That’s right. The recession is making clear what we’ve suspected for a long time. The concept of not working and embracing leisure for the last third of one’s life isn’t practical for most people.

Put it this way: Survey after survey has shown that a majority of aging baby boomers plan on working in retirement. Well, that plan is coming true.

Financial safety net
Economic downturns often accelerate change. For instance, in the latter part of the 19th century, the country moved from a rural, farm economy to an urban, industrial one. The wealthy associated old age with leisure, but for everyone else it usually meant involuntary unemployment and a humiliating dependence upon family, charity or community organizations for shelter and food. Policy reformers agitated for some kind of a financial safety net for the nation’s impoverished and isolated elderly.

Not much happened until the Great Depression. It was an economic disaster for families, especially the elderly “as they watched their hard-won assets vanish, and with them their hopes for an independent and secure old age,” write historians Carole Haber and Brian Gratton in “Old Age and the Search for Security.” (Sound familiar?) Traditional middle-class objections to a national safety net crumbled with the Depression. Social Security became law in 1935.

“The real or incipient collapse of individual households helps to explain the widespread popularity of Social Security,” say Haber and Gratton.

Our image of retirement is still shaped by the early decades after World War II. The elderly poverty rate plunged thanks to Social Security. Older Americans gained universal health care coverage with Medicare in 1965. And Corporate America offered workers defined-benefit pension plans based on a salary and years-of-service formula.

It was in these years that retirees developed a distinct lifestyle captured by the mass migration to Sunbelt communities, traveling in RVs and bus tours, spending long mornings on the golf course and other recreational pursuits. The development of modern retirement is a great social achievement of the 20th century.

But in the 21st century, the underlying economics of retirement are changing.

Living longer, working longer
On the positive side, we’re living longer. Average life expectancy is now about 78 years, up from 61 years when Social Security became law. We’re healthier, too. Disabilities among the elderly are declining, thanks to a combination of healthier lifestyles and medical advances.

A seismic shift in the economy and workplace is making it easier for an aging population to labor longer. An information- and services-dominated economy will ease the transition to longer working lives. Simply put, toiling away on a computer in medical diagnostics or government bureaucracy is far less demanding than manning an auto assembly line or mining for gold. The rise of an economy based on intangibles and longer life expectancy is behind more than a decade’s worth of scholarly research, aging conferences and popular press articles trying to redefine retirement.

Retirement savings wiped out by crisis
The day of retirement reckoning is here for less happy reasons, too. For the second time in eight years, savers have watched in horror as their 401(k)s, 403(b)s and other retirement savings were hit with sharp declines. This time around, the household wealth destruction is even greater because of the nationwide fall in home prices. For instance, from the last quarter of 2006 through the third quarter of 2008, the real value of homes and household holdings of stocks plummeted by $5.6 trillion, according to a recent report by Hoisington Investment Management Co. in Austin, Texas. It predicts that the wealth loss may exceed $10 trillion when the fourth-quarter figures are calculated.

Indeed, the current pension system is making everyday retirement insecurity worse. Employers have embraced defined-contribution savings plans like 401(k)s. But 401(k)s don’t deliver a steady stream of income during one’s golden years. There’s also plenty of evidence that workers with access to defined-contribution savings plans aren’t taking full advantage of them, either.

But wait, there’s more: The health insurance system is widely acknowledged to be broken and is a strain on family finances. Even with Medicare coverage after age 65, the elderly are finding it necessary to pay for a greater percentage of their overall medical bill.

The comedian George Burns used to get a laugh saying, “Don’t stay in bed, unless you can make money in bed.” It’s no longer a joke. Many aging workers simply can’t save enough to create a solid foundation of savings that will maintain their standard of living in retirement.

Postponing retirement
The solution: work longer. After all, earning a paycheck in your latter years can make a huge difference in retirement living standards. Pocketing even a slim income often allows retirement portfolios to compound over a longer period of time.

Take this calculation by economist Robert Shackleton of the Congressional Budget Office, which posits a married couple is in their early 60s earning $100,000 pretax a year. They’ll need nearly $66,000 a year after taxes to replace 80 percetn of their preretirement income. (The 80 percent is a standard rule of thumb when it comes to making this kind of retirement calculation.) If both retire at age 62, they’ll receive more than $25,000 in total Social Security benefits and require a portfolio of at least $891,000 to generate the income they need to live the good life through their normal life expectancy. (The calculation comes from a paper written several years ago, so the Social Security numbers will have changed a bit over the years. Yet the basic calculation remains true.)

