Have you procrastinated putting money aside for retirement? Have you withdrawn money from your retirement fund? Do you expect Social Security alone to meet your financial needs in retirement?
If your answer is yes to any of those questions, you’re probably going to find yourself worrying about income when you should be kicking back and enjoying the easy life. Nevertheless, it’s not too late – nor too early – to do something about it.
The American Savings Education Council estimates that 30 percent of Americans are not saving for retirement. An eTrucker.com poll shows that more than half of truckers fall into that category.
Bob Jordan, who drives for Allied Van Lines agent Dirck’s Moving Services out of Phoenix, is one of those. “I wish I could, but the bottom fell out of the moving business. But I’ve still got about 10 years before I retire,” says Jordan, who has been driving for 22 years.
Nick Kmezich, an accountant with First Security Advisors, says that situation is not uncommon. “Through difficult times owner-operators especially have a hard time holding onto their retirement plans,” Kmezich says.
That’s understandable, especially in recent years when fuel has been expensive and, for some owner-operators, freight has been slow. Even in hard times, Kmezich and other advisers say, the cost of retirement should be figured into your cost per mile. “It’s a cost associated with maintaining your business, and you, the driver, are definitely a part of your business,” he says. “It’s a cost, not an option.” Those who have trouble pulling money out monthly for retirement should consider setting up an automatic bank draft that sends money straight to a retirement account.
Financial advisors say you need about 75 percent of your present income to maintain a similar retirement lifestyle, and more if you intend to enjoy much travel. Under current law, if you have average earnings, your Social Security benefits will replace only about 40 percent at best (the current Social Security maximum is about $20,000 a year).
Jim Hughes, 29, of Bear, Del., isn’t trusting that Social Security alone will take him through retirement. “Why would you depend on that? The government’s running it,” he says. “I try to do about $500 a month in a money market account and about $200 a month in a savings account,” says Hughes, who is leased to Crete Carriers and has been an owner-operator for two years. His wife Angela, who is 28, also contributes 10 percent of her paycheck to a 401(k) – the tax code name for employer-sponsored, tax-deferred retirement plans.
To know how much you need to save to reach a certain retirement goal, you have to estimate your age at retirement, how long you expect to live and what it will cost you to live each year after you retire. The American Savings Education Council estimates that the average American retiring at 65 can expect to spend 18 years in retirement.
Websites such as www.ssa.gov, www.yourcreditcounts.com and www.asec.org contain some of the many calculators on the Internet that can help you crunch these numbers.
PLANT A SEED, WATCH IT GROW
Compound interest is interest that’s reinvested to earn more interest. Consider this example of three 25-year-olds investing at the same interest rate until they turn 65. Bob invests $50 a month, Jim contributes $150 a month and Dave contributes $250 a month. That $200 extra a month that Dave saved accumulated more than $260,000 in interest. Calculations are not adjusted for inflation.
These retirement calculators often produce target saving goals that start at about a half-million dollars. That might sound like a lot, but it’s actually reasonable, considering that a 10 percent return on $500,000 yields $50,000 a year before taxes – not bad today, but perhaps not enough in 20 or 30 years after inflation is factored in.
Using these calculators will help you realize that now is a good time to start saving because the longer you wait, the more you’ll have to save each month, and the less time you have to benefit from the compounding of interest.
For example, saving as little as $50 a month can earn you more than $75,000 in 30 years, assuming a conservative 8 percent interest. If you have trouble figuring where you’d get even that bit of extra money, consider reducing petty spending. Cutting out a dollar’s worth of sodas or snacks each day adds up to an $11,000 investment over 30 years, but with compounding of interest at 8 percent, it yields about $45,000.
John Jackson of Sumter, S.C., knows he needs to start saving. “I just finished paying off a truck, and I have two years to get two kids out of high school, but I’m only 41, so I think I’ll be set by the time I retire,” Jackson says. “Soon, it will just be me and my wife, and I’m going to try to save the last two paychecks of the month.”
One of the most popular retirement plans for people such as owner-operators, who don’t have the option of a 401(k), are Individual Retirement Accounts. “IRAs are a great place to start,” Kmezich says. “Saving $3,000 a year will get you a long way into retirement.”
