examine your health and family situation now and anticipate any possible changes that may affect your budget. Health Care The cost of health care has increased dramatically in recent years and has become a major concern in the budget of many retirees. Besides the direct cost of paying for medical care, a change in your health can have a large indirect effect on your retirement expenses. Health problems may force you to move to another area of the country or into a different type of housing. If health problems limit your ability to do things for yourself (that is, mow the lawn, service an appliance, or sew your own clothes), payrng someone else for such services could be a major new expense to your budget. Even if you are in good health now, remember that health-related problems increase greatly as people grow older. You can often prevent a future health crisis with simple preventive measures. Good nutrition, regular physical activity, and periodic medical examinations are all good investments toward a healthy retirement. You can also prepare yourself to handle financially any health crisis that may arise by having adequate health insurance coverage and being aware of the following sources of assistance: Medicare.Administered nationally by the Health Care Financing Administration, U.S. Department of Health and Human Services, Medicare is a Federal health insurance program. Local Social Security offices take claims and provide information. Just about all people age 65 and older have Medicare; so do some disabled

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people under age 65 who have been getting disability checks at least 2 years, or people of any age who need treatment for kidney failure. The two parts of Medicare are hospital insurance and medical insurance. Hospital insurance helps pay for inpatient hospital care and for certain followup care after you leave the hospital. You are entitled to this part of Medicare if you are 65 years old or older (you do not have to be retired) and you are eligible for a social security or railroad retirement check either as a worker, dependent, or survivor. Applying for your Medicare insurance 3 months before your birthday month is a good idea so that you will be protected by the time you reach age 65.

Medical insurance helps pay for your doctor's services, outpatient hospital services, and many other medical items and services not covered under hospital insurance. When you apply for hospital insurance, you will be enrolled automatically for medical insurance, unless you say you do not want it. If you do choose medical insurance protection, however, you must pay a monthly premium for it ($9.60 per month for the 12-month period starting July 1,1980). Even if you are not eligible for Medicare, you can buy the hospital insurance protection if you are age 65 or older. The cost will be $77 per month for the 12-month period starting July 1,1980. If you buy Medicare hospital insurance, however, you must also enroll in the medical insurance part. Check with your Social Security office for the latest information on eligibility, monthly premiums, and benefits for Medicare. Medicaid.A Federal-State health insurance program, Medicaid provides health care for eligible needy and low-income persons. Contact your local county Department of Public Welfare Eligibility office for financial eligibility details. Medicaid can pay what Medicare does not pay if you are eligible for both programs. Private health insurance.If you want more health coverage than is provided with Medicare, consider private health insurance. The two basic health insurance plans available to individuals are a group plan and an individual or family plan. The group plan usually has lower premiums. If you were enrolled in a group plan offered by your employer or a professional group, the benefits from this plan may continue after your retirement or you may be able to continue

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under a group plan if you agree to pay your employer's share of the premium. If you decide to get an individual or family plan, be sure you understand the provisions for renewing your policy. Be sure to review your health insurance policy often to insure that it is meeting your needs. Policies that were once right when you had dependent children at home are not necessarily the best ones for you in retirement. Look at what Medicare pays and what it covers. Many insurance companies offer special policies that fill in the gaps and pay for expenses not covered by Medicare. Mail-order health insurance.This type of insurance, offered in the mail by some companies, often provides low-cost insurance with no regard to passing a physical examination. Since this insurance can be fraudulent, study policies carefully and get qualified advice before enrolling. * Community health programs.This type of program offers a big advantage to the elderly. Communities often offer free testing and innoculation programs. Become aware of the health programs in your community-and plan to use them to help stretch your medical-care dollar.
Family Situation

* Insurance.On a limited retirement income, you are less able to financially handle a catastrophic loss. So as you approach retirement, review your insurance coverage. Is the life insurance coverage on you and your spouse or dependents adequate? You should try to have your policy paid up at retirement age. This will relieve the drain of insurance premiums on your retirement income. Make sure you have adequate homeowners and automobile insurance. Estate planning.Make arrangements for your property and assets to go where you want them to.

