Climbing 'Retirement Mountain'

You can hardly pick up any popular financial magazine these days without finding at least one article about early retirement. Everyone seems to think about it; some of us actually plan to act on it; and even fewer start early enough to be able to pull it off.

According to the American Savings Education Council in Washington, D.C., 70 percent of current retirees left the work force before age 65. Almost 40 percent left before age 60. On top of that, Americans are living longer. People age 85 and older make up one of the fastest-growing population groups in the nation.

Educational employees often say they feel as if they're climbing "Retirement Mountain" when faced with 30- or 35-year state-administered defined-benefit pension programs. But even though it takes a seeming lifetime to qualify for retirement, teachers and school employees are among the most likely to be in the ranks of early retirees.

A 30-year career may not meet most people's idea of "early" retirement, but a person who starts teaching after college, say at age 22 or 23, will qualify for retirement in most state systems before age 55. Retirement formulas that return at least 60 percent of one's final salary (or average the three highest years) provide a nice vantage point for viewing the retirement landscape. But a defined state pension is only one part of a real plan. No one wants to try to survive on 60 percent of his or her standard of living. Try to figure out which 40 percent you're going to go without.

Today's retirees follow no single pattern. Some leave the workplace completely and try to defy the frequently heard warning that "hey, you can't play golf every day." (Take it from me; yes, you can.) Others take part-time jobs. Some leave the work force, only to return later.

With the nation facing a well-publicized teacher shortage (some estimate that we will need to recruit 2 million teachers in the next decade), I would be remiss not to encourage those near retirement and still relatively young to consider sticking around a little longer. Under most state systems, the most lucrative years in the formula come after reaching the age and years-of-service necessary to qualify for "full" retirement. In some states the payoff is 2 percent or more per year (that's for the rest of your life, remember) with "caps" in the 75 percent range.

Retiring early takes effort, however. There is no substitute for starting to plan early. If you're in your twenties or thirties, you have plenty of time, but you must begin a savings and investment program now. Even if you're older, there's still time. Whatever you are able to squirrel away--if invested for the long term--can work to supplement that 60 percent you expect to receive from your state system.

Keep in mind that even after what feels like a full, grinding career, you may have as many years ahead of you as you spent in the workplace.

Your strategy doesn't have to be difficult: Live below your means, pay cash, save and invest with clear goals and strategies in place, build a diversified portfolio based on no-load mutual funds and don't panic when the stock markets experience a little turbulence. On average, Americans in their mid-fifties have only about $71,250 saved for retirement, according to the American Savings Education Council. Just how they expect to parlay that into a place on Easy Street is a big question.

Educational employees and some hospital workers are lucky to have access to 403(b) savings programs. Most of you know them as tax-sheltered or tax-deferred annuities (TDA). Essentially, these plans allow you to invest money out of each paycheck before taxes.

Unfortunately, most school employers offer unnecessarily limited choices to their employees. They may claim inadequate computer capacity, have long-standing relationships with a few insurance companies or make other excuses to hold down the number of companies that participate in their 403(b) programs. That usually results in some pretty plain-vanilla programs with a few choices centered in the lucrative, high-commission sale of insurance-based annuities.

Good, bad or indifferent, though, these programs are one of the few chances you have to avoid a tax discount on your investments. To have $50 to put into an after-tax investment, you would have to earn $64 (if you're in the 28 percent tax bracket). But to put $50 in a TDA you just have to earn, well, $50. So, you can accelerate your savings with minimal impact on your take-home pay.

As with any investment, check out the fine print and be sure you fully understand the costs and expected returns of TDAs before deciding where to put your hard-earned cash. Remember, you may have to close a 40 percent gap in your standard of living, and you'll need to keep your money working for at least 30 years.

American Federation of Teachers, AFL•CIO - 555 New Jersey Avenue, NW - Washington, DC 20001