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A good outlook
Younger workers encouraged to start planning for retirement
When Bobbie D. Munroe, certified financial planner, tells young workers that there's no time like the present to start planning for retirement, their eyes glaze over.
"It's hard for 25-year-olds to even imagine what their life will be like in 40 years. They're not married, don't have kids, don't own a house . . . to ask them to save for life after 65 just isn't on their minds."
But it should be, said Munroe, owner of Atlanta-based Fraser Financial and chairwoman of the Georgia Chapter of the Financial Planning Association, who often advises young people.
"Retirement planning is part of establishing good money habits early," she said. "It's about having the resources -- the financial freedom -- to support your choices all throughout your life."
What kind of choices? She asks clients how many people they know who are stuck in jobs they hate because they have no savings. Someone in that situation couldn't go two months without a paycheck in order to search for a better job. Suppose a friend asked him or her to go on a fabulous trip? Would he or she be able to take time off to be with a sick parent or a brand-new baby? Could he or she afford to start a business?
Learning to budget money -- or, in Munroe's words, "figuring out what they make and spending less" -- can fund dreams and keep emergencies from being financial disasters. "People think it was only low-income people who were hurt by Katrina, but, shortly after the hurricane, financial planners started getting calls from professionals in trouble," she said. "They'd lost their jobs [and] homes and didn't have any savings in the bank. Some had been earning $500,000 a year and had nothing to show for it."
"With young people coming out of school and getting their first job, the biggest temptation is to overspend," said Dick Lewis, a CPA and partner with Moore & Cubbedge, an accounting and financial services firm in Marietta. "Unless young workers set goals for what they want and learn to manage their money early, it's easy to get off on the wrong foot."
Smart moves include paying themselves first by starting to accumulate three to six months' living expenses in an emergency/savings account; paying off credit-card and other high-interest loans; determining how much house they can afford -- based on their budget, not what the mortgage company says; saving for retirement; and not buying into society's message that more stuff equals success.
Not being able to manage credit card debt can affect a person's credit score, which could mean having to pay higher loan rates for a house or car. "If you go through the process of budgeting and know what's important to you, it's easier to save, because you know why you're doing it," Munroe said.
Benefits for early bird
With people living longer, the average retiree will spend about one-third of his or her life without a paycheck, according to Francis Armstrong, certified financial planner and president of Investor Solutions Inc. That takes a lot of investment capital. He advises workers to plan on withdrawing no more than 5 percent to 6 percent of their accumulated retirement capital each year, which means that, for every dollar they think they will need to live on, they need to have saved $16 to $20.
"If people start saving for retirement with their first job, it really pays off," Lewis said. An individual who saves $2,000 a year with 6 percent interest at age 25 would have accumulated $350,000 by age 65. If he or she started saving the same amount five years later, there would be $100,000 less at retirement. By waiting until age 45 to start saving, he or she would need to put in $8,250 a year to reach $350,000. "That's the beauty of compound interest," Lewis said.
He advises clients to enroll in the company 401(k) retirement plan and save at least as much as the company will match -- more, if they can afford it.
"If the company doesn't offer a 401(k), they need to start an IRA (individual retirement account) with a bank or brokerage for tax-deferred savings," Lewis said. Contributions to a traditional IRA are tax-deductible within income limits. Contributions to a Roth IRA are not, but disbursements are tax-free after age 59.
Southern Co. offers employees both a 401(k) retirement plan -- with the company matching contributions up to 6 percent -- and a defined pension plan for retirement.
"Employees are eligible to enroll immediately in the company 401(k), and we send out an enrollment kit that explains the plan and go over benefits during employee orientation," said Dennis Stone, principal in the compensation and benefits department at Southern Co.
Employees can enroll and track their accounts with the outside vendors online through the company intranet. "We give them education upfront about their options and make it easy for them to keep learning," Stone said.
There's information available on the human resources Web site, and employees can contact the HR direct service center to talk to experts or ask questions. The company also offers some free financial planning with online calculating tools, phone advice and "lunch and learn" seminars.
When employees don't enroll in the 401(k) right away or are saving less than 6 percent, the company sends them additional information and reminders. "We at least want them to know how much money they are leaving on the table," Stone said.
"A matching contribution is free money that you should never turn down," said Helga Cuthbert, principal of Touchstone Financial Guidance, a fee-only financial planning and registered investment advisory firm.
Risky vs. safe
"Most companies will give you a list of vendors where you can invest, and you should allocate your investment across different types of funds," Cuthbert said. "Many people make the mistake of investing too conservatively or too aggressively."
Diversification helps maximize gain while minimizing risk.
Risk tolerance usually is calculated with age, with younger investors aimed toward stocks and older workers toward more conservative investments, such as bonds and money-market funds, Stone said. Those who don't want to monitor and adjust their accounts might consider a life-cycle fund, a pre-mixed portfolio that automatically makes conservative adjustments as they age, Cuthbert said.
A common mistake that employees make is cashing out their 401(k) accounts when they leave jobs.
"There's the temptation to spend it, but not only will they have to pay taxes on the money come April 15 but also a 10 percent penalty for taking the distribution early," Munroe said.
Instead, employees should roll the money over into their new companies' 401(k) plans or set up IRAs. "They can fill out an employer-to-institution transfer form free at their office and never even see the money," Munroe said.
Another benefit to sign up for is disability insurance, because the chances of being disabled are greater than the chances of dying.
"It's a good idea to increase the offered coverage, if that's an option, as what is offered usually isn't enough and it's very expensive to buy privately," Cuthbert said. She advises against buying life insurance through the company, because it's usually not portable when workers leave the job.
Flexible savings accounts that allow employees to set aside pre-tax dollars for things their health insurance doesn't cover -- such as eyeglasses, braces, prescriptions or dental co-pays -- can save money, however.
"Just don't put more than you anticipate needing in the account, because if you don't use it, you lose it," she added.
Professional advice
Young employees often don't take full advantage of company benefits because the documentation is complex and confusing. Seeking expert help could be a wise move.
"People think that the cost of getting professional advice is too expensive, but the cost of not having it could be a lot more," Lewis said.
Choose a fee-only professional who is vetted by a professional organization, such as the National Association of Personal Financial Advisors (www.napfa.org) or the Financial Planning Association (www.fpanet.org). "Fee-only" is important, because it means that the financial planner is not selling financial products.
"One or two hours, at $125 to $225 per hour, on average, should be enough planning time for young workers," Munroe said.
Be prepared to fill out an extensive questionnaire: Most planners want to work with a complete financial picture.
"The habits you establish early will make all the difference," said Munroe.
"If you get it right in the beginning, you will be fine in the end."