But if our couple waits until age 66 to retire, their Social Security benefits go up and the time they need to bank money shrinks, so $552,000 in savings will suffice. Retire at age 70? All they require is a portfolio worth some $263,000. And so on.

More than making ends meet, work is physically and mentally energizing. It keeps the mind active and dementia at bay. For many people, the workplace is a social environment, with birthday celebrations and coffee klatches. To be sure, you may want to say goodbye to your current office mates for the last time. But that doesn’t mean you won’t want to work.

Of course, not all senior citizens will be physically and financially healthy in retirement. Especially vulnerable are less educated workers. So are single-parent households. Both groups are far less likely to have a pension plan and own their home. And then there’s the lingering problem of ageism: Some employers are still hostile to aging workers with sagging middles and graying hair.

Nevertheless, the recession has made it clear that retirement and work will be woven into a new cloth for many Americans. The challenge for all of us — employees and employers — will be making the best of the situation.

Copyright © 2009 The McGraw-Hill Companies Inc. All rights reserved.

A growing number of financial planners are rethinking the conventional wisdom. (Remember the old adage that you should subtract your age from 100, and devote that percentage of your portfolio to stocks?) Here are five new rules to consider:

Separate your investments into different pots. Often, investors in retirement lump all of their money together, with which they pursue one strategy, says Eric Bailey, managing principal of Captrust Advisers in Tampa. His firm, which works with pensions, endowments, and high net-worth individuals, takes an approach ripped straight from the institutional investors’ playbook. Clients’ money is separated into three categories: Short-term funds reside in very low-risk investments, such as high-quality bonds; intermediate-term money goes in a balanced mix of stocks and bonds–such as a 50-50 or 60-40 split; and long-term investments starting with five-year time horizons are heavier on stocks. “This way, you can take advantage of a market sell-off with your long-term investments and you’ll avoid needing to liquidate investments when stocks are down,” Bailey says.

Don’t reach too far for yield. Cash may be king in this market, but decent yields are hard to find. Treasuries present the ultimate in safety, but the pay is meager: The one-year bill currently yields just 1.1 percent and the five-year 2.2 percent. Unfortunately, if you’re looking for a bigger payout, you’ll have to take on some risk. Says Oliver Tutt, managing director of Newport, R.I.-based Randall Financial Group: “You’ll have to make a trade-off somewhere, particularly if you’re dealing with large amounts of money.” Stick with quality: If you’re considering a bond fund, for example, be sure to look under the hood at its various holdings and review the fund’s prospectus to see what types of bonds–and credit ratings–it targets. “Quality is always important, but more than ever it is now,” says Bill Walsh, chief executive officer of Hennion & Walsh, an asset management firm based in Parsippany, N.J. “Know what you’re buying.”

Make it a muni. Government bonds are airtight when it comes to safety, but their yields are near all-time lows. As an alternative for retired investors in the upper tax brackets, municipal bonds are worth considering. With munis, investors get the benefit of tax-free income, less volatility than corporate bonds, and, theoretically, more safety. “Right now, there’s more value in munis than almost every other area. But be sure you know the issuer,” says Walsh. Among munis, he recommends high-grade, general-obligation bonds and essential-purpose bonds such as the sewer authority. “Stay away from things like nursing home bonds, which could go out of business,” he says. Walsh prefers single-issue bonds over bond funds, which “will work, but you have to be careful,” because there is no set maturity date, no set yield, and managers can sometimes buy outside of that asset class.

Go for dividends. It’s a no-brainer that quality matters in a market like this. But how do you know if a stock is “quality”? Dividends are one indicator. That’s because dividend income–which is essentially a portion of company profits paid out to shareholders–helps offset fluctuations in a stock’s share price, creating a cushion during turbulent markets. “During trying times, dividend-paying stocks tend to do well,” says Paul Alan Davis, portfolio manager of the Schwab Dividend Equity Fund. Davis also looks for companies on solid footing, which have plenty of cash and aren’t in “financial straits.” During the first 11 months of year, Davis says, the S&P’s dividend-paying stocks fell by roughly 36 percent; meanwhile, nondividend payers were down about 45 percent. You’ll find those dividend payers in more developed industries such as consumer staples, utilities, and healthcare. Examples include Philip Morris, Coca-Cola, General Mills, Bristol-Myers Squibb, and Pfizer.

