by Archie M. Richards, Jr., CFP^®
March 22, 2004

After reviewing his financial situation, the subject of a recent New Yorker cartoon says to his wife, "If we take a late retirement and an early death, we'll just squeak by."

Jackie Mason said, "Some of us have enough for the rest of our lives unless we buy something."

If these jests come close to describing your situation, you may have been snookered by big government's underlying message that it will take care of you. It won't. For most of us, big government makes things worse.

For example, forget about Social Security. The Social Security taxes you paid went out the window all along the way to whatever the government was spending money on that day. Social Security should be partly privatized within the next few years. This will help, but I wouldn't count on it yet. As things stand now, Social Security is a loser.

You can borrow to buy a house or pay tuitions. But no one will lend you money to retire. You have to accumulate the scratch yourself.

Invest your money early, which means, begin now. Give time for compounding to work its magic. Time means more than the rate. For example, assume that $10,000 grows at 11 percent for 20 years. The ending value is $80,600.

Now reduce the rate of return and increase the number of years: $10,000 grows at only 8 percent (not 11) for 30 years (not 20). The ending value is higher: $100,600.

Better yet, invest just $1000 a year for 30 years. Growing at 8 percent a year, the ending value is $113,300. You're getting warmer.

But even this won't buy much of a retirement. For 30 years in retirement, it supplies only $831 a month, with nothing left at the end. Will this be sufficient? Probably not.

How about starting with the need? You figure you'll need $3000 a month for 30 years in retirement. The money grows at 8 percent a year and is gone at the end. The amount of capital needed at the time of retirement is $408,800.

Let's say you have 20 years before retiring. You'll need to set aside $694 a month to accumulate $405,000. That's $33 every working day.

I expect good times in the next couple of decades. If you purchase a wide variety of index funds, an after-tax growth of 8 percent a year is readily achievable. Rebalance every year (for low-taxed, long-term capital gains, make that at least a year and a day). Sell portions of funds that have performed especially well and buy more of those that have performed poorly. Otherwise, let the funds alone to compound. You'll probably achieve 10 percent a year, possibly more.

To the extent you can, use a tax-qualified retirement plan, such as a traditional IRA. Not only can you take tax deductions up front, the money compounds without being cut down all along by taxes.

Does your employer offer a retirement program in which it matches your contributions? By all means, take advantage.

Don't give yourself the option of spending the money you need to set aside. Let the additions to your investments skim off the top of your salary. Make your contributions automatic.

For mutual funds in your IRA or regular investment account, also invest automatically. The mutual fund withdraws from your bank account whatever amount you request, monthly, quarterly, or semi-annually. If you don't see it, you won't spend it.

The idea is to spend less than you earn. You don't know how much you can set aside until you try. Automatically invest one hour of work per day and adjust to the reduction of your disposable income.

If you find all this difficult, a certified financial planner can help. Find one in your area via www.fpanet.org. You and the planner can determine how much money you'll need in the future and figure out how much to set aside to achieve your goals.

Don't rely on a late retirement and an early death. Make your retirement long and satisfying. Start preparing now.