To open an IRA, you have to choose a mix of investments. An IRA typically contains stocks, bonds or mutual funds made up of stocks and bonds. There are more conservative options, some of which have fixed rates of return, such as certificates of deposit, money market accounts, savings accounts and U.S. Treasury securities. As a general rule, the greater the risk of any investment, the greater the potential for gain or loss.
Apart from the actual investment, there are different kinds of IRAs. They vary in contribution limits, tax implications and other differences. Two of the most common are the traditional and the Roth. In general, financial experts say that a first-time IRA participant who has 10 years or more until retirement should choose a Roth.
The Owner-Operator Independent Drivers Association allows contributions as low as $25 a month to its IRA plan. It invests in a tax-deferred annuity (an investment that pays a certain income for a certain period) through American Underwriters Life Insurance Company.
Justin Mowery, of La Porte, Texas, who is leased to Security Trucking and has been driving for 20 years, has been regularly contributing to a traditional IRA for about 12 years. “I try to put some in every month, but how much I put in varies, depending on what I can survive without,” says Mowery, who plans on retiring in about six years.
The history of the stock market shows that those who invest regularly gain more in the market peaks than they lose in the valleys. For those who want long-term investments – two to 10 years or more – the best bet is stocks, bonds or mutual funds. If you’re older and don’t want to risk losing money or tying it up when you need it, look for short-term investments – one month to two years – such as money market accounts, certificates of deposit and U.S. Treasury Bills, which have low risk and are very liquid.
Whereas a bank savings account will give you, at best, 2 percent to 5 percent over a long period of time and even less over a short term, stocks have a historical average rate of return of about 10 percent. With the average rate of inflation between 4 percent and 5 percent, make sure you’re not investing in something with such a low interest rate that you effectively lose money.
Above all, make sure that you’re saving, even a small amount, on a regular basis and be committed to leaving it untouched until retirement. For all the years of hard work as an owner-operator, you owe it to yourself.
HOW TO BOOST YOUR SOCIAL SECURITY CHECK
Currently, the maximum monthly benefit from Social Security is $1,660 – about $20,000 a year. However, you can get more if you take advantage of incentives to postpone collecting benefits until age 70 instead of 65.
For each year you delay, your payments increase 6.5 percent. Hold off until you’re 70, and five years’ worth of credits will boost your checks by 32.5 percent.
On the other hand, the rules are about to get tougher. Starting next year, the retirement age is going to start its move toward 67 from 65.
You can add more to that Social Security check if you keep working. A recent change in the law allows you to claim full Social Security benefits and to still bring home paychecks.
John Dunning of Mobile, Ala., plans on retiring in a few years, but he doesn’t have a savings program. He plans on collecting Social Security and a military retirement in addition to working.
“I have my barber’s license, so I’ll probably cut hair part-time,” says Dunning, who is leased to Southeast Trucking.
If you’re unsure about your benefits, check the personal statement you receive from the Social Security Administration. It estimates the benefits you and your family may qualify for now and in the future. To read more about your benefits, go to www.ssa.gov.retirement.
“I wish I could (save for retirement), but I’ve still got about 10 years before I retire.”
– Bob Jordan
ORGANIZATIONS
Institute of Certified Financial Planners
(800) 282-7526
www.fpanet.org
National Association of Personal Financial Advisors
(888) 333-6659
www.napfa.org
Social Security Administration
(800) 772-1213
www.ssa.gov
Internal Revenue Service
(800) 829-1040
www.irs.gov
Owner-Operator Independent Drivers Association
(800) 444-5791
www.ooida.com
American Association of Retired Persons
(202) 434-3525
www.aarp.com
American Savings Education Council
(202) 775-6364
www.asec.org
ARTICLES, NEWS AND CALCULATORS
Smartmoney.com
Kiplinger.com
Money.com
Horizonfinplan.com
Retireearlyhomepage.com
Money.cnn.com/retirement
Morningstar.com
Retirementplanner.org
Fool.com/retirement
Thirdage.com/money
