BUSINESSWEEK ONLINE : JULY 19, 1999 ISSUE
COVER STORY

Building The Best Retirement Plan
Thanks to new tools, charting your future is easier than ever

Retirement--aahh! Leisurely days spent traveling, golfing, volunteering, visiting friends and family, or just relaxing with that mountain of books you've meant to read since college. With longer life spans and better health than your parents' generation, you expect your golden years to be active, exciting, and rewarding.

Retirement planning--ugh! Long, dusty hours spent hunched over brokerage statements, benefits brochures, budgets, and insurance policies. In the back of your mind, you fear the message this tedious exercise might yield: Squeeze all the fun out of your life now, or you'll live out your old age on the Alpo plan. If you retire earlier and expire later than your forebears, you'll have many more years to fund--and less hope that Uncle Sam's pinched benefits will tide you over. Little wonder that polls shows fewer than half of working Americans have even tried to figure out what they need to save.

Hey, it isn't that bad. Chances are, unless you've been on a desert island for the past 17 years, the bull market has done wonders for your nest egg. And planning is easier than ever now, thanks to a wealth of tools that help you crunch numbers and untangle the devilish details of investments and taxes. Plus, you have this--BUSINESS WEEK's Annual Retirement Guide.

Our message? Retirement planning is more than just number-crunching and poring over mutual-fund ratings. It's deciding how to live the rest of your life: how long to work at what you're doing now, whether to downshift into a second career, when to go to full leisure mode. It's balancing financial demands. And it's making crucial decisions far enough in advance.

To help get you going, we've singled out key planning challenges at three stages of life: your 30s, mid-40s, and mid-50s. We'll give you tips and steer you to tools to build your own plan--or find someone to help you do it. In the articles that follow, you'll find sample portfolios and advice on everything from figuring out your Social Security benefits to whether and when to insure against a nursing home stay.

By the time you're done reading, you'll be ready to gather up those statements, fire up that PC, and face your future.

SAVE FOR COLLEGE OR RETIREMENT?
Today's 30-year-olds don't need lectures on the importance of their finances. Coming into the workforce when traditional pensions are fading memories, Gen Xers know that no one else is salting away cash for their future. For them, retirement planning is basic--budgeting, saving, and getting the most out of employer benefits. The thirtysomethings' key challenge may be resisting lifestyle creep as their salaries climb early in their careers.

Dawn and Myron Glenn of Los Angeles faced that problem this year. With a combined income of more than $100,000, ''we're both making good money,'' says Dawn, 34, a partner in a Los Angeles law firm. ''But we didn't feel like we had any control.'' The Glenns hired Percy Bolton, a Los Angeles financial planner whom Myron, 35, also a lawyer, had known since college.

The result: a tune-up for the Glenns' 401(k) plans, advice on life and disability insurance, and a plan to control spending and pay off credit cards and student loans. This tack hasn't turned the Glenns into Grinches. When Myron wrecked his car, he replaced it with a $35,000 Land Rover. But on Bolton's advice, he cut costs by trimming options and leasing instead of buying. ''We're definitely aware of what we're doing with our money and where it's taking us,'' says Myron.

With their first child on the way, the Glenns will soon face the big parental challenge: planning how they'll pay for college. The old wisdom was to pile cash into a college fund until the kids graduate, then save like mad for retirement. But parents with 401(k)s would be crazy to pass up two powerful advantages--an early start on tax-deferred compounding and employer matching funds. Typically, employers will pony up 50 cents to $1 for every dollar, up to 6% of your pretax income, that you contribute to your 401(k). That can yield you an instant 50% to 100% return on your savings. To put this free money to work, pump into your 401(k) the largest amount your employer will match, then put additional savings in a college account. If your income qualifies you for a Roth or traditional individual retirement account (IRA), you can use those as college-savings vehicles, too.

How to invest in your 30s? Take some smart risks--you've got a lot of time to recover from any market setback. A portfolio made up solely of stocks or equity mutual funds is appropriate, if the holdings are diversified among large- and small-cap and international stocks. And focus on low-cost funds. The difference between 1% and 2% annual expense ratios on a $1,000 investment earning 11.5% over 35 years is $7,925. But your biggest challenge is amassing investment cash. That means pouring money into your 401(k)--and keeping it there, rather than cashing out when you change jobs. You must also resist the urge to let spending outpace your rising income.

