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PERSONAL FINANCE—Easy Answer for Retirement Savings: Take Out an IRA

Allow me to introduce Scott Burns’ soon-to-be-famous Missing Margarita Plan for making your first million. T-shirts to follow. It started with a simple demonstration of the time value of money from the managing director of a large Dallas insurance agency. He takes a sheet of paper and puts two numbers on it: Age 65 $1,000,000. Then he asks, “Do you think you can get money to grow at, say, 9 percent?” If you agree, and most people do, he tells you that a 9 percent return will double money in eight years. “Now let’s work it backward.” And he produces a series of figures like this: Age 57 $500,000 Age 49 $250,000 Age 41 $125,000 Age 33 $62,500 Age 25 $31,250 “Doesn’t look so difficult, does it?” he says. And it doesn’t. If you can put together $31,250 by the time you are 25, or $62,500 by the time you are 33, you’ll have enough saved at that time so you won’t have to save another dime for the rest of your life. To put this baseline figure in some perspective, the $31,250 is about a year of income for a college graduate with a few years of work experience. Take it back another eight years and the cost is $15,625 about the price of a Volkswagen convertible. A million dollars may not be what it once was, but it is still an awesome figure… far more than most people accumulate in a working lifetime. Yet if you look at it from the other end of a career, the possibility of a million-dollar retirement is no more than a year of income or, maybe, the shiny car that some parents buy for their teen-ager. Think about that. Early saving can produce some major lifetime benefits, including eliminating the need to save more, later, for longer; end worries about Social Security; eliminate worry about corporate pensions; and provide an above-average retirement income for as long as you live. Still nervous about getting the original sum together? I understand. So let’s extend the deadline another eight years: If you can’t put the money together by age 25 or age 33, you can still retire with a cool million if you manage to put together $125,000 by the time you are 41. Alas, while these figures are less intimidating than $1 million, it is still far more than most people accumulate. So the question remains: How do you put the original stake together? One answer is obvious: You pick your parents or grandparents as carefully as possible. A gift from a generous parent or grandparent when a person is young can do a great deal more than a much larger inheritance later. You can confirm this by talking to Donald Trump. But there is still another answer. One that does not require anything but having the fortitude to save every year: Use an IRA. Whether the contribution is tax deductible or not, the annual earnings are tax deferred, and a contribution of $2,000 a year will accumulate to the stake you need. If, for instance, you put aside $2,000 a year from age 21 to age 41 and earn 9 percent compounded, you will accumulate just more than $120,000. Similarly, if you put aside $2,000 a year from age 21 to age 33 and earn 12 percent a return available in growth stocks you will have $62,000 by the time you are 33. If you save, in other words, it can be done. Not as a lifetime savings project. Not as relentless drudgery. Just put aside $167 a month for somewhere between 12 and 20 years when you are young, and you’ll have a cool million at 65. That calculates out to about the price of a margarita a day. So if you can miss one margarita a day, you can be a millionaire. Easier said than done, of course. But consider trying to do the same thing from the other end of your working life. If you start saving at 50 (when most people do) you’ll need to put aside about $26,000 a year to accumulate the same million by the time you are 65. It may be difficult to give up a margarita a day when you are in your 20s but it’s virtually impossible to save more than $2,000 a month when you are in your 50s. Is a million more than you’ll ever need? OK. You can scale back. Give up fewer margaritas. Question: I work for the U.S. Postal Service, and there have been “rumors” flying around that an “early out” package will be offered. There would be no incentive bonus money. However, I would be offered both five years of age and five years of service to add on to what I currently have. I have been with the Postal Service for 25 years and am 49. This would give me a pension of about $30,000 per year right now, which would include about a 1 percent reduction, since I still would not be 55. I would still need to find another job. Here is my thinking. If I stayed with the USPS until I was 55, I would get about an additional $5,000 per year, if I retired then. However, if I were to get another job at the same pay rate and bank the pension, I would have more than $150,000 banked, not including interest. It would take 30 years for the increased pension to catch up. Am I correct in thinking that I should take the offer and move on? M.H., Eden Prairie, Minn. Answer: The “5 and 5” plan is typical of what large organizations with defined-benefit pension plans offer when they are looking for major staff reductions. They add five years to your experience with the company and five years to your age. This means that a worker who was 60 would be able to retire as though he had worked another five years and was 65 years old. The offer is a significant sweetener, particularly if you can remain on the company’s medical insurance plan. Should you take it? It’s not that clear. There is no final calculus for this kind of decision because it involves so many variables. The answer depends on your exact situation. Here are a few things to consider: Do you have an accurate estimate of your pension? Are you readily employable? If not, the first step out could be a long step down. What about medical insurance? Will you have to buy it on your own? Do you have any ailments that could make getting it difficult or ultra-expensive? Does your wife work, and can you get your medical insurance through her? The most powerful years in a defined-benefit pension plan are the years from 55 to 65. During that period, the amount of your pension normally doubles, even if your salary were frozen for the entire period. If your salary increases, your pension will be still higher. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: scott@scottburns.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.

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