Consider “alternatives”: This asset class, which is used most often by pensions and other institutional investors, runs the spectrum from commodities and annuities to real estate. But individual investors can also use them to dramatically reduce volatility in their portfolios, says Gary Hager, founder and chief executive of Integrated Wealth Management in Edison, N.J. He likes real estate investment trusts, or REITs, which have historically provided a smooth ride for investors. A sample portfolio from 1978 through 2007 shows that putting 10 percent of equity holdings in U.S. REITs improved returns by 0.3 percent and cut volatility by 0.9 percent, compared with investing in stocks alone, according to The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly. Other alternative investments to consider include commodities and inflation-protected securities, both of which are offered in ETF form.

Save the market’s decline, 2008 might seem like any other year for individual retirement accounts. But that’s not so.

There were many new laws, court decisions, IRS notices and other rule changes affecting the retirement plan of choice for millions of Americans, according to Ed Slott, the nation’s preeminent IRA expert.

Here’s a snapshot of the top IRA changes in 2008.

New Laws on Distributions

By far, the biggest changes came as part of the Worker, Retiree, and Employer Recovery Act of 2008, or WRERA (which might be an acronym for “we’re in big trouble”).

Under that law, required minimum distributions for IRA owners, plan participants and beneficiaries are waived for 2009. Of note, you are still required to take your RMD if you turned 701/2 in 2008 but decided to wait until this year to take that distribution.

Another provision of WRERA: Starting in 2010, non-spouse beneficiaries aren’t allowed to leave retirement plans with the former IRA owner’s employer. They will have to transfer those plans to an IRA at a bank, brokerage or mutual-fund firm.

Under the Emergency Economic Stabilization Act of 2008, sometimes called the bailout bill, IRA owners who are 701/2 can transfer up to $100,000 to a charity in 2009 without having the amount included in their gross income.

Court Decisions

If an IRA owner dies and has designated a revocable trust as the beneficiary, the expectation is that the money in the IRA would be exempt from claims by creditors of the decedent, as they say in estate planning circles.

Not so, according to Seymour Goldberg, author of J.K. Lasser’s “Inherited IRAs” and contributor to Slott’s newsletter.

In a recent Kansas court case, creditors were able to get at the money in an IRA that named a revocable trust as the beneficiary. According to Goldberg, the lesson learned is this: Don’t designate a revocable trust as the IRA beneficiary. Instead, name an irrevocable discretionary trust with spendthrift language as the beneficiary, he said.

IRS Takes Note of Roth Conversions

Uncle Sam cleared up a big issue with IRS Notice 2008-30: A non-spouse beneficiary of a qualified retirement plan can transfer the account to an inherited Roth IRA so long as the transfer is allowed by the plan and the beneficiary meets the Roth conversion eligibility requirements, according to Slott’s newsletter. Starting in 2010, plans must allow such transfers.

IRS Private Letter Rulings

In its private letter rulings (PLRs), the IRS responds to a specific taxpayer’s request for relief. But sometimes these rulings can help other IRA owners who might need guidance with similar problems. Take, for instance, PLRs 200840054 and 200835033, both of which deal with substantially equal periodic payments or 72(t) payment plans.

Some IRA owners who are under age 591/2 can avoid having to pay the 10% penalty on IRA distributions by taking money out in substantially equal periodic payments or SEPP.

In those two rulings, the IRA owner failed — because of a mistake by the account custodian — to take a distribution and then did a make-up distribution. Typically, the IRA owner has to pay the 10% penalty on all early distributions if he fails to take the SEPP. But the IRS ruled in these cases that the custodian was at fault and the IRA owner didn’t have to pay the penalty.

Given all the mergers of financial firms lately, it’s likely mistakes of this sort will increase, Slott said. If you’re using a SEPP plan to withdraw money from your IRA and the custodian fails to make a payment, consider asking the IRS for relief.

Saving the ‘Stretch’ IRA

People who inherit IRAs use their life expectancy to calculate the amount of the distribution, in effect “stretching” the IRA over their lifetimes. But in PLR 200811028, the beneficiary failed to take the required distribution for a couple of years. After realizing the mistake, the beneficiary took three years of distributions and even paid the 50% penalty due on the late RMD.

In years past, the IRS would have forced the beneficiary to withdraw the rest of the IRA money over five years. But in this PLR, the IRS gave the beneficiary permission to continue taking required distributions over her life expectancy. “This PLR now indicates that IRS now treats a stretch IRA as the default mode,” according to Slott’s newsletter.

Identifying the Beneficiary

No matter what else you do this year, be sure to designate a beneficiary on your IRA. In PLR 200846028, the IRA owner wrote that the beneficiary is “as stated in the will.” Well, the IRS says the beneficiary must be “identifiable” and forced the IRA beneficiaries “as stated in the will” to take the IRA money out in five years instead over their life expectancies – the more tax-friendly way. The takeaway? Make sure your beneficiary or beneficiaries are “readily identifiable.”

