| Retirement Planning | |
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This article was submitted by Cassandra Van Winkle, an at-home mother of one young son.
Should stay-at-home parents worry about retirement?
Dealing with the wonderful, busy career of raising a family, the thought about retirement planning is understandably pushed into the background. In addition, the immediate financial needs and wants of family members may render thoughts about distant future finances unimportant or unattainable. Perhaps your spouse has a retirement plan from work, or you have an old 401(k) sitting in your last employer’s program, so you may believe you are settled in this area. Maybe it is not a concern since there is Social Security, Medicare, the love of your children, and a possible inheritance. Let’s take a closer look.
Can the (US) government help?
Social Security was created to supplement retirement income, not necessarily to replace it. The amount that one receives depends on the amount paid into the systems and the number of years worked. Self-employed people have the delightful task of paying their total Social Security tax--15 %-- while regular employees only have to pay half that amount. For those who have worked less than 10 years, no matter the amount of income, they will not be eligible for full benefits unless they are disabled or widowed. Non-working spouses only receive 50% of what their spouse will receive. The new twist on how Social Security will work is the expectation that it will eventually run out of money; when the amount drawn by recipients exceeds the revenues generated by workers. Without intervention, Social Security payments to retirees and their dependents must of necessity be reduced. Unless something changes, the individuals retiring 30 or 40 years from now should not even consider Social Security as a significant part of retirement income. You can find out how much you and your spouse are eligible to receive and look for more information about the program at Social Security Online and Social Security for Women.
Medicare is also expected to suffer the same outcome--perhaps even sooner. This may mean that Medicare will also have to reduce its benefits in order to stay solvent. The continuing evolution of health care technology and the decrease in the number of people entering the medical field will guarantee price increases, so you may or may not want to depend on it solely to meet future medical bills. Medicaid can help, but you must prove that your financial situation qualifies you to receive it. To find out more about Medicare and Medicaid, you can check out the following sites: U.S. Medicare and Medicaid Consumer Information.
Familial obligations
If you or your spouse have your hopes set on that future inheritance or are expecting your children to assist you when necessary, you could be disappointed. An unexpected financial catastrophe can affect anyone; your loved ones may have to turn to you for help. Conversely, they may not be able to afford nor perhaps want to help you. Or they may leave this world with sufficient debt to render any surplus funds moot.
Your spouse may have a pension or retirement package from work, but for a majority of Americans it alone is insufficient to maintain their current lifestyle. You may have a retirement fund from your last employer still invested through the company in a retirement fund, but are you confident the vehicle is or will continue to provide a reasonable return? If you are planning to pay for your children’s college education, will your income and investments be enough to finance both retirement and college? Also, are you worried about financial help or long-term care for your aging parents and in-laws? How do assets, like a home or rental property, figure into the quality of your retirement? These questions, and many more depending on your personal situation, are crucial to determining the amount and the strategy of your retirement plans.
Compound interest
Simple interest is the interest calculated on the original amount only. Compound interest is the interest calculated on the sum of an original amount plus the previous interest. Let’s take a look at both increasing and decreasing a given amount ($1000) at a given interest rate (10%) per year rounded to the nearest dollar.
| Year | Simple Interest | Compound Interest |
| 1 | 1100 900 | 1100 900 |
| 2 | 1200 800 | 1210 810 |
| 3 | 1300 700 | 1331 729 |
| 4 | 1400 600 | 1464 656 |
| 5 | 1500 500 | 1611 590 |
As you can see, the amount grew more quickly and decreased more slowly using compound interest. This is why compound interest is more widely used than simple interest. Also, inflation (which averages 3% per year) is calculated using compound interest, so you have time on your side.
Let’s crunch some numbers
If you have some numbers on hand, let’s put compound interest to work. Here are a few retirement calculators that can help you estimate whether or not you are on the right path. The basic rule-of-thumb for the amount you need for retirement is 70% of your current income adjusted for inflation. I personally prefer the first two because they are detailed, but simple.
If you are right on track, you can breathe a sigh of relief. You may wish to do more research to make sure you are taking full advantage of every option available to you.If you are forecasted to have a shortfall, don't fret. There may be some options you have not yet discovered or used to their full advantage.
Retirement plans for stay-at-home parents
Thanks to the Tax Relief Act of 1997, stay-at-home parents are free to have their own individual retirement accounts.
Traditional IRA
A Traditional IRA and Spousal IRA allows you and your spouse to each contribute up to $2000 per person a year. It may reduce your tax bill by the full $4000 or part of it due to income and other retirement plans. The money grows tax-deferred until you decide to remove some or all of your funds.
