| Sargent & Lundy Savings Investment Plan |
| MAKING UP FOR LOST TIME |
| The following excerpts are from an article in the Fall
1999 issue of "Fidelity Focus" magazine. The opinions of the
author, Patricia Amend, may or may not reflect those of the SIP Committee.
At a class reunion, a friend confides that he has scrimped and invested since you both graduated from college so he can retire at 50 - with $1.2 million. Your younger cousin happens to mention her $150,000 IRA and the additional $90,000 she has in her 401(k). Another friend announces that he is set for life because he scored with stock options at his Internet startup company. A neighbor down the street dies of a heart attack at age 52, leaving a rumored $750,000 t his wife and two grown children. You ask yourself, Where does that leave me? Although you suspect you are off track, you're not quite sure how much you should have in assets at this point - or what to do about your situation. If you're like many Americans, your concerns center on retirement savings. The Employee Benefits Research Institute (EBRI), a private, public-policy research organization, says that since 1993 the percentage of working Americans who are very confident that they will have enough money to live comfortably throughout retirement has consistently ranged from 20% to 25% (EBRI, 1998). "Procrastination is one reason people get off track," says David Strege, CFP, CFA, a partner at Syverson, Strege, Sandager and Company in West Des Moines, Iowa. "They haven't planned or set goals, so they don't have the motivation to save. The majority of financial independence comes from discipline - to spend less than you make and invest the rest. Yet in our society it is very easy to spend more than one earns." Indeed, there are other reasons for falling behind: Parenthood at a later age. Divorce. Downsizing. Struggling at self-employment. Working at a startup company that never delivers. Failing to manage existing retirement assets. Whatever the reason for your situation, you're anxious about your future. Can you make up for lost time? If you have at least 10 years until retirement, and if you get very serious about saving more and making smarter decisions about the money you have, you can build your assets substantially. The most important thing is to put the past behind you, and to start planning for your future right now. STEP 1: Take a Hard Look First, you need to honestly assess your current financial standing. A goal planning worksheet (call the SIP Office for a copy) can help you estimate how much you are going to need to save monthly or annually to meet your goals. STEP 2: Control Your Spending Next, try to determine where your extra savings are going to come from. You have several choices. You could increase your take-home pay by working more hours at your job (if you are paid hourly), or get a second job to generate more income. You could also free more dollars for savings by cutting back on expenses. To decide, you have to know what you owe and what you're spending: * Create a personal balance sheet. List your debts in order of interest rate, from highest to lowest. Total your liquid assets, including savings and investment accounts if you have any. List any major purchases you'll need to make in the next year, and subtract that amount from your liquid assets. Now you know how much cash you have and which debts to pay off first. * Keep track of expenses. That is the only way you will know where your money is going. Figure out a year's worth of "unexpected" expenses - auto and home repairs, gifts, vacations, and so on - and divide that number by 12. You may want to use one of the personal finance software programs available to do this. "We encourage our clients to use a software program like Quicken to balance their checkbooks and track their living expenses," Strege says. "If you don't have a computer, do it manually. Normally, you need to go back six months in your check register to see where the money is going." If bills and credit card payments are eating up most of your income, you have to consider reducing your debt. You should also, of course, have a savings cushion of three to six months on hand in case of emergency. But what should you do first? Reduce your debt or start saving? Opinions differ here. Some financial planners may advise you to use your available resources to pay down high-interest debts first - which is good advice. However, the following strategies may help you control your cash flow, pay off debt, and encourage saving so that you can handle the unexpected expenses that may have dug you into debt in the first place. In time, you'll be ready to invest more dollars. To help control your spending and build your savings, you may want to: * Link savings and checking accounts using your ATM card. (Carry the card only to withdraw just what you need for two weeks.) Set up three savings accounts with goals attached to them: "cushion" for emergency cash; "expenses" for your unexpected bills; and a third for "savings". * Keep only living expenses in your checking account. Put all other funds into savings. If you put more into checking, you'll probably spend it. * Put one month's needs into your "expenses" account. Try to build at least a small stash so you don't have to use your credit card when the car blows a tire or the washing machine breaks down. * Build your cushion with bonuses, holiday checks, and raises. Should you need emergency cash, use this account rather than retirement savings. Using your retirement money now could not only cost you in penalties and taxes, but also in potential future investment earnings. * Ask your employer about direct deposit. Have money from your paycheck deposited directly into any one of these savings accounts. You probably won't even miss it. * Contribute whatever you can to your "savings" account. Develop the discipline of saving so that you can begin investing regularly. You can even have the money from your "savings" account transferred directly into mutual funds or a brokerage non-retirement account or IRA. Now, about that debt. To begin reducing it, you may want to: * Pay off expensive debt first and avoid the "minimum balance" trap. Paying just a little more than the minimum can make a big difference. For example, if you have a