I'M 45. WHAT ARE MY GOALS?
Kande Larson shouldn't have to worry about her future. The 43-year-old MBA puts 15% of her $70,000 salary into a 401(k) at the computer-systems consultancy where she's director of administration. She maintains a hefty savings account as a hedge against disability--her big concern as a single person. And Larson lives frugally: She just bought her first new car, a Subaru Forester, in 15 years. Aside from the travel she loves and the kitchen remodeling under way at her Minneapolis home, ''I'm pretty low-maintenance,'' Larson says with a laugh.

Even so, Larson feels the need to assess her fiscal state. ''It's time to figure out what my goals are,'' she says. ''Am I doing what I need to do to get there?'' While she wouldn't mind working into her 70s, she would like to cut back to part-time well before that.

The mid-40s, planners say, is when the retirement bug bites. ''The 45-year-olds look at retirement as the brass ring--they can almost taste it,'' says Susan Freed, a financial planner in Washington. It's a time for serious analysis, to see whether your goals--going part-time at 50 or launching a new business, say--are realistic. Planning is doubly important if, like so many of your generation, you still have kids to put through school.

Unless you've already got a huge head start, you should aim to put 15% of pretax income into your old-age accounts. That means maxing out your 401(k) and, if you qualify, IRA contributions. With a $10,000 annual limit on pretax dollars you can put in a 401(k), you'll probably need to save aftertax dollars as well--in the 401(k), if you like its investment choices, or in a personal portfolio.

Asset allocation, the science of dividing funds among classes of stocks and bonds to balance risk and return, becomes vital as your portfolios grow. In shifting markets, two portfolios with the same average return can have vastly different outcomes. Software, Web sites, and financial planners offer plenty of allocation advice. But resist the urge to become too conservative. The bulk of your assets should still go into stocks or stock funds, with about 25% in bonds.

Within that mix, which assets do you keep where? If your 401(k) offers a range of good choices, you can set up your outside account to minimize taxes. Conventional wisdom says that bonds, which produce income, go in your 401(k), while stocks, which create more lightly taxed capital gains, should be in your taxable accounts. But Coral Gables (Fla.) financial planner Harold Evensky argues that the reverse strategy actually incurs less tax. With 50% or higher annual turnover, most stock funds don't get favorable tax treatment for much of their return. And bond income, by contrast, can be tax-exempt, if you buy municipal bonds. With yields now exceeding 80% of corporate bond rates, munis are a bargain. But be warned that munis are strictly buy-and-hold: If you have to sell, you'll take a beating on their wide spreads and stiff sales fees.

You need to invest in more than just your finances during your mid-40s. More and more workers dream of launching a second career in their late 50s as a means of easing into retirement. If that's your goal, ''now's the time to identify and develop the skills you need for that 'mellow job' phase,'' says Elissa Buie of Financial Planning Group in Falls Church, Va., and president of the Institute of Certified Financial Planners (ICFP).

TAKING STOCK AT 55
Retirement planning in your mid-50s is no abstract exercise. Your portfolio is no longer Monopoly money, but real cash that has to sustain you for decades. The decisions are imminent. Consult or travel? Move or stay put? And no matter how good your planning, you may face barriers you would never anticipate.

Take the unusual problem of Robert Busch, an independent sales rep in Eden Prairie, Minn., who thought he would be retired two years ago. Busch and his wife, Dawn, could live comfortably on their $3 million portfolio's 8% return. But Busch can't find anyone to buy out his industrial heating equipment business, which nets him about $150,000 a year. Three would-be successors washed out, but Busch still hopes to turn over to someone the customer relationships he has developed over 22 years. ''Emotionally, I just want to see the business continue,'' says Busch, 60. ''I always planned to be retired by 58--but life had a way of fouling up my plans.''

To keep your plans on course, now's the time for specific reality checks, not rules of thumb. Figure out what you're spending now, and project what life will cost when you're no longer working. Don't be surprised if you anticipate spending as much or more. You won't have commuting costs or payroll taxes, but travel, sports, and hobbies in the first, active stage of retirement are expensive, too.