What is your family situation as you enter retirement? Married or single? With or without dependents? If your situation were to change, would you still be in good financial shape? As you plan your retirement income, make sure that your income is adequate for you as a retired couple (if that is your situation) and also for the surviving spouse, in addition, prepare yourself for possible changes by reviewing the following areas:

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RETIREMENT

Make sure your will is in good order, or make a will if you do not already have one. Without a will your estate must be distributed according to the laws of your State, and this may not be what you desire. Seek expert advice. An accountant, banker, or lawyer can help you determine the most advantageous way to dispose of your estate as you desire. Have a lawyer draw up your will for you. Even a small change in a will, incorrectly made, can legally cancel an entire will. Important information.Assemble all your important papers and decide on a safe place to keep them. Designate someone to take over and manage your affairs in case of death or

disablement. Inform them of the location of important information, how you want your affairs managed, and any funeral preferences. You may wish to join a memorial society to assist you in preplanning for dignity, simplicity, and economy of funeral arrangements. Pension.You can assure a continuing income for a surviving spouse by electing a survivor's clause as part of your pension benefit.

RETIREMENT

Living on Your Retirement Income Balancing the Budget

As you planned your retirement, you estimated,a-budgetor spending plan. Now you are in retirement and it is time to make a new budgetone that reflects your actual retirement expenses. You may find that your expenses are more than you had anticipated. The first step in stretching your retirement income is to make sure you are receiving all the income to which you are entitled. Examine the possible sources of income mentioned earlier for more programs you could qualify for or for additional benefits, What assets or valuables could you use as a cash or income source if need be? You may also need to make some changes in your spending plans to stay within your income. Some hints to help you balance your retirement budget are: 1. Shop for specials. 2. Use consumer information to help make informed buying decisions and learn moneysaving tips. 3. Buy prescription medicines by their generic names. 4. Use your skills and time instead of money. There are probably many things you could do yourself instead of paying someone else. 5. Install or increase energy-saving measures such as insulation, weather stripping, lowering the thermostat, and being cautious with use of electricity. 6. Take advantage of free and low-cost recreation you may enjoy/such as walks, picnics, public parks, lectures, museums, libraries, art fairs, gardening, and church and club programs.

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RETIREMENT

Services for the Elderly Use all the extra services available to you as a senior citizen. These vary from place to place. The following services are typical: 1. Free transportation or discounts on public transportation. 2. Discounts on prescription medicine. 3. Legal advice. 4. Travel discounts. 5. Senior citizen clubs. 6. Low-cost meal programs'either in group setting or home delivered. 7. Discounts at movies, plays, restaurants, and department stores. (You may need to show your Medicare card or some other identification.)

8. Special low-cost recreation programs offered by the YMCA or YWCA or other community organizations. 9. Free or low-tuition courses of study at community colleges and universities.
Tax Advantages

Be sure to take advantage of all tax savings given to retirees. You may need to file a quarterly estimated income tax return beginning with the first quarter of your first year of retirement. For more information, ask your local IRS for a free copy of Tax Benefits for Older Americans. If you have any questions about your taxes, get help from someone at the IRS.

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RETIREMENT

Working During Retirement

You may want to start a new career in retirement or work part-time. Retirement work can provide a greater sense of usefulness, involvement, and self-worth and may be the ideal way to add to your retirement income. You may want to pursue a personal interest or hobby, or you can contact your State or local agency on aging for information on employment opportunities for retirees. The Federal Government offers opportunities for volunteer or income-producing employment through the following agencies or programs: ACTION, 806 Connecticut Ave. NW., Washington, D.C 20525 Foster Grandparent Program Retired Senior Volunteer Program (RSVP) Volunteers in Service to America (VISTA) Peace Corps Senior Companion Program U.S. Department of Commerce, Bureau of the Census, Washington, D.C. 20233 Census interviews U.S. Department of Education, Washington, D,C. 20202 Teacher Corps Small Business Administration, 1441 L Street NW., Washington, D.C. 20416 Service Corps of Retired Executives (SCORE) U.S. Department of Labor, Washington, D.C. 20212 Senior Community Service Employment Program (SCSEP) Comprehensive Employment and Training Act (CETA) For more information on these programs, contact the appropriate agency.