balance of $1,100 at an interest rate of 18.5%, it will take 12-1/2 years to pay off and cost you $2,480.94 in interest. However, paying just $10 more than the minimum each month would reduce the time to six years and the interest paid to $676.37, a savings of $1,805.57. * Transfer balances to lower-interest cards. Read the fine print, though - extra low rates are often "teaser rates" that apply the first 6 to 12 months you have the card. If you don't want to transfer your balances, ask your current credit card company to match the interest rate of a competitor. Cancel your old cards, and leave the ones you still need at home. STEP 3: Maximize Tax-Deferred Savings You've now assumed more control over your money. But to maximize your retirement savings in the years to come, it's also important to manage your tax-deferred accounts. Here are some suggestions: * Invest the full amount in your 401(k) or SEP-IRA. "If you can raise the level of your 401(k) contribution from, say, 6% to 12% or 15% (or the maximum allowed by your 401(k) plan), that can make a tremendous difference over time," says Stephen Mitchell, senior vice president of product development for retirement and college savings for Fidelity's Personal Investment and Brokerage Group. For example, if you contribute just 6% of your $50,000 salary each year for 20 years, and earn 8% on your money, you would have $148,238 on a pretax basis. Raise your contribution to 12%, and you'd have $296,476. A 15% annual contribution would yield $370,595. * Allocate your investments properly. When choosing from the investment options in your retirement plan, it's important to remember that this money has to last throughout retirement. So if the circumstances are appropriate, going for growth can be extremely important. Over a 20-year period, even a moderate level of inflation - 3% - will erode the buying power of a dollar to 55 cents. In 30 years, your dollar would be worth 41 cents; in 40 years, just 30 cents. Stock investments have outperformed all others, returning approximately 12.7% over the last 60 years, compared with 5.5% for bonds and 4.4% for Treasury bills (Chartwatch Services, Ned Davis Research, Inc., 1999). If retirement is more than 10 years away, you may want to consider putting all or a large percentage of your retirement assets into stock mutual funds. * Use benchmarking. You should monitor each investment to make sure it is performing well against the appropriate indexes and against other investments in its category. This is called benchmarking. Should you find that one of your investments is lagging in performance, be sure to determine whether the investment itself is a problem or if the larger market sector is underperforming. * Rebalance annually. Whenever one market sector does particularly well (or poorly), it changes your asset allocation due to relative growth. "We suggest you look at your asset allocation at least once a year, or any time the actual allocation differs by more than 10% from what you intended," Mitchell says. "When stocks rise sharply, it's a good time to rebalance to make sure you're not overexposed to equities. It's also good to rebalance after a market decline - to buy more stocks when they're at a relatively low price." * Roll over or consolidate retirement investments. If you change jobs, it is very important to keep your money working on a tax-deferred basis. "If you take a distribution from a 401(k) before age 59-1/2, it can cost you nearly half in taxes and penalties," says Donna Harrington, president of Family Business Advisors Group LLC, in St. Paul, Minn. * Consider a Roth IRA. The Roth IRA, available for the first time in the 1998 tax year, permits a maximum nondeductible individual contribution of $2,000 per year (which is subject to phase out and elimination at certain income levels and offset by contributions made to any Traditional IRAs). If you have an employer-sponsored retirement plan, you are still eligible to contribute to a Roth IRA. Earnings grow tax-free, and distributions of both earnings and principal are tax-free, provided that your Roth IRA assets have met the five- year aging requirements, and you are at least 59-1/2 when you withdraw the funds. You need not take distributions from your Roth at age 70-1/2 if you don't need them. "If you are eligible for a Roth, it may be a good idea to participate," says Mitchell. "If you can leave the money in a Roth IRA for five or more years and you expect to be in the same or higher tax bracket when you use the money, it's a great deal. You pay no taxes when you withdraw the money, provided certain requirements are met." STEP 4: Supplement Your 401(k)/SEP-IRA You've contributed the maximum to your 401(k) or SEP-IRA, and you've maxed out your IRA contribution. If you still have money to invest, you might want to consider an annuity - a contract between you and an insurance company that can allow you to accumulate additional money on a tax-deferred basis. You can choose between fixed annuities, which offer a fixed return for a set period, and variable rate annuities, whose returns fluctuate depending on the performance of the underlying portfolios that you select. "Once you contribute the maximum to other tax-deferred vehicles, you could move some of your taxable assets to an annuity, an additional tax-deferred long-term savings option," says Farrell Dolan, senior vice president, marketing, for Fidelity's Insurance and Annuities Group. "Annuities are funded with after-tax dollars, so there is no limit on the amount you can contribute." When shopping for an annuity, look for a company that you feel confident will be around for decades to come. As you study the annuity's performance and underlying fund choices, don't forget to look at its fees. If they're high, they may eat into your returns. STEP 5: Adjust If Necessary What if you're still behind after all of this planing? In that case, you may want to adjust your goals. Perhaps the time frame in which you'd like to achieve your desired savings amount needs to be adjusted. For those whose goal is retirement, that may mean considering a pre-retirement "bridge" job, which is either part time or short in duration. Whatever your goal, you can make up for lost time the sooner you start to plan. |
This page updated on 8/20/99