Rules on Disclaimers

Often IRA beneficiaries will disclaim an inherited IRA to reduce any potential tax bills. But there are right and wrong ways to do a disclaimer, according to Slott.

PLR 200837046 points to the right way. In that case, two children, one of whom was the named beneficiary and the other who was born after the IRA owner had named the older child as beneficiary. When the owner died, the oldest child disclaimed half of the IRA, in effect giving half of the IRA to the younger sibling. The older brother got to use his life expectancy for the distributions and the younger brother had to take his share of the IRA over five years.

PLR 200846003, meanwhile, was the wrong way to disclaim. In effect, an IRA owner signed a prenuptial agreement saying a trust for her new husband would be the beneficiary. Well, the wife died before she actually changed the beneficiary and all heck broke loose. Her children, who were the named beneficiaries, disclaimed the IRA. Now estate taxes might be due because the children failed to disclaim the IRA and trust assets the right way. Suffice to say: If you plan to disclaim IRAs, make sure you talk to a qualified professional.

IRA Trust Rulings

Many problems that arise with IRAs are the result of owners not naming beneficiaries correctly.

In PLR 200826028, the IRA owner said in his estate plan that after specific gifts were made, all remaining assets, including an IRA, would go to charity. Well, the IRS said the estate failed to pay any income tax when it transferred the IRA to the charity. This tax could have been avoided, according to Slott’s newsletter, if the IRA owner had simply named the charity as the beneficiary.

In PLR 2008260008, an IRA owner named his two children as beneficiaries, one of whom was a minor. The minor’s guardian asked the court for permission to create a trust for the minor’s share of the IRA. Not surprisingly, the IRS ruled that the transfer of the IRA to a trust would trigger taxable income, though that tax wouldn’t be due until distributions came out of the IRA.

The lesson? If you have a beneficiary who’s a minor, it’s best to designate “a custodian or a trust to hold an inherited IRA for the minor” rather than have to ask for a ruling later.

What the Future Holds

What will be the top IRA rulings in 2009? That’s impossible to say just yet. The only certainty is that that there will be a list next year, too.

Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.

A retirement calculator shows you how much to need to save to get the income you need when you retire. Or it may be how much you want! That depends how much you are making, and how young you are. Either way do use a retirement calculator.

You can find a retirement calculator on many web sites, so you do not need to get the services or a retirement planner or investment advisor to find the answers. In this way, you use the retirement calculator, calculate the amounts you need, and then visit an investment advisor or retirement planner.

To decide how much you need to save, you need:

1. The income you need to live on at today’s prices

2. The rate of inflation per annum between now and the retirement date.

3. The rate at which your fund will grow.

Let’s go through these and how they relate to a retirement calculator. First, how much do you need to live on? Remember, that retired people do not normally spend as much as people who work. When you retire, you won’t need:

special clothes for work the sort of car that keeps you up with the Joneses

you will be able to take holidays at off-peak times

and you will have time to do things – instead of paying to get them done.

So your costs will be lower. So let’s say you are earning $60,000 a year now, you might think that $50,000 would be enough. Next you need to remember that if you are healthy, you expect to live for 15-20 years, and so need to allow for inflation in that period – so actually you need more! This is where a good retirement calculator comes in.

2. The next thing the retirement calculator needs is the rate of inflation, or what you expect it to average until you retire. With the price of oil going up, we know that inflation over the next decade will be higher than it is now. Official figures put inflation at around 2-3%, but the true figure is more like 5%.

This means that you need to allow for at least 5%, and probably 7% and feed that into the retirement calculator.

4. At what rate will your retirement plan grow? A difficult one this. Five years ago, people were talking in terms of 10%, but not now experts suggest a lower figure. The problem is that a retirement fund or retirement plan has to be prudent – you don’t want to wake up one morning, a year or before you retire, to find that a crash on Wall Street has cut the value of your fund by 30%. You just won’t have the time to get that money back.

So you will be doing well to get 10% return, but could almost guarantee 5-6%. Maybe 7-8% would be a realistic figure to put into the retirement calculator.

The retirement calculator is just some software set up to make a calculation after you enter some figures. As I said earlier, the retirement calculator needs:

Required income

Inflation

Expected return

And of course, how long till you retire.

Here are some results from a retirement calculator:

Required income: $30,000 per annum

Years till retirement: 15 years

Annual inflation: 2.5% (unrealistic)

Annual yield: 5%

Income needed in 15 years: $43,448

Required value of retirement plan in 15 years: $825,000

Quite a lot of money for a modest retirement income. Here’s another one:

Required income: $30,000 per annum

Years till retirement: 20 years

Annual inflation: 5%

Annual yield: 8%

Required value of retirement plan in 20 years: $987,573

If you want an income of $45,000 when you retire – equivalent to less than $30,000 today – you will need: $148,000.