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RETIREMENT

exempt amount, your social security payments will be reduced by one-half the amount over the exemption. (For example, if the exemption is $4,500 and you earned $5,500, your social security payment will be reduced by $500.) The first year that you are eligible for social security benefits and have little or no earnings for at least 1 month is considered your "grace year/' During your "grace year" you can collect a monthly benefit for every month in which you do not earn more than the monthly exempt amount (1/12 of annual exempt amount), even if your annual earnings are more than the annual exempt amount. Any time you are no longer eligible for one type of social security benefit and after a break of at least 1 month become eligible for another type of benefit, you are entitled to another "grace year." Your earnings may affect your dependents' social security checks as well as your own. But if you get checks as a dependent or survivor, your earnings can affect only your own check. If you are over age 72 (after 1981age 70) you can earn as much as you like with no reduction in your social security benefits. To get more information, contact your local Social Security office for a pamphlet called, "If you work after you retire/' You should also note that different rules apply to work performed by people getting benefits because they are disabled. For more information, ask for a copy of the leaflet, "If you become disabled/' If you decide to work part time after retirement, you should be aware of how earnings will affect your social security retirement income. As long as you do not earn more than the annually exempt amount2, your social security payments will not be affected. If you do earn more than the annual
The annually exempt amount in 1980 is $5,000 for people age 65 and older, and $3,720 for people under age 65. Since the amount changes with wage levels each year, however, you should check with the Social Security Administration.
2

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RESOURCES

Resources Organizations Some other organizations that may be able to help you with your retirement plans are: U.S. Department of Health and Human Services

(HHS) Administration on Aging Office of Human Development Welfare Washington, D.C. 20201 (tel: 202-245-0724) The Administration on Aging (HHS) sponsors programs that benefit the elderly throughout the country. The National Clearinghouse on Aging makes available various publications in the field of aging, and a magazine entitled, Aging, is pu bl ished 10 times a year.

National Council on Aging 1828 L Street NW. Washington/D.C. 20036 (tel: 202-223-6250) The National Council on Aging has published a Guide for Selection of Retirement Housing and has designed and implemented preretirement planning programs for various groups nationally. The National Council on Aging publishes a quarterly journal, Industrial Cerontology.

Institute of Life Insurance 277 Park Avenue New York, N.Y. 10017 (tel: 212-922-3000) The Institute of Life Insurance has publications -on pensions, life and health insurance, and otner pertinent topics related to preretirement National Retired Teachers Association (NRTA) American Association of Retired Persons (AARP) planning. 1909 K Street NW. National Council on Senior Citizens Washington, D.C. 20036 1511 K Street NW. (tel: 202-872-4700) Washington, D.C. 20005 NRTA and AARP are companion organizations (tel: 202-347-8800) that offer a broad range of services in retirement The National Council of Senior Citizens is a planning, including a series of retirement national membership organization with local preparation booklets and two magazines, clubs. The council offers discounts on health Modern Maturity and NRTA Journal, AARP, insurance, drug service, and travel, and publishes through its division called AIM (Action for a monthly newsletter, Senior Citizens News. independent Maturity), offers retirementplanning seminars and training programs for Retirement Living Magazine employers and other organizations and groups. 850 Third Avenue AIM publishes a magazine, Dynamic Maturity, New York, N.Y. 10022 for those persons still in the preretirement years. (tel: 212-593-2100) NRTA-AARP have many local clubs and offer education and travel programs, drug discounts, and insurance.

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RESOURCES

Retirement Living Magazine, a monthly publication, focuses on various aspects of retirement, including money management, health, housing, leisure-time opportunities, and travel hints. In addition, the magazine publishes a retirement planning kit called Planning Your Tomorrow.

Be sure to check with your county or State Cooperative Extension Service and with your State or local Agency on Aging for additional information or help.

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RESOURCES

Publications Here are some publications that may help you plan for your retirement. Single copies are available free from the Consumer Information Center, Pueblo, Colo. 81009. Consumer Information Catalog A Brief Explanation of Medicare, No. 571H A Woman's Guide to Social Security, No. 539H Your Social Security, No, 540H Know Your Pension Plan, No. 534H

Listed below are some publications of the U.S. Department of Agriculture that may help you live within your retirement budget. Singles copies are available free from the Publications Division, U.S. Department of Agriculture, Office of Governmental and Public Affairs, Washington, D.C. 20250. Please include your return address and Zip Code. Order no. Home Care of Purchased Frozen Foods How to Buy Fresh Vegetables How to Buy Eggs How to Buy Beef Roasts Keeping Food Safe to Eat: A Guide for Homemakers How to Buy Canned and Frozen Vegetables Your Money's Worth in Foods Renovate an Old House? G-69 G-143 G-144 G-146 G-162 G-167 G-183 G-212

The following are for sale by the Superintendent of Documents; U.S. Government Printing Office, Washington, D.C. 20402: Cooking for Two, PA 1043 Buying FoodA.Guide for Calculating Amounts to Buy and Comparing Costs in Household Quantities, HERR 42

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