''BOND LADDER.'' As a World War II baby, you're more likely to depend on a traditional pension than your younger co-workers. Be sure you know its terms. An executive resisting his wife's pleas to retire at 62 found a clinching argument in calculations by planner Judy Ludwig of Tandem Financial Services in Canton, Mass. The increased pension benefit from each additional year he worked would make the couple's nest egg last three years longer. But you might not be so lucky. Some pensions, designed to induce turnover among senior employees, shrink when you work past 62 or 65.

Project your portfolio's health carefully, too. You'll want to shift to a more conservative mix, boosting bonds to perhaps 50% of your holdings. You should consider using new computerized calculators that highlight the odds of getting the returns you expect. Even with a lower-risk mix, a string of down years combined with withdrawals could boost your odds of outliving your money.

One safe way to withdraw funds is to construct a ''bond ladder''--a series of bonds of staggered maturities. Five years in advance, buy a regular or zero-coupon bond to mature in your first year of retirement for the amount you expect to spend that year, says James Shambo of Lifetime Planning Concepts in Colorado Springs, Colo. Each year thereafter, buy another. The result: You'll always have five years' living expenses covered with safe, well-timed investments--enough to outlast a bear cycle without forcing you to sell stocks when they're down. ''Withdrawing money from stocks when they're down locks in losses and doesn't give you a chance to recover,'' Shambo says.

What if you find a gap between your retirement hopes and your finances? You've still got time to adjust. Boost your savings to 25% or 30% of income, and invest a bit more aggressively. Plan to live more cheaply. Or figure on downshifting into part-time work or consulting for a few years before you retire outright. Harry Renner of Rochester, Minn., voluntarily retired from IBM two years ago--but he's still putting in 40-hour weeks at the computer giant. Now, he's a consultant, a less stressful job that better suits the 58-year-old.

THE RETIREMENT TOOLS YOU NEED
If you can manipulate a mouse, you can develop a retirement plan. That's the message from Web sites and software publishers eager to tap aging baby boomers' financial anxieties and Gen Xers' fascination with the market. Planning tools (table, page 110) are indeed better than ever at crunching numbers, projecting risks, and handling, or at least spotlighting, tricky tax and pension problems.

No PC can deliver complete peace of mind about your old age. So even do-it-yourself investors turn to financial advisers for guidance and reassurance. ''Eventually, you'll need a higher level of sophistication than you can get from software,'' says ICFP President Buie.

Software and the Web, however, can get you rolling. If you're just starting to think about retirement, cruise to the American Savings Education Council to assess your savings personality and ''retirement readiness.'' You'll find dozens of calculators at FinanCenter and InvestorGuide. And everything you wanted to know about Roth IRAs can be found on Brentmark Software's site.

BEST BETS. Web-based planners are starting to provide services you would expect from personal finance software. Intuit's Quicken.com features a retirement planner that users can link to an online portfolio tracker. Mutual-fund giant Vanguard Group's software offers a bonus with simple advice on estate planning.

The newest calculators have their roots in casinos. They use the Monte Carlo method, a mathematical technique for testing thousands of possible investment outcomes, to assess your portfolio for worst-case results. While two asset mixes might have the same average return, one may keep you solvent in 90% of all possible market forecasts, while with the other you would go broke in 40% of the cases. When your retirement's on the line, you need to shoot for the 9-to-1 odds. The best-known Monte Carlo calculator is offered by Financial Engines, founded by economics Nobel laureate William F. Sharpe.

Non-mathematicians may be baffled by the Monte Carlo calculators' odds-based output. When you master the charts, however, the results are eye-opening--and they are closer to reality than what-if scenarios run on a traditional calculator. Whatever their algorithms, software planning tools still have one weakness: No program will look you in the eye and say: ''Are you following that budget? Have you bought that insurance?'' You must find the discipline to plan, and follow through, within yourself--or hire a human adviser to provide it. But that's what it takes to reach that bright retirement that you want so badly.

BY MIKE McNAMEE

To read a letter to the editor about this story, click here.

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Building The Best Retirement Plan

COVER IMAGE: How to Retire

TABLE: Retirement Planning Resources (extended)

CHART: Age 30: Should You Save for College or Retirement First?

CHART: Age 45: Lowering Risk Via Asset Allocation

CHART: Age 55: How Long Will Your Nest Egg Last?



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