When you use a retirement calculator, make sure you use one that does calculate the income you will get at retirement adjusted for inflation – over 20 years, you will need 50% more than think you need today. If you do this, then you will benefit form using a retirement calculator.

About the Author:
Rex Truman is not retired but should be – instead he gives information at RetireWhenULike.com to help people save enough so they can enjoy retirement, ideally with an interesting job where they are in control.

It can therefore be an incredibly resourceful tool in the overall planning of your retirement, but remember that it is only an estimate and therefore you should not use the results given to you by this calculator as an exact calculation of your retirement benefits.

You can use a federal retirement calculator to calculate the basic annuity for employees in the FERS, CSRS, or CSRS-offset retirement system including credit for sick leave if applicable, to confirm retirement eligibility, and to calculate survivor benefits.

The federal retirement calculator is not a tool that can be used to estimate all variables of retirement. For example, it would not be helpful in determining life insurance or health insurance during retirement or in calculating the annuity amounts for those who do not work full time. It is best to stay within the perimeters of what the calculator is designed to do.

Other Tools

Besides the federal retirement calculator there are other retirement planning tools that you can take advantage of as well, including the QuickAnswer retirement calculator which helps assess your progress towards retirement, the standard retirement calculator which tells you how much you should save for retirement, the RRSP accumulator which tells the power of compounded investment returns, post retirement calculator which estimates your retirement income, and the RRIP calculator which helps you to build a productive and successful withdrawal strategy.

A few others that estimate useful information that will help you develop a plan for your retirement are the life expectancy calculator and the annuity calculators.

Retirement is one of the most major and important times in anyone’s life, and it is an issue that you should be thinking about early on in your life. The earlier that you can begin to plan and prepare for your retirement the better off you are going to be and whether that means using a federal retirement calculator or other retirement planning tool, the more you can do the better.

Employees in the upper Midwest and Northeast had the highest levels of participation in retirement plans in 2007, according to an Employee Benefit Research Institute analysis released today. Wisconsin topped the list with approximately 68 percent of full-time workers preparing for retirement. Workers in the South, West, and Southwest had the lowest participation levels. Florida bottomed out the list with 42 percent of workers partaking in an employer’s plan.

Participation was significantly lower for workers in the private sector. About 42 percent of private-sector employees between ages 21 and 64 engaged in retirement plans in 2007, versus 75 percent in the public sector. Workers from Milwaukee-Racine-Waukesha, Wis., and Huntsville-Decatur, Ala., had the highest participation rates in the private sector, while Macon-Warner-Robins-Fort Valley, Ga., Fresno-Madera, Calif., and Los Angles-Long Beach-Riverside, Calif., residents had the lowest. In the public sector, Huntsville-Decatur, Ala., had the highest participation levels and Macon-Warner-Robins-Fort Valley, Ga., again bottomed the list.

Here’s a look at the top states for retirement plan participation.

Full-Time Workers Who Participated in an Employment-Based Retirement Plan in 2007

Source: Employee Benefit Research Institute

To plan for early retirement you have to think beyond the regular full time job that you have and even beyond the 401K you are working hard to build. There are other avenues of saving for your future so that you can enjoy retirement at an early age.

These avenues can really help your finances grow so that you will be able to stop working well before you reach the age of 65. And even after you reached your financial goal you may find it easy to continue following the same pattern and continue to build on your savings.

If you look at the history of the financial world and you consider the current state of affairs with government funds the future looks really bleak. That is especially true if you are resting your hope on social security benefits which may not be around when you are ready to draw on them. And because of the unstable market many have retired with nothing in their 401K. A different approach is needed. You need to invest.

The Variety Is Astounding

Probably the best way to secure your financial future is through investing in real estate. There are a lot of ways to do this and before you put a single penny into any investment you are best served by taking classes, reading books, and becoming very familiar with how to purchase land and property and what is involved in it.

There are always advertisements out there telling you how you can make millions in a day. To learn how to avoid the frauds and find the real investment opportunities you have to educate yourself. With a little know how you can find properties to invest in that have real potential for huge value increases.

Another way to invest in property is to buy rental property that you can earn money on during your working years and then sell for a nice profit when you are ready to retire. Or you can invest property that needs some work and fix it up to sell for a profit. There are so many possibilities when it comes to real estate investing.