Oaks From Acorns Grow: Retirement Planning

By: George Wallace

I don’t know just how old this saying is, but its antiquity does not mean that it does not contain an important truth that applies to many aspects of life, and especially retirement.

Trees are farmed like any other crop. Some trees are planted with harvest targeted for up to eighty years in the future. At the other extreme are crops that can be harvested in just days. There are many crops with harvests that spread across this range of spans of time. Just so with savings and retirement planning.

There are many kinds of savings and retirement instruments available. Sometimes availability depends upon your particular circumstances, but most are available to everyone. The real point is to develop a savings attitude very early. This is the simple concept of putting something aside for a rainy day, a future need. Make your umbrella while the sun shines. Aesops fable: the ant and the grasshopper.

This lesson is best learned as a child. While the value of savings during ones working lifetime is one of averaging out the bumps and chug holes that happen to the best of plans, savings for retirement are a special case and require special consideration. Today, for most people, Social Security is their bottom line. This is their default retirement plan.

It is a faulty plan. These individuals will one day unpleasantly awaken to the fact that Social Security skates very close to the bottom of the economic scale. It may keep you from starving, but that is about all it will do for you. Social Security is like farming trees for only timbers and lumber. It is a long range plan with very limited objectives.

The original purpose of Social Security was to keep people from falling into abject poverty. I am old enough to remember “poor” farms. Actual farms where indigents were placed by governments where they would be forced to work to “earn” their “keep”. Social Security will never keep up with inflation, especially in the area of medicine and prescription drugs.

If Social Security is not going to be enough for you to live on in retirement, then you need to begin early in your working career to make provisions that will provide additional income in your retirement. Or plan to die in harness.

This means that you must become aware of what is available to you. You need to know which plan best fits your current and future circumstances. You must implement a plan and periodically you must review the whole thing over again and adjust it as circumstances then require.

In addition to Social Security, if you also have a retirement plan available to you at your place of employment, you need to fund it to the maximum available to you as early in your career as possible.

In addition to Social Security, and a retirement plan at work, add in a 401k plan, and possibly an IRA. Fund these types of plans to the best of your ability every year. Companies that match any part of your contribution are wonderful places to work. A caveat: never, never, never, never ever keep all of your 401k funds in one place, one company, especially the one you work for. The risk is simply too great.

A well regarded rule of thumb is a maximum of 20% of such funds in any one company. The older you are, the smaller this percentage should be. Most plans offer you one or more opportunities each calendar year to spread out your investments over a range of possibilities. The older you are, the lower the range of risk that you should be willing to accept. You should begin to become more conservative at forty, and very conservative at fifty to fifty-five years of age.

Everyone should have a savings account at their bank or credit union. For me, the purpose of such an account is to have some provision for temporary emergencies which will inevitably come up to shatter your current budget plan. Examples: The car needs new brakes, or a set of tires, or the transmission has to be replaced. Ten million items fall into this category. You will probably invent the ten millionth and one item.

Right about here is where I start to hear comments like, “Nobody can save that much.” My answer to that is , “Bullshit!” Yes you can. You do have to want to do it. More about this in another article.

Your retirement plan now has three legs, and this arrangement id fairly stable. It should be dependable. However, you have at least two, probably three, and possibly even four or more very important remaining areas into which you need to put considerable financial and mental effort.

Number one is your home. Your home is not, and should not be thought of as an investment. Do not ever fall into the trap of thinking like that. Your home is a place where you live. Risk your home as little as possible. It is also a place where over time you may possibly enjoy a couple of additional possibilities: (A) relative stability in the average cost of that living space, and (B) some, or even a lot of capital appreciation.

For most families, a home is a savings instrument. Warning ! This particular savings instrument is a poor one when compared to other investment instruments. One reason is that related costs are never fixed: utilities, maintenance, insurance and taxes. That is why government gives home ownership preferential income tax treatment. If you rent throughout your working career, when you retire you will have accumulated about twenty cents worth of paper trash in the form of rental receipts with which to start your morning coffee warming fires.

If, on the other hand, you are paying into a mortgage, when you retire, you can sell the home and get back a part, a useful fraction, of your total living space expenditures, after capital gains taxes. Not all, a part, a fraction. Remember, the general rule of thumb is that over the lifetime of your mortgage, you will pay out three times the face value of your mortgage in regular monthly payments. The chances of your enjoying enough inflation and other increases in value to beat the costs of interest on the loan, associated ownership costs, and capital gains taxes are slim, but this opportunity is still a lot better than a worthless pile of rent receipts.

Number two is stocks and bonds. Do not believe that you need huge sums, hundreds or thousands of dollars, to invest in the stock market. You also do not need to pay huge broker fees. Go to the internet. Learn about DRIPS, dividend reinvestment plans. There are three paths to follow. Use one. Start with one stock, one company.

If you don’t have time to study market sectors, then start with electric utilities. Study this sector. Choose one of the larger electric utilities with a long history of paying dividends and stable stock prices. You can start by buying only one share of stock. Once the program is set for that stock, you can buy additional shares, or fractional shares on a monthly basis. Do this as frequently as you can. Dividends will automatically be reinvested in the stock. You usually get monthly, or quarterly reports.

When you accumulate 100 shares in that company, choose another company and repeat the plan. Your first company will continue to grow and accumulate shares and value. Of course, if you can put in more money than the cost of one share a month, do that. Think tax refund checks, sudden windfalls, an inheritance, or hitting the jackpot at the slots.

Your retirement plan now has five legs, and this arrangement is very stable, and is usually dependable. The more companies you have in your general DRIP plan portfolio, the more props you have surrounding your long term retirement financial security.

Number three. Once a year, at Christmas time, study your holdings. Ask yourself if it would be to your advantage to add to your 401k contributions, or to sell the stocks in one company and use the funds to purchase municipal bonds which are protected from taxation.

Number four. Real estate investments in real estate that is not your home. In this particular area, because real estate is not a “liquid” investment, you are only looking for “blood in the streets”, bargain basement opportunities. The very best place to find these bargains is at Sheriff’s tax sales. Every county in the United States has these sales from time to time. Generally, you must pay cash on the barrel head, and you get a deed. Depending upon the state, the former owner may have up to a year to redeem his property from you, but only if you get a major interest premium for your effort. This rate varies, but 18% to 22% is not uncommon.

Much more commonly, you really do now own the property outright. You can turn around and sell it, or hold it for market appreciation or economic rebounds and capital appreciation. Start by looking at good building lots, or small acreage suitable for building. If the property is a home, perhaps some refurbishing, painting, and some minimal D.I.Y. repairs creates a viable rental which also creates cash flow and in a few years a much larger appreciation when you are ready to sell it.

Your retirement plan now has seven, or more, legs and this arrangement is very stable, and is very dependable.

Article Source: http://www.retirementlivingarticledirectory.com

(c) Copyright 2006: George Wallace recently published a book on religion which lashes out at nearly all of the comfortable ideas about God, the trappings of organized religion, and the priesthood. His pithy comments and suggestions for a return to a God-centered personal religion will interest everyone. This article may be freely reprinted so long as all copyright attributions, and the full content of this resource box are included. www.OhGodIsThatYou.com

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