Roth IRA
A Roth IRA allows you each to contribute up to $2000 of after-tax money with income restrictions on the amount. This IRA relaxes some of the restrictions that are on the traditional one-the most notable one is that the money grows and can be removed federal tax-free within certain guidelines.
Rollover IRA
A Rollover IRA allows you to place your 401(k) funds into an investment vehicle after leaving a company without any tax penalty. You are not allowed to contribute any money into a rollover until after ten years or it is placed into another employer’s 401(k) program. If you do not like the investments in your last employer’s 401(k) plan, this may be a good option, for you.
Self-employed, work-at-home parents have the same options as other self-employed workers. A Keogh Plan works like a traditional IRA, but the amounts you can contribute are much greater.
For those who have employees, a SIMPLE plan or an SEP-IRA may be ideal. The IRS has more information on these plans. Here are some links concerning these plans:
What is your investment tolerance?
Investment tolerance is the amount of risk you are willing to assume in order to get a return on your investments. The more risk you take, the better your chances of a greater return. Studies have shown that women are inclined to have lower investment tolerance than men. In addition, women tend to keep familiar, higher-risk investments longer, which can help achieve higher returns in the long run. Investment tolerance is broken down into three major categories: conservative, moderate, and aggressive.
Conservative investors prefer returns with little or no risk. This investment tolerance is fine for those who are very close to retirement or are already retired. If retirement is decades away, inflation will become your enemy. Inflation averages 3% a year and can eat away at the value of your returns. For example, if you place $1000 a year into a bank IRA with the rate of 5% per year, you will have $35,719 in twenty years. With inflation, the real value of that amount in today’s dollars will be $25,626-decrease of $10,093 in spending power. In order to deal with this problem, a little more risk taking will be needed. Mutual funds are a wonderful way to deal with low risk tolerance because the risk is spread out into different stocks or corporate bonds. Also, choosing familiar companies’ stocks, like Walgreen, GE and Wal-Mart, can help ease the fear of losing your money.
Moderate investors are usually willing to take on more risk, but place a small percentage into low-return investments. This investment temperament is best for those who will retire within 10 to 25 years. The major obstacle is if they become too complacent or afraid to re-evaluate their investments. This can result in staying in an investment that is doing poorly, year after year. A once-a-year evaluation is advisable to protect the growth of your funds.
Aggressive investors are willing to take great risks in order to receive the highest return. This investment type is best for young adults, since retirement is far into the future. Greed can become a problem, since greater risk can lead to much greater loss. Stock market timing, commercial gimmicks, “hot” stock tips, unknown companies, the futures market, and a host of other shaky strategies can mean trouble. The best way to invest aggressively is to have 85+% into stocks that are in growing, well-known companies, like Nokia, Intel, and Qualcomm. Another way is using aggressive growth or international mutual funds. Keep at least 5-15% percent of your investments in something “safe.” For example: bonds, bond mutual funds, and money market mutual funds, to reduce the impact of losses in your investments.
No matter your investment tolerance, you should never place all of your money into one stock or type of business. Diversification is the key to reducing your amount of loss. By spreading your funds into different areas, you could have most of your investments doing well to offset the few losses in other areas.
Insurance
Life insurance comes in two different forms, whole-life and term-life.
A whole-life policy contains death benefits and investments that are in affect as long as the policyholder pays the premium. The drawbacks to these plans are the high administrative fees, expensive premiums, and low returns on investments. Unless you are wealthy and need a tax shelter, you would do better investing the money yourself and purchasing a term policy.
A term-life policy only contains death benefits allowed over a period of time. The premium cost of this type of life insurance depends on the number of years the policy will be in effect and the age of the insured. This type of policy is best utilized to protect your investments and should be eliminated as soon as they are no longer needed, like when the mortgage is fully paid and the children have left the nest. There are many variations of the two types, but as long as you have enough coverage to take care of your family for a few years and pay off the house, you do not need additional insurance.
Health insurance is vital to keep from withdrawing your retirement funds too soon due to medical financial crisis. Its importance increases near retirement and businesses are attempting to fill in the hole that Medicare is leaving.
Long term care insurance covers the medical expenses associated with the recovery after a major medical event. The best time to buy this type of insurance is between ages 50-55.
Medigap insurance is designed to close most or all of the shortfalls left by Medicare. One policy bought and maintained from the age of 65 should be enough.
For those lacking health insurance, here are a few sites that may be able to help:
- Alternative Health Insurance Services
- HealthPlan Services
- Norman Wyatt Insurance Agency
- Blue Cross/Blue Shield Association
- Benefits Plus, Inc.
- Bureau of Primary Health Care
- Eisenberg Associates
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